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Global Securities Markets: Navigating the World's Exchanges and OTC Markets by George W. Arnett

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REGULATORY OBLIGATIONS ON CUSTODY OF CUSTOMER FUNDS AND SECURITIES

Under normal circumstances, regulatory obligations of a broker-dealer holding customer funds and securities should obviate the need to rely on SIPC protection or excess SIPC coverage to satisfy customers’ claims in a bankruptcy proceeding. In particular, the need to rely on SIPC protection and excess SIPC coverage should arise only in the unlikely event that a broker-dealer had not segregated sufficient customer funds and securities pursuant to the SEC's Customer Protection Rule, Rule 15c3-3 under the 1934 Act. In particular, the Customer Protection Rule requires a broker-dealer to segregate customers’ funds in a separate bank account and to maintain possession or control of customers’ fully paid and excess margin securities.2 The correspondent firms’ customers are considered a clearing broker's customers for purposes of the Customer Protection Rule.3

With respect to customer funds, the Customer Protection Rule requires a broker-dealer to make a periodic computation (generally every Friday), according to a specified formula (Reserve Formula), to determine the amount of funds that it must have on deposit in a special reserve bank account for the exclusive benefit of customers (Special Reserve Account). Under the Reserve Formula, a broker-dealer is required to determine how much money it is holding that is either customer money or money obtained from the use of customer securities (Credits). From that figure, the ...

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