Finance: What is the Uniform Net Capital Rule?

A uniform net capital rule is a rule for securities brokerages which enforces the idea that a minimum amount of equity or capital must be kept on hand at all times.

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Transcript

00:27

days that demanda you know bearded guy with pairs of animals and a boat and

00:31

that the brokerage has to be stable and sturdy enough to withstand the wrath of [Brokerage written on the side of Noah's ark]

00:36

you know Oprah or whoever's running the world specifically this rule states that [Oprah giving a speech]

00:40

even though your investment firms actual worth is constantly wildly fluctuating [Stock chart of Shmidelity]

00:46

due to making trades for your clients and quote holding unquote stocks and

00:50

assets for them you've got to have enough liquid cold hard cash to meet

00:54

your obligations at the end of the business day you can't be speculating on [The uniform net capital rule broken down into each part]

00:59

the markets yourself as a broker dealer and you have to have a net of debt and

01:04

or investments minimum amount of capital in 1975 this rule was enacted to give

01:10

the SEC the power it needed to make sure that these firms didn't become you know [Guy speaking in front of a trading floor]

01:14

accidental Ponzi schemes which would have destroyed the faith and Trust and [Definition of a Ponzi scheme]

01:19

the integrity and the American investment community and that would be

01:22

really bad well each security held by the broker dealer is valued by the SEC

01:26

factoring in what they call a haircut which is different for each security [Stocks, bonds and cash each with different hair styles]

01:31

well the haircut for each is determined by the current market price and how

01:35

liquid the investment actually is that is if the brokerage needed to quickly

01:40

get out of five million shares could they well like if the average trading

01:44

days total volume is only two million shares like some small cap tech stock

01:49

well then yeah that would be a big problem if they had to suddenly sell

01:52

five million shares then that huge onslaught of supply onto the market [Dumpster truck dumps stock]

01:57

would likely crash the stock ten twenty thirty forty percent something like that

02:01

so the SEC applies that liquidity haircut or discount to the calculations

02:06

of what they consider to be true net capital like it's not like you're trying

02:10

to sell five million shares of Google which you could do in

02:13

minutes right very little haircut there on google so as you can guess every [Someone selling 5 million shares of Google online]

02:17

security is completely different when figuring out how much of it is actually

02:21

usable by a broker dealer in the net capital rule if everything you know hits

02:26

the fan tomorrow be careful though the uniform net capital rule still does not [Stock chart showing a big decline in value]

02:30

protect against ponzi schemes yeah different the only kind of scheme there [Picture of 'The Fonz']

02:34

you ask your parents remember happy day oh come on