Founders costing a brokerage usually budget the application fee, the legal work and the technology, then treat capital as a deposit they will get back. It is not a deposit. Regulatory capital is money that has to sit inside the licensed entity, unencumbered, for as long as the licence is live, and the requirement rises with headcount, with the permissions the firm holds and with the risk it takes onto its own book. Get the class wrong at application stage and the whole financial model changes.
Permission class sets the floor
Under the European investment firm regime, and in the equivalent rulebooks that regulators such as CySEC and the FCA apply, a firm's permanent minimum capital is set by what it is allowed to do rather than by how large it is. There are three broad classes.
The lowest applies to firms that receive and transmit orders or provide advice without holding client money or client assets. The middle class covers firms that hold client money, execute on a matched principal basis or run portfolio management. The highest applies to firms that deal on their own account, which in retail CFD terms means any firm that quotes its own prices and warehouses client positions rather than passing every trade out to a liquidity provider.
The distance between the bottom class and the top is large, and it is the single decision with the biggest effect on the launch budget. It also interacts with the business model. A firm that intends to internalise flow needs the dealing on own account permission, so the choice between A book and B book operation is a capital decision before it is a revenue decision.
The floor is not the requirement
The permanent minimum is the number the firm can never go below. The actual requirement is the highest of several calculations, and for most young brokerages the binding one is the fixed overheads requirement, which is set at a quarter of the previous year's fixed expenditure. In plain terms, the firm must hold enough to run itself for three months with no revenue at all.
This is where operating decisions become capital decisions. Every salary, office lease, platform licence and data feed that counts as a fixed overhead raises the requirement, and it raises it permanently rather than for one quarter. A brokerage that hires fifteen people in its second year discovers that its capital requirement has grown alongside its payroll, and the shareholders have to fund both.
Larger firms also face activity based add-ons calculated from client money held, assets under management, order flow handled and net position risk carried. Those matter once volumes are real. For a firm in its first two years, the overheads calculation is usually the one that bites.
Regulatory capital is measured in own funds, principally paid up share capital and retained earnings. A shareholder loan is not capital. Neither is a signed commitment to inject funds later, an intangible asset carried at book value, or a receivable from a related party. Supervisors examine the composition, not the headline figure.
Own funds and client money are different pots
Client money never counts towards capital. It is held on trust for clients, in accounts identified as such at approved credit institutions, and reconciled on a defined cycle. The rules on how it is titled, where it is placed and how often it is checked sit in the client fund segregation regime rather than in the capital rules, and firms fail on that regime more often than on the capital arithmetic.
The two connect in one important place. If a reconciliation shows a shortfall in the client money pot, the firm must fund the difference from its own resources immediately. A brokerage running close to its capital floor has no room to do that, which is why supervisors look at capital headroom and client money controls as one picture rather than two.
Liquidity, reporting and the wind down plan
Capital alone does not keep a broker solvent. Regulators also require a liquid asset buffer, because own funds tied up in illiquid holdings cannot pay a margin call at 9am. Firms report their capital position to the regulator on a set schedule, and the return is a detailed breakdown rather than a balance figure.
Most regimes now also expect a documented wind down plan: a written assessment of what it would cost to close the business in an orderly way, return client money and meet outstanding obligations, with capital held to cover it. That plan is not a formality. It is frequently the calculation that produces the largest number, particularly for firms with long client onboarding tails or with obligations in several jurisdictions. Firms operating under MiFID II carry the reporting and governance load alongside it.
Offshore is cheaper, and the difference is not free
Capital requirements in offshore jurisdictions are materially lower than in the EU, the UK or Australia, and for some licences they are nominal. That is one of the reasons those licences exist and one of the reasons they are chosen. The trade-off is what the licence buys: access to which markets, acceptance by which banks and payment providers, and what a prospective client sees when they check the register.
Payment partners in particular price licence quality directly. A firm with a nominal capital requirement in a light touch jurisdiction will pay more in rolling reserves and processing fees than a firm holding a European licence, and that recurring cost has a way of matching the capital it saved. The jurisdiction by jurisdiction picture is set out in the guides to offshore broker licences and licence costs compared.
What this means when you plan a launch
Model capital as a permanent line on the balance sheet and as a growing one. Decide the permission class from the intended risk model rather than from the application fee. Assume the fixed overheads calculation will bind before any activity based measure does, and build the hiring plan knowing that each fixed cost raises the requirement. Treat the client money regime as a separate obligation with its own controls. And read the wind down expectations early, because they change the number more than founders expect. None of this is legal advice; the exact figures and definitions are set by the regulator you apply to, and firms take their own professional advice before filing.
"Founders ask what the minimum capital is. The better question is what the requirement becomes after you have hired the team, because that is the number the auditor tests."
— Roman Onta, Executive Director, SINGUARD
Key Takeaways
- Permanent minimum capital is set by permission class, and dealing on own account sits in the highest class by a wide margin.
- For most young brokerages the binding figure is the fixed overheads requirement, a quarter of the previous year's fixed costs.
- Client money is never capital, and a reconciliation shortfall has to be funded from own resources the same day.
- A documented wind down plan, with capital held against it, often produces a larger number than the headline minimum.
Frequently Asked Questions
Is client money counted towards a broker's capital?
No. Client money is held for clients and is kept in segregated accounts separate from the firm's own funds. Regulatory capital is the firm's own resources, mostly paid up share capital and retained earnings, and it must be available to absorb the firm's losses. Treating client balances as working capital is one of the most serious breaches a licensed firm can commit and it is a standard focus of supervisory inspections.
Why does a firm that only routes orders need less capital than one that quotes prices?
Because the risks are different. A firm that receives and transmits orders without holding client money carries limited exposure of its own. A firm that deals on its own account takes market risk onto its balance sheet every time it warehouses a client position, so the regime places it in the highest capital class and adds ongoing requirements linked to the size of that exposure.
What happens if a broker falls below its requirement?
The firm has to notify its regulator, usually immediately, and present a plan to restore the position. Supervisors can restrict activities, require the firm to stop taking on new clients, demand an injection of capital from shareholders, or in serious cases begin an orderly wind down. Firms are also expected to monitor the position continuously rather than discovering the shortfall at the next reporting date.