Haircuts
Haircuts are a discount that the SEC applies to the market value of securities held by a broker-dealer. Since the value of a security is constantly fluctuating, the SEC discounts its current market value to provide a cushion to account for a possible decrease in value at the time of a firm’s liquidation.
Once you have a total amount of all haircuts taken, deduct that from the tentative net capital amount. The result will be the firm’s net capital.
Let’s see that formula again.
Net Capital = Net Worth + Subordinated Debt – Non-allowable Assets – Haircuts
= Assets – Liabilities + Subordinated Debt – Non-allowable Assets – Haircuts
= [Assets – Non-allowable Assets – Haircuts] – [Liabilities – Subordinated Debt]
= Tentative Net Capital – Haircuts
Determining the Size of a Haircut
Haircut amounts vary depending on the type of security – riskier securities tend to have higher haircuts. Here is a list of the most common haircuts:
- • Equity securities, commonly traded = 15% of their current market value
- • Equity securities, limited trading market = 40% of their current market value.
- • Equity securities, Aged Fail to Deliver = 15% of its current market value. An aged fail to deliver means that the security has not been delivered within four days after the settlement date.
- • Nonmarketable securities = 100% of their current market value. A nonmarketable security is one in which there are no buyers other than your firm.
- • Undue concentration = 15% of the excess concentration amount. A firm is allowed to have only up to 10% of its tentative net capital invested in one security. Any amount over the 10% allowed must be deducted by 15% when calculating net capital.
Once you have a total amount of all haircuts taken, deduct that from the tentative net capital amount. The result wi