Capital Requirements for Securities Firms




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    • Both authors are from the London Business School. Part of this research was completed while Dimson held the Houblon-Norman Fellowship at the Bank of England. Helpful comments were received from seminar participants at the American Finance Association Meetings, Bank of England, Cambridge University, Centre for Economic Policy Research, European Finance Association Meetings, Hebrew University, Inquire Group, Institute for International Research, International Federation of OR Societies, London Business School, London School of Economics, Securities and Investments Board, and Warwick University. We owe a particular debt to Dick Brealey, Marty Gruber, Jeremy Fairbrother, Sabrina Kwan, Stephen Schaefer, Bill Sharpe, Georgio Szego, and colleagues at London Business School, and to the market makers who made available the compositions of their equity books.


Regulatory authorities set capital requirements to cover the position risk of securities firms and to protect against losses arising from fluctuations in the value of their holdings. The requirements may be set using the comprehensive approach required by the U.S. Securities and Exchange Commission, the building-block approach required by the European Community, or the portfolio approach required by the United Kingdom. We compare these three alternatives using a large sample of U.K. equity trading books. The portfolio approach systematically specifies larger requirements for riskier books, and vice versa. It is more efficient than the building-block approach, and far more efficient than the comprehensive approach.