Haircuts
Haircuts are a discount that the SEC applies to the market value of securities held by a broker-dealer. Since the value of a security is constantly fluctuating, the SEC discounts its current market value to provide a cushion to account for a possible decrease in value at the time of a firm’s liquidation.
Once you have a total amount of all haircuts taken, deduct that from the tentative net capital amount. The result will be the firm’s net capital.
Let’s see that formula again.
net capital = net worth + subordinated debt – non-allowable assets – haircuts
= assets – liabilities + subordinated debt – non-allowable assets – haircuts
= (assets – non-allowable assets – haircuts) – (liabilities&