Financial and Operational Requirements, Including Capital and Segregation
Capital and customer funds: two separate ledgers
CFTC Regulation 1.17 and the NFA Financial Requirements set minimum adjusted net capital - generally $1,000,000 for an FCM and $45,000 for an introducing broker - computed with prescribed haircuts and adjustments. A Member must notify NFA and the CFTC immediately if capital falls below the minimum, and early-warning notice thresholds above the minimum exist so regulators learn of trouble before a failure. Financial reports (Form 1-FR) are filed monthly, with certified annual statements and the required accountant's opinion at fiscal year-end.
Customer funds are governed separately. Under Regulation 1.20, funds received to margin, guarantee or secure customer positions must be segregated from firm money and held in properly titled accounts; Regulation 1.22 prohibits using customer funds to margin or guarantee proprietary accounts or other customers' accounts; Regulation 1.23 requires a daily computation of the segregation requirement; Regulations 1.24 and 1.25 limit permitted investments of customer funds; and Regulation 1.32 requires daily records. "Excess" segregated funds may be withdrawn only after the daily computation shows the remaining balance still covers everything owed to customers.
Traps: confusing net capital with segregation, which are independent tests; treating excess segregated funds as firm money before the computation; letting branch personnel accept currency or checks payable to an individual; and imagining an introducing broker holds customer funds - it does not; those funds belong with the carrying FCM.
Rule of thumb: segregation is a loan test - what you hold for customers must always equal or exceed what you owe them, measured daily.