On December 20, 2024, the Securities and Exchange Commission (SEC) issued a final rule amending SEC rules 15c3-3 (the customer protection rule) and 15c3-1 (the net capital rule). The SEC also amended Form X-17A-5 Part II (the FOCUS report).1
I. Background
These amendments will require certain large clearing/carrying broker-dealers (those with $500 million or more in customer credit balances and proprietary accounts of broker-dealer (“PAB”) credit balances) to compute customer and PAB reserve requirements and make any required customer or PAB reserve account deposits daily rather than, as is now the case, weekly. This new daily computation requirement has a compliance date of December 31, 2025. Clearing/carrying broker-dealers subject to the amendments will be determined based on the average of the broker-dealer’s credit balances for the 12 months ending June 30, 2025.
The SEC adopted these amendments to address what the SEC describes as the “mismatches” that may occur between the amount of customer credits and the amount of the deposits in the broker-dealer’s reserve account when reserve requirements are computed on a weekly basis. A daily reserve computation and deposit requirement would reduce these mismatches. In the Adopting Release, the SEC stated that the new requirements will make the financial system safer by:
(1) increasing the likelihood that a failing carrying broker-dealer can self-liquidate (meaning customers and PAB account holders do not temporarily lose access to their cash or securities); (2) lowering the risk that the SIPC Fund may be depleted by having to address a large shortfall in customer cash held by a failed carrying broker; and (3) increasing the liquidity of carrying broker-dealers performing the daily customer and PAB reserve computations thereby positioning them to better address potential financial shocks.2
The SEC estimates that 49 broker-dealers will be subject to this new daily reserve computation and deposit requirement.
II. The Amendments Apply to Larger Carrying/Clearing Broker-Dealers
The daily computation requirement will apply to any broker-dealer with average total credits equal to or greater than $500 million. The amendment defines average total credits as “the arithmetic mean of the sum of Total Credits in the Customer Reserve Bank Account computation and the PAB Reserve Bank Account computation reported in the 12 most recently filed month-end Forms X-17A-5.” The SEC originally proposed a $250 million threshold but increased the threshold in the final rule to include within the daily computation requirement those clearing firms with the highest risk of a mismatch. According to the SEC, the threshold increase reduced by 12 the number of broker-dealers subject to the amendments.
III. Timing of Computation and Deposit
A broker-dealer subject to the daily reserve computation requirement must make the computation daily as of the close of the previous business day, and any required deposit so computed must be made by no later than one hour after the opening of banking business on the second following business day. Once a broker-dealer crosses the $500 million threshold, the broker-dealer will have six months to comply with the daily requirement. If the broker-dealer’s average total credits later drop below the $500 million threshold, the broker-dealer may revert to weekly reserve requirement computations upon 60 days’ notice to its designated examining authority.
IV. Reduction in “Cushion” Requirement for Clearing/Carrying Broker-Dealers That Calculate Net Capital Using the Alternative Method
A broker-dealer that reaches the $500 million threshold, computes its reserve requirements daily, and calculates its net capital pursuant to the alternative method may reduce its aggregate debit items when computing its reserve requirement by 2% rather than 3%.3 This decrease in the reduction of aggregate debit items when computing its reserve requirement is a decrease in the “cushion” required in the reserve account for firms using the alternative method. The SEC reasoned that since a daily computation should reduce mismatches, a smaller cushion is warranted.
Under the amendments, a broker-dealer that does not reach the $500 million threshold may voluntarily compute its reserve requirements daily and, if it uses the alternative method rather than the basic method to calculate its net capital, similarly use a 2% cushion rather than a 3% cushion. Such a broker-dealer must provide its designated examining authority with 30 days’ notice prior to beginning the daily computation and must obtain its designated examining authority’s consent to revert to a weekly computation.
For broker-dealers that are required to compute reserve requirements daily, the decrease in the cushion from 3% to 2% is reflected in an amendment to Rule 15c3-1(a), whereas for broker-dealers that voluntarily compute the reserve requirements daily, the decrease in the cushion from 3% to 2% is reflected in an amendment to Rule 15c3-3(e).
V. Transitory Cash
The SEC in the Adopting Release also addressed the issue of “cash in motion” or “transitory cash.” Commenters observed that at times a broker-dealer may include in its reserve formula computation customer credits that are leaving the firm shortly after the computation, for example, as a result of a cash sweep pursuant to Rule 15c3-3(j). The broker-dealer may be required to make a reserve deposit from its own funds, as the swept funds will no longer be available. Commenters asked the SEC for relief, which the SEC declined to provide, noting that the reduction in the cushion from 3% to 2% and the daily calculation requirement, which would shorten the time the cash would need to remain in the reserve account, would mitigate the effect of such transitory cash. The SEC, however, stated that the transitory cash issue “merits further consideration,” and the SEC “encourages market participants to engage with [SEC] staff regarding their particular facts and circumstances.”
VI. Exigent Circumstances and Holidays
The SEC also acknowledged the possibility of exigent circumstances that may interfere with a broker-dealer’s ability to compute or fund its reserve requirement daily. The SEC encourages firms that find themselves in this situation to notify their designated examining authority. The SEC said it will evaluate exceptions to the daily requirement related to holiday schedules and notes that if a deposit requirement falls on a day that banks are closed, the broker-dealer should make the deposit by 10:00 a.m. on the next business day the banks are open.
VII. Timing of the Amendments
The SEC stated that “[c]arrying broker-dealers must begin calculating their average total credits using the 12 most recently filed month-end FOCUS Reports ending with the FOCUS Report for June 30, 2025. As a result, carrying broker-dealers that exceed the $500 million threshold using each of the 12 filed month-end FOCUS Reports from July 31, 2024, through June 30, 2025, must perform customer and PAB computations daily beginning no later than December 31, 2025.” The SEC notes that because part of the 12-month calculation period is forward looking, broker-dealers would have time to manage their customer and PAB credits to remain below the $500 million threshold. A carrying broker-dealer that does not meet the $500 million threshold and that chooses to voluntarily comply with the daily reserve requirement may do so upon the effective date of the rule (60 days after publication in the Federal Register) and, if it calculates its net capital pursuant to the alternative method, may reduce its cushion from 3% to 2%.
VIII. FOCUS Report Changes
The amendments also make changes to the FOCUS Report. First, they add a line to report the 2% debit reduction in lieu of the 3% debit reduction. Second, they specify that the computation of total debits in the reserve formula would vary based on whether a broker-dealer is subject to a 2% debit reduction or the 3% debit reduction. Third, the amendments will require broker-dealers to check a box to indicate whether they are subject to the 2% debit reduction or the 3% debit reduction.