The Overfunded Reserve Account: A Hedge Fund Coded as Non-Customer
Calder Government Markets Inc. computes its Rule 15c3-3 customer reserve as of Friday, November 14. The controller reports credit items of $6,410,000 and debit items of $5,800,000, a requirement of $610,000, against $640,000 on deposit in the special reserve bank account. The next Tuesday the treasurer withdraws $100,000 from the account to fund the firm's own Treasury settlement, reasoning that the account is overfunded by $30,000 plus a comfortable cushion. On Wednesday the controller discovers that a hedge fund that trades Treasuries with the firm - holding $900,000 of fully paid Treasuries and a $250,000 free credit balance at the firm - has been coded as a non-customer, so none of its balances entered the formula.
1. Is the hedge fund a customer for reserve purposes? What is the corrected reserve requirement?
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Rule 15c3-3(a)(1) defines a customer as any person for or with whom the firm has effected a securities transaction, and excludes only a narrow set - other broker-dealers, general partners, subordinated lenders and similar insiders. A hedge fund is none of these, and the coding label in the books does not control the analysis.
Its $900,000 of fully paid Treasuries and $250,000 free credit balance are amounts the firm owes to a customer, so both are credit items in the Exhibit A formula. Corrected requirement = $610,000 + $1,150,000 = $1,760,000. Misclassifying a customer as a non-customer is the most common cause of a reserve deficiency at a government securities firm, precisely because Treasury positions are uncertificated and easy to park in an account labeled proprietary.
2. Was the $100,000 withdrawal permissible? Quantify the shortfall.
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No. Under Rule 15c3-3(e) funds may be withdrawn from the special reserve account only to the extent the balance exceeds the requirement computed as of the most recent computation date. The treasurer measured the excess against an understated requirement, so the $30,000 cushion was illusory.
With $640,000 on deposit against a corrected requirement of $1,760,000, the account is short $1,120,000. The withdrawal is part of that gap rather than a separate violation, but it is also the aggravating fact: customer reserve money was used to settle the firm's own proprietary position. The firm should want to know why the computation was prepared without a second review, because a one-line coding error should have been caught by an independent reviewer comparing the formula to the account list.
3. What must Calder do now, and by when? What are the downstream reporting consequences?
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For a weekly computation the deposit must be made no later than the second business day after the as-of date, so the shortfall should have been funded by the Tuesday following the Friday computation. The deadline has already passed. The firm must fund the full $1,120,000 immediately, from firm capital, with cash or qualified U.S. government or agency securities, and must not offset it against anything.
Then: open a deficiency file with the corrected computation and supporting detail, notify its designated examining authority promptly rather than waiting for the annual filing, and expect the independent accountant to treat the miscoding as a control breakdown during the exemption-report work. An uncured reserve deficiency during a computation period is a 15c3-3 violation even where net capital is comfortably above its minimum, and it must be described in the annual reports.