Level 1 lifecycle of each product from the standalone broker-dealer’s point of view: the firm takes the customer’s order, executes it with the venues or from its own inventory, clears and settles through its own memberships or its clearing firm, carries or introduces the account, and reports to FINRA and the SEC under the financial responsibility rules. Columns are the parties, rows the phases from the order to the FOCUS report; numbered steps are messages, deliveries or payments between them, with the channel or infrastructure in the pill. Hover a step for the detail, click it or use the walkthrough to be taken through the diagram step by step. The groups are business lines: retail and institutional brokerage, market making, clearing and custody, financial responsibility and capital markets; the Inside the Broker-Dealer section shows the same flows from inside the firm, team by team and system by system. The broker-dealer inside a bank is on the sell-side page. US market conventions throughout; all numbers illustrative. New to this? Begin with Start here.
Business line
Product
Retail Brokerage
Institutional Brokerage
Market Making
Clearing and Custody
Financial Responsibility
Capital Markets
Inside the Broker-Dealer
Control
Operations
Finance
How the diagrams work, the lifecycle common to all 15 products, a map of the products and of the views inside the firm, which firms run each product and what it takes in capital and reporting, and a glossary.
The retail business of a standalone broker-dealer: the customer’s equity order through the market access checks to a wholesaler, then to the clearing firm (introducing) or through the firm’s own clearing (self-clearing); the margin loan and the free credit balances that the firm lends, sweeps and locks up under the customer protection rule; and a covered call cleared at the OCC. Reg BI governs the recommendation, CAT captures the order, and the clearing agreement decides who does the rest.
OrderThe customer or the rep enters the order; the account, the approvals and the Reg BI documentation are checked; the market access controls apply; CAT takes the event.
ExecutionThe router sends the order to a wholesaler or an exchange under the routing arrangements; the fill with price improvement returns in milliseconds.
Post-tradeThe execution goes to the clearing firm, which books and confirms in the firm’s name, or to the firm’s own P&S and back office.
Clearing and settlementNSCC CNS between the clearing members; DTC on T+1; the OCC for options; the money through the settling bank.
Life of accountMargin calls and interest, the sweep, dividends and corporate actions, statements; the options position to expiry.
Control and reportingThe blotter review, surveillance, Rule 606, the reserve formula and possession or control, FOCUS.
The agency business with institutions: the client’s order worked by the firm’s algorithms across the venues, confirmed through CTM and settled to each fund’s custodian, with the commission paying for execution and, through a commission sharing account, for research; and the block that is either crossed as agent or facilitated as principal with the firm’s capital at risk. Best execution, information barriers and the capacity disclosure are the controls.
OrderThe client’s order arrives by FIX with its instructions; the market access rule and the client’s limits apply; a block comes by voice under information controls.
ExecutionThe algorithm works the order across exchanges, the firm’s ATS and dark pools; a block is crossed, printed or bought by the desk.
Post-tradeAllocations and confirmations through CTM, affirmation by 21:00 ET, the SSIs from ALERT; the capacity on the confirmation.
Clearing and settlementThe firm’s side in CNS; delivery to each custodian at DTC on T+1; a facilitated position in the firm’s own account.
Control and reportingThe best execution committee, Rule 605 and 606(b)(3), CAT, the TRF print, the 15% haircut on an overnight position, surveillance for front running.
The principal businesses: a wholesaler that buys retail order flow, fills each order from inventory inside the spread in microseconds, nets and hedges the residual, reports to the tape and publishes its execution quality; and a regional bond dealer that sells to its advisors’ customers from inventory or as riskless principal with a markup disclosed on the confirmation. Both finance an inventory and carry its haircut in net capital.
Arrangements and orderRouting agreements with the retail brokers and the 606 disclosure; or the advisor’s customer order against the desk’s offering.
ExecutionInternalized from inventory inside the NBBO in microseconds, or bought from another dealer and resold with a markup.
Post-tradeThe tape within seconds, CAT; RTRS within 15 minutes or TRACE; the markup against the prevailing market price on the confirmation.
Clearing and settlementNet at NSCC and DTC on T+1; the bond in and out of the firm’s DTC account the same day.
Inventory and controlLongs and shorts netted and hedged; inventory financed in repo and haircut; Rule 605 monthly; the fixed income principal’s markup review.
What a carrying firm does: correspondent clearing for introducing brokers under FINRA Rule 4311, with the conversion, the daily files, the margin and the clearing firm’s own customer protection obligations across every correspondent; the self-clearing settlement cycle at NSCC and DTC with the clearing fund, the settling bank and possession or control; and the stock loan desk that borrows for shorts and fails and lends the supply the rules allow.
Setup and demandThe clearing agreement and the conversion; the day’s trades into CNS; the short sales and fails that need a borrow.
Daily processingOrders, confirmations and statements in the correspondent’s name; CNS netting and the projection; the borrow located and delivered.
SettlementNet securities at DTC and net money through the settling bank on T+1; institutional deliveries outside CNS; collateral at 102%.
ObligationsThe reserve formula and possession or control for all customers; the clearing fund and its intraday calls; marks, recalls and returns.
Control and reportingThe surveillance of the correspondent; daily reconciliations, aged fails, 17a-13 counts; SLATE; FOCUS.
The rules that regulate the broker-dealer’s balance sheet: the net capital computation from the ledger through the haircuts and the charges to the requirement and the early warning, with the FOCUS cycle, the audit and the FINRA financial examination; and the funding of the margin book, the inventory and the settlements from bank loans, stock loan cash, repo and customer free credits within the customer protection rule.
Computation and sourcesNet worth less non-allowable assets, haircuts and charges; the day’s funding needs against capital, free credits, stock loan cash, bank loans and repo.
DeadlinesThe net settlement through the settling bank; intraday clearing fund and OCC calls within the hour; the margin securities pledged within 140% of the debits.
FOCUSMonthly or quarterly within 17 business days; 17a-11 notices at the early warning; withdrawal limits.
Audit and oversightThe 17a-5 audit within 60 days; the SIPC assessment; FINRA’s financial examiners; the CFO and FINOP certifications.
PlanningLiquidity stress tests, contingency funding, subordinated debt and the owners’ equity; what the capital allows the business to do.
What a standalone firm does in the primary market and as a venue: a co-manager or selling group seat in a syndicate, with the commitment charged in net capital until closing and the shares delivered through DTC; a private placement under Regulation D with the firm’s own due diligence, the escrow and the Form D; and an alternative trading system under Regulation ATS, matching at the midpoint and clearing the matches with the operator in the middle.
EngagementThe invitation from the lead and the commitment committee; the engagement letter and the firm’s due diligence; the Form ATS-N and the subscriber agreements.
Marketing and tradingThe book from the firm’s investors; the offering to accredited investors with a relationship; orders matched at the midpoint without displayed quotes.
Post-tradeThe allocation and the prospectus; subscriptions and the escrow; the trade report to the TRF and CAT within seconds.
Closing and settlementShares from the lead’s DTC account on T+2; the escrow released and the securities issued at the closing; two trades per match through NSCC.
AfterRegulation M and the aftermarket; the restricted securities and Rule 144; the surveillance, the ATS volume publication and Form ATS-R.
The same flows seen from inside the firm: who does what, in which system, in what order. Front to Back is the map. The registered reps and the trading desk face the customers and the venues; supervision and compliance keep the evidence FINRA examines; operations keeps the money and the stock record or reconciles to the clearing firm that keeps them; the FINOP computes what the capital allows and what the customers are owed. Columns are the firm’s own teams, with the outside world at the edges; the pills name the systems.
FrontThe reps and the app take the order under Reg BI; the order system applies the market access controls; the router executes under the best execution policy. Systems: rep workstation, OMS, risk gateway, smart order router, CAT.
ControlThe principals approve and review the blotter; compliance runs the surveillance, the registrations, the AML program and the filings; FINRA examines the evidence. Systems: trade blotter, surveillance, compliance engine, reporting hub, CRD.
OperationsP&S compares the trades, cashiering moves the money, the stock record is reconciled daily or the clearing firm’s files are; corporate actions, statements and 1099s. Systems: clearing portal and files, settlement system, ACATS, DTC and CNS interfaces.
FinanceThe FINOP computes net capital, the reserve formula and possession or control, sizes the business from the excess, funds the settlements and files the FOCUS. Systems: FOCUS, reserve formula, treasury system, Fedwire.
How to read a diagram
Columns are the partiesThe customer on the left, the broker-dealer next to it, then the venues and wholesalers it routes to, the clearing firm or the clearing houses that clear and settle, the banks that move the money, and the regulators that take the reports; an issuer, a custodian or an introducing broker appears where the flow needs it. In the Inside the Broker-Dealer section the columns are the firm’s own teams instead, with the outside world at the edges.
Rows are the phasesTime runs down the page: order, execution, post-trade, clearing and settlement, life of account, control and reporting. The band label gives the timing (T is trade date, T+1 the next business day).
Arrows are stepsNumbered in order. Solid arrows are messages, deliveries or payments; dashed ones are standing flows like statements and reports; two-headed ones are exchanged or matched. Boxes on a lifeline are things a party does internally.
Pills are the channelAmber for voice and chat, blue for electronic platforms and portals, rose for SWIFT messages, grey for infrastructure systems, teal for market data, lavender for the firm’s internal systems. Each pill shows a one-line definition on hover.
Figures are the worked exampleThe short figures under the arrows follow one illustrative trade or account through the lifecycle; the strip above the diagram summarizes it. Hovering a step shows the full detail; clicking it opens the walkthrough.
Routes are the alternativesWhere a product runs two ways, the steps carry a letter and a color: I and S for introducing and self-clearing, C and R for a block crossed as agent or facilitated as principal. The route buttons above the diagram show one at a time.
A product can be read two ways: scroll the diagram and hover for detail, or press Walk through the steps above any diagram to follow it one step at a time, with the detail in a card. The arrow keys move forward and back.
The lifecycle every product follows
Broker-dealerClientMarket participantsMarket infrastructureService providersmessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsVoice, chatElectronic platform, APIInfrastructure system (payment, clearing, reporting)Internal systemOtherhover an arrow or a badge for the full detail
Each product is a variation of this sequence: an order checked and time-stamped, an execution with a venue or from the firm’s own inventory, a confirmation and a trade report, clearing and settlement through the firm’s own membership or its clearing firm, the money through the banks, the life of the account, and the evidence of supervision and the computations the regulators examine. What changes is whether the firm acts as agent or principal, and whether it clears itself or through a clearing firm.
The products, 15 of them
Each card opens its diagram. The business line and product tabs at the top do the same; the search box finds a product by name, rule or keyword.
Inside the broker-dealer, 4 views
The same flows seen from the firm’s own teams: who does what, in which system. Front to Back is the map; supervision and compliance keep the evidence; operations keeps the money and the stock record or reconciles to the clearing firm; the FINOP computes the capital and the customer protection.
Which firms, where it is executed, who clears and holds it, what capital it takes, what is reported
The same five questions for every product, from the firm’s side. A broker-dealer’s business model is the answer to the second and third: agent or principal, introducing or self-clearing; the capital and the reporting follow from it.
matched at the midpoint in the ATS; routed out under the market access rule
two trades per match through NSCC with the operator as riskless principal
the operator’s net capital; the clearing arrangements
Form ATS-N and ATS-R; the TRF and CAT; the weekly ATS volume publication
Glossary
The terms that come back on every diagram. Every pill in the diagrams also shows its definition on hover.
Concepts, terms and rules
Introducing broker: A broker-dealer that opens the customer relationship and takes the orders but does not carry the accounts: a clearing firm holds the cash and securities, settles and sends the statements.
Clearing firm: A self-clearing broker-dealer that carries accounts for introducing brokers under a clearing agreement (Pershing, Fidelity Clearing, Apex, Wedbush, RBC Clearing and others), with the responsibilities allocated under FINRA Rule 4311.
Fully disclosed clearing: The clearing arrangement in which the clearing firm knows and carries each customer’s account; omnibus clearing carries the introducing firm’s customers as one account the introducing firm sub-accounts.
Self-clearing: A broker-dealer that is itself the NSCC, DTC and OCC member for its trades and carries its own customer accounts, with the back office, the settling bank, the stock record and the customer protection obligations that come with it; the alternative to introducing through a clearing firm.
Net capital rule: Rule 15c3-1: a broker-dealer must keep liquid net capital above a minimum (a fixed dollar amount, or a ratio to aggregate indebtedness or to customer debits), computed by deducting illiquid assets and haircuts from net worth; an early warning level sits above the minimum.
Customer protection rule: Rule 15c3-3: a broker-dealer must keep possession or control of customers’ fully paid and excess margin securities and lock up customer cash in a reserve account under the reserve formula, so that customer assets are not used to fund the firm.
Possession or control: The requirement that customers’ fully paid and excess margin securities be held in locations the broker controls (DTC, a bank) free of liens, with any shortfall resolved by buy-ins within set times.
Reserve formula: The computation under Rule 15c3-3 of the cash a broker-dealer must lock up in a special reserve bank account for the benefit of customers: customer credits minus customer debits, run weekly or daily.
Early warning: The net capital level above the minimum at which a broker-dealer must notify its regulators and restrict capital withdrawals; in Canada, CIRO’s Level 1 and Level 2 tests on risk-adjusted capital, liquidity and profitability, with restrictions on dividends, business and capital at each level.
Haircut: The discount applied to collateral: lending USD 100 against USD 102 of bonds is a 2% haircut.
Free credit balance: Customer cash held by a broker-dealer that the customer can withdraw on demand; the broker may use it only within the reserve formula.
Regulation T: The Fed rule setting the initial margin a broker may extend on a securities purchase (50% for most stocks); exchanges set the maintenance margin.
Rehypothecation: A broker-dealer’s right to reuse a client’s margin securities for its own financing (the prime broker’s for a hedge fund), limited in the US to 140% of the client’s debit; fully paid securities are segregated.
Sweep program: The automatic placement of a client’s uninvested cash into program bank deposits (FDIC insured up to the limit per bank) or a money market fund.
Reg BI: Regulation Best Interest: the SEC’s 2020 standard for broker-dealers recommending securities to retail clients (care, disclosure, conflicts, compliance), alongside the fiduciary duty of investment advisers.
Suitability: The client profile (objectives, horizon, risk tolerance, liquidity, tax situation) against which each recommendation is tested.
Best execution: The manager’s duty to obtain the most favorable terms reasonably available for its clients’ trades, documented by transaction cost analysis and broker reviews.
Payment for order flow: Payments a wholesaler or market maker makes to a retail broker for routing its orders; disclosed in Rule 606 reports.
Price improvement: An execution at a price better than the national best bid or offer, which wholesalers give retail orders in exchange for the order flow.
Internalization: Executing a customer order against the firm’s own book or against another customer’s order rather than sending it to an exchange.
Riskless principal: A dealer trade in which the firm buys from one party and immediately sells to another at the same price plus a markup, bearing no position risk; disclosed as principal with the markup on the confirmation.
Markup: The difference between the price a dealer pays and the price it charges a customer on a principal trade, limited by FINRA’s fair pricing rule and disclosed on bond confirmations since 2018.
Rule 605: The SEC rule requiring market centers (and, since 2024, large brokers) to publish monthly execution quality statistics.
Rule 606: The SEC rule requiring brokers to disclose quarterly where they route customer orders and what payment for order flow or rebates they receive.
Market access rule: Rule 15c3-5: a broker that gives clients access to markets must apply its own pre-trade risk controls to every order and cannot delegate them.
Regulation SHO: The SEC’s short sale rules: the locate requirement, the close-out of fails and the threshold securities list.
Rule 204: Regulation SHO’s close-out rule: a broker that fails to deliver on a short sale must buy in by the start of the next day’s trading.
Locate: The confirmation, before a short sale, that the broker can borrow the shares to deliver; required by Regulation SHO.
Conduit lending: A broker-dealer borrowing securities from one party to lend to another, earning the spread between the two rates.
Commission sharing: An arrangement under which part of the commission paid to executing brokers funds research from third parties (CSA or soft dollars under Section 28(e)).
Form BD: The broker-dealer’s registration form with the SEC and FINRA, listing its business, owners and affiliates.
Form U4: The registration form for each registered representative, with employment history and disclosures; Form U5 on departure.
FOCUS: The Financial and Operational Combined Uniform Single report: the broker-dealer’s monthly or quarterly filing of its balance sheet, net capital computation and reserve formula with FINRA and the SEC.
SIPC: The Securities Investor Protection Corporation: insures customers of a failed broker-dealer up to USD 500,000 (USD 250,000 for cash) against missing assets, not against market loss; funded by member assessments.
Selling group: The dealers in an offering that sell to investors without underwriting commitment, for a selling concession.
Co-manager: An underwriter in a syndicate other than the lead, with an allocation of the offering to sell and a share of the fees.
Private placement agent: A broker-dealer that places securities with investors in an unregistered offering under Regulation D for a placement fee, with its own due diligence duty.
Accredited investor: The income or net worth test a client must meet to buy private placements; qualified purchaser and qualified client are the higher tests for 3(c)(7) funds and performance fees.
Regulation ATS: The SEC rules under which a broker-dealer may operate an alternative trading system without registering as an exchange: Form ATS-N disclosures for NMS stock ATSs, fair access above 5% of the volume in a stock, weekly volume reports, books and records, and Regulation SCI for the largest.
Platforms, utilities and market infrastructure
NSCC: National Securities Clearing Corporation: the clearing house for US stocks and corporate bonds; nets each firm to one position per security per day.
CNS: NSCC’s Continuous Net Settlement: nets each member’s trades per security into one daily delivery or receipt against one money balance, with the failed positions carried forward.
DTC: Depository Trust Company: holds nearly all US stocks, corporate bonds and money market instruments in book-entry form and moves them against payment.
OCC: Options Clearing Corporation: the clearing house for every listed option in the US.
FICC: Fixed Income Clearing Corporation: the clearing house that stands between dealers in Treasury and repo trades and nets their deliveries.
Clearing fund: The collateral each NSCC or OCC member posts to the clearing house against its unsettled positions; the first loss layer if a member defaults.
ACATS: NSCC’s Automated Customer Account Transfer Service: moves a client’s whole account or selected assets between broker-dealers in about a week.
Fund/SERV: NSCC’s mutual fund order and settlement service: the broker-dealer or platform sends purchases, redemptions and exchanges to the fund’s transfer agent and settles the net cash.
CTM: DTCC’s Central Trade Manager: matches the broker’s trade details with the client’s and its custodian’s so settlement can happen.
ALERT: DTCC’s database of standing settlement instructions: where the bank picks up a client’s custodian and account details instead of asking by email.
Loanet: The stock loan processing platform (now part of EquiLend) brokers use to book, mark and return securities loans.
EquiLend: The industry platform for securities lending: locates, trade matching, recalls and returns between borrowers and lenders.
SLATE: FINRA’s Securities Lending and Transparency Engine: the securities loans reported under SEC Rule 10c-1a, from September 28, 2028 after the SEC’s December 2025 extension.
CAT: The Consolidated Audit Trail: every order, route, modification, cancel and execution in US equities and listed options, reported to FINRA by 08:00 ET the next day with customer identifiers.
TRF: A FINRA trade reporting facility: where over-the-counter trades in exchange-listed stocks (wholesaler fills, ATS matches, block prints) are reported to the consolidated tape within seconds, with the executing party and the capacity.
TRACE: FINRA’s Trade Reporting and Compliance Engine: every US bond trade is reported to it and published to the market within minutes.
RTRS: The MSRB’s Real-Time Transaction Reporting System: every municipal bond trade is reported to it within 15 minutes.
Wholesaler: A market maker that pays retail brokers for their order flow and executes it, usually inside the quoted spread (Citadel Securities, Virtu, Susquehanna and others).
Market maker: A dealer that quotes two-sided prices and trades as principal; on exchanges a registered market maker has quoting obligations.
Dark pool: An ATS that matches orders without displaying quotes, used by institutions to trade size with less information leakage.
ATS: An alternative trading system: a matching venue run by a broker-dealer under Regulation ATS rather than as an exchange; dark pools are ATSs that do not display quotes.
Smart order router: The broker’s routing logic that sends each order to the exchange, market maker or wholesaler expected to give the best execution.
Fedwire: The Federal Reserve’s real-time payment system; the way large US dollar payments move between banks.
ACH: The Automated Clearing House network for batch electronic payments between bank accounts; one to two days, low cost.
CRD: The Central Registration Depository: FINRA’s system of record for broker-dealer and representative registrations, qualifications, employment history and disclosures (Forms BD, U4 and U5); BrokerCheck is its public window.
Inside the broker-dealer: systems and providers
Rep workstation: The registered representative’s desktop: accounts, order entry, approvals, the suitability profile, the clearing firm’s data.
OMS: Order management system: where portfolio managers raise orders, compliance checks run and allocations across funds are kept (Aladdin, Charles River, SimCorp, Bloomberg AIM).
Risk gateway: The pre-trade risk checks a broker applies to every order before it reaches a market, as the market access rule (15c3-5) requires: credit and capital limits, erroneous order checks, restricted securities.
Trade blotter: The record of the day’s orders and executions by account and by representative, which supervision reviews.
Surveillance: Monitors orders, trades, chats and calls for market abuse and conduct breaches and raises alerts for compliance (NICE Actimize, Nasdaq SMARTS, Behavox).
Compliance engine: The rules engine that checks every order and every position against the fund’s mandate, the regulations and the restricted lists, before and after the trade.
Reporting hub: The engine that turns bookings into regulatory reports (TRACE, CAT, SDR, SBSDR, RTRS, FR 2052a) and tracks acknowledgments and rejects (DTCC Report Hub, AxiomSL, in-house).
Clearing portal: The clearing firm’s site for its introducing brokers: accounts, orders, cashiering, margin, reports, exception queues.
Trade file: A batch file of trades or positions exchanged between the manager, a custodian or a sponsor platform when no messaging standard applies.
Settlement system: The back-office system that turns a trade into settlement instructions, tracks fails and holds the settled positions (Broadridge, the back-office module of Murex or Calypso, in-house).
Reserve formula: The computation under Rule 15c3-3 of the cash a broker-dealer must lock up in a special reserve bank account for the benefit of customers: customer credits minus customer debits, run weekly or daily.
Statements: The client’s monthly or quarterly account statement from the custodian, and the firm’s performance report.
FINOP: The financial and operations principal: the registered Series 27 or 28 principal responsible for a broker-dealer’s net capital and customer protection computations, its FOCUS reports and its financial books and records; personally accountable to FINRA for their accuracy.
SWIFT message types used in the diagrams
MT300: SWIFT confirmation of an FX trade.
MT305: SWIFT confirmation of an FX option.
MT320: SWIFT confirmation of a fixed-term loan or deposit.
MT950: SWIFT account statement from a correspondent bank.
camt.053: ISO 20022 end-of-day bank account statement, the successor to MT950.
MT535: SWIFT statement of securities holdings from a custodian.
MT541: SWIFT instruction to receive securities against payment.
MT543: SWIFT instruction to deliver securities against payment.
camt.057: ISO 20022 notice to the account holding bank or custodian to expect an incoming payment, the successor of the MT210.
MT900: SWIFT debit confirmation from a bank.
MT304: SWIFT advice of an FX trade from a manager to its custodian, so the custodian can settle it.
MT545: SWIFT confirmation from the custodian that securities were received against payment.
MT547: SWIFT confirmation from the custodian that securities were delivered against payment.
MT548: SWIFT settlement status from the custodian: pending, matched, failed, with the reason.
MT566: SWIFT corporate action confirmation: the cash or securities credited for an event.
MT540-543: SWIFT instructions to receive or deliver securities, with or without payment; used to move collateral.
MT515: SWIFT client confirmation of a securities trade.
MT527: SWIFT triparty collateral instruction.
MT600: SWIFT confirmation of a precious metals trade.
MT604: SWIFT precious metals transfer or allocation instruction.
MT670: SWIFT standing settlement instruction update: how a counterparty notifies its SSIs by authenticated message.
MT340: SWIFT confirmation of a forward rate agreement.
MT564: SWIFT corporate action notification from a custodian or depository: the event, the options and the deadline.
MT502: SWIFT order to buy or sell securities, sent by a client to its broker or manager.
MT509: SWIFT trade status message from a broker or custodian.
MT101: The SWIFT request for transfer a corporate sends its bank, or a bank sends another, to move funds from the customer’s account.
MT700: The SWIFT message by which a bank issues a documentary credit to the advising bank.
MT710: The SWIFT advice of a documentary credit issued by a third bank, sent by the advising bank onward.
MT742: The SWIFT reimbursement claim a paying or negotiating bank sends the reimbursing bank under a documentary credit.
MT754: The SWIFT advice of payment, acceptance or negotiation sent by the paying bank to the issuing bank under a documentary credit.
MT799: The SWIFT free-format message between banks, used for trade finance correspondence and bank-to-bank undertakings.
MT940: The SWIFT customer statement message a bank sends an account holder (or its other bank) with the day’s entries and balances.
MT540: The SWIFT instruction to receive securities free of payment, used for the stock loans and the collateral deliveries.
MT306: The Swift confirmation of the FX options the MT305 cannot describe: average rate (Asian) options and forwards, barriers, digitals and other exotic structures, with their averaging or observation dates.
MT380: The Swift FX order: an investment manager instructs its custodian to buy or sell a currency for a fund; the custodian confirms the execution with an MT381.
MT606: The Swift precious metal debit advice: the account keeper tells the account owner its metal account was debited, with the bar list when the metal moves into allocated bars.
MT607: The Swift precious metal credit advice: the account keeper tells the account owner its metal account was credited, in fine troy ounces.
MT608: The Swift statement of a metal account: the opening and closing balances in ounces and the movements of the period, or the bars held in an allocated account.
Retail Brokerage›Retail Equity Order
A Retail Equity Order, Introducing and Self-Clearing
A retail customer’s order enters the firm’s system, passes the market access checks and is routed to a wholesaler that fills it with price improvement and pays the firm for the flow. On the introducing route the execution goes to the clearing firm, which carries the account, confirms, settles at NSCC and DTC and sends the statements (I); a self-clearing firm does all of that itself (S). The firm reports its orders to CAT and its routing in the 606 report either way.
Worked example, illustrative:order 300 shares at USD 120 (USD 36,000); solicited or unsolicitedrouting to a wholesaler under the routing arrangements; USD 119.99, a cent of improvementI the clearing firm books, confirms, settles and holds in street nameS the firm’s own back office, DTC account and settling banksettlement NSCC CNS between the wholesaler and the clearing member; DTC on T+1control CAT, Rule 606, the blotter review
Routes:Iintroducing firm, the clearing firm carries the accountSself-clearing firm, its own back office and memberships1shared steps
Broker-dealerClientMarket participantsMarket infrastructureService providersmessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsVoice, chatElectronic platform, APIInfrastructure system (payment, clearing, reporting)Internal systemOtherhover an arrow or a badge for the full detail
Jump to13 steps, hover or click any of them
The introducing firm owns the customer and the order; the clearing firm owns the account, the settlement and the statements, in the introducing firm’s name. A self-clearing firm is both. The wholesaler is on the other side of nearly every retail order and pays for the privilege.
Introducing versus self-clearing: most of the 3,400 FINRA member firms are introducing brokers that clear through a few dozen clearing firms under fully disclosed clearing agreements (FINRA Rule 4311 allocates the responsibilities: who opens accounts, who supervises, who sends statements, who extends margin); self-clearing requires DTC and NSCC membership, a back office, a settling bank, the customer protection and net capital apparatus and a much larger capital base.
Order routing economics: wholesalers pay retail brokers for marketable order flow and execute inside the NBBO; exchanges pay rebates for resting limit orders; the SEC’s Rule 606 report discloses the routing and the payments quarterly, Rule 605 the execution quality; the firm’s best execution committee reviews both (FINRA Rule 5310); commission-free trading made payment for order flow the retail broker’s main trading revenue.
Reg BI and supervision: a recommendation to a retail customer carries the best interest obligations; unsolicited orders do not, but the account’s suitability for options, margin and penny stocks still applies; the branch manager’s review of the trade blotter and the correspondence is the FINRA 3110 supervision the examiners test.
Books and records: the firm records orders, executions and customer data under Rules 17a-3 and 17a-4 (the clearing firm keeps the account records on route I under the clearing agreement); CAT captures every order event; the clearing firm’s daily files are the introducing firm’s reconciliation and its exception management.
Retail Brokerage›Margin and Cash
The Customer Margin Account, Free Credits and the Sweep
The two sides of a customer’s cash: the margin loan the firm extends under Regulation T, funded by its capital, bank loans or the rehypothecation of the customer’s margin securities, and the free credit balances the firm sweeps to program banks or locks up in the reserve account under the customer protection rule. The margin rate and the sweep spread are the firm’s revenue; possession or control and the reserve formula are its obligations.
Worked example, illustrative:margin USD 50,000 bought with USD 25,000 of cash; the firm lends half under Reg Tfunding capital, bank loans, rehypothecation within 140% of the debitmaintenance FINRA 25%, house 30 to 40%; calls and liquidationpossession or control fully paid and excess margin securities segregated at DTCsweep free credit balances to program banks within the FDIC limit; the firm earns the spreadreserve formula credits minus debits, locked up weekly or daily
Broker-dealerClientMarket infrastructureService providersmessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsVoice, chatElectronic platform, APIInfrastructure system (payment, clearing, reporting)Internal systemOtherhover an arrow or a badge for the full detail
Jump to10 steps, hover or click any of them
A customer’s cash is a liability the firm may use within rules written after brokers used it to fund themselves: the margin loan is the use the rules allow, the reserve account is the lock-up for the rest, and the sweep is the modern way to earn on it without holding it. The carrying firm, not the introducing firm, owns all of this.
Who extends the credit: the carrying firm; an introducing firm’s customers borrow from the clearing firm under the clearing agreement, with the introducing firm often sharing the interest; the margin book is funded by the firm’s capital, bank loans collateralized by margin securities, and the rehypothecation and lending of those securities, which is where the stock loan desk earns on the customer’s positions (see Clearing and Custody, Stock Loan).
Rule 15c3-3 in two parts: possession or control (customers’ fully paid and excess margin securities held free of lien at DTC or a bank, with daily computation and buy-ins for shortfalls) and the reserve formula (customer credits minus customer debits deposited in a special reserve bank account weekly, daily above a threshold); the rule is what makes a broker-dealer failure a custody problem rather than a loss, and SIPC covers the rest.
Sweeps: free credit balances are swept to program banks or money funds under the customer’s election; the bank deposit sweep is the retail broker’s largest revenue line in a positive rate environment; the SEC’s 2024 and 2025 cases on advisory sweeps and the FDIC pass-through rules frame the disclosures; cash left unswept enters the reserve formula and earns the firm nothing.
Supervision: margin approvals, house requirements, concentration in margin accounts, margin call handling and forced liquidations, the margin disclosure statement, and the day-trading rules (pattern day trader minimum equity of USD 25,000) are FINRA examination items; the clearing firm and the introducing firm share them under Rule 4311.
A customer sells covered calls through the firm: the order passes the options level and cover checks, is routed to an options exchange or wholesaler, clears at the OCC through the firm or its clearing firm as clearing member, and at expiry is assigned or lapses with the OCC’s random allocation and the member’s own allocation method. The options principal supervises; CAT captures the orders.
Worked example, illustrative:order sell 5 covered calls, 30 days, 5% out of the money, at USD 1.82: USD 910 of premiumapprovals options level 2, agreement and risk disclosure document on filerouting options exchanges or an options wholesaler; price improvement auctionsclearing OCC through the firm or its clearing firm; covered by the sharesexpiry assigned by random allocation; shares delivered at the strike on T+1supervision registered options principal; FINRA 2360; CAT
Broker-dealerClientMarket participantsMarket infrastructuremessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsVoice, chatElectronic platform, APIInfrastructure system (payment, clearing, reporting)Internal systemOtherhover an arrow or a badge for the full detail
Jump to10 steps, hover or click any of them
Listed options are the retail product with a single clearing house and sixteen exchanges, so the firm’s work is the approval levels, the routing, the cover and the assignment allocation. The OCC sees the clearing member, not the customer; the member’s allocation method decides which customer is assigned.
Options at a retail broker: covered calls, cash-secured puts, spreads and the speculative buying of calls and puts; approval levels by strategy and by customer profile; the options agreement and the OCC’s Characteristics and Risks of Standardized Options document before the first trade; FINRA Rule 2360 governs supervision, suitability, position limits and the allocation of assignments.
Clearing: the OCC is the single clearing house for all US listed options; the firm is a clearing member or clears through its clearing firm; customer positions sit in the member’s segregated customer account at the OCC with the member’s margin; covered positions need the cover certified; uncovered short options need margin under the exchange rules, higher for retail.
Routing and economics: options orders route to the 16 exchanges or to options wholesalers (payment for order flow in options is larger per contract than in equities); the firm charges per-contract commissions; Rule 606 discloses options routing separately; the exchanges’ price improvement auctions handle marketable retail orders.
Expiry mechanics: the OCC exercises in-the-money options automatically at expiry (by exception) and assigns by random allocation to clearing members; each member allocates among its customers by a disclosed method; assignments settle as stock trades on T+1; the firm’s systems warn customers of expiry and ex-dividend assignment risk.
An Institutional Algorithmic Order, Commissions and Research
An institutional client sends an order to the firm’s algorithm by FIX; the firm works it across the venues under its router and the market access rule, returns the fills and the TCA, confirms the client’s allocations through CTM, settles to each fund’s custodian at DTC through institutional delivery and nets its own side in CNS. The commission pays for execution and, through a commission sharing account, for research; the best execution committee, Rule 605 and CAT are the controls.
Worked example, illustrative:order 400,000 shares through the VWAP algorithm, 10% participation; 1.5 cents with a CSAexecution child orders across exchanges, the firm’s ATS and dark pools; USD 85.12 vs VWAP 85.10post-trade allocations through CTM, affirmation by 21:00 ET, SSIs from ALERTsettlement CNS for the firm’s side; DTC institutional delivery to each custodian on T+1commission execution portion to the firm; research portion to the CSAcontrol best execution committee, Rule 605, CAT, market access
Broker-dealerClientMarket participantsMarket infrastructureService providersmessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsVoice, chatElectronic platform, APISWIFT messageInfrastructure system (payment, clearing, reporting)Internal systemhover an arrow or a badge for the full detail
Jump to11 steps, hover or click any of them
An agency broker never owns the shares for more than the time it takes the custodian to pay: its product is the algorithm, the routing and the report, its revenue is the commission, and its risks are the fail and the market access control it cannot delegate. The research side of the commission is the part the regulators watch.
Institutional agency brokers: the independent agency brokers and the electronic brokers (and the agency arms of the large banks) execute for asset managers and hedge funds on commission, with algorithms, smart order routing, dark pools and program trading; many run an ATS; some offer outsourced trading desks; their edge is execution quality, their revenue the commission, and their balance sheet small.
Market access and venues: the firm applies the 15c3-5 controls to every order it sends, including the clients’ DMA orders; it is a member of the exchanges or routes through members; its ATS, if it has one, operates under Regulation ATS with Form ATS-N disclosures; Rule 605 applies to large brokers’ execution quality since 2024 and Rule 606 to routing.
Commissions and research: client commissions pay for execution and research under Section 28(e) through commission sharing arrangements; the broker administers the CSA balances and pays the research providers the client directs; MiFID-affected clients pay research from the manager’s own money; the broker vote decides the research allocation.
Settlement for an agency broker: the firm’s executions net in CNS with the venues’ counterparties; the client-side deliveries go through DTC’s institutional delivery against each custodian after affirmation; fails on either side are the firm’s to finance and to chase; the net capital rule charges aged fails.
Institutional Brokerage›Block and Facilitation
A Block Crossed as Agent or Facilitated as Principal
A client’s block is either crossed with another client as agent, in the firm’s ATS or printed to the tape with a commission on each side (C), or bought by the firm as principal at a discount and worked out of over the following days, with the firm’s capital and net capital haircut at risk (R). The information control around the inquiry and the capacity disclosure on the confirmation are what the rules require.
Worked example, illustrative:block 2,000,000 shares, three days of volumeC crossed with a natural buyer at a negotiated or midpoint price; commission each sideR bought at a 0.6% discount as principal; worked out over two dayscapital a 15% haircut on the overnight position in net capitalsettlement from the client’s custodian at DTC; the market side in CNScontrol information barriers, front running surveillance, capacity disclosure
Routes:Cagency cross between two clientsRriskless principal facilitation with the firm in the middle1shared steps
Broker-dealerClientMarket participantsMarket infrastructureService providersmessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsVoice, chatElectronic platform, APIInfrastructure system (payment, clearing, reporting)Internal systemhover an arrow or a badge for the full detail
Jump to10 steps, hover or click any of them
The same block is a service on route C and a trade on route R, and the difference is the firm’s capital: an agency broker crosses, a firm with a balance sheet facilitates. The confirmation’s capacity line tells the client which one happened, and the net capital rule tells the firm how long it can hold the result.
Agency versus principal: an agency broker crosses natural orders and earns commissions; a firm with capital facilitates blocks as principal, earning the discount and bearing the position; many firms do both and disclose the capacity on each confirmation; riskless principal trades (buy and sell at once, markup disclosed) sit between the two; the choice is also a net capital question, since inventory is haircut.
Information and conduct: block inquiries are material information; the firm’s barriers keep its proprietary and other client trading away from them; pre-hedging a block before it is agreed and trading ahead of a client order are enforcement cases; the block desk’s records of indications, the timing of the cross and the price negotiation are the examiners’ file.
Venues for blocks: the firm’s own ATS (conditional orders, block crossing), independent block venues (Liquidnet), exchange block facilities and the tape’s block reporting; the SEC’s Regulation ATS and the Form ATS-N disclosures govern how a broker’s ATS handles its own and its clients’ orders.
Capital: an equity position held overnight carries a 15% haircut in the net capital computation (more for concentrated or illiquid positions), and the position is financed from the firm’s own resources or a bank line; a smaller firm facilitates only what its excess net capital allows, so block facilitation is concentrated in the larger firms.
Market Making›Wholesaler
A Wholesaler Internalizing Retail Order Flow
A wholesaler buys retail order flow from the brokers, fills each order from its own inventory inside the quoted spread in microseconds, nets the longs and shorts across millions of orders and hedges the residual on the exchanges. It reports every trade to the tape and CAT, settles net at NSCC and DTC, finances its inventory and publishes its execution quality. The payment for order flow and the price improvement are two sides of the same spread.
Worked example, illustrative:arrangements routing agreements with retail brokers; payment per share; 606 disclosureexecution internalized at USD 119.99 against a USD 120.00 offer, in microsecondsinventory longs and shorts net; the residual hedged on the exchangesreporting tape within seconds; CAT; Rule 605 monthlysettlement CNS and DTC net on T+1economics the fraction of a cent between the retail fill and the hedge, times billions of shares
Broker-dealerClientMarket participantsMarket infrastructureService providersmessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsVoice, chatElectronic platform, APIInfrastructure system (payment, clearing, reporting)Internal systemhover an arrow or a badge for the full detail
Jump to10 steps, hover or click any of them
The wholesaler is a broker-dealer whose customers are other broker-dealers and whose product is a better price than the exchange for orders that carry no information. It lives on the net of its flow and the speed of its pricing, under the same net capital, tape and CAT rules as everyone else, and under the regulators’ recurring question of whether the arrangement serves the retail customer.
The retail market structure: a handful of wholesalers (Citadel Securities, Virtu, Susquehanna, Two Sigma Securities, Jane Street) execute most retail equity and options orders off-exchange; they pay the retail brokers for the flow and give the customers price improvement; the exchanges see the institutional and the residual flow; the SEC has examined the arrangement for a decade and reformed the tick sizes and access fees in 2024 while dropping the order competition proposal.
Being a market maker: registered market makers on the exchanges have quoting obligations; the wholesaler’s off-exchange fills are reported to a trade reporting facility; its net capital rule treatment as a market maker gives it some haircut relief; its risk controls under the market access rule apply to its own orders; its systems are the business.
Settlement at scale: billions of shares a day net to small positions at NSCC; the clearing fund deposit at NSCC reflects the gross activity and the volatility (the January 2021 meme stock episode raised clearing fund calls on the retail brokers and the wholesalers overnight); the wholesaler’s inventory is financed by capital, bank lines and stock loan.
Options wholesaling: the same model in listed options with larger payments per contract and the OCC as the clearing house; the retail brokers route options orders to the wholesalers or to the exchanges’ price improvement auctions; the 606 report shows the options routing separately.
A Regional Bond Dealer Trading as Principal With Markups
A regional broker-dealer’s bond desk sells to its advisors’ customers from inventory or as riskless principal, buying from another dealer on the marketplaces and reselling with a markup that the confirmation discloses against the prevailing market price. Both legs are reported to RTRS or TRACE, the bond passes through the firm’s DTC account, the inventory is financed in repo and haircut in the net capital computation, and the fixed income principal supervises the markups.
Worked example, illustrative:desk USD 150,000,000 of inventory; offerings on the marketplaces and in the workstationstrade USD 50,000 of a 2031 A muni: bought at 100.75, sold at 101.25, markup 0.5% (USD 250)reporting RTRS within 15 minutes, both legs with capacity; TRACE for corporatesdisclosure markup in dollars and percent against the prevailing market pricesettlement DTC on T+1, in and out the same daycapital inventory financed in repo; haircuts by maturity and rating
Broker-dealerClientMarket participantsMarket infrastructureService providersmessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsVoice, chatElectronic platform, APISWIFT messageInfrastructure system (payment, clearing, reporting)Internal systemOtherhover an arrow or a badge for the full detail
Jump to10 steps, hover or click any of them
The bond dealer earns a markup where the equity broker earns a commission, and the rules since 2018 make the markup as visible as a commission: the public tape shows both legs, the confirmation shows the number. The inventory is the dealer’s balance sheet and its net capital charge; the riskless principal trade is how a small dealer offers a large shelf.
Regional and retail bond dealers: the fixed income desks of regional broker-dealers, independent broker-dealers and the online brokers serve advisors and retail customers with corporates, munis, agencies, CDs and Treasuries, from inventory and through the retail marketplaces (Tradeweb Direct, ICE BondPoint, MarketAxess); the muni market in particular runs on regional dealers.
Markups and fair pricing: FINRA Rule 2121 and MSRB Rule G-30 require fair prices with markups justified by the prevailing market price; the 2018 confirmation disclosure (FINRA 2232, MSRB G-15) shows retail customers the markup in dollars and percent when the dealer traded the same bond the same day; the public TRACE and RTRS prints let anyone compute it; excessive markups are a recurring enforcement theme.
Trade reporting: RTRS (munis, 15 minutes) and TRACE (corporates, agencies, 15 minutes, moving toward one minute for some) capture both the dealer-to-dealer and the dealer-to-customer legs with the capacity; EMMA shows the muni data publicly; the reporting timeliness and accuracy are examined.
Capital and inventory: bond inventory carries net capital haircuts by maturity and credit quality; it is financed in repo with banks and larger dealers; a rate shock marks the inventory and a widening of spreads reduces its liquidity; small dealers keep inventory short-dated and rely on riskless principal trades for the rest.
Clearing and Custody›Correspondent Clearing
Correspondent Clearing: Carrying Accounts for an Introducing Broker
The clearing firm’s side of fully disclosed clearing: due diligence and the clearing agreement under FINRA Rule 4311, the conversion and the connectivity, the daily processing of the correspondent’s customers’ orders and activity in the correspondent’s name, clearing and settlement as the NSCC and DTC member, margin and the correspondent’s exposure, the daily files and exception queues, the clearing firm’s own customer protection and net capital obligations across all correspondents, the surveillance of the correspondent, and the fees.
Worked example, illustrative:agreement FINRA 4311 allocation: the correspondent opens and supervises; the clearing firm custodies, settles, margins, reportsonboarding due diligence, deposit, bulk ACATS conversion, FIX and the portaldaily orders, confirmations and statements in the correspondent’s name; CNS and DTC; margin and callsobligations reserve formula and possession or control for all correspondents’ customers; net capital; SIPCoversight surveillance of the correspondent; restriction or terminationeconomics tickets, margin interest and sweep shared, platform fees, minimums
Broker-dealerClientMarket infrastructureService providersmessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsVoice, chatElectronic platform, APIInfrastructure system (payment, clearing, reporting)Internal systemOtherhover an arrow or a badge for the full detail
Jump to11 steps, hover or click any of them
The clearing firm is the broker-dealer behind hundreds of broker-dealers: it holds the customers it never meets, lends them margin, settles their trades and answers for their assets under the customer protection rule, while the introducing firm keeps the relationship. The clearing agreement is the industry’s division of labor and the examiners read it first.
The clearing firms: Pershing (BNY), Fidelity Clearing (National Financial), Apex, Wedbush, RBC Clearing, Axos, Hilltop, StoneX and the clearing arms of the large banks carry the accounts of most introducing broker-dealers and many RIAs; the business is scale (millions of accounts, thousands of correspondents), technology (the portals, the files, the APIs the fintech brokers build on) and capital (the margin book and the customer protection obligations).
FINRA Rule 4311: the clearing agreement must allocate every function (account opening, KYC, suitability, supervision, custody, margin, settlement, statements, complaints, regulatory reporting) and the customer must be told; the clearing firm must have procedures to monitor the correspondent and to report its own concerns; the rule came out of cases where clearing firms were held to know their correspondents’ misconduct.
Risk to the clearing firm: unsecured customer debits in a correspondent’s accounts (the correspondent is liable but may be unable to pay), a correspondent’s failure or enforcement action, concentration in a few correspondents, and the operational exposure of carrying accounts it did not open; the deposit, the credit policy and the surveillance are the mitigants.
Omnibus clearing: the alternative in which the clearing firm carries the correspondent’s customers as one omnibus account and the correspondent sub-accounts them, keeping the customer protection obligations itself; used by firms that want to keep the custody and by some non-US brokers; fully disclosed is the norm for US retail.
Clearing and Custody›Self-Clearing Cycle
The Self-Clearing Settlement Cycle at NSCC and DTC
What a self-clearing broker-dealer does every day as an NSCC and DTC member: the day’s trades compared and netted in CNS, the back office reconciled to the CNS report, the net deliveries and receipts at DTC on T+1 with the net money through the settling bank, the institutional deliveries outside CNS, the clearing fund and its intraday calls, possession or control at DTC, the dividends and corporate actions allocated by the stock record, and the books and records that hold it together.
Worked example, illustrative:comparison locked-in and matched trades; the CNS projection per security and the net moneysettlement net securities at DTC on T+1; net money through the settling bank by the deadlineoutside CNS institutional delivery against custodians after affirmation; customer deliveriesclearing fund daily requirement from unsettled positions and volatility; intraday calls in stresscustody possession or control at DTC; the stock recordrecords daily reconciliation, aged fails and their capital charges, 17a-13 counts, FOCUS
Broker-dealerClientMarket participantsMarket infrastructureService providersmessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsElectronic platform, APISWIFT messageInfrastructure system (payment, clearing, reporting)Internal systemOtherhover an arrow or a badge for the full detail
Jump to11 steps, hover or click any of them
Self-clearing turns the broker-dealer into a settlement system’s member: one net position per security, one money number per day, a clearing fund that can be called within the hour, and a stock record that must agree with DTC every night. The customers see positions in street name; the firm sees the net of everything it did and owes.
NSCC and DTC membership: capital, operational and financial requirements, the clearing fund and the participant fund, a settling bank, connectivity and a back office able to process the CNS reports; the DTCC rulebooks and the SEC’s covered clearing agency rules govern them; a firm that cannot meet them clears through a clearing firm (see Correspondent Clearing).
CNS: continuous net settlement nets each member’s obligations per security into one position that rolls forward; NSCC becomes the counterparty at comparison and guarantees settlement, funded by the clearing fund; the January 2021 meme stock episode showed the clearing fund calls can be a multiple of a firm’s normal requirement overnight; T+1 (May 2024) shortened the cycle and the guarantee period.
Institutional delivery outside CNS: trades with institutional clients settle through DTC’s ID system against the clients’ custodians after affirmation (by 21:00 ET on trade date under the T+1 rules); a DK or a late affirmation causes a fail the firm carries; fails are aged and charged in net capital after set periods, and short sale fails must be closed out under Rule 204.
The stock record: the firm’s ledger of every security position by customer (long and short) and by location (DTC, segregated, bank, transfer agent, in transit, loaned), reconciled daily to DTC and the other locations and counted quarterly under Rule 17a-13; possession or control, the reserve formula and the dividend allocation all run from it; a broken stock record is how broker-dealer failures start.
Clearing and Custody›Stock Loan
The Stock Loan Desk: Borrowing for Shorts, Lending the Supply
The broker-dealer’s stock loan desk borrows shares to deliver on its customers’ short sales and its own fails, lends the margin securities it may use and its inventory for cash collateral it reinvests, and runs conduit loans for the spread. Every loan is marked daily, rates and recalls move with the name, the customer protection rule limits what can be lent and counts the collateral, and since 2026 every loan is reported to SLATE.
Worked example, illustrative:borrow 50,000 shares of a hard-to-borrow name at 15% a year; located and borrowed on EquiLend and Loanetdelivery against 102% cash collateral at DTC; delivered into CNS on the short sale (Rule 204)lending margin securities within the rules, inventory, fully paid lending with customer consenteconomics the rebate paid against the reinvestment of the collateral; borrow fees passed to the short customerdaily marks, rate changes, returns and recallsrules reserve formula, possession or control, net capital charges, SLATE, Regulation SHO
Broker-dealerClientMarket participantsMarket infrastructureService providersmessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsVoice, chatElectronic platform, APIInfrastructure system (payment, clearing, reporting)Internal systemOtherhover an arrow or a badge for the full detail
Jump to10 steps, hover or click any of them
The stock loan desk is where the customer protection rule meets the firm’s funding: the margin securities the rule lets the firm use become loans and cash, the fully paid ones stay segregated, and the shorts the firm’s customers sell are deliverable only because the desk borrowed them. It is a dealer in the use of securities, and SLATE now makes every loan visible.
Why a broker-dealer runs a stock loan desk: to deliver on customer short sales and the firm’s fails (Regulation SHO), to earn on the margin securities it is allowed to use, to finance itself with the cash collateral, and to intermediate between lenders (agent lenders, custodians) and borrowers (prime brokers, hedge funds) as a conduit; prime brokers run the same desk at scale (see the sell-side page, Prime Brokerage Financing).
Rules: possession or control decides which customer securities may be lent (margin securities up to 140% of the customer’s debit; fully paid securities only under a fully paid lending agreement with the customer, which the SEC has examined for its disclosures and collateral); Regulation SHO requires the locate and the close-out; the reserve formula counts stock loan cash related to customer securities; net capital charges apply to the exposures.
Reporting: Rule 10c-1a requires lenders (or their agents) to report every securities loan to FINRA’s SLATE from September 28, 2028 (the SEC extended the date in December 2025), with aggregate data published; combined with Rule 13f-2’s short position reports from managers, the regulators now see both sides of the short market; the firm’s locate records and its loan reports are examination items.
Economics: lending income (the spread between the rebate and the reinvestment, plus hard-to-borrow fees), the funding value of the collateral, and the borrow costs passed to short customers; the desk’s rates by name are set against EquiLend’s and the primes’ data; a short squeeze (2021) is where borrow fees and recalls hit the customers and the desk at once.
Financial Responsibility›Net Capital
Net Capital and the FOCUS Cycle
The net capital rule in practice: the FINOP’s daily or monthly computation from the ledger through the non-allowable assets, the haircuts and the charges to the requirement and the early warning level, the inputs from the clearing house, the depository and the banks, the notifications and the withdrawal limits, the FOCUS report, the FINOP’s sign-off, the annual audit and the 17a-5 reports, the SIPC assessment and the FINRA financial examination. Net capital is what lets the firm carry inventory, fails and margin, and losing it stops the business the same day.
Worked example, illustrative:computation net worth less non-allowable assets, haircuts (2% Treasuries, 15% equities, 100% unlisted) and chargesrequirement fixed minimum by firm type; aggregate indebtedness 15 to 1 or 2% of customer debits; early warning above itinputs NSCC and DTC positions and fails, the margin book, the inventory marks, the bank statements, approved subordinated debtcycle daily or monthly computation; FOCUS within 17 business days; annual 17a-5 audit within 60 daysconsequences early warning notice and withdrawal limits; below the minimum, cease businessoversight FINOP, CFO certification, PCAOB auditor, SIPC, FINRA financial exams
Broker-dealerMarket infrastructureService providersmessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsVoice, chatElectronic platform, APIInfrastructure system (payment, clearing, reporting)Internal systemhover an arrow or a badge for the full detail
Jump to10 steps, hover or click any of them
Net capital is liquidity, not solvency: the rule asks whether the firm could liquidate today and pay everyone, and it answers by refusing to count anything slow to sell. The FOCUS report is the firm telling its regulators the answer every month, and the FINOP is the person who signs it.
Rule 15c3-1: the minimum net capital by type of firm (carrying customer accounts USD 250,000; introducing firms that receive but do not hold customer funds USD 50,000; firms that do neither USD 5,000; market makers by the number of securities; the alternative method for the large carrying firms); haircuts by asset class and maturity; the aggregate indebtedness and the alternative standards; the early warning levels in Rule 17a-11; and the special rules for the largest firms (the alternative net capital computation using models).
What counts and what does not: cash, receivables from clearing organizations and from customers for recent trades, marketable securities (after haircuts) and approved subordinated debt count; fixed assets, goodwill, unsecured receivables, aged fails and illiquid positions do not; the structure rewards an agency, introducing business model and penalizes inventory, so the standalone firms look the way they do.
The FINOP and the FOCUS: every firm has a registered financial and operations principal responsible for the computation and the filings; the FOCUS report (Part II for carrying firms, Part IIA for introducing) is filed electronically with FINRA monthly or quarterly with the supplemental statements of income; the annual audited report under Rule 17a-5 by a PCAOB-registered auditor includes the compliance report (carrying firms) or the exemption report (introducing firms claiming the 15c3-3 exemption).
Failures: the cases where net capital was overstated (unrecorded liabilities, misclassified assets, fraud) are the history of SIPC liquidations (MF Global’s customer funds, the small firms every year); the regulators’ tools are the early warning notices, the withdrawal restrictions and the FINRA financial examination; the clearing firms watch their correspondents’ FOCUS reports for the same reason.
The Broker-Dealer’s Funding: Banks, Stock Loan, Repo and Customer Credits
How a broker-dealer funds its margin book, its inventory and its settlements: bank loans secured by margin and firm securities, stock loan cash collateral from lending the securities it may use, repo on the bond inventory, and customer free credit balances within the reserve formula, with the settling bank for the daily settlement and the clearing houses’ intraday calls as the hard deadlines. The customer protection rule draws the line between the firm’s funding and the customers’ assets.
Worked example, illustrative:needs USD 800,000,000 of customer debits; USD 400,000,000 of inventory; fails; clearing fund; settlementssources capital, free credits within the reserve formula, stock loan cash, bank loans on margin collateral, repolimits margin securities pledged or lent within 140% of debits; fully paid segregateddeadlines net settlement through the settling bank; intraday clearing fund and OCC margin calls within the hourplanning liquidity stress tests, contingency funding, subordinated debt, owners’ equitycustomers the margin rate, the sweep rate, fully paid lending income
Broker-dealerClientMarket participantsMarket infrastructureService providersmessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsVoice, chatElectronic platform, APISWIFT messageInfrastructure system (payment, clearing, reporting)Internal systemOtherhover an arrow or a badge for the full detail
Jump to10 steps, hover or click any of them
The firm’s balance sheet is customer money and securities on one side and the rules that limit their use on the other; what the rules do not allow, the banks, the stock loan market and the repo market must fund overnight. That is why a broker-dealer’s crisis is always a funding crisis, and why the standalone firms keep their balance sheets small.
The funding sources in order of cost and stability: the firm’s equity and approved subordinated debt (capital), customer free credit balances usable under the reserve formula (cheap but locked up beyond the debits), stock loan cash collateral (cheap for lendable names, volatile), bank loans secured by margin and firm securities (committed lines cost a fee), repo and triparty for the inventory (overnight and term), and for the largest firms the parent’s support; none is insured and all are secured.
The customer protection rule as a funding constraint: the firm may use customer margin securities up to 140% of the customer’s debit (pledging them to banks or lending them) and customer credits only to the extent of customer debits; everything else is locked up in segregation and the reserve account; the rule was written after the 1960s paperwork crisis and 1970 failures so that customer assets fund customers, not the firm.
Clearing house liquidity: NSCC’s clearing fund and OCC’s margin can be called intraday with an hour’s notice; the firm needs cash or Treasuries it can move at once, through a settling bank that will extend intraday credit; the January 2021 calls on retail brokers (Robinhood’s emergency raise) are the reference; the clearing firms carry this for their correspondents.
Stress: lenders withdraw secured lines, haircuts rise, stock loan counterparties recall, and the clearing houses call more; the firm’s contingency funding plan, its unencumbered liquid assets and its parent are the defenses; the regulators’ interest is the customers (SIPC, the customer protection rule) rather than the firm’s survival, which distinguishes a broker-dealer from a bank.
Capital Markets›Syndicate Participation
A Co-Manager or Selling Group Member in an Offering
A standalone broker-dealer joins a syndicate as a co-manager or a selling group member: the commitment committee sizes the net capital charge, the firm markets the offering to its own investors and submits its book, the lead prices and allocates, the firm allocates its shares under its own policy and confirms with the prospectus, the shares are delivered through DTC at the closing and the firm keeps the concession. Regulation M, the allocation rules and the records govern it.
Worked example, illustrative:role co-manager (commitment and fee share) or selling group (concession only) on a USD 300,000,000 follow-oncapital the underwriting commitment as an open contractual commitment charged in net capital until closingbook the firm’s institutional and retail indications submitted to the leadallocation 600,000 shares at USD 48; FINRA 5130 and 5131; the firm’s allocation policyclosing shares from the lead’s DTC account against payment on T+2economics the selling concession per share; the management fee as a co-manager
Broker-dealerClientMarket participantsMarket infrastructuremessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsVoice, chatElectronic platform, APIInfrastructure system (payment, clearing, reporting)Internal systemOtherhover an arrow or a badge for the full detail
Jump to11 steps, hover or click any of them
A smaller firm in a syndicate is a distributor with a capital charge: it sells the deal to its own customers and earns the concession, while the lead runs the book, the pricing and the stabilization. The allocation to its customers is where its own rules apply, and the net capital rule is why its commitment is small.
The sell-side page covers the bookrunner’s side (Fixed Income, New Issue; Equities, IPO and Follow-On); a standalone firm is more often a co-manager, a selling group member or, in the regional and middle-market space, the lead on smaller deals; its capital markets team, its research and its sales force are the assets the issuers and the leads buy.
Rules: the underwriting commitment is an open contractual commitment with a net capital charge (the haircut on the committed shares) until the closing, which caps a small firm’s participation; Regulation M restricts the syndicate’s trading during the offering; FINRA Rule 5110 (the corporate financing rule) reviews the underwriting compensation; Rules 5130 and 5131 govern allocations to restricted persons and spinning; the firm’s research is restricted under the quiet period and the research rules.
Allocation: the firm allocates its shares among its customers under a written policy; institutional allocations by the sales desk, retail allocations through the reps with Reg BI applying to recommended offerings; flipping by the firm’s customers triggers the lead’s penalty bid; the syndicate records are a FINRA examination item.
Settlement: a closing through DTC on T+2 after pricing (longer for debt new issues); the lead delivers to each member’s DTC account against payment; the member’s customers settle into their accounts; the syndicate’s accounting of fees and expenses follows weeks later from the lead.
Capital Markets›Private Placement
A Private Placement Agent Under Regulation D
The firm places a private company’s securities with accredited investors under Regulation D: an engagement letter and a placement fee, the firm’s own due diligence (its liability), the offering to investors it has a relationship with, subscriptions with accreditation and AML, funds held in escrow until the minimum is met, the closing with the fee, the Form D and the FINRA 5123 filing, and the restricted securities the investors then hold.
Worked example, illustrative:engagement USD 40,000,000 of preferred equity; 5% placement fee; 506(b) or 506(c)diligence the firm’s own investigation of the issuer; the commitment committeeinvestors accredited investors with a substantive relationship; suitability and Reg BI for retailmoney subscriptions to a bank escrow under Rule 15c2-4; released at the closingsecurities issued on the issuer’s register, restricted under Rule 144filings Form D within 15 days; FINRA Rule 5123
Broker-dealerClientMarket participantsMarket infrastructureService providersmessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsVoice, chatElectronic platform, APIInfrastructure system (payment, clearing, reporting)Internal systemOtherhover an arrow or a badge for the full detail
Jump to10 steps, hover or click any of them
A private placement has no exchange, no depository and no public tape: the firm is the whole market, and the rules make it responsible for what it sells (due diligence) and keep it away from the money (escrow). The restricted security the investor ends up holding is the opposite of everything else on this page.
Private placements and the standalone firms: regional and boutique broker-dealers place private equity, debt, real estate programs, private funds and start-up rounds for issuers too small for the public markets; the fees are high and the enforcement history long (unsuitable sales to retail investors, inadequate due diligence, undisclosed conflicts); FINRA’s Notice 10-22 and Rule 5123 exist for that reason.
Regulation D: Rule 506(b) allows unlimited accredited investors and up to 35 sophisticated non-accredited investors without general solicitation; 506(c) allows general solicitation if accreditation is verified; Form D is filed by the issuer; the securities are restricted and resold under Rule 144 or to qualified institutional buyers under Rule 144A; a placement agent must be a registered broker-dealer (unregistered finders are a recurring problem).
Money handling: Rule 15c2-4 requires an offering with a minimum to hold the funds in a bank escrow until the minimum is met, and the firm must never commingle them; the firm’s net capital treatment of the engagement is simple (no commitment) unless it also underwrites.
Related businesses on a standalone firm’s capital markets side: M&A advisory (fees, no securities), 144A resales and secondary private market trading (a growing business for the firms with an ATS for private shares), and the sponsorship of private funds for the firm’s wealth clients (see the wealth page, Private Funds).
Capital Markets›Running an ATS
Running an Alternative Trading System
A broker-dealer operating a matching venue under Regulation ATS: the Form ATS-N disclosures and the subscriber agreements, orders matched at the midpoint without displayed quotes, trade reporting to the tape and CAT, routing out under the market access rule, clearing of the matches through NSCC with the operator in the middle, confirmations and fees, the surveillance and the information controls, and the Regulation ATS obligations. The firm is a venue and a broker-dealer at once.
Worked example, illustrative:venue a dark pool for NMS stocks (or a fixed income or private shares venue) under Regulation ATS; Form ATS-Nmatching resting and conditional orders crossed at the midpoint; 50,000 shares matchedreporting the trade reporting facility within seconds; CAT; weekly ATS volume publicationclearing two trades per match through NSCC, the operator as riskless principalcontrols surveillance, information leakage, Form ATS-N disclosures, Regulation SCI for the largestobligations Form ATS-R, fair access above 5%, books and records
Broker-dealerClientMarket participantsMarket infrastructuremessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsVoice, chatElectronic platform, APIInfrastructure system (payment, clearing, reporting)Internal systemOtherhover an arrow or a badge for the full detail
Jump to10 steps, hover or click any of them
An ATS is an exchange run by a broker-dealer under lighter rules in exchange for disclosure: it matches without quoting, reports without a listing, clears through its operator and answers to Regulation ATS rather than to exchange registration. The enforcement history is about what operators did with the order information, and Form ATS-N is the response.
ATSs in the US market: about 30 equity ATSs (dark pools run by the large banks, the agency brokers and independents) execute around 10 to 15% of equity volume; fixed income ATSs (MarketAxess, Tradeweb and others are registered as ATSs or broker-dealers for their platforms); private shares and crypto venues register as ATSs too; the SEC’s 2018 Form ATS-N rules and the 2024 expansion of the ATS definition to more fixed income and Treasury platforms shape the category.
The operator’s dual role: a broker-dealer subject to the market access rule, the trade reporting rules, CAT and the net capital rule, and a venue subject to Regulation ATS (fair access above thresholds, Form ATS-N and ATS-R, Regulation SCI for the largest) and to the exchanges’ rules for the trades it prints through them; its own trading in the pool and its handling of subscriber data are the disclosed conflicts.
Clearing structure: most equity ATSs stand between the matched subscribers as riskless principal so that the subscribers face only the operator; the operator submits the trades to NSCC and carries the clearing fund; some ATSs match agency-to-agency with the subscribers facing each other; fixed income and private venues settle bilaterally or through their own arrangements.
Enforcement history: the dark pool cases of 2014 to 2018 (misrepresentations about who traded in the pool, the use of order data, latency advantages) produced the Form ATS-N regime; the SEC continues to examine ATS disclosures, fair access and the operators’ affiliated trading.
Inside the Broker-Dealer›Front to Back
A Customer Order Through the Firm, Front to Back
A retail customer order seen from inside a standalone broker-dealer: the rep or the app, the order system and the market access checks, the router and the wholesaler, the trade to the clearing firm or through the firm’s own clearing, the confirmation and the account, the branch manager’s review, compliance’s surveillance and reporting, the FINOP’s computations and the records. The clearing agreement decides which steps belong to the clearing firm.
Who uses what:front rep workstation, the app, Reg BI documentation; the order system and the risk gateway; the router and the routing arrangementsoperations the clearing firm’s portal and files (introducing) or the P&S department, the back office and NSCC (self-clearing); confirmations and statementscontrol the trade blotter review, surveillance, CAT and 606, AML; net capital, the reserve formula, FOCUSoutside customers, the clearing firm or the clearing houses, the venues and wholesalers; the regulators read the records
Advice, products and tradingOperationsCompliance, risk and financeOutside the firmmessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsVoice, chatElectronic platform, APIInfrastructure system (payment, clearing, reporting)Internal systemOtherhover an arrow or a badge for the full detail
Jump to10 steps, hover or click any of them
The columns run from the customer and the reps on the left through trading, operations, supervision and compliance and the FINOP to the clearing firm and the venues on the right. Every arrow is a hand-off between two teams or two systems; the pill names the system. The chain is the same whether the firm clears itself or through a clearing firm; the agreement moves the operations column outside.
Who is who in a standalone broker-dealer: the registered representatives and their branch managers (the OSJs); trading and routing (an order desk, the router, market makers if the firm makes markets); capital markets if the firm has it; supervision (the principals under FINRA 3110); compliance and AML (the CCO, the AML officer); operations (purchase and sales, cashiering, transfers, corporate actions, the stock record for a self-clearing firm); technology; finance and the FINOP; outside, the customers, the clearing firm or the clearing houses, the venues and the regulators.
Firm types: the introducing broker-dealer (thousands of them, retail and institutional, with a clearing firm behind them), the self-clearing retail firm, the clearing firm, the agency and electronic brokers, the wholesalers and market makers, the regional full-service firms with capital markets, the ATS operators; the chain above is the same, the columns inside versus outside the firm differ.
Systems: the rep workstation and the order system (often the clearing firm’s platform for an introducing firm), the risk gateway for the market access rule, the router, CAT reporting (the firm’s own or through a vendor), the surveillance system, the books and records archive (17a-4), the FOCUS and net capital tools, and the clearing firm’s portal and files or the firm’s own back office and the NSCC and DTC interfaces.
The examination program: FINRA’s cycle exams (every one to four years by risk), the SEC’s exams, the state regulators’ for branch offices; the examiners test the supervisory system, the Reg BI program, the best execution reviews, the market access controls, the AML program, the net capital and customer protection computations, the books and records and the CAT reporting; the clearing agreement is the first document they read for an introducing firm.
Inside the Broker-Dealer›Supervision and Compliance
Supervision, Compliance and AML Under FINRA
The control functions of a broker-dealer: the membership and the registrations, the supervisory system with its principals, branches and written procedures, the approvals and the blotter review, the surveillance exceptions on customers and on trading, the AML program and the money movements, complaints and arbitration, the examinations and the filings. FINRA’s rulebook is the calendar.
Who uses what:framework membership agreement, Form BD, CRD, U4s and qualifications; WSPs, principals, OSJs, 3120 and 3130daily approvals workflow, the trade blotter, surveillance exceptions, CAT and trade reporting checks, best execution reviewsmoney and conduct the AML program (CIP, monitoring, SARs, OFAC), complaints and 4530, arbitrationregulators FINRA cycle exams and sweeps, SEC and state exams; FOCUS, 606, 4530, 3120, Form CRS, the annual AML test
Advice, products and tradingOperationsCompliance, risk and financeOutside the firmmessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsVoice, chatInfrastructure system (payment, clearing, reporting)Internal systemhover an arrow or a badge for the full detail
Jump to10 steps, hover or click any of them
A broker-dealer is supervised people and reported trades: FINRA licenses the people, prescribes the supervision, takes the trade reports and examines the evidence. Compliance is the function that keeps the evidence, and the clearing agreement decides how much of it the clearing firm keeps instead.
FINRA as the SRO: membership (Rule 1017 for changes), the rulebook (supervision 3110 to 3130, Reg BI through the SEC, suitability and the customer rules, trade reporting, market making, the financial rules), the registration and qualification of people (CRD, the qualification exams, continuing education), the examination program and enforcement; the SEC oversees FINRA and examines firms directly; the states register the firm and the reps for their residents.
Supervision: the written supervisory procedures assign a principal to every activity; branch offices and OSJs are inspected on a cycle (yearly for OSJs); correspondence and electronic communications are reviewed by sample and by lexicon; the 3120 report tests the system and the 3130 certification by the CEO attests to it; the examiners’ findings most often concern evidence of supervision rather than its absence.
AML for a broker-dealer: the Bank Secrecy Act program (a written program, an AML officer, training, an independent test), the customer identification program, the beneficial ownership rules, OFAC screening, suspicious activity reports (structuring, low-priced securities schemes, elder exploitation, third-party activity); FINRA’s and FinCEN’s cases against firms are about monitoring the money movements and the microcap deposits.
The clearing agreement and compliance: FINRA 4311 allocates supervision and compliance functions between the introducing and the clearing firm; the clearing firm reports its own concerns about the correspondent to the regulators under the rule; both firms keep the records they are responsible for; the examiners of each read the same agreement.
Inside the Broker-Dealer›Operations and Clearing
Operations and the Clearing Interface, Introducing and Self-Clearing
What operations does in a broker-dealer and where the clearing firm takes over: purchase and sales and the comparison, cashiering and the fraud controls, the stock record and the reconciliations, fails and buy-ins, corporate actions and dividends, statements and tax reporting, the operational data to the FINOP, and the systems and the clearing interface. An introducing firm runs the front half and reconciles to the clearing firm; a self-clearing firm runs all of it.
Who uses what:P&S comparison through NSCC or the clearing firm’s trade file; DKs and differencescashiering checks, ACH, wires, journals, ACATS; call-backs; the clearing portal or the firm’s own bankscustody the stock record and its reconciliations (self-clearing) or the reconciliation to the clearing firm’s files (introducing); fails, Rule 204, possession or controlservicing and data corporate actions, dividends, proxies, statements, 1099s; the operational data in the FOCUS; the back office system and the clearing interfaces
Advice, products and tradingOperationsCompliance, risk and financeOutside the firmmessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsElectronic platform, APISWIFT messageInfrastructure system (payment, clearing, reporting)Internal systemOtherhover an arrow or a badge for the full detail
Jump to10 steps, hover or click any of them
Operations in a broker-dealer is the stock record and the money, and the clearing agreement decides who keeps them. The introducing firm’s operations team is a reconciliation and a service desk against the clearing firm’s files; the self-clearing firm’s is a back office with a depository account and a settling bank.
The operations departments of a self-clearing firm: purchase and sales (comparison), cashiering (money and securities movements), the cage and the stock record (custody, segregation, counts), settlements (DTC, Fedwire, fails), stock loan, dividends and reorganization (corporate actions), new accounts and transfers (ACATS), and the regulatory reporting unit; an introducing firm keeps a service and reconciliation team and relies on the clearing firm for the rest.
The clearing interface: the clearing firm’s platform (its portal, its files, its APIs) is the introducing firm’s system of record for accounts, positions and cash; the firm’s technology integrates it with its own front-end and compliance tools; a change of clearing firm is a conversion project of a year (accounts, history, cost basis, the reps’ retraining).
Fraud and errors: cashiering fraud (imposter clients, changed wire instructions, employee theft) and operational errors (wrong account, missed corporate action elections, dividend allocation errors) are the losses; the controls are call-backs, dual approval, segregation of duties, the daily reconciliations and the 17a-13 counts; FINRA’s financial and operational examiners test them.
Statements and tax: customer statements monthly or quarterly with the SIPC and clearing firm disclosures, the consolidated 1099 with cost basis reporting (the broker’s obligation since 2011), the retirement forms; the clearing firm produces them for its correspondents under their names, so a customer of a small firm receives a statement from a large one.
Inside the Broker-Dealer›Financial Responsibility
The FINOP: Net Capital, Customer Protection and Funding
The finance and FINOP function: the operational inputs each day, the net capital and customer protection computations, the capital allocated to the business and the limits set from it, the settlement and the funding, the FOCUS and the notifications, the certifications and the owners, the operational controls the rules require, the FINRA financial examination and the audit, and what the rules do if the firm fails. The function exists because a broker-dealer holds other people’s money.
Who uses what:computations net capital daily or monthly; the reserve formula weekly or daily; possession or control daily; signed by the FINOPbusiness limits inventory, commitments and market making sized from excess net capital; the risk gateway’s capital limitsfunding the settling bank, the clearing fund, bank loans on margin collateral, stock loan cash, repo; the clearing firm deposit for an introducing firmreporting and assurance FOCUS within 17 business days, 17a-11 notices, Form Custody, the 17a-5 audit, the 17a-13 counts, FINRA’s financial exams, SIPC
Advice, products and tradingOperationsCompliance, risk and financeOutside the firmmessage or transferstanding flowexchanged and matchedoption, when needed1sequence, on the party that actsVoice, chatElectronic platform, APIInfrastructure system (payment, clearing, reporting)Internal systemhover an arrow or a badge for the full detail
Jump to10 steps, hover or click any of them
The FINOP is the officer the rules put between the firm’s business and its customers’ assets: every day the computation says how much business the capital allows and how much customer money must be locked away, and every month the FOCUS report tells the regulators. The failures the rules remember are the ones where the computation was wrong.
The FINOP: a registered Series 27 (or 28) principal responsible for the firm’s financial reports and computations; often the CFO at a large firm, an outsourced FINOP at a small one; FINRA expects independence from the sales side and holds the FINOP personally responsible for the accuracy of the FOCUS and the net capital; the examiners interview the FINOP first.
The rules as a set: 15c3-1 (net capital), 15c3-3 (customer protection), 17a-3 and 17a-4 (books and records), 17a-5 (reports and the audit), 17a-11 (notifications), 17a-13 (counts), 15c3-5 (market access), the SIPC Act; together they are the broker-dealer’s prudential regime, built around the customers’ assets rather than the firm’s survival.
Capital allocation: the excess net capital is the firm’s risk budget; the commitment committee, the trading desk’s limits and the market making positions are set from it; the risk gateway’s capital thresholds under the market access rule read from it; a growing business needs subordinated debt or equity from the owners, approved by FINRA for the subordinated form.
Failure and SIPC: a failed broker-dealer’s customers receive their segregated securities and the reserve account cash, SIPC covers the missing part up to USD 500,000 per customer, and the SIPC trustee transfers the accounts to a solvent firm; the system has worked for retail customers since 1970; the exceptions (MF Global’s commodity customers, Madoff’s fictitious securities) were about assets that were never there.
1
→ next, ← previous, Esc exit. Click any step in the diagram to jump to it.