SEC Proposal Requires BDs to Assess Credit for Net Capital Calculation
The SEC has proposed eliminating the references to credit ratings for broker-dealers determining required net capital. Instead, broker-dealers would be required to have policies and procedures designed to “assess the credit and liquidity risks applicable to a security, and based on this process, would have to determine that the investment has only a ‘minimal amount of credit risk.'” Such securities would incur a lower net capital haircut. Broker-dealers would be required to consider factors including credit spreads, securities-related research, credit risk assessments, default statistics, inclusion on an index, priorities and enhancements, price, yield and volume, and other “asset class-specific factors.” The changes are mandated by the Dodd-Frank Act.
OUR TAKE: Rather than relying on credit ratings, broker-dealers will have the burden of proving to the SEC that a particular security does not require a 100% haircut for net capital purposes. The proposal also adds more work to the compliance folks who will have to develop and test relevant policies and procedures.