April 4, 1988
Mr. Thomas R. Cassella
Vice President - Financial Responsibility
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006
Dear Mr. Cassella:
The Department understands that some government securities brokers that execute certain trades on a “give-up basis” have raised questions about the appropriate capital treatment of the give-up receivable due to the broker. The brokers have questioned how the language in 17 CFR 402.1(e) (5) and 17 CFR 402.2(d)(6) should be properly applied in the situation where the trade date and billing date occur in different calendar months.
This situation develops frequently in the case of forward trades and term repurchase transactions. Specifically, the question relates to the meaning of the phrase “give-up receivables outstanding no more than 30 days from the billing date, which shall be no later than the last day of the month in which they arise.” In the instance where the trade date and the settlement date or termination date, in the case of a repurchase transaction, fall in different calendar months, there is a question concerning when the give-up receivable is deemed to arise for determination of the aging period for the purposes of 17 CFR 402.1(e)(5) and 17 CFR 402.2(d)(6).
It is our understanding that the broker, if on a trade date basis of accounting, will recognize a receivable on the trade date but will typically not bill the give-up receivable until the end of the settlement month or end of the termination month in the case of a repurchase agreement. In the case of a forward trade or term repurchase agreement, the period that the unbilled receivable is reflected as an asset of the broker could be significantly longer than 60 days. While this is acceptable accounting treatment under Generally Accepted Accounting Principles (GAAP), we understand that there are questions as to the appropriate capital treatment of this situation under 17 CFR Part 402.
The language in 17 CFR 402.1(e)(5) and 17 CFR 402.2(d)(6) was included in response to comments from government securities brokers that the provisions in 17 CFR 240.15c3-1(c)(2)(iv)(C) would be inconsistent with their billing practices for give-up receivables, which is to bill the counterparties at the end of the month. The capital treatment of commissions receivable in 17 CFR 240.15c3-1(c)(2)(iv)(C) provides that the aging period begins with the recognition of the receivable, regardless of the billing date. 17 CFR 402.1(e)(5) and 17 CFR 402.2(d)(6) permit a broker to include a give-up receivable in its capital, provided: (i) that the give-up receivable has not been outstanding longer than 30 days from the billing date and (ii) that the billing date is no later than the end of the month in which the give-up receivable arose. However, it was not the Department's intention to provide a situation in which a receivable could be included in the firm's capital in excess of 30 days without being billed.
Pursuant to 15 U.S.C. 78o-5(b), the provisions of 17 CFR 402.1(e)(5) and 17 CFR 402.2(d)(6) are interpreted to mean that a give-up receivable becomes an allowable asset for the capital computation on a date chosen by the broker, provided it is consistently applied, and that it can remain an allowable asset until 30 days from the billing date provided that the billing date is no later that the last day of the month in which the give-up receivable becomes an allowable asset. If the billing date is later than the corresponding month end, the give-up receivable will be accorded the treatment in 17 CFR 240.15c3-1(c)(2)(iv)(C) from the date it became an allowable asset. For those firms which are on a trade date basis of accounting but recognize the give-up receivable as an allowable asset on the settlement date, the give-up receivable would be accorded the treatment of an unsecured receivable in 17 CFR 240.15c3-1(c)(2)(iv)(B) during the period between the trade date and the settlement date.
In arriving at this interpretation, the Department has consulted with the staff of the Securities and Exchange Commission. This interpretation will be immediately available to the public.
Charles O. Sethness