Net Capital and Complex Products

By Fred Wagstaff

Blocks representing financial services wealth management

An established broker-dealer oftentimes introduces new and possibly complex products into its existing business.  There are many things a firm needs to consider as part of that process, one of which is determining the impact to its net capital computation and the other financial/regulatory reports required to be filed.

Things to Consider: Net capital and Introducing Complex Products:

Gather as much information as possible regarding the new product.  In order to determine the appropriate regulatory treatment, you must first understand the type of product that is being proposed and how it will be accounted for in the firms’ books and records.  Ask a lot of questions to the group who is proposing the product and document how the transactions will be processed.

Determine the various areas in the firm that may have a stake in the processing of the new product.  Include areas such as operations, legal, accounting, regulatory reporting, treasury and risk management.  Request input from each of these groups so that they can assist in identifying how the new product impacts their respective groups.  Understanding the viewpoints of various groups will certainly help to assess and determine the appropriate impacts to net capital and other regulatory reports.

Determine what general ledger accounts will be utilized for the new product.  What balance sheet accounts will be used, both assets and liabilities.  Also, what income statement accounts will be used. 

Map any new general ledger accounts to the various regulatory reports.  For asset accounts, it is critical that you determine whether or not the asset is considered an allowable or a non-allowable asset in the net capital computation.  Depending on the product, this could be an easy thing to do; others could be more of a challenge.  For example, on the easy side, a firm may decide to purchase, build or license a technology solution for a new online trading platform for its customers, resulting in an asset on the firms’ balance sheet.  This asset would be determined under the Net Capital Rule to be a non-allowable asset in the net capital computation.  On the more difficult side, let’s assume that the firm is entering into trading of asset-backed securities.  The trading inventory would be considered an allowable asset on the balance sheet; however, the asset would be subject to a securities inventory “haircut” as a deduction from net capital.  The rules around haircuts on asset backed securities are convoluted at best, and are dependent on various items such as marketability, investment ratings, issuer, etc.  Classifying general ledger accounts on the liability side is important, as it could impact what the required minimum net capital is if a firm is computing its net capital under the aggregate indebtedness standard.

Each new product initiative is unique and could have very different results in a firms’ net capital computation and how it is reported in other regulatory filings.  As a result, firms must perform due diligence in order to assess the impact.

Oyster’s FINOP consultants are leading experts in Net Capital Rule regulatory requirements and establishing new or complex products. Oyster Consulting can also provide your firm with FINOP support or an outsourced FINOP who not only understands the industry and your firm, but who also has the experience, Series 27 license and resources to navigate regulatory nuances and interpretations.


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About The Author
Photo of Fred Wagstaff

Fred Wagstaff

Fred is an accomplished financial CFO and FINOP with extensive experience in the full-service broker-dealer, clearing, and registered investment advisory industry. Fred’s experience includes merger and acquisition financial responsibilities, financial and operational responsibilities including financial statement preparation, net capital computations, regulatory filings, incentive compensation development, commission payout systems and financial/accounting optimization and strategy.