Funding and Cash Management
What the exam tests
Funding questions test whether you understand how a broker-dealer finances settlement, margin, and fails without touching customer money.
Core concepts
- Daily cash projection: forecast settlement obligations, margin calls, and stock loan activity.
- Funding tools: bank lines of credit, stock loan/borrow, repurchase agreements, and clearing fund deposits.
- Restricted cash: the customer reserve account and clearing fund deposits are not available for operations.
- Free credit balances belong to customers and are credits in the reserve formula; they cannot be used as working capital.
- Stock loan requires collateral, usually cash or securities, and the cash collateral is not free cash.
- Liquidity buffers: firms hold excess net capital and committed funding lines to absorb fails and margin stress.
Traps
Using customer free credits to fund the business; treating stock loan cash as available liquidity; forgetting that a large fail can require overnight funding; assuming a bank line is committed when it is demand-only.
Worked example
A $1,000,000 fail to deliver arises. The firm can fund it through a stock borrow, a repo, or a drawn line of credit. It cannot use the customer reserve account or free credit balances. The treasurer compares the cost of each source and ensures net capital and the AI ratio remain within limits after the funding.