The Mutual Fund Dealers Association’s board of directors has approved amendments to rules regarding how firms calculate their risk adjusted capital.

Under current MFDA rules, the formula for calculating regulatory capital uses a risk-adjusted working capital approach. The current formula limits current assets to those that are liquid and from reliable sources and deducts current liabilities, 10% of long-term debt and contingent liabilities, and margin items to arrive at RAC.

But, it notes, that the current formula is based upon a working capital approach and there may be situations where a member has negative financial statement capital (equity plus subordinated debt), but sufficient working capital to comply with MFDA requirements. It could therefore be technically compliant with current MFDA capital requirements, but have liabilities greater than its assets. MFDA staff has also identified various other issues it aims to address with the amendments.

Under the proposed rule amendments, MFDA members will be required to maintain positive financial statement capital. Members will also be required to notify the MFDA of any request for accelerated payments by creditors not contemplated under an existing repayment schedule, among other things.