BD / FCM Subordination Agreements

Overview

The computation by a broker-dealer or a futures commissioner merchant of its regulatory "net capital" begins by determining its net worth under GAAP. From there, it must make various adjustments, largely downwards. However, a firm may adjust its net worth upward in an amount equal to its liabilities under a subordinated loan agreement that meets regulatory requirements -- in effect, the firm is allowed to treat the proceeds from a satisfactory subordination agreement as if it were a contribution of equity.

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