1. There is a need for a common conceptual framework regarding the capital requirements for securities firms.

2. The framework should contain the following elements:

A. Liquidity and solvency should be covered by a standard that provides for a firm to have sufficient liquid assets to meet its obligations given the risks a firm faces.

B. Marking of marketable securities and commodities positions to market is necessary to prevent firms from storing up losses and also to give a true picture of a firm's position.

C. Risk-based requirements⁽²⁾should cover all the risks to a firm and, in particular, should contain:

i. a base requirement reflecting the scale of a firm s activities to capture non-measurable risks.

ii. position risk requirements (for both on and off balance sheet items) reflecting the price volatility of individual securities with provisions for concentrated positions and allowances for risk reduction measures such as hedging.

iii. settlement risk requirements reflecting the risk of non-performance in a timely manner.

The capital held by each firm must exceed the sum of the risk-based requirements.

3. In some systems, it is necessary that the definition of capital should reflect the fluctuating nature of the risk- based requirements. Some regulatory systems allow certain types of financings such as subordinated loans to serve as capital in addition to owner s equity. It is, however, recognised that there should be limits on the amount of these financings relative to owner s equity. Some systems do not make allowances for such financings. The Technical Committee recognises that at present the definition of capital varies between systems to reflect their differing regulatory structure

4. Differential minimum capital requirements, based on the type of business being conducted by the firm, should be established so that firms wishing to enter the securities business demonstrate a level of commitment to the business. Capital requirements should not be set so high as to adversely affect competition in the marketplace.

5. Capital requirements should be reinforced by adequate recordkeeping, reporting, and examination programs.

Footnote:

2. The Technical Committee believes that minimum requirements should not be regarded as a substitute for risk-based requirements.