[Federal Register Volume 59, Number 25 (Monday, February 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2727]
[[Page Unknown]]
[Federal Register: February 7, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33547; File No. SR-PCC-92-1]
Self-Regulatory Organizations; Pacific Clearing Corporation;
Order Approving a Proposed Rule Change to Revise PCC's Rules and to
Adopt a Participant Agreement and a Clearing Fund Agreement
January 31, 1994.
On September 1, 1992, Pacific Clearing Corporation (``PCC'') filed
with the Securities and Exchange Commission (``Commission'') under
section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'')\1\ a
proposed rule change (File No. SR-PCC-92-1) to revise PCC's rules and
to adopt a Participant Agreement and a Clearing Fund Agreement. On
December 12, 1992, PCC filed an amendment to the proposal.\2\ The
Commission published notice of the proposal in the Federal Register on
May 3, 1993.\3\ No written comments were received. On September 27,
1993, PCC filed an amendment that did not require republication of
notice.\4\ For the reasons discussed below, the Commission is approving
the proposal.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\This amendment corrected a typographical error to the
Clearing Fund Agreement and added language to the filing to clarify
the types of services PCC performs for PSE. Letter from Rosemary A.
MacGuinness, Senior Counsel, PSE, to Richard C. Strasser, Attorney,
Division of Market Regulation (``Division''), Commission (December
7, 1992).
\3\Securities Exchange Act Release No. 32212 (April 26, 1993),
58 FR 26372.
\4\This amendment revised the language of paragraph 3.1(a) of
PCC's Participant Agreement to clarifying PCC's role in processing
trades. Letter from John C. Katovich, Senior Vice President, General
Counsel, and Director of Legal Affairs, PSE, to Richard C. Strasser,
Attorney, Division, Commission (September 20, 1993).
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I. Description
In 1987, PCC transferred most of its clearing and depository
functions to the National Securities Clearing Corporation (``NSCC'')
and The Depository Trust Company (``DTC''). PCC now performs limited
services for specialists of the Pacific Stock Exchange Incorporated
(``PSE''). These services, which are set forth in PCC's revised rules
and in PCC's Participant Agreement include: (1) Clearing and settlement
services for PSE specialists' trades executed on the PSE directly or
through a registered clearing agency or a securities depository; (2)
custody services for securities not eligible for depository services at
DTC and receipt and delivery services for securities arising from
balance orders or ex-clearing transactions; (3) processing services
with respect to dividends, reorganizations, buy-ins for or against PSE
specialists, and cash and next day trades; and (4) preparation and
provision of reports containing information on trading and related
activity at each specialist's post.\5\
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\5\For instance, PCC will prepare and provide each specialist
with a security ledger that contains information on the specialist's
trading activities and positions, a security summary that contains a
report summarizing the security ledger, and a trial balance report
that contains a summary of the specialist's long and short
positions, bank balances, profits and losses, and expenses incurred.
PCC will reconcile specialists' bank statements and records daily
and at the end of the month. PCC also will prepare a daily liquid
asset valuation report for each specialist at the beginning of each
day to ensure that each specialist is meeting its minimum capital
requirement. Participant Agreement at 3.1.
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PCC currently interfaces with NSCC on behalf of PSE specialists.
PCC is a member of NSCC and maintains a clearing account at NSCC with
subaccounts for PSE specialists. PCC subcontracts with NSCC to provide
clearing and settlement services for each PSE specialist organization.
NSCC maintains subaccounts with DTC, which serves as the depository for
PSE specialists' positions,\6\ on behalf of the specialists. Under the
subcontract arrangement, PSE transmits compared trade information to
NSCC to allow NSCC to determine specialists' net settlement
obligations.\7\ NSCC then transmits these settlement obligations to
PCC. Based on NSCC's final settlement figures, PCC will use funds
received by PCC from specialists or will initiate payments against the
specialists' bank accounts to satisfy specialists' settlement
obligations to NSCC, DTC, or another entity as required.\8\
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\6\Pacific Securities Depository Trust Company, PCC's former
affiliated depository, no longer functions as a depository.
\7\PSE specialists are responsible for correcting trade
differences in a timely manner. PCC will provide assistance in
correcting trade differences but will not be liable for losses
resulting from that assistance. PCC Participant Agreement at 3.1(b)
\8\Each specialist firm must maintain funds sufficient for
purposes of settlement that are accessible to PCC, and each
specialist firm must maintain an account at a bank where PCC has the
ability to execute withdrawals and disbursements. PCC Rule 3.4.
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PCC will review the bank balance of each specialist post to
determine whether there are sufficient funds in the specialist firm's
account to satisfy the specialist's settlement obligations. If PCC
determines that there are insufficient funds for settlement, PCC either
(1) will transfer excess funds between specialist posts in the case of
intra-firm specialist posts or (2) will notify the specialist firm's
bank of the shortfall to enable the bank to furnish the settlement
funds pursuant to its loan agreement with the specialist firm. If these
procedures do not result in sufficient funds for settlement, PCC will
direct the specialist firm to make up the shortfall.
(A) PCC Rules
As a result of the substantial diminution of PCC's operations, PCC
revised its rules so they accurately reflect the actual functions and
services PCC performs. As revised, PCC's rules consist of fourteen
separate rules detailing participants' and PCC's rights and obligations
with respect to each other.
Rule 1 sets out definitions. Rule 2 discusses membership
requirements, including financial responsibility requirements and
operational capacity requirements.\9\ Rule 3 details the types of
services performed by PCC for its participants.\10\ Rule 4 discusses
the procedures by which business operations are transacted between
participants and PCC.\11\ Rule 5 provides information on fees and
charges. Rule 6 requires annual auditing of PCC's financial statements.
Rule 7 describes PCC's clearing fund and the method for assessing
participants' contributions.\12\ Rule 8 is reserved for future use.
Rule 9 contains the provisions governing participants' termination of
their memberships with PCC and the conditions under which PCC may cease
to act for a particular participant. Rule 10 discusses procedures to be
followed in the case of a participant's insolvency. Rule 11 discusses
disciplinary procedures. Rule 12 discusses a participant's right to
appeal an adverse decision by PCC relating to the termination of the
participant's membership, the participant's insolvency, or a
disciplinary proceeding. Rule 13 describes various procedures relating
to such topics as PCC's authority to delegate its power,\13\ PCC's
suspension of its rules or procedures,\14\ and indemnification of PCC
against loss, liability, or expenses.\15\ Rule 14 requires PCC to use
its best efforts to maintain insurance of a type and coverage that the
board of directors deems appropriate.
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\9\PSE members registered as specialists must at all times
maintain for each specialist post a minimum of $150,000 in either
cash or marketable securities or an amount equal to 25% of the sum
of the market value of its securities position both long and short,
whichever is greater. A member organization operating more than one
specialist post shall be deemed to meet the requirements for minimum
post capital so long as the average capital per post operated by
such member organization is equal to or greater than the greater of
the two amounts stated above. PSE Rule 2.2, 3347.
\10\Generally, as discussed above and in PCC's Participant
Agreement, PCC acts as an intermediary between NSCC and PCC
participants. PCC also provides various custodial services, which
are specified in the Participant Agreement, for its participants.
For a detailed description of the services performed by PCC for its
participants, refer to PCC Rule 3 and PCC Participant Agreement at
3.1.
\11\For example, each PCC participant must make accessible to
PCC at least one representative who is authorized to sign on behalf
of the participant all necessary documents, to correct errors, and
to perform other necessary duties each day one-half hour prior to
the opening of trading and one-half hour after the close of trading
at PSE. PCC Rule 4.1(a).
\12\The clearing fund is discussed in detail below.
\13\PCC's Board of Directors may delegate PCC's authority to
PCC's chairman, president, an executive vice president, a vice
president, or other person provided such delegation is not
prohibited by PCC's rules or procedures or by the Act. PCC Rule
13.1.
\14\The time fixed by PCC's rules or procedures for performing
any action may be extended or the performance of any act required by
PCC's rules may be waived or suspended by PCC's board of directors,
chairman, or president, whenever PCC deems such action to be a
necessary expedient. PCC Rule 13.4(a).
Generally, a written report providing the detailings of such
extension, waiver, or suspension must be filed with PCC's records
and with the Commission and be available for inspection by any PCC
participant. PCC Rule 13.4(b).
\15\PCC participants must indemnify PCC against any loss,
liability, or expense PCC sustains. Participants shall not be liable
for any losses arising from the negligent, fraudulent, or criminal
acts of PCC. PCC Rule 13.7.
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(B) Clearing Fund
As described above, PCC interfaces with NSCC on behalf of its
participants and guarantees the performance of its participants'
obligations to NSCC. As a result, participants now are required to
contribute to a clearing fund established by PCC to ensure that PCC
maintains adequate funds to fulfill its guarantee obligations to NSCC
and to cover losses suffered by PCC or its participants which are
incident to PCC's clearance and settlement operations.\16\ In
connection with the contribution requirement, PCC and each of its
participants will enter into a Clearing Fund Agreement\17\ which sets
out PCC's and each participant's rights and obligations with respect to
the clearing fund.\18\
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\16\Each PCC participant is required to make a minimum
contribution to the clearing fund in an amount fixed by PCC. The
minimum contribution, which must be in cash, is currently $20,000. A
participant also may be required to contribute an amount in addition
to the minimum contribution as a result of calculations using PCC's
clearing fund formula. Currently, PCC has adopted the formula used
by NSCC to calculate clearing fund contributions. NSCC requires its
members to make a minimum cash contribution of $10,000. For a
discussion of the formula used by NSCC, refer to NSCC Rules and
Procedures, Section XV.
\17\The Clearing Fund Agreement is attached as Exhibit C to the
PCC filing [File No. SR-PCC-92-1].
\18\For example, PCC's investment of cash contained in the
clearing fund and PCC's permitted uses of the clearing fund are
governed by PCC Rules 7.4 and 7.5, respectively.
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If a PCC participant fails to discharge any liability to PCC or to
PSE, its clearing fund contribution or a portion thereof will be
applied to discharge the liability.\19\ If PCC suffers a loss due to a
participant's default and that loss exceeds the amount of the
participant's contribution to the clearing fund, PCC may satisfy the
remainder out of other participants' contributions to the clearing
fund. Any such loss charged to the clearing fund will be charged pro
rata against the required contribution of the nondefaulting
participants. The participants and the Commission will be notified of
the amount of and the reason for any charge against the clearing fund.
After pro rata charges are made against participants' required
contributions, each participant must pay immediately upon PCC's demand
the difference between the participant's minimum requirement and the
actual amount it has in the clearing fund.
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\19\Obligations of PCC participants to PSE are subordinated and
are junior to those of the participants to PCC and to other PCC
participants. PCC Rule 7.5(d).
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(C) Participant Agreement
The Participant Agreement,\20\ an agreement between each PSE
specialist/specialist firm\21\ and PCC, sets out the rights and
obligations between PCC and each participant with respect to clearance
and settlement activities. Specialists' obligations include, among
other things, (1) maintaining the net capital requirements required by
PSE Rules, (2) ensuring the availability of funds for PCC's settlements
with NSCC and DTC, (3) reviewing and verifying all records of their
transactions provided by PCC, and (4) acting promptly upon receipt of
dividend, reorganization, and buy-in notices.
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\20\See Form 19b-4, Exhibit B, File No. SR-PCC-92-1.
\21\PSE specialists are categorized as either individuals
registered as specialists with PSE or firms, referred to as backers,
registered as specialists with PSE. Only PSE specialists and PSE
specialist firms can be participants of PCC.
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II. Discussion
The Commission believes PCC's proposal is consistent with the Act
and in particular with section 17A(b)(3)(F) thereunder.\22\ That
section requires that the rules of a clearing agency be designed (1) to
ensure the safeguarding of securities and funds in the clearing
agency's custody or control or for which it is responsible, (2) to
foster cooperation and coordination with persons engaged in the
clearance and settlement of securities transactions, and (3) to remove
impediments to and perfect the mechanism of a national system for the
prompt and accurate clearance and settlement securities transactions.
The Commission believes that PCC's rules and procedures, which are
designed to facilitate the clearance and settlement at PCC, NSCC, and
DTC of PSE specialists' securities transactions and which aid PCC in
acting as an intermediary between its participants and NSCC, are
consistent with PCC's requirements under the Act.
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\22\15 U.S.C. 78q-1(b)(3)(F) (1988).
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As discussed above, PCC's rules and procedures must be designed to
ensure the safekeeping of securities and funds in PCC's possession or
control or for which it is responsible. To achieve this aim, PCC
designed certain of its rules, procedures, and operations in a manner
that makes them consistent with those of other registered clearing
agencies and adopted for its own use certain methods of operation and
systems which previously have been approved by the Commission. For
instance, PCC is instituting the use of a clearing fund similar to
other clearing agencies and will use the same clearing fund formula
that is used by NSCC, a formula which the Commission has acknowledged
is consistent with a clearing agency's safekeeping responsibilities
under the Act.\23\ In addition, because PCC's rules and procedures are
designed to be consistent with those of other market participants, PCC
is fostering cooperation and coordination with others engaged in the
clearance and settlement of securities transactions and is removing
impediments to and helping perfect the mechanism of a national system
for the prompt and accurate clearance and settlement of securities
transactions as required under Section 17A of the Act.
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\23\Securities Exchange Act Release No. 32547 (June 29, 1993),
58 FR 36491 [File No. SR-NSCC-93-4] (order approving modifications
to NSCC's clearing fund formula).
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As discussed above, PCC's revised rules and procedures present a
more accurate reflection of PCC's current operations as a clearing
agency. The Commission stresses that it is of the utmost importance
that clearing agency rules and procedures be maintained so that they
present an accurate reflection of the clearing agency's rights and
responsibilities with regard to its participants. Such administrative
maintenance helps to ensure that disputes that may arise between
clearing agencies and their participants are fairly and quickly
resolved. Precise written rules and procedures also eliminate
uncertainty in the daily interactions between participants and among
participants and the clearing agency. Should PCC decide to modify its
clearance and settlement activities, PCC must file with the Commission
a proposed rule change pursuant to Section 19(b)(2) of the Act prior to
implementation of any such changes. In addition, PCC, as a registered
clearing agency, is required pursuant to Exchange Act Rule 17a-22 to
submit to the Commission all material it issues to its participants or
to other entities with which it has a significant relationship.\24\
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\24\17 CFR 240.17a-22 (1993).
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III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the Act and in particular with
section 17A thereunder.
It Is Therefore Ordered, pursuant to section 19(b)(2) of the
Act,\25\ that the proposed rule change (File No. SR-PCC-92-1) be, and
hereby is, approved.
\25\15 U.S.C. 78s(b)(2) (1988).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\26\
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\26\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-2727 Filed 2-4-94; 8:45 am]
BILLING CODE 8010-01-M