SEC Mandates Broker-Dealers Calculate Cash Custody Daily
The SEC adopted amendments to Exchange Act Rule 15c3-3 ("Customer protection-reserves and custody of securities"). The amendments require broker-dealers that carry over $500 million in customer credit to perform daily cash reserve account calculations.
The amendments:
- require certain broker-dealers to increase the frequency of the computations of the net cash they owe to customers and other broker-dealers from weekly to daily under Rule 15c3-3.
- permit certain broker-dealers that perform a daily customer reserve computation to decrease the required 3 percent "buffer" in the customer reserve bank account by reducing the customer-related receivables charge (i.e. aggregate debit items charge) from 3 percent to 2 percent in the computation under Rules 15c3-3 and 15c3-1—the broker-dealer net capital rule.
The amendments will become effective 60 days after publication in the Federal Register.
Statements
SEC Chair Gary Gensler highlighted that "nine of the largest broker-dealers already make these calculations on a daily basis." He stated that "[the] amendments are intended to reduce the likelihood of any mismatch between the amount of segregated funds and the net cash owed to customers and other broker-dealers," and that "lowering the likelihood of mismatches will help to protect the Securities Investor Protection Corporation (SIPC) Fund."
SEC Commissioner Hester M. Peirce said that, while the final amendments "are not perfect," they are "net beneficial to investors." She highlighted that "[the amendments] increase costs and operational challenges for 40 of the estimated 49 broker-dealers subject to the daily computation requirement," but concluded that "the final amendments do incorporate an increased threshold for triggering the requirement that mitigates some of the costs. In addition, it allows carrying broker-dealers that use the alternative method for net capital and perform a daily customer reserve computation to reduce their aggregate debit items by 2% (instead of the 3% that is currently required)."
In dissent, SEC Commissioner Mark T. Uyeda argued that the Commission overlooked "many suggestions from commentators that might potentially lower cost while still reducing risk." He said that the adoption was rushed in an "apparent attempt" to finalize the amendments prior to the end of the current administration. Mr. Uyeda said that the SEC should have taken additional time to consider comments and data as well as interact with the public. He argued that the SEC "may end up leaving yet another mess for its successors to clean up."
Commentary
Rule 15c3-3 is, in structure, quite a good rule, proven successful at keeping broker-dealers safe (the failure of Lehman Brothers was not because Rule 15c3-3 did not work). However, it is operationally complicated. Going final with the amendments to the Rule during the same period where broker-dealers are required to implement cleared repo on US government securities (which will also require significant changes to firms' Rule 15c3-3 procedures) does not seem like good timing, particularly as the details of how firms will implement the interaction between the central clearing requirements and the requirements of Rule 15c3-3 are not wholly resolved.
The practical reality is that moving Rule 15c3-3 requirements to daily calculation won't do much, if anything, to make customers safer. Broker-dealers' segregation requirements will rise when customers' money is flowing into a broker-dealer, which is a sign that the broker-dealer is not in financial danger. So, the more frequent calculation requirements are not helpful in practice. The real benefit of daily calculations is that they allow a broker-dealer to move money out of reserve when there are outflows of customers' cash. For large broker-dealers, they do this because the liquidity benefits of daily calculations are sufficient to offset the higher operational expenses.
In short, Commissioner Uyeda is right that it would have been better for the SEC to wait for the new Administration before going ahead with the Rule changes. Notwithstanding that these changes have now gone final, it would be quite reasonable for the incoming SEC leadership to "extend" the effective date, consider the various other rule suggestions referenced by Commissioner Uyeda, and also consider whether the interaction between Rule 15c3-3 and the Treasury Clearing mandate has been properly addressed (because the general consensus is that it has not been).