4 ms·

15c3-3 does not say that a broker can not use client funds to purchase securities for the client that the client is trying to buy. It says the broker can’t use

by zaroth 6y ago

15c3-3 does not say that a broker can not use client funds to purchase securities for the client that the client is trying to buy. It says the broker can’t use client funds to purchase securities for proprietary trading. Everyone has totally misread the rule and then is stating a total falsehood as if it’s unequivocal truth. It’s maddening. > The Commission adopted Rule 15c3-3 in 1972, in part, to ensure that a broker-dealer in possession of customers' funds either deployed those funds “in safe areas of the broker-dealer's business related to servicing its customers” or, if not deployed in such areas, deposited the funds in a reserve bank account to prevent commingling of customer and firm funds.[7] Rule 15c3-3 requires a broker-dealer to calculate what amount, if any, it must deposit on behalf of customers in the reserve bank account, entitled “Special Reserve Bank Account for the Exclusive Benefit of Customers” (“Reserve Bank Account”), under the formula set forth in Rule 15c3-3a (“Reserve Formula”).[8] Generally, the Reserve Formula requires a broker-dealer to calculate any amounts it owes its customers and the amount of funds generated through the use of customer securities, called credits, and compare this amount to any amounts its customers owe it, called debits.[9] If credits exceed customer debits, the broker-dealer must deposit that net amount in the Reserve Bank Account.[10] https://www.federalregister.gov/documents/2004/09/07/04-20188/rule-15c3-3-reserve-requirements-for-margin-related-to-security-futures-products https://www.federalregister.gov/documents/2004/09/07/04-2018... > Possession and Control Monitoring is related to SEC rule 15c3-3 - The Customer Protection Rule. The Customer Protection Rule prohibits a brokerage firm from commingling fully paid for customer securities with non-fully paid for customer securities and/or firm securities. > When a client of the firm purchases securities through the firm and pays for those securities in full, the firm must "lock-up" or "segregate" those securities for the protection of the client. The segregation of fully paid for customer securities protects those client owned securities from the firm's creditors in the event that the firm can no longer continue as a going concern - that is, the firm goes belly up. > SEC rule 15c3-3 also prevents the brokerage firm from using full paid for segregated shares to satisfy any delivery commitments that might result from the firm's trading activities. If, for whatever reason, the firm does use segregated customer shares to satisfy a firm delivery a 'SEG Violation' or Possession and Control violation occurs. http://brokerage101.com/opscntl.html http://brokerage101.com/opscntl.html > The reserve formula calculation is performed weekly to identify customer related payables and receivables. If the calculation results in a net payable to customer, the broker-dealer is required to reserve this amount in a special reserve bank account. This special reserve bank account is for the exclusive benefit of customers and funds can only be withdrawn with the support of an updated reserve formula calculation. In theory, on the date the reserve formula is calculated, combining the securities held in possession or control plus the funds included in the reserve formula should equal the amount the broker- dealer owes to the customer. https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Financial-Services/dttl-fsi-us-FSI-CustomerAssetProtection-051013.pdf https://www2.deloitte.com/content/dam/Deloitte/global/Docume... > Rule 15c3-3 prohibits use of customer property to support non-customer activities. https://www.sec.gov/rules/final/34-50295.htm https://www.sec.gov/rules/final/34-50295.htm

tptacek 6y ago
This is a long series of citations that seems on its face to confirm that broker-dealers can't use customer funds to post DTCC collateral.
- zaroth 6y ago
  Where do you get that from? Everything in the rule is about not using customer funds for proprietary purposes. Not co-mingling customer and brokerage funds. Meaning the brokerage can’t make their own trades with customer money. There isn’t a single word against using customer funds to purchase customer shares. It’s a rule against using customer funds for non-customer activities. If anything the problem that Robinhood ran up against was net capital requirements under 15c3-1.
  - tedunangst 6y ago
    It seems that clearinghouse collateral is considered "firm overhead"?
    - NovemberWhiskey 6y ago
      Yes. I don't really understand what is being argued here. There are three stages; execution, clearing and settlement. Execution is the formation of the legal-binding agreement, e.g. a contract to exchange money for stock. For these cases, this is happening via matching on an exchange between a buyer and a seller. If the time of the trade is T, then happens at T+0. Clearing is the paperwork activity that takes place after execution that include the due diligence steps of making sure that trades match, as well as other stuff that can reduce the amount of settlement activity. This happens in the period from T+delta through T+2-delta. Settlement is the actual exchange, and is the point at which legal ownership of the stock changes. This happens at T+2. It is obviously true that the brokerage uses client money for settlement; otherwise how would the broker ever fund any trades by its clients? Is also obviously true that prior to the moment of settlement the client money is ... the client money, and subject to segregation. In other words, from the broker perspective, it's always client money until it's off their books. The time when the NSCC wants to see adequate collateral is exactly during the clearing period, when the actual counterparty risk exists. That collateral absolutely cannot be from client money due to the segregation rules because the whole purpose of the collateral is to reduce the risk of a broker failure causing clients to lose money. RH's collateral requirements blew up because some substantial proportion of their clientele was attempting to go long GME during a period of vast price volatility, and the NSCC's procedure for determining those requirements takes into account primarily the size of the net long position and the volatility for each member. Net result: RH has to go raise capital in a hurry; RH stops its clients from going any further long GME.

by zaroth 6y ago

tptacek 6y ago

This is a long series of citations that seems on its face to confirm that broker-dealers can't use customer funds to post DTCC collateral.

zaroth 6y ago
Where do you get that from? Everything in the rule is about not using customer funds for proprietary purposes. Not co-mingling customer and brokerage funds. Meaning the brokerage can’t make their own trades with customer money. There isn’t a single word against using customer funds to purchase customer shares. It’s a rule against using customer funds for non-customer activities. If anything the problem that Robinhood ran up against was net capital requirements under 15c3-1.
- tedunangst 6y ago
  It seems that clearinghouse collateral is considered "firm overhead"?
  - NovemberWhiskey 6y ago
    Yes. I don't really understand what is being argued here. There are three stages; execution, clearing and settlement. Execution is the formation of the legal-binding agreement, e.g. a contract to exchange money for stock. For these cases, this is happening via matching on an exchange between a buyer and a seller. If the time of the trade is T, then happens at T+0. Clearing is the paperwork activity that takes place after execution that include the due diligence steps of making sure that trades match, as well as other stuff that can reduce the amount of settlement activity. This happens in the period from T+delta through T+2-delta. Settlement is the actual exchange, and is the point at which legal ownership of the stock changes. This happens at T+2. It is obviously true that the brokerage uses client money for settlement; otherwise how would the broker ever fund any trades by its clients? Is also obviously true that prior to the moment of settlement the client money is ... the client money, and subject to segregation. In other words, from the broker perspective, it's always client money until it's off their books. The time when the NSCC wants to see adequate collateral is exactly during the clearing period, when the actual counterparty risk exists. That collateral absolutely cannot be from client money due to the segregation rules because the whole purpose of the collateral is to reduce the risk of a broker failure causing clients to lose money. RH's collateral requirements blew up because some substantial proportion of their clientele was attempting to go long GME during a period of vast price volatility, and the NSCC's procedure for determining those requirements takes into account primarily the size of the net long position and the volatility for each member. Net result: RH has to go raise capital in a hurry; RH stops its clients from going any further long GME.