This article was originally published 17 September, 2008
On September 5, 2008, the Financial Industry Regulatory Authority Inc. ("FINRA") issued interpretive guidance on the net capital treatment of introducing broker-dealers' clearing deposits. The interpretive guidance addresses two distinct issues relating to clearing deposits: (i) the net capital treatment of clearing deposits upon termination of a clearing agreement; and (ii) the net capital treatment of clearing deposits in connection with clearing agreements containing an early termination penalty clause.
Background
When an introducing broker-dealer enters into a clearing arrangement with a clearing firm, the clearing agreement generally requires that the introducing firm deposit funds (a "clearing deposit") with the clearing firm to ensure that any obligations resulting from the clearance of the introducing firm's accounts are satisfied. Such a clearing deposit is returned to the introducing broker upon termination of the clearing agreement, provided the introducing firm does not have any obligations to the clearing firm that have not otherwise been satisfied. The termination of a clearing agreement for which the introducing firm does not have any outstanding obligations to the clearing firm can result in a capital charge by the introducing firm, if the clearing firm does not return the clearing deposit to the introducing firm within a specified period of time.
Clearing agreements may also contain an early termination penalty clause requiring the introducing firm to pay a monetary penalty to the clearing firm in the event that the introducing firm voluntarily terminates the agreement prior to an agreed-upon date.
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This article has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Readers should not act upon this without seeking professional counsel.
