Asset-Liability Committee - ALCO

Finance a la shmoop what is the uniform net capital rule alright well it's

basically a speed limit rule for a securities brokerage in that there is a [Speed limit sign with 'uniform net capital rule' on it]

uniform ie same across the board minimum amount of equity or capital that you [Definition of uniform capital rule]

must keep on hand at all times if you're the brokerage well the rule revolves

around the storied belief that there will always be rainy days maybe even [Trees being blown in the wind]

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

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

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

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

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

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

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]

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

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

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]

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

the integrity and the American investment community and that would be

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

you ask your parents remember happy day oh come on