Electronic Code of Federal Regulations (e-CFR)

Chapter II. SECURITIES AND EXCHANGE COMMISSION

Part 240. GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934

Subjgrp 95. Rules Relating to Over-the-Counter Markets

Section 240.15c3-1. Net capital requirements for brokers or dealers.

17 CFR 240.15c3-1 – Net capital requirements for brokers or dealers.

240.15c3-1 Net capital requirements for brokers or dealers.

(a)Every broker or dealer must at all times have and maintain net capital no less than the greater of the highest minimum requirement applicable to its ratio requirement underparagraph (a)(1)of thissection, or to any of its activities underparagraph (a)(2)of thissection, and must otherwise not be insolvent as that term is defined inparagraph (c)(16)of thissection. In lieu of applying paragraphs (a)(1) and (a)(2) of thissection, anOTC derivatives dealershall maintain net capital pursuant toparagraph (a)(5)of thissection. Each broker or dealer also shall comply with the supplemental requirements of paragraphs (a)(4) and (a)(9) of thissection, to the extent either paragraph is applicable to its activities. In addition, a broker or dealer shall maintain net capital of not less than its own net capital requirement plus the sum of each brokers or dealerssubsidiaryoraffiliateminimum net capital requirements, which is consolidated pursuant to appendix C, 240.15c3-1c.

(i)No broker or dealer, other than one that elects the provisions ofparagraph (a)(1)(ii)of thissection, shall permit its aggregate indebtedness to all other persons to exceed 1500 percent of its net capital (or 800 percent of its net capital for 12 months after commencing business as a broker or dealer).

(ii)A broker or dealer may elect not to be subject to the Aggregate Indebtedness Standard ofparagraph (a)(1)(i)of thissection. That broker or dealer shall not permit its net capital to be less than the greater of $250,000 or 2 percent of aggregatedebititems computed in accordance with the Formula forDeterminationof Reserve Requirements for Brokers and Dealers (Exhibit A to Rule 15c3-3, 240.15c3-3a). Such broker or dealer shall notify its Examining Authority, in writing, of its election to operate under this paragraph (a)(1)(ii). Once a broker or dealer has notified its Examining Authority, it shall continue to operate under this paragraph unless a change is approved upon application to the Commission. A broker or dealer that elects this standard and is not exempt from Rule 15c3-3 shall:

(A)Make the computation required by 240.15c3-3(e)and set forth in Exhibit A, 240.15c3-3a, on a weekly basis and, in lieu of the 1 percent reduction of certaindebititems required by Note E (3) in the computation of its Exhibit A requirement, reduce aggregatedebititems in such computation by 3 percent;

(B)Include in Items 7 and 8 of Exhibit A, 240.15c3-3a, the market value of items specified therein more than 7business daysold;

(C)Excludecreditbalances in accounts representingamountspayable for securities not yet received from theissueror its agent which securities are specified in paragraphs (c)(2)(vi) (A) and (E) of thissectionand any relateddebititems from the Exhibit A requirement for 3 business days; and

(D)Deduct from net worth in computing net capital 1 percent of the contract value of all failed to deliver contracts or securities borrowed that were allocated to failed to receive contracts of the same issue and which thereby were excluded from Items 11 or 12 of Exhibit A, 240.15c3-3a.

(iii)No broker or dealer registered as a futures commission merchant shall permit its net capital to be less than the greater of its requirement under paragraph (a)(1) (i) or (ii) of thissection, or 4 percent of the funds required to be segregated pursuant to theCommodity Exchange Actand the regulations thereunder (less the market value of commodity options purchased by optioncustomerson or subject to the rules of a contract market, each such deduction not to exceed theamountof funds in thecustomers account).

See Appendix E ( 240.15c3-1E) for temporary minimum requirements.

(i)A broker or dealer (other than one described in paragraphs (a)(2)(ii) or (a)(8) of this section) shall maintain net capital of not less than $250,000 if it carriescustomeror broker or dealer accounts and receives or holds funds or securities for those persons. A broker or dealer shall be deemed to receive funds, or to carrycustomeror broker or dealer accounts and to receive funds from those persons if, in connection with its activities as a broker or dealer, it receives checks, drafts, or other evidences of indebtedness made payable to itself or persons other than the requisiteregistered broker or dealercarrying the account of acustomer, escrow agent,issuerunderwriter, sponsor, or other distributor of securities. A broker or dealer shall be deemed to hold securities for, or to carrycustomeror broker or dealer accounts, and hold securities of, those persons if it does not promptly forward or promptly deliver all of the securities ofcustomersor of other brokers or dealers received by the firm in connection with its activities as a broker or dealer. A broker or dealer, without complying with this paragraph (a)(2)(i), may receive securities only if its activities conform with the provisions of paragraphs (a)(2) (iv) or (v) of thissection, and may receive funds only in connection with the activities described inparagraph (a)(2)(v)of thissection.

(ii)A broker or dealer that is exempt from the provisions of 240.15c3-3pursuant to paragraph (k)(2)(i) thereof shall maintain net capital of not less than $100,000.

(iii)A dealer shall maintain net capital of not less than $100,000. For the purposes of thissection, the term dealer includes:

(A)Any broker or dealer that endorses or writes options otherwise than on a registerednational securities exchangeor a facility of a registered national securities association; and

(B)Any broker or dealer that effects more than ten transactions in any one calendar year for its own investment account. Thissectionshall not apply to those persons engaging in activities described in paragraphs (a)(2)(v), (a)(2)(vi) or (a)(8) of thissection, or to those persons whoseunderwritingactivities are limited solely to acting asunderwritersin best efforts or all or noneunderwritingsin conformity with paragraph (b)(2) of 240.15c2-4, so long as those persons engage in no other dealer activities.

(iv)A broker or dealer shall maintain net capital of not less than $50,000 if it introduces transactions and accounts ofcustomersor other brokers or dealers to anotherregistered broker or dealerthat carries such accounts on a fully disclosed basis, and if the broker or dealer receives but does not holdcustomeror other broker or dealer securities. A broker or dealer operating under thisparagraph (a)(2)(iv)of thissectionmay participate in a firm commitmentunderwritingwithout being subject to the provisions ofparagraph (a)(2)(iii)of thissection, but may not enter into a commitment for the purchase ofsharesrelated to thatunderwriting.

(v)A broker or dealer shall maintain net capital of not less than $25,000 if it acts as a broker or dealer with respect to the purchase, sale and redemption of redeemablesharesof registeredinvestment companiesor of interests or participations in an insurance company separate account directly from or to theissueron other than a subscription way basis. A broker or dealer operating under thissectionmay sell securities for the account of acustomerto obtain funds for the immediate reinvestment in redeemable securities of registeredinvestment companies. A broker or dealer operating under this paragraph (a)(2)(v) must promptly transmit all funds and promptly deliver all securities received in connection with its activities as a broker or dealer, and may not otherwise hold funds or securities for, or owe money or securities to, customers.

(vi)A broker or dealer that does not receive, directly or indirectly, or hold funds or securities for, or owe funds or securities to,customersand does not carry accounts of, or for,customersand does not engage in any of the activities described in paragraphs (a)(2) (i) through (v) of thissectionshall maintain net capital of not less than $5,000. A broker or dealer operating under this paragraph may engage in the following dealer activities without being subject to the requirements ofparagraph (a)(2)(iii)of this section:

(A)In the case of a buy order, prior to executing suchcustomers order, it purchases as principal the same number ofsharesor purchasessharesto accumulate the number ofsharesnecessary to complete the order, which shall be cleared through anotherregistered broker or dealeror

(B)In the case of a sell order, prior to executing suchcustomers order, it sells as principal the same number ofsharesor a portion thereof, which shall be cleared through anotherregistered broker or dealer.

(4)A broker or dealer engaged in activities as amarket makeras defined inparagraph (c)(8)of thissectionshall maintain net capital in anamountnot less than $2,500 for eachsecurityin which it makes a market (unless asecurityin which it makes a market has a market value of $5 or less, in which event theamountof net capital shall be not less than $1,000 for each such security) based on the average number of such markets made by such broker or dealer during the 30 days immediately preceding the computation date. Under no circumstances shall it have net capital less than that required by the provisions ofparagraph (a)of thissection, or be required to maintain net capital of more than $1,000,000 unless required byparagraph (a)of thissection.

(5)In accordance with appendix F to thissection 240.15c3-1f), the Commission may grant an application by anOTC derivatives dealerwhen calculating net capital to use the market risk standards of appendix F as to some or all of its positions in lieu of the provisions ofparagraph (c)(2)(vi)of thissectionand thecreditrisk standards of appendix F to its receivables (including counterparty net exposure) arising from transactions ineligible OTC derivative instrumentsin lieu of the requirements ofparagraph (c)(2)(iv)of thissection. AnOTC derivatives dealershall at all times maintaintentative net capitalof not less than $100 million and net capital of not less than $20 million.

(i)A dealer who meets theconditionsofparagraph (a)(6)(ii)of thissectionmay elect to operate under this paragraph (a)(6) and thereby not apply, except to the extent required by this paragraph (a)(6), the provisions of paragraphs (c)(2)(vi) or appendix A ( 240.15c3-1a) of thissectiontomarket makerand specialist transactions and, in lieu thereof, apply thereto the provisions ofparagraph (a)(6)(iii)of thissection.

(ii)This paragraph (a)(6) shall be available to a dealer who does not effect transactions with other than brokers or dealers, who does not carrycustomeraccounts, who does not effect transactions in options notlistedon a registerednational securities exchangeor facility of a registered national securities association, and whosemarket makeror specialist transactions are effected through and carried in amarket makeror specialist account cleared by another broker or dealer as provided inparagraph (a)(6)(iv)of thissection.

(iii)A dealer who elects to operate pursuant to this paragraph (a)(6) shall at all times maintain a liquidating equity in respect of securities positions in hismarket makeror specialist account at least equal to:

(A)Anamountequal to 25 percent (5 percent in the case of exempted securities) of the market value of the long positions and 30 percent of the market value of the short positions;provided, however, in the case of long or short positions in options and long or short positions in securities other than options which relate to a bona fide hedged position as defined inparagraph (c)(2)(x)(C)of thissection, suchamountshall equal the deductions in respect of such positions specified by appendix A ( 240.15c3-1a).

(B)Such lesser requirement as may be approved by the Commission under specified terms andconditionsupon written application of the dealer and the carrying broker or dealer.

(C)For purposes of this paragraph (a)(6)(iii), equity in such specialist ormarket makeraccount shall be computed by (1) marking all securities positions long or short in the account to their respective current market values, (2) adding (deducting in the case of adebitbalance) thecreditbalance carried in such specialist ormarket makeraccount, and (3) adding (deducting in the case of short positions) the market value of positions long in such account.

(iv)The dealer shall obtain from the broker or dealer carrying themarket makeror specialist account a written undertaking which shall be designated Notice Pursuant to 240.15c3-1(a)(6)of Intention to Carry Specialist orMarket MakerAccount. Said undertaking shall contain the representations required byparagraph (a)(6)of thissectionand shall befiledwith the Commissions Washington, DC, Office, the regional office of the Commission for the region in which the broker or dealer has its principal place of business and the Designated Examining Authorities of both firms prior to effecting any transactions in said account. The broker or dealer carrying such account:

(A)Shall mark the account to the market not less than daily and shall issue appropriate calls for additional equity which shall be met by noon of the followingbusiness day;

(B)Shall notify by telegraph the Commission and the Designated Examining Authorities pursuant to17 CFR 240.17a-11, if themarket makeror specialist fails to deposit any required equity within the time prescribed inparagraph (a)(6)(iv)(A)of thissection; said telegraphic notice shall be received by the Commission and the Designated Examining Authorities not later than the close of business on the day said call is not met;

(C)Shall not extend furthercreditin the account if the equity in the account falls below that prescribed inparagraph (a)(6)(iii)of thissection, and

(D)Shall take steps to liquidate promptly existing positions in the account in the event of a failure to meet a call for equity.

(v)No such carrying broker or dealer shall permit the sum of (A) the deductions required byparagraph (c)(2)(x)(A)of thissectionin respect of all transactions inmarket makeraccounts guaranteed, indorsed or carried by such broker or dealer pursuant toparagraph (c)(2)(x)of thissectionand (B) the equity required by paragraph (iii) of this paragraph (a)(6) in respect of all transactions in the accounts of specialists ofmarket makersin options carried by such broker or dealer pursuant to this paragraph (a)(6) to exceed 1,000 percent of such brokers or dealers net capital as defined inparagraph (c)(2)of thissectionfor any period exceeding five business days;Provided,That solely for purposes of this paragraph (a)(6)(v), deductions or equity required in a specialist ormarket makeraccount in respect of positions in fully paid securities (other than options), which do not underlie optionslistedon thenational securities exchangeor facility of a national securities association of which the specialist or market marker is amember, need not be recognized.Provided further,That if at any time such sum exceeds 1,000 percent of such brokers or dealers net capital, then the broker or dealer shall immediately transmit telegraphic notice of such event to the principal office of the Commission in Washington, DC, the regional office of the Commission for the region in which the broker or dealer maintains its principal place of business, and such brokers or dealers Designated Examining Authority.Provided further,That if at any time such sum exceeds 1,000 percent of such brokers or dealers net capital, then such broker or dealer shall be subject to the prohibitions against withdrawal of equity capital set forth inparagraph (e)of thissection, and to the prohibitions against reduction, prepayment and repayment of subordination agreements set forth in paragraph (b)(11) of 240.15c3-1d, as if such broker or dealers net capital were below the minimum standards specified by each of the aforementioned paragraphs.

(7)In accordance with Appendix E to thissection 240.15c3-1e), the Commission may approve, in whole or in part, an application or an amendment to an application by a broker or dealer to calculate net capital using the market risk standards of appendix E to compute a deduction for market risk on some or all of its positions, instead of the provisions of paragraphs (c)(2)(vi) and (c)(2)(vii) of thissection, and using thecreditrisk standards of Appendix E to compute a deduction forcreditrisk on certaincreditexposures arising from transactions in derivatives instruments, instead of the provisions ofparagraph (c)(2)(iv)of thissection, subject to anyconditionsor limitations on the broker or dealer the Commission may require as necessary or appropriate in the public interest or for the protection of investors. A broker or dealer that has been approved to calculate its net capital under appendix E must:

(i)At all times maintaintentative net capitalof not less than $1 billion and net capital of not less than $500 million;

(ii)Provide notice that same day in accordance with 240.17a-11(g)if the brokers or dealerstentative net capitalis less than $5 billion. The Commission may, upon written application, lower the threshold at which notification is necessary under this paragraph (a)(7)(ii), either unconditionally or on specified terms andconditions, if a broker or dealer satisfies the Commission that notification at the $5 billion threshold is unnecessary because of, among other factors, the special nature of its business, its financial position, its internal risk management system, or its compliance history; and

(iii)Comply with 240.15c3-4as though it were anOTC derivatives dealerwith respect to all of its business activities, except that paragraphs (c)(5)(xiii), (c)(5)(xiv), (d)(8), and (d)(9) of 240.15c3-4shall not apply.

(i)Amunicipal securitiesbrokers brokers, as defined in subsection (ii) of this paragraph (a)(8), may elect not to be subject to the limitations ofparagraph (c)(2)(ix)of thissectionprovided that such brokers broker complies with the requirements set out in paragraphs (a)(8) (iii), (iv) and (v) of thissection.

(ii)The termmunicipal securitiesbrokers brokershall mean amunicipal securitiesbroker or dealer who acts exclusively as an undisclosed agent in the purchase or sale ofmunicipal securitiesfor aregistered broker or dealeror registeredmunicipal securitiesdealer, who has no customers as defined in this rule and who does not have or maintain anymunicipal securitiesin its proprietary or other accounts.

(iii)In order to qualify to operate under this paragraph (a)(8), a brokers broker shall at all times have and maintain net capital of not less than $150,000.

(iv)For purposes of this paragraph (a)(8), a brokers broker shall deduct from net worth 1% of the contract value of each municipal failed to deliver contract which is outstanding 21business daysor longer. Such deduction shall be increased by any excess of the contract price of the fail to deliver over the market value of the underlyingsecurity.

(v)For purposes of this paragraph (a)(8), a brokers broker may exclude from its aggregate indebtedness computation indebtedness adequately collateralized bymunicipal securitiesoutstanding for not more than onebusiness dayand offset bymunicipal securitiesfailed to deliver of the same issue and quantity. In no event may a brokers broker exclude any overnight bank loan attributable to the samemunicipal securitiesfailed to deliver contract for more than onebusiness day. A brokers broker need not deduct from net worth theamountby which the market value of securities failed to receive outstanding longer than thirty (30) calendar days exceeds the contract value of those failed to receive as required by Rule 15c3-1(c)(2)(iv)(E).

(9)A broker or dealer shall maintain net capital in addition to theamountsrequired underparagraph (a)of thissectionin anamountequal to 10 percent of:

(i)The excess of the market value ofUnited StatesTreasury Bills, Bonds and Notes subject to reverse repurchase agreements with any one party over 105 percent of the contract prices (including accrued interest) for reverse repurchase agreements with that party;

(ii)The excess of the market value of securities issued or guaranteed as to principal or interest by an agency of theUnited Statesor mortgage related securities as defined insection3(a)(41) of the Act subject to reverse repurchase agreements with any one party over 110 percent of the contract prices (including accrued interest) for reverse repurchase agreements with that party; and

(iii)The excess of the market value of other securities subject to reverse repurchase agreements with any one party over 120 percent of the contract prices (including accrued interest) for reverse repurchase agreements with that party.

(1)The provisions of thissectionshall not apply to any specialist:

(i)Whose securities business, except for an occasional non-specialist related securities transaction for its own account, is limited to that of acting as an optionsmarket makeron anational securities exchange;

(ii)That is amemberin good standing and subject to the capital requirements of anational securities exchange;

(iii)That does not transact a business in securities with other than a broker or dealer registered with the Commission undersection15 orsection15C of the Act or amemberof anational securities exchange; and

(iv)That is not a clearingmemberof The Options Clearing Corporation and whose securities transactions are effected through and carried in an account cleared by another broker or dealer registered with the Commission undersection15 of the Act.

(2)Amemberin good standing of anational securities exchangewho acts as a floor broker (and whose activities do not require compliance with other provisions of this rule), may elect to comply, in lieu of the other provisions of thissection, with the following financial responsibility standard: The value of the exchange membership of themember(based on the lesser of the most recent sale price or current bid price for an exchange membership) is not less than $15,000, or anamountequal to the excess of $15,000 over the value of the exchange membership is held by an independent agent in escrow:Provided,That the rules of such exchange require that the proceeds from the sale of the exchange membership of thememberand theamountheld in escrow pursuant to this paragraph shall be subject to the prior claims of the exchange and its clearing corporation and those arising directly from the closing out of contracts entered into on the floor of such exchanges.

(3)The Commission may, upon written application, exempt from the provisions of thissection, either unconditionally or on specified terms andconditions, any broker or dealer who satisfies the Commission that, because of the special nature of its business, its financial position, and the safeguards it has established for the protection of customers funds and securities, it is not necessary in the public interest or for the protection of investors to subject the particular broker or dealer to the provisions of thissection.

(c)Definitions.For the purpose of this section:

(1)The termaggregate indebtednessshall be deemed to mean the total money liabilities of a broker or dealer arising in connection with any transaction whatsoever and includes, among other things, money borrowed, money payable against securities loaned and securities failed to receive, the market value of securities borrowed to the extent to which no equivalent value is paid orcredited(other than the market value of margin securities borrowed fromcustomersin accordance with the provisions of17 CFR 240.15c3-3and margin securities borrowed from non-customers), customers and non-customers freecreditbalances,creditbalances in customers and non-customers accounts having short positions in securities, equities in customers and non-customers future commodities accounts andcreditbalances in customers and non-customers commodities accounts, but excluding:

(i)Indebtedness adequately collateralized by securities which are carried long by the broker or dealer and which have not been sold or by securities which collateralize a secured demand note pursuant to appendix D to this; indebtedness adequately collateralized by spot commodities which are carried long by the broker or dealer and which have not been sold; or, until October 1, 1976, indebtedness adequately collateralized bymunicipal securitiesoutstanding for not more than onebusiness dayand offset bymunicipal securitiesfailed to deliver of the same issue and quantity, where such indebtedness is incurred by a broker or dealer effecting transactions solely inmunicipal securitieswho is either registered with the Commission or temporarily exempt from such registration pursuant to17 CFR 240.15a-1(T) or17 CFR 240.15Ba2-3(T);

(ii)Amountspayable against securities loaned, which securities are carried long by the broker or dealer and which have not been sold or which securities collateralize a secured demand note pursuant to Appendix (D) (17 CFR 240.15c)

(iii)Amountspayable against securities failed to receive which securities are carried long by the broker or dealer and which have not been sold or which securities collateralize a secured demand note pursuant to Appendix (D) (17 CFR 240.15c3-1d) oramountspayable against securities failed to receive for which the broker or dealer also has a receivable related to securities of the same issue and quantity thereof which are either fails to deliver or securities borrowed by the broker or dealer;

(iv)Creditbalances in accounts representingamountspayable for securities or money market instruments not yet received from theissueror its agent which securities are specified in paragraph (c)(2)(vi)(E) and whichamountsare outstanding in such accounts not more than three (3) business days;

(v)Equities in customers and non-customers accounts segregated in accordance with the provisions of theCommodity Exchange Actand therules and regulationsthereunder;

(vi)Liability reserves established and maintained for refunds of charges required bysection27(d) of theInvestment Company Act of 1940, but only to the extent ofamountson deposit in a segregated trust account in accordance with17 CFR 270.27d-1under theInvestment Company Act of 1940;

(vii)Amountspayable to the extent funds and qualified securities are required to be on deposit and are deposited in a Special Reserve Bank Account for the Exclusive Benefit of Customers pursuant to17 CFR 240.15c3-3under theSecurities Exchange Act of 1934;

(viii)Fixed liabilities adequately secured by assets acquired for use in the ordinary course of the trade or business of a broker or dealer but no other fixed liabilities secured by assets of the broker or dealer shall be so excluded unless the sole recourse of the creditor for nonpayment of such liability is to such asset;

(ix)Liabilities on opencontractual commitments;

(x)Indebtedness subordinated to the claims of creditors pursuant to a satisfactory subordination agreement, as defined in Appendix (D) (17 CFR 240.15c3-1d);

(xi)Liabilities which are effectively subordinated to the claims of creditors (but which are not subject to a satisfactory subordination agreement as defined in Appendix (D) (17 CFR 240.15c3-1d)) by non-customersof the broker or dealer prior to such subordination, except such subordinations bycustomersas may be approved by the Examining Authority for such broker or dealer;

(xii)Creditbalances in accounts of general partners;

(xiv)Eighty-five percent ofamountspayable to a registered investment company related to fail to deliver receivables of the same quantity arising out of purchases ofsharesof those registeredinvestment companies; and

(xv)Eighty-five percent ofamountspayable against securities loaned for which the broker or dealer has receivables related to securities of the same class and issue and quantity that are securities borrowed by the broker or dealer.

(2)The termnet capitalshall be deemed to mean the net worth of a broker or dealer, adjusted by:

(i)Adjustments to net worth related to unrealized profit or loss, deferred tax provisions, and certain liabilities.

(A)Adding unrealized profits (or deducting unrealized losses) in the accounts of the broker or dealer;

(B)(1) In determining net worth, all long and all short positions inlistedoptions shall be marked to their market value and all long and all short securities and commodities positions shall be marked to their market value.

(2)In determining net worth, the value attributed to any unlisted option shall be the difference between the options exercise value and the market value of the underlyingsecurity. In the case of an unlisted call, if the market value of the underlyingsecurityis less than the exercise value of such call it shall be given no value and in the case of an unlisted put if the market value of the underlyingsecurityis more than the exercise value of the unlisted put it shall be given no value.

(C)Adding to net worth the lesser of any deferred income tax liability related to the items in (1), (2), and (3) below, or the sum of (1), (2) and (3) below;

(1)The aggregateamountresulting from applying to theamountof the deductions computed in accordance withparagraph (c)(2)(vi)of thissec