# ARCOLA SECURITIES, INC. X-17A-5 (2024-02-21) — Broker-dealer annual report - Company: ARCOLA SECURITIES, INC. - Form: X-17A-5 - Filed: 2024-02-21 - Period: 2023-12-31 - Accession: 0001440161-24-000001 - CIK: 1440161 - File #: 8-67940 - Type: Broker-dealer - Material weakness: No - Auditor: Ernst & Young LLP - Auditor location: New York, NY - Contact: Mike Hernandez - Phone: (646)454-3742 - Email: mhernandez@arcolasecurities.com - Website: arcolasecurities.com - Signed by: Mike Hernandez (Chief Financial Officer) Original filing: https://www.sec.gov/Archives/edgar/data/1440161/000144016124000001/Public_2023.pdf --- {0}------------------------------------------------ ![](_page_0_Picture_0.jpeg) STATEMENT OF FINANCIAL CONDITION Arcola Securities, Inc. December 31, 2023 With Report of Independent Registered Public Accounting Firm *(SEC I.D. No. 8-67940)* {1}------------------------------------------------ **UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ANNUAL REPORTS FORM X-17A-5 PART** Ill **FACING PAGE** 0MB APPROVAL 0MB Number: 3235-0123 Expires: Nov. 30, 2026 Estimated average burden hours per response: 12 SEC FILE NUMBER 8-67940 **Information Required Pursuant to Rules 17a-5, 17a-12, and 18a-7 under the Securities Exchange Act of 1934** FILING FOR THE PERIOD BEGINNING **\_\_ 0\_1\_/0\_1\_/\_2\_3 \_\_ AND** ENDING **\_\_ 1\_2\_/\_3\_1\_/2\_3 \_\_** MM/DD/VY MM/DD/VY **A. REGISTRANT IDENTIFICATION** NAME oF FIRM: Arcola Securities, Inc. TYPE OF REGISTRANT (check all applicable boxes): C!J Broker-dealer □ Security-based swap dealer D Check here if respondent is also an OTC derivatives dealer □ Major security-based swap participant ADDRESS OF PRINCIPAL PLACE OF BUSINESS: (Do not use a P.O. box no.) 1211 Avenue of the Americas, 41st Floor (No. and Street) New York NY (City) (State) PERSON TO CONTACT WITH REGARD TO THIS FILING 10036 (Zip Code) Mike Hernandez (646) 454-37 42 mhernandez@arcolasecurities.com (Name) (Area Code -Telephone Number) (Email Address) **B. ACCOUNTANT IDENTIFICATION** INDEPENDENT PUBLIC ACCOUNTANT whose reports are contained in this filing\* Ernst & Young, LLP (Name - if individual, state last, first, and middle name) One Manhattan West New York NY 10001 (Address) (City) (State) (Zip Code) 10/20/2003 42 **l" of Reglstrntloo with PCAOBJ(lf applicable** I **FOR OFFICIAL USE ONLY (PCAOB Reglst,atloo N,mbec,** If **appllcableJ** I \* Claims for exemption from the requirement that the annual reports be covered by the reports of an independent public accountant must be supported by a statement of facts and circumstances relied on as the basis of the exemption. See 17 CFR 240.17a-S(e)(l)(ii), if applicable. **Persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid 0MB control number.** {2}------------------------------------------------ #### **OATH OR AFFIRMATION** | I, Mike Hernandez | | | swear (or affirm) that, to the best of my knowledge and belief, the | | | | |--------------------------------------------------------------------|----|-----------------------------------------------------------------------------------|---------------------------------------------------------------------|--|--|-------| | financial report pertaining to the firm of Arcola Securities, Inc. | | | | | | as of | | 12/31 __________
~ | 2~ | is true and correct. I further swear (or affirm) that neither the company nor any | | | | | partner, officer, director, or equivalent person, as the case may be, has any proprietary interest in any account classified solely as that of a customer. **Signature: };{/v,t #J** Title: Chief Financial Officer #### This filing\*\* contains (check all applicable boxes): NOTARY PUBLIC-STATE OF NEW YORK - ~ (a) Statement of financial condition. No. 01 FR6297334 - - ~(b) Notes to consolidated statement of financial condition. Oualifi.ad ,in New ~{ork Count;026 □ (c) Statement of income (loss) or, if there is other comprehensive income in t1-M\p~Affi:flslf~rnre~tglf,9 a5s~~ti~ent of comprehensive income (as defined in § 210.1-02 of Regulation S-X). - D (d) Statement of cash flows. - D (e) Statement of changes in stockholders' or partners' or sole proprietor's equity. - □ (f) Statement of changes in liabilities subordinated to claims of creditors. - D (g) Notes to consolidated financial statements. - D (h) Computation of net capital under 17 CFR 240.15c3-1 or 17 CFR 240.18a-1, as applicable. - □ (i) Computation of tangible net worth under 17 CFR 240.18a-2. - D (j) Computation for determination of customer reserve requirements pursuant to Exhibit A to 17 CFR 240.15c3-3. - D (k) Computation for determination of security-based swap reserve requirements pursuant to Exhibit B to 17 CFR 240.15c3-3 or Exhibit A to 17 CFR 240.18a-4, as applicable. - D (I) Computation for Determination of PAB Requirements under Exhibit A to§ 240.15c3-3. - D (m) Information relating to possession or control requirements for customers under 17 CFR 240.15c3-3. - D (n) Information relating to possession or control requirements for security-based swap customers under 17 CFR 240.15c3-3(p)(2) or 17 CFR 240.18a-4, as applicable. - D (o) Reconciliations, including appropriate explanations, of the FOCUS Report with computation of net capital or tangible net worth under 17 CFR 240.15c3-l, 17 CFR 240.18a-1, or 17 CFR 240.18a-2, as applicable, and the reserve requirements under 17 CFR 240.15c3-3 or 17 CFR 240.18a-4, as applicable, if material differences exist, or a statement that no material differences exist. - D (p) Summary of financial data for subsidiaries not consolidated in the statement of financial condition. - ~ (q) Oath or affirmation in accordance with 17 CFR 240.17a-5, 17 CFR 240.17a-12, or 17 CFR 240.18a-7, as applicable. - D (r) Compliance report in accordance with 17 CFR 240.17a-5 or 17 CFR 240.18a-7, as applicable. - □ (s) Exemption report in accordance with 17 CFR 240.17a-5 or 17 CFR 240.18a-7, as applicable. - ~ (t) Independent public accountant's report based on an examination of the statement of financial condition. - D (u) Independent public accountant's report based on an examination of the financial report or financial statements under 17 CFR 240.17a-5, 17 CFR 240.18a-7, or 17 CFR 240.17a-12, as applicable. - D (v) Independent public accountant's report based on an examination of certain statements in the compliance report under 17 CFR 240.17a-5 or 17 CFR 240.18a-7, as applicable. - D (w) Independent public accountant's report based on a review of the exemption report under 17 CFR 240.17a-5 or 17 CFR 240.18a-7, as applicable. - D (x) Supplemental reports on applying agreed-upon procedures, in accordance with 17 CFR 240.15c3-le or 17 CFR 240.17a-12, as applicable. - D (y) Report describing any material inadequacies found to exist or found to have existed since the date of the previous audit, or a statement that no material inadequacies exist, under 17 CFR 240.17a-12(k). D (z) Other: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_ - - \*\*To request confidential treatment of certain portions of this filing, see 17 CFR 240.17a-5{e){3) or 17 CFR 240.18a-7{d)(2), as applicable. RACHEL L. FREEDMAN {3}------------------------------------------------ Arcola Securities, Inc. Statement of Financial Condition As of December 31, 2023 #### **Contents** | Facing Page and Oath or Affirmation | | |-----------------------------------------------------------|--| | Report of Independent Registered Public Accounting Firm 1 | | | Statement of Financial Condition 2 | | | Notes to Statement of Financial Condition 3 | | {4}------------------------------------------------ ![](_page_4_Picture_0.jpeg) Ernst & Young LLP Tel: +1 212 773 3000 One Manhattan West ey.com New York, NY 10001-8604 #### **Report of Independent Registered Public Accounting Firm** To the Stockholder and the Board of Directors of Arcola Securities, Inc. #### **Opinion on the Financial Statement** We have audited the accompanying statement of financial condition of Arcola Securities, Inc. (the Company) as of December 31, 2023, and the related notes (the "financial statement"). In our opinion, the financial statement presents fairly, in all material respects, the financial position of the Company on December 31, 2023, in conformity with U.S. generally accepted accounting principles. #### **Basis for Opinion** This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's 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 in 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 is 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 accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. ~ t ~ (.;vyO We have served as the Company's auditor since 2012. February 15, 2024 {5}------------------------------------------------ #### Statement of Financial Condition #### As of December 31, 2023 (dollars in thousands, except per share data) #### **Assets** | Cash and cash equivalents | \$
4,420 | |------------------------------------------------------|------------------| | Deposits with clearing organizations | 261,548 | | Reverse repurchase agreements | 20,097,391 | | Other assets | 3,279 | | Total Assets | \$
20,366,638 | | Liabilities | | | Repurchase agreements | \$
19,941,333 | | Payable to affiliates | 720 | | Accounts payable and other liabilities | 6,812 | | Subordinated borrowings due to affiliate | 150,000 | | Total Liabilities | 20,098,865 | | Stockholder's equity | | | Common stock - par value \$0.01 per share; 1,000,000 | | | shares authorized, 1,000,000 issued and outstanding | 10 | | Additional paid-in capital | 266,514 | | Retained earnings | 1,249 | | Total stockholder's equity | 267,773 | | Total liabilities & stockholder's equity | \$
20,366,638 | | | | *See notes to Statement of Financial Condition.* {6}------------------------------------------------ # Arcola Securities, Inc. Notes to Statement of Financial Condition December 31, 2023 #### **1. Organization and Nature of Business** Arcola Securities, Inc. (the "Company" or "Arcola") was incorporated in Maryland on July 3, 2008, is registered as a broker-dealer with the Securities and Exchange Commission ("SEC") and is a member of the Financial Industry Regulatory Authority ("FINRA"). Arcola was granted membership to FINRA in January 2009 and commenced operations in February 2009. Arcola received approval as a member of Fixed Income Clearing Corporation ("FICC") on May 4, 2009 and Depository Trust and Clearing Corporation ("DTCC") on October 22, 2009. Arcola is a direct subsidiary of Annaly TRS, Inc. ("Annaly TRS"), which is a wholly owned subsidiary of Annaly Capital Management, Inc. ("Annaly"), Arcola's ultimate parent. Arcola's principal business activity primarily involves operating a financing matched book of predominantly U.S. Agency mortgage-backed and U.S. Treasury securities. #### **2. Significant Accounting Policies** *Basis of Presentation* – The Statement of Financial Condition and related footnotes are presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). *Cash and Cash Equivalents –* The Company defines cash and cash equivalents as short-term, highly liquid securities and interest-earning deposits with maturities, when purchased, of 90 days or less. Cash and cash equivalents are carried at cost, which approximates fair value. *Deposits with Clearing Organizations –* The Company is a member of various clearing organizations with which it maintains cash and/or securities collateral required for the conduct of its day-to-day clearance activities. The Company carries cash deposited with clearing organizations at cost, which approximates fair value. *Reverse Repurchase and Repurchase Agreements* – The Company enters into reverse repurchase agreements and repurchase agreements (collectively "Repos") as part of the Company's matched book trading activity. The Company generates income from the spread between interest earned on the reverse repurchase agreements and interest incurred on the matched repurchase agreements. Repos are accounted for as collateralized financing or collateralized borrowing transactions and are recorded at their contracted resale or repurchase amount plus accrued interest. The Company earns and incurs interest over the term of the Repos. Repos with the same counterparty and the same maturity are presented net on the Statement of Financial Condition when the terms of the agreement meet the criteria to permit netting. {7}------------------------------------------------ ### Notes to Statement of Financial Condition (continued) #### **2. Significant Accounting Policies (continued)** The Company's policy is to monitor the fair value of the underlying collateral daily versus the related receivable or payable balances. Should the fair value of the underlying securities decline or increase, additional collateral is requested or excess collateral is returned, as appropriate. The Company applies the collateral maintenance practical expedient under Accounting Standards Codification ("ASC") 326, *Financial Instruments – Credit Losses*, to its reverse repurchase agreements and has not recorded an allowance for credit losses as of December 31, 2023, as the company reasonably expects the counterparty to continue to replenish the collateral as necessary to meet the requirements of the contract. Repos are transacted under master repurchase agreements or other documentation that give the Company the right, in the event of default, to liquidate collateral held and to offset receivables and payables with the same counterparty. *Other Assets and Other Liabilities –* Other assets consist primarily of deferred tax assets, receivables, and prepaid expenses. Other liabilities consist primarily of subordinated borrowings due to Annaly, accrued expenses and accounts payable. *Equipment and Facilities –* Generally, the Company does not own or lease its own equipment and facilities. The cost of the equipment and facilities is shared with affiliates and is allocated to the Company by Annaly based on an expense sharing agreement. *Use of Estimates –* The preparation of the Statement of Financial Condition in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Statement of Financial Condition. Actual results could differ from those estimates. *Fair Value Measurements and Disclosures –* ASC 820, *Fair Value Measurements*, requires the disclosure, at fair value, of all financial instruments, including assets and liabilities recorded on the Statement of Financial Condition at their contract amounts. Management estimates that the carrying values of these financial instruments approximates their fair value, as they are short-term in nature or are open contracts subject to frequent re-pricing. *Legal Reserves –* In many lawsuits and arbitrations, including class action lawsuits, claims and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. The Company accrues a liability for legal reserves when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. As of December 31, 2023, the Company was not aware of any outstanding claims or legal actions against the Company. {8}------------------------------------------------ ### Notes to Statement of Financial Condition (continued) #### **2. Significant Accounting Policies (continued)** *Income Taxes –* The Company is taxable as a domestic C Corporation and is subject to federal, state and local income taxes based upon its taxable income. The Company provides for income taxes on all transactions that have been recognized on the Statement of Financial Condition. Accordingly, in the event that there are deferred tax assets or liabilities, the deferred taxes would be adjusted to reflect the tax rates at which future taxable amounts will likely be settled or realized. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The provisions of ASC 740, *Income Taxes*, clarify the accounting for uncertainty in income taxes recognized on the Statement of Financial Condition and prescribe a recognition threshold and measurement attribute for tax positions taken or expected to be taken on a tax return. ASC 740 also requires that interest and penalties related to unrecognized tax benefits be recognized on the Statement of Financial Condition. The Company does not have any unrecognized tax benefits that would affect its financial position. Thus, no accruals for penalties and interest were necessary as of December 31, 2023. #### *Recent Accounting Pronouncements* The Company considers the applicability and impact of all Accounting Standards Updates ("ASUs") issued. ASUs not mentioned were not applicable, are not expected to or did not have a material impact on the Statement of Financial Condition upon adoption. ### **3. Related Party-Transactions** The Company enters into reverse repurchase agreements and repurchase agreements with Annaly. The Company entered into a \$150 million subordinated debt agreement with Annaly on April 30, 2014, which is included in Subordinated borrowings due to affiliate on the Statement of Financial Condition (see Footnote 7). Additionally, on January 1, 2023, the Company renewed its Revolving Line of Credit Agreement with Annaly in the amount of \$500 million, which has a one-year maturity and allows for annual renewal thereafter. The Company paid a commitment fee of \$7.5 million upon renewal of this agreement. As of December 31, 2023, the Company has not drawn upon the line of credit. This Agreement was renewed on January 1, 2024, and the Company paid a commitment fee of \$7.5 million. {9}------------------------------------------------ ### Notes to Statement of Financial Condition (continued) #### **3. Related Party Transactions (continued)** During the year Annaly withdrew \$100 million of capital from the Company. Payable to affiliates consists of expenses to be reimbursed to Annaly pursuant to an expense sharing agreement. Payable to affiliates also includes an income tax reimbursement due to Annaly TRS, which will be reimbursed after Annaly TRS and the Company file their combined federal, state and city tax returns. Related party transactions are comprised of the following (in thousands): | Receivable:
Reverse repurchase agreements | \$
20,097,391 | |----------------------------------------------|------------------| | Payable: | | | Subordinated borrowings | 150,000 | | Payable to affiliates | 720 | #### **4. Securities Financing Transactions** The Company enters into Repos to provide financing for its matched book transactions and to earn residual interest rate spreads. Under reverse repurchase agreements and transactions, the Company receives collateral. Under many agreements the Company is permitted to sell or re-pledge the securities received as collateral and deliver to counterparties to cover short positions. As of December 31, 2023, the fair value of securities collateralizing the reverse repurchase agreements as reported on the Statement of Financial Condition, where the Company is permitted to sell or re-pledge the securities was \$21.0 billion of which all were received from affiliated companies. The fair value of these securities that had been sold or re-pledged was \$20.2 billion of which none have been sold or re-pledged to affiliated companies. {10}------------------------------------------------ #### Notes to Statement of Financial Condition (continued) #### **5. Reverse Repurchase and Repurchase Agreements** Repos with the same counterparty and the same maturity are presented net on the Statement of Financial Condition when the terms of the agreements permit netting. The following table summarizes information regarding netting of Repos on the Statement of Financial Condition as of December 31, 2023 (in thousands): | | | Amounts Offset
on the Statement | Net Amounts
Presented on the | Amounts Not Offset
on the Statement of | | |-------------------------------|--------------|------------------------------------|---------------------------------|-------------------------------------------|---------| | | Gross | of Financial | Statement of | Financial | Net | | | Amounts | Condition(1) | Financial Condition | Condition(2) | Amounts | | Reverse repurchase agreements | \$24,525,364 | (\$4,427,973) | \$20,097,391 | (\$20,097,391) | \$0 | | Repurchase agreements | \$24,369,306 | (\$4,427,973) | \$19,941,333 | (\$19,941,333) | \$0 | 1 Amounts relate to master netting agreements which have been determined by the Company to be legally enforceable in the event of default and where certain other criteria are met in accordance with applicable offsetting accounting guidance ASC 210-20-45-11. 2 Amounts relate to master netting agreements and collateral agreements which have been determined by the Company to be legally enforceable in the event of default and where certain other criteria are not met in accordance with applicable offsetting accounting guidance ASC 210-20-45-11. The following table summarizes information regarding the remaining maturities and collateral types of Repos on a gross basis as of December 31, 2023 (in thousands): | | Repos by Collateral Type | | | | | | | | | | |------------------|----------------------------------|--------------------------------------|--------------------------|--------------------------------------|----------------------------------|-----------------------------|----|-----------------------------|--|--| | | Reverse Repurchase
Agreements | | Repurchase
Agreements | | Reverse Repurchase
Agreements | | | Repurchase
Agreements | | | | | | Agency Mortgage
Backed Securities | | Agency Mortgage
Backed Securities | | U.S. Treasury
Securities | | U.S. Treasury
Securities | | | | 1 to 29 days | \$ | 19,442,855 | \$ | 22,210,672 | \$ | 2,169,293 | \$ | 2,158,634 | | | | 30 to 59 days | | 2,708,463 | | - | | - | | - | | | | 60 to 89 days | | - | | - | | - | | - | | | | 90 to 119 days | | - | | - | | - | | - | | | | Over 119 days(1) | | 204,753 | | - | | - | | - | | | | Total | \$ | 22,356,071 | \$ | 22,210,672 | \$ | 2,169,293 | \$ | 2,158,634 | | | 1 No reverse repurchase agreements had a remaining maturity over 1 year as of December 31, 2023. {11}------------------------------------------------ ### Notes to Statement of Financial Condition (continued) #### **6. Fair Value Measurement** The Company follows fair value guidance in accordance with GAAP to account for its financial instruments. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP requires classification of financial instruments into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest priority input that is significant to the fair value measurement of the instrument. Financial assets and liabilities recorded at fair value on the Statement of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques as follows: *Level 1* – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets. *Level 2* – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. *Level 3* – inputs to the valuation methodology are unobservable and significant to overall fair value. GAAP requires disclosure of fair value information about financial instruments that are not measured at fair value on a recurring basis on the Statement of Financial Condition, for which it is practical to estimate the value. The carrying value of short-term instruments including cash and cash equivalents, deposits with clearing organizations, reverse repurchase agreements and repurchase agreements whose term is less than twelve months, generally approximates fair value due to the short-term nature of the instruments. The following table summarizes the estimated fair values for financial instruments and liabilities as of December 31, 2023 (in thousands): | | Level In Fair
Value Hierarchy | Carrying Value | | Fair Value | | |--------------------------------------|----------------------------------|----------------|------------|------------|------------| | Financial assets: | | | | | | | Cash and cash equivalents | 1 | \$ | 4,420 | \$ | 4,420 | | Deposits with clearing organizations | 1 | | 261,548 | | 261,548 | | Reverse repurchase agreements | 2 | | 20,097,391 | | 20,097,391 | | Financial liabilities: | | | | | | | Repurchase agreements | 2 | \$ | 19,941,333 | \$ | 19,941,333 | {12}------------------------------------------------ ### Notes to Statement of Financial Condition (continued) ### **7. Subordinated Borrowings** The borrowings under subordination agreements as of December 31, 2023, are listed in the following (in thousands): Subordinated notes, 9.25 percent, due April 29, 2025 \$ 150,000 The subordinated borrowings are with Annaly and are available in computing net capital under the SEC's uniform net capital rule. To the extent that such borrowings are required for the Company's continued compliance with minimum net capital requirements, they may not be repaid. The subordinated borrowings are carried at cost, which approximates fair value. #### **8. Commitments, Contingencies and Guarantees** The Company provides guarantees to securities clearinghouses and exchanges. Under the standard membership agreement, members are required to guarantee the performance of other members. Under the agreements, if another member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet shortfalls. The Company's liability under these arrangements is not quantifiable and could exceed the cash and securities it has posted as collateral. However, management believes the potential for the Company to be required to make payments under these arrangements is remote. Accordingly, no liability is carried on the Statement of Financial Condition for these transactions. #### **9. Risk Management** The Company makes use of various policies in the risk management process: *Market Risk –* Market risk is the potential change in an instrument's value caused by fluctuations in interest and currency exchange rates, equity and commodity prices, credit spreads, or other risks. The level of market risk is influenced by the volatility and the liquidity in the markets in which financial instruments are traded. *Interest Rate Risk –* Interest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments. As previously mentioned, the Company maintains a matched book of Repos, which reduces net exposure to interest rate risk. The relatively short-term nature of the Company's Repos also mitigates the magnitude of financial instrument value changes due to interest rate risk. However, typically the reverse repurchase agreements are longer-term than the Company's repurchase agreements. Accordingly, in a period of rising interest rates, we would experience a decrease in net income or a net loss because the interest rates on the Company's repurchase agreements adjust faster than the interest rates on the Company's reverse repurchase agreements. There might also {13}------------------------------------------------ ### Notes to Statement of Financial Condition (continued) ### **9. Risk Management (continued)** be differences between the repurchase and reverse repurchase agreements in size and timing of margin calls after interest rate changes. *Liquidity Risk –* Liquidity risk arises from the possibility that there may not be sufficient liquid assets available to meet the Company's obligations in accordance with contractual terms. *Counterparty Credit Risk –* The Company is exposed to risk of loss if a counterparty fails to perform its obligations under contractual terms. The Company has established policies and procedures for mitigating credit risk, including reviewing credit exposure and maintaining qualifying collateral. In the normal course of business, the Company executes, settles, and finances various counterparty (defined as "non-customer" pursuant to SEC Rules 15c3-1 and 15c3-3) securities transactions. These activities may expose the Company to default risk arising from the potential that a counterparty may fail to satisfy their obligations. The Company seeks to control the risks associated with its counterparty activities by requiring counterparties to maintain collateral in compliance with regulatory and internal guidelines. *Concentrations of Credit Risk –* The Company primarily provides financing to Annaly and occasionally provides financing and related services to other counterparties. The Company's exposure to credit risk associated with these transactions is measured for each individual counterparty. The Company's primary counterparty to the reverse repurchase agreements is Annaly. As of December 31, 2023, the Company's significant indirect concentration of credit risk was with the U.S. government and its Agencies. The Company's indirect exposure results from maintaining U.S. government and Agency securities as collateral for reverse repurchase agreements. The Company's direct credit exposure on these transactions is with Annaly; thus, the Company has credit exposure to the U.S. government and its Agencies only in the event of Annaly's default. The Company's significant industry credit concentration is with financial institutions, as well as REITs, including both affiliates and third parties. Financial institutions include other brokers and dealers and asset managers. This concentration arises in the normal course of the Company's brokerage, trading and financing activities. #### **10. Income Taxes** The Company is included in the consolidated tax return of its direct parent, Annaly TRS. The Company calculates the provision for income taxes by using a "separate return" method. Under this method, the {14}------------------------------------------------ ### Notes to Statement of Financial Condition (continued) #### **10. Income Taxes (continued)** Company is assumed to file a separate return with the tax authority, thereby reporting its taxable income or loss and paying the applicable tax to or receiving the appropriate refund from Annaly TRS. The Company's current provision is the amount of tax payable or refundable on the basis of a hypothetical, current-year separate return. The Company provided deferred taxes on temporary differences and on any carryforwards that it could claim on its hypothetical return and assessed the need for a valuation allowance on the basis of all available evidence and projected future operation results. The Company has recorded deferred tax assets of \$1.7 million for the benefit associated with prior period federal taxable loss carryforwards and temporary differences incurred as of December 31, 2023 which are included in Other assets on the Statement of Financial Condition. These assets will be reduced once the benefits are recognized. No valuation allowance was established as of December 31, 2023. Any difference between the tax provision (or benefit) allocated to the Company under the separate return method and payments to be made to (or received from) Annaly TRS are adjusted for once the consolidated tax return is filed and settled in cash. The corporate statutory U.S. federal tax rate is 21%. The Company, through its direct parent, files tax returns in several U.S. jurisdictions, predominately New York State and New York City. The 2020 through 2023 tax years remain open to U.S. federal, state and local tax examinations. ### **11. Net Capital Requirements** The Company is subject to the SEC Uniform Net Capital Rule (SEC Rule 15c3-1), which requires the maintenance of minimum net capital. The Company computes its net capital under the alternative method permitted by SEC Rule 15c3-1, which requires that minimum net capital shall be the greater of 2% of aggregate debit items arising from customer transactions or \$0.25 million. As of December 31, 2023, the Company's regulatory net capital of \$415.5 million exceeded the minimum requirement of \$0.25 million by \$415.2 million. #### **12. Subsequent Events** The Company has evaluated all subsequent events through the date this report was available to be issued. In February 2024, the Company received a capital contribution of \$100 million from Annaly. Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.