The $2 Million 'Excess' That Wasn't
A small FCM's customer segregated account holds $52.4 million against a segregation requirement of $50.0 million computed at yesterday's close. The treasurer wants to wire $2.0 million to the firm's house account this afternoon to cover a proprietary margin call at its clearing member, leaving $50.4 million and, he says, '$400,000 to spare.' Reviewing the computation, the branch manager notices two components of the $52.4 million asset total: a $1.1 million check from a new customer deposited yesterday but not yet collected, and $600,000 described as 'funds in transit' sitting in an affiliate introducing broker's own operating account with no written acknowledgment from the affiliate. The treasurer says the firm has 24 hours to fund the call or the clearing member will liquidate the firm's positions.
1. Recompute the position. Is the $2.0 million transfer permissible?
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Start with what counts. Segregation is asset-based: the firm must hold qualifying customer funds at least equal to the amount owed to customers.
- Requirement: $50.0M
- Stated assets: $52.4M
- Less uncollected check: -$1.1M. A deposited check is not yet funds the firm holds; it cannot be counted until collected.
- Less 'in transit' at the affiliate: -$0.6M. Money sitting in another entity's operating account, with no segregation, no written acknowledgment, and no clear in-transit treatment, is not a segregated customer asset.
- Countable assets: $52.4 - 1.1 - 0.6 = $50.7M
- True excess: $50.7 - $50.0 = $0.7M
The transfer is not permissible. Moving $2.0M would leave $48.7M against a $50.0M requirement - a $1.3M segregation deficiency, not a $400,000 cushion. The treasurer is solving an arithmetic problem with an asset base he has misclassified.
There is a second, independent problem: the request is being made on a stale, prior-day computation with no real-time confirmation. Even a genuine excess must be verified before withdrawal, and the withdrawal must be documented.
2. The firm still has a margin call due in 24 hours. What are the permissible funding options, and what must NOT be used?
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Permissible:
- House funds - proprietary cash, a bank line, or a parent/affiliate capital contribution booked as equity.
- Genuine excess customer funds, after a corrected real-time computation - a documented $0.7M is available at most; the $1.3M gap must come from elsewhere.
- Collecting the $1.1M check and obtaining a written, properly segregated arrangement for the affiliate funds - which converts them into countable assets only from the point they qualify.
- Reducing exposure - transferring or liquidating house positions at the clearing member to shrink the call.
Must not be used: customer segregated funds in an amount that creates a deficiency; any uncollected item or unacknowledged affiliate balance treated as if it were segregated; or a withdrawal documented after the fact as 'excess' to paper over the gap.
The branch manager's role is to refuse to authorize on the treasurer's figures and to require a corrected computation, in writing, before any wire leaves.
3. If the corrected computation shows the firm has already been operating with a deficiency, what are the branch manager's obligations?
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A segregation deficiency is not a bookkeeping inconvenience; it is a reportable event with a remediation clock.
- Stop the bleeding: no further transfers out, and move house funds in to cure the shortfall immediately.
- Notify: escalate to the firm's CEO, CFO, and compliance officer, and see that the firm notifies its regulators as required, with the amount, duration, and cause. Self-reporting early is materially better than being found.
- Fix the computation: the error source (uncollected items, affiliate balances) must be removed from the daily process, and the computation must be independently reviewed rather than prepared and approved by the same desk.
- Document: a dated memo identifying when the deficiency began, how long it lasted, who prepared the computation, and what controls change.
- Don't sign off: the branch manager should not certify figures he believes are wrong. A written objection in the file is the manager's protection and the firm's chance to fix it.