Net Capital: The Two Tests, Allowable Assets, and Haircuts
The two tests
Rule 15c3-1 requires a broker-dealer to maintain net capital at or above an absolute minimum and to keep aggregate indebtedness (AI) within 15 times net capital, a 15:1 ratio equivalent to net capital of at least 6 2/3% of AI. The absolute minimum is $5,000 for a firm that does not hold customer funds or securities and $50,000 for a firm that does. Introducing brokers that never touch customer funds usually sit at the $5,000 level.
Computing net capital
Start with equity capital, add qualifying subordinated loans, then deduct non-allowable assets (fixed assets, prepaid expenses, goodwill, unsecured receivables) and haircuts on securities positions. What remains is net capital. Receivables from the carrying broker are generally allowable; receivables from affiliates or employees are not.
Traps
The commonest error is checking only the dollar minimum and ignoring the AI ratio; a firm can exceed $50,000 and still be in violation at 16:1. Another is treating a subordinated loan as capital without the required subordination agreement and minimum term. A third is forgetting the early-warning triggers: at 120% of the minimum, or at AI above 12:1, a Rule 17a-11 notice is required.
Worked example
Net capital $60,000; AI $800,000. The ratio is 13.33:1, within 15:1, and the firm is above the $50,000 minimum, but 13.33:1 exceeds the 12:1 early-warning line, so the firm must notify regulators.