Net Capital is a measure of a broker dealer’s liquidity. All broker dealers are required to maintain a certain level of net capital in order to ensure that they are financially solvent. A broker dealer’s capital requirement is contingent upon the type of business that the broker dealer conducts. The larger and more complex the firm’s business is, the greater the net capital requirement. Should a firm fall below its net capital requirement, it is deemed to be insolvent
Most FINRA principal and operations exams will require that you have masted the concept of net capital and how it is calculated. There are a number of minimum capital requirements that you will be required to know. Such as that for a general securities broker dealer. A General securities broker dealer carrying customer accounts has a financial responsibility or minimum net capital of $250,000. A large general securities broker dealer may be subject an alternative minimum net capital requirement. A broker dealer who is subject to the alternative minimum net capital, must have net capital equal to the greater of $250,000 or 2% of its aggregate indebtedness. Broker dealers who generally do not carry customer accounts have a financial responsibility or minimum net capital of $50,000. These minimum net capital numbers are the minimum to qualify to conduct business. Virtually all broker dealers in the real world have significantly more net capital. A broker dealer’s required minimum net capital is almost always based on it aggregate indebtedness or AI. A firm that is in its first year of operation may have AI:NC of 8:1. After the first year it may have AI:NC of 15:1. If at any point the level of AI:NC exceeds the maximum, the firm is out of business.
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