Free Credit Balances
Chapters in this video
- 0:00 Free credit balances are not in a vault
- 1:34 Defining the free credit balance and possessory lien
- 2:55 Payable on demand: the non-negotiable rule
- 3:15 The quarterly disclosure triad in plain language
- 4:49 How reserve formula credits backstop customer cash
- 6:12 The $50 million example: netting credits against debits
- 6:54 Two separate violations: disclosure does not cure reserve
- 7:37 Rapid-fire exam recap
What this video covers
- What a free credit balance is: customer cash not subject to a possessory lien, and the four everyday scenarios that create one
- Why free credit balances are payable on demand and the three forbidden firm behaviors (deferral, conditioning on new trades, set-off for unrelated obligations)
- The three required elements of the quarterly written disclosure: amount due, payable on demand, and may be used in firm's business
- Why monthly disclosure satisfies the rule but annual disclosure violates it, and that "at least quarterly" is a floor not a ceiling
- How free credit balances flow into the customer protection rule as a credit in the reserve formula, and the netting logic against margin debits
- Why omitting free credit balances from the reserve formula creates a second violation even when disclosure is perfect
- The structural similarity to fractional reserve banking and why the system depends on aggregate math, not one-for-one segregation
Read the full lesson, free
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