Crunching the Numbers
One of the more interesting comments made about the proposed capital requirement was made by Todd Crosland of Interbank FX who said, "The NFA has proposed to raise the minimum net capital requirement to $5 million. If you offer greater than 100:1 leverage, you would have to maintain two times that amount, or $10 million." It's a point I have not stressed enough.
The minimum initial capital requirement is not the only capital requirement that firms have to make. There are other requirements as well and when they are added together they can quickly total $10 million. Let's do the math:
Should the proposal pass the following requirements will have to be met:
1) Minimum Initial Capital Requirement: $5 million
2) Requirement that firms offering 100:1 leverage set aside 10% of customer assets in additional capital. Assuming a firm has $30 million in customer assets: $3 million
3) CFTC concentration charges on outstanding open positions which can range from 6 to 20% of total net exposure. Assume a firm has $50 million in net exposure then 6% of 50 million would be: $3 million
As you can see when you add up all the various capital requirements most firms will need in excess of $10 million to be compliant. These cold, hard numbers are staring many of the poorly capitalized squarely in the face and no amount of spin can make them go away.
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