# VELOCITY CLEARING, LLC X-17A-5 (2020-02-28) — Broker-dealer annual report
- Company: VELOCITY CLEARING, LLC
- Form: X-17A-5
- Filed: 2020-02-28
- Period: 2019-12-31
- Accession: 0001295234-20-000005
- CIK: 1225460
- File #: 8-65894
- Material weakness: No
- Auditor: Crowe LLP
- Auditor location: New York, NY
- Contact: Frank W. Bracero
- Phone: 201-706-7152
- Signed by: Frank W. Bracero (Chief Financial Officer)
Original filing: https://www.sec.gov/Archives/edgar/data/1225460/000129523420000005/qc19s.pdf
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U !TED STA rES SECURITIES A D EXCI IANGE COMMISSIO Washington. D.C. 20549
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8-65894
SEC FILE NUMBER
| ANNUAL AUDITED REPORT |
|-----------------------|
| FORM X-
17A-5 |
| PART III |
| |
# **FACl~G PAGE**
# Information **Required** of **Brokers and Dealers Pursuant to Section** 17 of the **Securities Exchange Act** of **1934 and Ruic 17a-S Thereunder**
| REPORT FOR THE PERIOD BEGINNIJ\:G | | ---
--~
O~l/~O~l/~19~
MM/IJD/YY | AND E DING | 12/31/19
~ M/DD/YY |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------|---------------------------------------------------------------------|----------------|------------------------------------------------|
| | | A. REGlSTRANT IDENTIFICATION | | |
| DEALER:
AME OF BROKER - | | | | |
| Ouantex Clearing, LLC | | | | OFFICIAi. USE 0:-.'L Y |
| ADDRESS OF PRINCIPAL PLACE OF BUSI ESS: (Do not use P.O. Box No.) | | | | FIR.\1 IO. NO. |
| | 1301 Highway 36- | Suite 109
(No. and Street) | | |
| I lazlet | | NJ | | 07730 |
| (City) | | (State) | | (Zip Code) |
| | | | | (20 I) 706-7152
(Arca Code - Telephone No.) |
| Frank W. Bracero | | B. ACCOUNTANT IDENTIFICATION | | |
| INDEPE DENT PUl31.1C ACCOUNTA"T whose opinion is contained in this Report* | | | | |
| | | Crowe LLP
(Name - if individual. state last, first, middle name) | | |
| | | New York | | |
| (Address) | | (City) | NY
(State ) | (Zip Code) |
| 488 Madison A venue
CHECK ONE:
~ Certified Public Accountant
D
Public Accountant
D
Accountant not resident in United States or any of its possessions. | | | | 10022 |
*\*Claims for exemption from the requirement that the annual report be co,·ered by the opinion of an independent p11hlic accountant must be supported by a statement of f acts and circumstances relied on as the basis/or the exemption. See section 2.J0.* / *7a-* 5(e)(l).Sf.C 141 0(3-91 )
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# Quantex Clearing, LLC
As of December 31 , 2019, and report of independent registered public accounting firm
*Filed p11rs11u11110 Rule 17a-5(e)(3) under tire Securities Exchanf.e Act of* I 93./ *us a Public Document*
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# **Quantex Clearing, LLC TABLE OF CONTENTS**
# This report •• contains (check all applicable boxes):
- [>.) Independent Auditor"s Report.
- rxJ Facing Page.
- [x] Statement of Fin11ncial Condition.
- l I Statement of Operations.
- I I Statement of Changes in Liabilities Subordinated to Claims of General Creditors.
- 11 Statement of Changes in Member's Equity.
- l I Stalcmcnt of Cash Flows.
- 11 Computation of Net Capital Under Ruic I 5c3- I of the Securities and Exchange Commission.
- 11 Computation for Detennination of Reserve Requirements for Brokers and Dealers Pursuant to Ruic I 5c3-3 under the Securities Exchange Act of 1934.
- 11 Information Relating to the Possession or Control Requirements for Brokers and Dealers Pursuant to Rule l 5c3-3 under the Securities Exchange Act of 1934 (not applicable).
- II A Reconciliation. including appropriate explanations, of the Computation of Net Capital Pursuant to Rule I 5c3-l (included above) and the Computation for Detennination of Reserve Requirements Under Rule I Sc3-3 (included above).
- I I A Reconciliation Between the Audited and Unaudited Statements of Financial Condition With Respect to Methods of Consolidation.
- [xi An Affirmation.
- I I A report describing any material inadequacies found to exist ot found to have existed since the date of the previous audit (Supplemental Report on Internal Control).
- lxl Independent Auditors· Report Regarding Ruic I 5c3-3 exemption.
- (x] Ruic I 5c3-3 Exemption Report.
- •• *For conditions of <:onfidential 1rea1me111 of cer1ain porlions of !his filing, see section 2.JO. I 7a-5M(J).*
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# **AFFIRMATION**
I. I-ran!.. \\. Bracero. affinn that. to the bcM of tn) I-no" ledge and belief. the accompan) ing Statement of Financial Condition and supplcmcmal <;chcdules pertaining to Quante:\ Clearing. l I C lthe ··compan~ .. ) for the) car ended December JI. 2019. arc tnic and correct. I further affirm that nei (,er the Com pan) nor an) officer or director has an) proprietaf) 111terest in an) account cl~Stfied ~
. amc
Chief 1-inancial Officer Title
Subscribed and s~orn to before me
2 ROBERTE NOTARY PUBIJC, STATE OF NEW YORX Registratioo No. OIME6JS8l!l8 QuaWicd in RichcloDd C,ogJty Commlliaioo ~ 05Al8/2021
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# **Quantcx Clearing, LLC Index**
| | Page(s) |
|--------------------------------------------------------------|---------|
| Report of Independent Registered Public Accounting Firm 1-2 | |
| Financial Statements | |
| Statement of Financial Condition 3 | |
| Notes to Statement of Financial Condition 4- | 10 |
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# REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Members of Quantex Clearing, LLC Hazlet. NJ
# Opinion on **the Financial Statement**
We have audited the accompanying statement of financial condition of Quantex Cleanng, LLC (the "Company") as of December 31. 2019, and the related notes (collectively referred to as the "financial statement"). In our opinion, the financial statement presents fairly, in all material respects, the financial position of the Company as of December 31 , 2019. in conformity with accounting principles generally accepted in the United States of America
# **Basis** for Opinion
This financial statement is the responsibility of the Company's management Our responsib1lrty 1s to express an opinion on this financial statement based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit m accordance with the standards of the PCAOB Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement 1s free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statement, whether due to error or fraud, and performing procedures that respond to those risks Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statement Our audit also included evaluating the accountmg principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement. We believe that our audit of the financial statement provides a reasonable basis for our opinion.
**C.towc.** LL?
Crowe LLP
We have served as the Company's auditor since 2014
New Yori<. New York February 27. 2020
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# **Quantex** Clearing, LLC Statement of Financial Cond ition For the **year** ended December 31 , 2019
#### **Asse ts**
| C
a
sh | s | 24
.669,347 |
|--------------------------------------------------|--------|----------------------------|
| Securities borrowed | | 8
0
,496.750 |
| bles from brokers and dealers
Receiva | | 702.628 |
| Deposits with clea
r
ing broker dealer | | 503,073 |
| D
eposits with clearing
o
rganizations | | 391.682 |
| No
n-marketable securities | | 76.897 |
| er assets
Oth | | 994.784 |
| ta I assets
To | s 10 | 3 5,161
7
,
8 |
| bilities and Members' Equ
L
i
a
ity | | |
| Liabili
ties | | |
| Securities loaned | S | 66.92
8.6
89 |
| Accounts payable | | 55
174
6 |
| her
Accrued expenses
and ot
liabilities | | 159
1.095
, |
| Total liabi
lities | | 580
,022
6
8
, |
| Membe
r
's
equity | | 39
,255.139 |
| r's equity
Total liabilities and
membe | S 107, | 8
3
5
, 161 |
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# Note l - Organization
Quantex Clearing. LLC (the "Company"') is a wholly owned subsidiary of VCT I loldings LLC (··VCT"). which VCT is ultimately wholly owned by VCT Holdings II, LLC (··VCT 11"). The Company is self-clearing brokerdealer registered with the Securities and Exchange Commission ( .. SEC'"), Financial Industry Regulatory Authority, Inc ("FINRA .. ) and the various securities exchanges in which it maintains membership. The Company·s principal business activities include securities borrow and securities loan activities and acting as a provider for companies to borrow specific securities. On August 22. 2019, the Company began to refer customers on a fully disclosed basis with a clearing broker-dealer for equities.
The Company is approved by FIN RA to engage as a clearing broker for two correspondent clients with proprietary accounts. For the year ended December 31. 2019, the Company had not engaged in any clearing activity. The Company was organized as a limited liability company under the laws of the State of Delaware in 2010
On July 30, 2019. VCT II signed an agreement with exus Clearing Investor ( .. Nexus··). Subsequently on October 29. 2019 the owners for VCT Holdings, LLC contributed 100% of their equity into I exus Clearing I.LC ('·Nexus'"). 111is transaction was approved by Fl I RA and finalized on October 29.2019.
On July 31. 2019 and October 29. 2019. the Parent contributed \$1.500.000 and \$35,700.000 of cash capital into the Company.
On February I, 2020, the Company changed its legal name to Velocity Clearing. LLC.
## **Note 2** - **Summary of Significant Accounting Policies**
# **Basis of Presentation**
The accompanying Statement ofFinancial Condition have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). which includes industry practices.
# **Use of Estimates**
Management makes estimates and assumptions that affect the reponed amounts in the Statement of Financial Condition and accompanying footnotes. Management believes that the estimates utilized in preparing its Statement of Financial Condition arc reasonable. I lowever. actual results could differ from those estimates and differences may be material.
## **Cash**
The Company has all cash on deposit with a major money center bank. Cash is carried at cost. which approximates fair value. fhe cash balances on deposit exceed Federal Deposit Insurance Corporation insured limits.
# **Securities Borrowed and Securities Loaned Activities**
Securities borrowed and Securities loaned are recorded at the amount of cash collateral advanced or received. Securities borrowed transactions require the Company to deposit cash or similar collateral with the lender. With respect 10 Securities loaned, the Company receives collateral in the fonn of cash in an amount generally in excess of the fair value of securities loaned. The Company monitors the fair value of securities borrowed or securities loaned daily with additional collateral obtained or returned. as necessary. Interest receivable or interest payable on such transactions is accrued and included in the Statement of Financial Condition in Other assets and Accrued expenses and other liabilities. respectively.
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# Receivables from and Payables to Broker-Dealers and Clearing Organii,ations
Receivables from broker-dealers and clearing organization include amounts receivable from securities locate fees, fees receivables on securities borrowed related transactions and clearing deposits at a broker-dealer. Payables to broker-dealers and clearing organizations include an amount owed of S 177 to a clearing organization. which is included in Accrued expenses and other liabilities.
# Receivables from Broker-Dealer a nd Rcscr\'c for Doubtful Accounts
The Company carries i~ Receivables from broker-dealers at cost less a reserve for doubtful accounts. On a periodic basis, the Company evaluates its receivables and establishes **a** reserve for doubtful accounts if necessary. The Company can adjust the reserve based on multiple ractors which include history of past debts. collections and current credit conditions. Accounts arc written off as uncollectible on a case-by-case basis. At December 3 1, 2019. the Company reviewed its receivables from broker-dealen. and detennined that all are collectible.
# **Deposits " itb Clearing Organil.Jltions**
I hese balances consist of cash deposits at National Securities Clearing Corporation and Depository Trust Company deposits required to transact as a member firm.
# **Deposits with Clearing Broker Dealer**
This balance consists of cash deposits at a clearing broker dealer where the Company is conducting full)' disclosed activities.
# **~on-Marketable Securities**
1 he Company owns Depository Trust & Clearing Corporation common stock. These shares arc reflected as Nonmarketable securities in the Statement of Financial Condition. Management determined these values to be Level 2 inputs because it has a quoted price in a market that is not active. There were no transfers of securities among levels I. 2 or 3 during the year ended December 31. 2019.
# **Other Assets**
lhc balances reported in Other assets predominantly consists of interest receivables on !.ecuritics borrowed transactions. cash security deposits on leased office premises. property and equipment. and right to use related to leases of \$391.322.
### **Property and Equipment**
Property and equipment arc recorded at cost less accumulated depreciation and amortization. Depreciation and amortization arc computed using the straight-line method over the remaining useful lives of the assets. ranging from 3 to *5* years, less any pennanent impairments. These balances of \$35,971 arc included in the Statement of Financial Condition in Other assets.
## **Accounts Payable**
The balances reported in Accounts payable predominantly consists of amounts owed to various vendors for securities related activities. these amounts owed arc less than 60 days outstanding.
# **Accrued expenses and other liabilities**
The balances reported in Accrued expenses and other liabilities predominantly consists of interest payables on securities loaned transactions, employee bonuses, and lease liability of \$391,322.
Income **Taxes**
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The Company is a limited liability company and is treated as a partnership for income tax reporting purposes. The Internal Revenue Code provides that any income or loss is passed through to the members for federal and state income tax purposes. At December 31, 2019. management has detennined that the Company had no uncertain tax positions that would require financial statement recognition. This detennination will always be subject to ongoing re-evaluation as facts and circumstances may require.
# Concentration
Substantially all the cash deposits are held by one financial institution and therefore are subject to the credit risk at that financial institution. The Company has not experienced any losses on such accounts and does not believe there to be any significant credit risk with respect to these deposits.
# Safe I !arbor 40 I K Plan
The Company currently has a Safe I larbor 401 K matching plan. The matching contribution equals I 00% on the first 6% of participant's compensation which is deferred as an elective deferral.
# **Recently Issued Accounting Pronouncement**
In June 2016. the FA 13 ssucJ ASU 2016-1 J. Financial Inst rum ems - Credit Los es (Topic 326 ): Measurement of Credit Lo!>Ses on Financial ln~1rume111s. The:: main objective of this nC\\ standard is to provide financial ~tatement users \\ith more decision-useful infomiation about the expecteJ credit losses on fi nancial asseb and other commitments to c:\tcnd credit held by a reporting entit) at each reporting date. ASU 2016-13 applies to all entities and is t:fft:c1i-.e for fiscal years beginning after December IS. 2019 for ··public t:nlities". including non-public registered broker-dealers. with earl} adoption permitted. In October 2019, the FAS8 voted to defer implementation of the standard for ~mailer reporting companies. such as the Company. to fiscal ) cars beginning after December 15 2022. The Com pan) has assessed the impact to the Statement of Financial Condition and no material impact was noted.
# **Recently Adopted Accounting Pronouncement**
On January I. 2019. the Company adopted ASU No. 2016-02 .. Lease (Topic **842)''** and subsequent amendments thereto, which requires the Company to recognize most leases on the Statement of Financial Condition. The Company adopted the standard under a modified restrospective approach as of the dateof adoption and elected to apply several of the available practical expedients, including:
- Carry over of historical lease detennination and lease classification conclusions:
- Carry over of historical initial direct cost balances for existing leases:
- Accounting for lease ad non-lease components in contracts in which the Company is a lessee as a single lease component.
Adoption of the leasing standard resulted in the recognition of operating right-of-use assets of \$226.896 and operating lease liabilities of\$226,896 as of January I. 2019. These amounts were determined based on the present value of remaining minimum lease payments. discounted using the Company's incremental borrowing rate as of the date of adoption. There was no material impact to the timing of expense or income recognition in the Company·s Statement of Income. Prior periods were not restated and continue to be presented under legacy GAAP. Disclosures about the Company's leasing activities are presented in Note 4 - Leases.
# **Securities borrowed and securities loaned transactions**
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Securities borrowed transactions require the Company to deposit cash and other collateral with lender. At December 31, 2019. the Company has advanced cash under securities borrowed agreements of \$80,496,750. With respect to securities loaned. the Company receives collateral generally in an amount in excess of the market value of the securities loaned. Al December 3 1, 2019, the Company has received collateral under securities loaned agreements of\$66.928,689. The Company monitors the market value of the securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as necessary.
# **Note 3** - **Regulatory Requirements**
## **Net Capital Requirements**
The Company is subject lo the SEC Unifonn Net Capital Rule (Ruic I Sc3- l) which requires the maintenance of minimum net capital. The Company has elected to use the alternative method permitted by the rule, which requires that the Company maintain net capital. as defined, equal to the greater of\$250.000 or 2% of aggregate debit items arising from customer transactions, as defined in SEC Rule I 5c3-3. Al December 31.2019, the Company had net capital, as defined. of\$37.876.867 which was \$37.626.867 in excess of its required net capital of\$250,000.
# **Cash and Securities Segregated under Regulations**
As a registered broker-dealer. the Company is subject to the SEC Customer Protection Rule ("Rule I Sc3-3") under the Securities Exchange Act of 1934. The Rule requires the deposit of cash and/or qualified securities. as defined, in a special reserve account for the exclusive benefit of customers.
The Company did not engage in clearing activity during the calendar year; however, the Company is approved as a clearing broker. and when it is engaged as such. the Company will be subject to SEC Rule I Sc3-3. As of December 31. 2019. there was no amount deposit requirement required to be segregated in a special reserve account for the exclusive benefit of customers. During 2019, the Company did not hold customer funds or securities.
# **Note 4** - **Leases**
EfTective January I, 2019. the Company adopted /\SU 2016-02. Leases (Topic 842). The Company has obligations as a lessee for office spaces with initial noncancelable tenns in excess of one year. The Company classified these leases as operating leases. These leases do not contain renewal options. The weighted average remaining life of the lease term for these leases was 4.09 years as of December 31, 2019.
The operating lease asset and lease liability are dctennined at the commencement date of the lease based on the present value of the lease payments. As most of our leases do not provide an implicit rate, the Company used its incremental borrowing rate, the rate of interest to borrow on a collateralized basis for a similar term. at the lease commencement date. The Company utilized a weighted average discount rate of 5.17% in detennining the lease liability as of December 31 .2019.
The Company made a policy election to exclude the recognition requirements of ASU 2016-02 to short-tenn leases, those leases with original tcnns of 12 months or less. Short-tern, lease payments are recognized in the income statement on a straight-line basis over the lease term. Certain real estate leases may contain lease and non-lease components, such as common area maintenance charges. real estate taxes. and insurance, which are generally accounted for separately and arc not included in the measurement of the lease liability since they arc generally able to be segregated. The Company docs not sublease any of its leased properties. There were no sale and leaseback transactions. leveraged leases or lease transactions with related parties during the year ended December 31, 2019.
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Future minimum lease payments. exclusive of renewal provisions, and a reconciliation ofundiscountcd lease cash nows and the lease liability recognized in the statement of financial condition as of December 31.2019 is shown below:
| Lease liability (discounted) | s | 391,322 |
|----------------------------------------------------|---|----------|
| Discountmg efTcct on cash flows | | (42,697} |
| Total future minimum lease payments (undiseountcd) | | 434,019 |
| Thereafter | | 15,285 |
| 2024 | | 59,644 |
| 2023 | | 58,177 |
| 2022 | | 56,737 |
| 2021 | | 95,351 |
# **Note 5** - Indemnifications
In the nonnal course of business. the Company indemnifies and guarantees certain service providers. such as clearing and custody agents. trustees and administrators. against specified potential losses in connection with their acting as an agent of or providing services to the Company.
# **Note 6** - **Line of Credit**
The Company has a secured financing arrangement with the Bank of Montreal that permits the Company to borrow an amount up to \$5.000,000. bearing interest at the rate of 3.90% annually. All borrowings are fully secured b)' securities pledged to the lender and arc subject to repayment on demand. There was no outstanding principal balance at December 31. 2019.
# **Note** 7 - **Related Party Tnnsaction**
The Company engages in various securitie:. transactions with a broker dealer affiliate.
At December 31.2019, assets ttnd liabilities \\-ith a related pany consist of:
| Assets | | | |
|---------------------------------------|--------------------|----|-----------|
| Securities borrowed | | s | 1.158.300 |
| Other assets | | | 82,097 |
| | Total assets | \$ | 1,240,397 |
| Liabilities | | | |
| Securities loaned | | s | 7,386.500 |
| Accmcd expenses and other liabilities | | | 85.021 |
| | Total Ii.abilities | \$ | 7,471,521 |
| | | | |
# **Note 8** - **Cnllateralizcd Agreements**
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The Company enters into securities borrowed and securities loaned transactions to. among other things, settle other sccuritic:. obligations. accommodate customc~ · needs and conduit matched book activities. The Company manages credit exposure arising from such transactions by entering into master netting agreements and collateral agreements with counterparties that provide the Company. in the event of a eountcrparty default (such as bankruptcy or a counterparty's failure to pay or perfom1). the right to net a counterparty"s rights and obligations under such agreement and liquidate and setolT collateral agafost the net amount owed by the counterparty. The Company monitors the fair value of the underlying securities as compared with the related receivable or payable. as necessary. requests additional collateral as provided under the applicable agreement to ensure such transactions are adequately collateralized.
In accordance with applicable accounting guidance. there were no eligible items for netting. All sccun11es borrowed and securities loaned transactions were executed on a overnight or open basis. with rights lo terminate b} either counterparty. At December 31. 2019. the underlying collateral for securities borrO\\Cd and securities lending transactions were US denominated equities.
At December 31. 2019. the approximate fair values of collateral received which may be sold or replcdged by the Company were:
| Fair value of collateral related to securitites borrowed transactions | S | 78.823.360 |
|-----------------------------------------------------------------------|----|------------|
| Total | \$ | 78.823.360 |
At December 3I.2019. the approximate fair values of the portion of collateral received that were sold or repledged by the Company were:
| Fair value of collateral related 10 securitile'l loaned transactions | S | 65.629.236 |
|----------------------------------------------------------------------|----|------------|
| Total | \$ | 65,629,236 |
# Note 9 - Credit Ris k and Financial Instruments with Off Balance Sheet Risk
In the normal course of business, the Company executes and settles securities financing activities with securities lending countcrpanies. These securities transactions arc on a cash basis performed under a master securities lending agreement. The Company is exposed 10 risk of loss on these transactions in the event the counterparty or affiliate fails to satisfy its obligations in which case the Company may be required to purchase or sell financial instruments at prevailing fair value prices.
The Company·,; exposure to credit risk associated with the nonperformance of these counterparties in fulfilling their contractual obligations pursuant 10 these activities can be directly impacted by volatile trading markets which may impair the ability of the countcrparties to satisfy their obligations to the Company.
In connection with securities financing activities. the Company enters into securities borrowing and lending arrangements which may result in significant credit exposure in the event the counterparty to the transaction is unable to fulfill its contractual obligations.
# **Note 10** - **Subsequent Events**
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EfTcctivc January 31. 2020. the Firm now holds customer ca~h and has reporting obligations under SEC Ruic I 5c3-3.
On February 3, 2020. the Compan, was approved for membership on the NASDAQ BX and NASOAQ PHLX LLC.
• ••••••
Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.