DislikedA negative capital number indicates undercapitalization which can lead to a company going straight to court as we have seen with FXLQ, One World, etc...Ignored
QuoteDislikedI didn't say you were bankrupt but when you are reporting such a number I think it perfectly fair to say you are close.
I'm going to try to explain, but keep in mind, I can't explain the specific example, or I'll be relating company information on said incident.
Suppose a company has 100 million in assets (please note, this example is not i-Trade FX - I'm using round numbers to explain). Not all of those numbers have to be reported in net cap... in fact, there are many numbers of ways they aren't to be shown on the net cap numbers (even with the NFA tweaking the formula on occasion). Think of net cap as your audited savings account (admittedly, a limited audit - how much it is audited depends on how old your firm is and how much the NFA wants to look). So maybe you report 5 million plus some more goes on because of open hedges, bank pays, etc. That doesn't mean you don't have other bank accounts - in fact, I would argue that MANY firms are putting some of that money in other areas. Just because your assets are not in direct savings certainly doesn't mean you can't transfer/liquidate other monetary assets or accounts to meet obligations. Net cap is a snapshot of positions versus direct savings on that given day that the report is due. It doesn't mean you have no other assets that can't be moved to offset what you're showing. I can show a net cap position of like 7-8 million and easily still have 92 million more in other accounts (that would be an oddity to have that much elsewhere, but its possible). Our net cap is currently 16 million - do you think we only have 16 million in assets? I can tell you for certain that companies like UBS have more than they're showing.
Our net cap showed a neg on the report date, but we were by no means (from my understanding) close to being bankrupt. But some people (I guess not necessarily you) assumed that was EXACTLY what a net cap meant. That's understandable, but not accurate.
You can argue that net cap numbers should be worked to be a more realistic interpretation of assets, but that's another discussion. I would love to explain more, but its one of those areas where I'm limited in what I can talk about.