A broker-dealer enters into a reverse repurchase agreement with another dealer in a risk trade for a 15-year Treasury Bond, which the dealer takes into custody. The contract price for resale, not including accrued interest of $21,000, is $1,031,000 while the current market value of the bonds is $1,030,000. Under Rule 15c-3-1, the charge to net capital is:
The best answer is A. In a reverse repurchase agreement, a broker-dealer that has excess cash buys government securities from a counterparty with an agreement to sell them back, typically the next day. The difference between the purchase price and the higher resale price is the “interest” earned for the 1-day loan of funds. Rule 15c-3-1 states that a reverse repurchase agreement is an allowable asset only if the buying broker gets control of the underlying collateral, which is the case here. However, the contract cannot be valued at more than the current market price of the collateral. Since the collateral value is $1,030,000 while the contract value is $1,031,000, net capital must be charged for the $1,000 excess of resale price over market value. The amount of accrued interest does not affect this computation since it is added to both the buy price and resale price.
