Net Capital & Financial Responsibility

We build and maintain net capital computation frameworks under SEC Rule 15c3-1 — both Basic and Alternative methods. That includes haircut calculations across your full inventory, intraday capital monitoring, early warning thresholds under FINRA Rule 4120, and FOCUS Report preparation. We also support the customer protection requirements of Rule 15c3-3, including reserve formula computation and the transition to daily calculations for qualifying firms under the December 2024 amendment.

Risk Modeling & Analytics

We design portfolio-calibrated VaR and Expected Tail Loss (ETL/CVaR) frameworks tailored to your actual positions and trading activity. VaR tells you the boundary — ETL tells you what happens beyond it. We build both, along with historical replay and hypothetical scenario analysis, so your firm can quantify risk under normal conditions and stress events. Every model is documented to the standards regulators expect, with clear assumptions, limitations, and validation procedures.

Portfolio Margin Optimization

We implement portfolio margin programs under FINRA Rule 4210 using the OCC's TIMS methodology. That means calculating risk-based margin requirements that account for offsets across correlated positions — reducing capital requirements without increasing exposure. We design the real-time intraday monitoring systems required for portfolio margin accounts, ensure equity thresholds are maintained, and build the operational infrastructure to manage concentrated and cross-product positions.

NSCC/DTC Exposure Management

We monitor and manage your clearing fund obligations at NSCC in real time — including volatility charges, mark-to-market charges, and CNS fails charges that determine your total required deposit. Intraday margin calls are assessed at 15-minute intervals, and deficits are due by 10:00 AM each business day. We build the dashboards, alerting systems, and optimization strategies that keep your clearing fund deposits efficient without exposing you to deficiency risk.

Liquidity Risk Management

We design liquidity risk management programs that meet FINRA's heightened expectations — including contingent funding plans, stress-tested liquidity buffers, and intraday cash position monitoring. For firms required to file the Supplemental Liquidity Schedule, we build the data infrastructure, reporting workflows, and governance frameworks to ensure accurate and timely submissions. Liquidity management isn't optional — it's a top-tier exam priority.

Model Risk Governance

We establish model risk governance frameworks aligned with the principles of SR 11-7 and OCC 2011-12 — the industry-standard guidance for model risk management. That includes independent model validation, ongoing performance monitoring, backtesting, and clear documentation of model assumptions and limitations. Whether you're using vendor models or proprietary analytics, every quantitative tool your firm relies on should be validated, governed, and subject to periodic review.

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What We See Most

After years building and managing risk infrastructure inside broker-dealers, these are the gaps we find most often — and the ones that carry the most capital and regulatory exposure.

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Net Capital Haircut Errors

Firms applying incorrect or outdated haircut percentages to their securities inventory — overstating net capital and creating deficiency risk they don't know they're carrying until an exam or a market dislocation.

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Unvalidated Risk Models

VaR and margin models running in production without independent validation, documented assumptions, or backtesting. Models that have never been stress-tested against the scenarios that would actually challenge the firm.

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Clearing Fund Blind Spots

Limited visibility into NSCC clearing fund component charges — volatility, mark-to-market, and fails charges that shift intraday. Firms absorbing excess capital deposits or scrambling to meet 10:00 AM deficit calls.

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No Liquidity Contingency Plan

Firms with no documented plan for how they would fund operations under stressed market conditions. FINRA's 2026 priorities make liquidity risk management a top examination focus area.

Common Questions

Under the Basic Method, a firm's aggregate indebtedness cannot exceed 15 times its net capital. Under the Alternative Method, net capital cannot fall below 2% of aggregate debit items. The Alternative Method generally allows firms to operate with lower net capital requirements, but it comes with different early warning thresholds and reporting obligations. The right choice depends on your firm's business model, balance sheet composition, and customer activity levels. We help firms evaluate which method optimizes their capital position while maintaining a comfortable compliance margin.

VaR measures the maximum expected loss at a given confidence level under normal market conditions — but it systematically underestimates tail risk. It won't capture volatility jumps, correlation breakdowns, or the kinds of cascading failures that define real market crises. Stress testing fills that gap by simulating specific scenarios — both historical events like the 2008 financial crisis or the March 2020 COVID selloff, and hypothetical scenarios tailored to your firm's particular vulnerabilities. A robust risk framework needs both: VaR for day-to-day monitoring, and stress testing for the events that VaR can't model.

SR 11-7 was issued by the Federal Reserve and OCC for banking institutions, so it doesn't directly apply to broker-dealers by regulation. However, its principles — independent model validation, ongoing monitoring, backtesting, and clear documentation — have become the industry standard for model risk management across financial services. FINRA examiners increasingly expect broker-dealers to demonstrate that their quantitative models are validated, governed, and subject to periodic review. Adopting the SR 11-7 framework proactively puts your firm ahead of regulatory expectations rather than behind them.

In December 2024, the SEC adopted amendments requiring large clearing and carrying broker-dealers — those with $500 million or more in average total credits — to compute customer and PAB reserve requirements daily rather than weekly. Firms that compute daily may reduce the required 3% buffer to 2%. The compliance deadline is December 31, 2025. Even for firms below the threshold, the move signals the SEC's direction: more frequent, more granular financial responsibility monitoring. We help firms assess their obligations, build the data infrastructure for daily computation, and optimize their reserve positions under the new framework.

It depends on your firm's size, complexity, and risk profile. A full-time CRO makes sense for firms with substantial proprietary trading, complex derivatives books, or multi-asset class operations. For small and mid-sized broker-dealers, a fractional CRO — senior risk expertise on a retainer basis — delivers the same strategic oversight, model governance, and regulatory readiness at a fraction of the cost. CuttoneTAC's founding partners can serve in this capacity, bringing decades of hands-on risk management experience without the overhead of a full-time executive hire.

Quantitative Risk Infrastructure for Broker-Dealers

Key Regulations

Risk Frameworks

Net Capital Haircut Errors

Unvalidated Risk Models

Clearing Fund Blind Spots

No Liquidity Contingency Plan

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