SEC approves alternative method of capital measurements for broker-dealers

The Securities and Exchange Commission (SEC) has approved a rule that allows certain broker dealers to use internal models to determine their capital requirements. The Commission believes the rule would improve its oversight of broker-dealers.

The Rule on Alternative Net Capital Requirements for Broker-Dealers that are part of consolidated supervised entities stipulates that, to use the provision, a broker-dealer must be part of a holding company that has a group-wide internal risk management control system. The holding companies must also consent to group-wide Commission supervision.

The holding companies are also required to comply with stringent rules regarding its internal risk management control system, and would make periodic reports to the Commission, which would include group-wide financial and risk management information and a capital computation consistent with the Basel standards.

Under the rule, a broker-dealer can use its proprietary mathematical risk measurement models under prescribed circumstances to calculate its regulatory capital requirement. Specifically, the alternative method will be used to compute certain market and credit risk net capital charges.

The Securities Industry Association (SIA) applauded the approval, saying it would give the US broker-dealers “a new comprehensive supervision by their holding companies, thereby creating a framework that is fully equivalent to the European Union Directive on Financial Conglomerates”.

“Permitting qualifying firms to use approved market-risk models to meet regulatory requirements will more accurately reflect the true risks of an investment bank’s business, permit more efficient capital allocation, and both modernise the SEC’s capital rules and harmonise them with global standards as represented by Basel II,” said Richard Thornburgh, chairman of the SIA.

Under the EU Financial Conglomerates Directive, financial institutions active in the EU capital markets will be subject to consolidated supervision. A non-EU firm would have to demonstrate that its home country supervisor provides a form of consolidated supervision equivalent to that required by the EU.

BaselAlert.com