FINRA is introducing a new criterion to its FOCUS surveillance efforts:  any carrying or clearing firm whose ratio of total balance sheet assets (less U.S. Treasury and U.S. government agency inventory) to total regulatory capital exceeds 20:1 will be identified for further follow-up.  The new leverage measurement will be implemented with the next scheduled quarterly FOCUS filing.   

• A firm whose ratio exceeds 20:1 will be identified for further follow-up. 
  
• A firm that meets this criterion should expect to be contacted by its Regulatory Coordinator and asked for more information, including a breakdown of the collateral between government-guaranteed and other securities collateralizing reverse repo and securities borrowed agreements.
• Firms that continue to exceed 20:1, after excluding government guaranteed assets, will be subject to heightened monitoring. This monitoring may include, but not be limited to, a request for high, low and average monthly balances for certain balance sheet line items, weekly net capital and reserve formula computation estimates, as well as more detail on specific balance sheet line items.

    Current Surveillance Criteria.   FINRA closely monitors the net capital position as well as the profitability of firms for early signs of potential problems. A pattern of sizable losses provides a warning signal that if such losses were to continue unchecked, the firm could be approaching financial difficulty in the near future.  When deemed necessary, under FINRA Rule 4521, FINRA may require a single carrying or clearing firm or group of carrying or clearing firms to report certain financial and operational information weekly, or even daily. 

FINRA’s alert-monitoring criteria is designed to more closely surveil those firms that carry customer accounts or self-clear transactions that may be experiencing financial or operational problems that warrant special monitoring. The criteria that  historically have been used include:

1. Cumulative losses in 2 consecutive months equal to or in excess of 25% of current excess net capital.
2. Cumulative losses in 3 consecutive months equal to or in excess of 30% of current excess net capital.
3. Net capital ratio at or in excess of 1,000% or less than 5% of SEA Rule 15c3-3 aggregate debits.
4. Net capital of less than 150% of a firm’s minimum net capital requirement.
5. Debt/equity ratio of 70% or greater for a period of 30 days or more.
6. Net capital of less than 25% of haircuts, excluding contractual commitment haircuts.
7. Restriction or reduction in business pursuant to FINRA Rule 4120.
8. Other internal or external factors as determined by the staff, including but not limited to, severe operational or books and records problems, cash flow problems and proprietary and/or customer concentrations.

Later in 2011, FINRA will consider whether to implement rulemaking re: leverage limits.  For further details, click onto:   [ FINRA RegNote 10-44, September ]