Independent Introducing Broker Net Capital Requirements
Independent Introducing Brokers ("IIB") or non-guaranteed Introducing Brokers have a capital requirement mandated by the NFA Rules and CFTC Regulations. The following will discuss such capital requirements and reporting requirements of an IIB.
Required Financial Statements
IIBs are required to maintain an accounting system which records all of the IIB's financial activity. The financial statements created from the accounting system must be prepared following U.S generally accepted accounting principles ("GAAP"), on an accrual basis, and kept current.
Net Capital
Net Capital is generally defined as Assets less Liabilities. However, NFA financial requirements and CFTC Regulation 1.17 requirements are much more restrictive than GAAP. CFTC Reg. 17 specifically identifies Net Capital as Current Assets less Liabilities. Moreover, the CFTC further defines (much more restrictive) what is considered a Current Asset towards the IIBs Net Capital. To calculate Net Capital, per CFTC Reg. 1.17, only Current Assets as defined under the regulations can be used. Typically, Current Assets under these regulations will only include Cash, Cash Equivalents, Receivables from an FCM actually received within 30 days, and 50% of Security Deposits with an FCM.
Additionally, there are "charges" which will be taken against the defined Current Assets. Charges may include a percent of a Certificate of Deposit, a restricted money market account, or government obligations etc. held by the IIB. These charges are fully defined in CFTC Reg. 1.17(c)(5).
Also, when computing Adjusted Net Capital, an IIB may exclude a liability that is subordinated to the claims of all general creditors pursuant to a satisfactory subordination agreement. A subordinated loan agreement must be filed with NFA at least ten days prior to the proposed effective date of the agreement and cannot be considered "satisfactory" until NFA finds the agreement acceptable.
Adjusted Net Capital = Current Assets - Liabilities - Charges against Capital
Independent IBs are required to maintain Adjusted Net Capital greater than the minimum net capital requirement for that Independent IB at all times.
Minimum Adjusted Net Capital
IIBs must maintain Adjusted Net Capital (as defined in CFTC Regulation 1.17) equal to or the greater of:
(a) $45,000;
(b) For Member IIBs with less than $1,000,000 in Adjusted Net Capital, $6,000 per office operated by the IIB (including the main office);
(c) For Member IIBs with less than $1,000,000 in Adjusted Net Capital, $3,000 for each AP sponsored by the IIB; or
(d) For securities brokers and dealers, the amount of net capital required by Rule 15c3-1(a) of the Securities and Exchange Commission (17 CFR 240.15c3-1(a)).
For example: An IIB has 4 branch offices with 20 APs. The Minimum Adjusted Net Capital (ANC) is the greater of the following:
$45,000; or 4 offices X $6,000 = $24,000; or 20 APS X $3,000 = $ 60,000
Therefore: Minimum ANC = $ 60,000
Reporting Requirements
Each IIB must complete a Net Capital Computation each month within 17 business days of month end.
Unless required to file more frequently by the NFA, each IIB must file Form 1-FR-IB (or the FOCUS report) using NFA's Easy File system, semi-annually, within 17 business days of the 6 month period ending. For example, an IIB with a December 31 year-end must file Form 1-FR-IB within 17 business days of June 30th and December 31st each year.
Additionally, each IIB is required to have a financial audit every fiscal year. From this audit, the IIB must file using the NFA Easy File system, the year end "certified" 1-FR (or FOCUS report) and attach an electronic copy of their audit to this filing. The audit must be filed within 90 days after year-end. For example, an IIB with a December 31 year-end must file Form 1-FR-IB "certified" on or before March 31 of the following year.
