ShmoopTube

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

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

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

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

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

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

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

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

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

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

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

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your obligations at the end of the business day you can't be speculating on [The uniform net capital rule broken down into each part]

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

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

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the SEC the power it needed to make sure that these firms didn't become you know [Guy speaking in front of a trading floor]

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

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the integrity and the American investment community and that would be

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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you ask your parents remember happy day oh come on

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