Customer Protection
What the exam tests
Rule 15c3-3 requires a broker-dealer to safeguard customer securities and customer cash. The two pillars are possession or control of customer securities and the customer reserve formula that funds a special reserve bank account.
Possession or control
Fully paid and excess-margin customer securities must be in the firm's physical possession or in a control location (e.g., DTC, a clearing firm, or a bank). Securities loaned to the firm must be collateralised at 100% of market value. Fails to deliver and securities borrowed are treated as control deficits unless covered.
Reserve formula
The firm computes debits (cash owed to customers, fails, etc.) and credits (customer free credit balances and other customer funds) weekly as of the close of the last business day of the week, with limited exceptions. If credits exceed debits, the firm deposits the difference into a Special Reserve Account for the Exclusive Benefit of Customers, generally no later than the next business day.
Traps
Reversing debits and credits; forgetting that free credit balances are credits; treating the reserve as working capital; assuming stock loan collateral can be 90%; ignoring fails as debits.
Worked example
Credits = $1,000,000; debits = $600,000. Required deposit = $400,000. The firm must fund the special reserve account before using that cash for anything else.