[Federal Register Volume 59, Number 140 (Friday, July 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17863]


[[Page Unknown]]

[Federal Register: July 22, 1994]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34389; File No. SR-NSCC-94-06]

 

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change Modifying Clearing 
Fund Requirements

July 15, 1994.
    On April 4, 1994, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-NSCC-94-06) under 
Section 19(b) of the Securities Exchange Act of 1934 (``Act'').\1\ 
Notice of the proposed rule change was published in the Federal 
Register on May 25, 1994, to solicit comments from interested 
persons.\2\ No comments were received by the Commission. This order 
approves the proposal.
---------------------------------------------------------------------------

    \1\15 U.S.C. 78s(b) (1988).
    \2\Securities Exchange Act Release No. 34084 (May 18, 1994), 59 
FR 27092.
---------------------------------------------------------------------------

I. Description of the Proposal

    The proposed rule change modifies NSCC's clearing fund requirements 
for those NSCC members for which NSCC sponsors an account at The 
Depository Trust Company (``DTC''). The modified requirements are 
designed to more accurately reflect NSCC's risks associated with such 
sponsoring. The modified requirements also will be more consistent with 
the way in which NSCC and DTC address similar risks associated with 
dual NSCC/DTC members.
    Currently under certain situations, NSCC applies a factor in 
calculating its clearing fund requirements for members' non-continuous 
net settlement (``non-CNS'') activity (e.g., envelope settlement system 
activity'').\3\ The DTC settlement activity of members which NSCC 
sponsors into DTC (``sponsored members'') is included in the non-CNS 
calculation. The factor is applicable when a member's average daily 
envelope settlement system debits exceed the member's excess net 
capital. For the reasons set forth below, NSCC desires to eliminate 
application of the factor in the clearing fund calculation related to 
sponsored members' DTC settlement activity. In lieu thereof, NSCC has 
determined to add an additional advisory surveillance criteria to its 
guidelines for placing a member on surveillance status in order to 
cover circumstances where a sponsored member's average daily envelope 
settlement system debits plus its average daily DTC settlement debits 
exceed the sponsored member's excess net capital.\4\
---------------------------------------------------------------------------

    \3\The factor is a number, calculated and adjusted in order to 
provide a minimum of one and a maximum of three, by which the 
member's non-CNS clearing fund requirement is multiplied in order to 
increase the requirement.
    \4\Advisory surveillance status permits NSCC, among other 
things, to increase a member's clearing fund requirement 2.5% (or in 
the discretion of NSCC up to 5%) of the member's average daily non-
CNS and non-mutual fund services debits plus 2.5% of the member's 
average daily non-CNS and non-mutual fund services credits.
---------------------------------------------------------------------------

    In File No. SR-NSCC-82-10, NSCC amended its clearing fund formula 
to permit the collection of additional clearing fund deposits from 
members using NSCC's envelope settlement system.\5\ Calculation of the 
additional clearing fund deposits involved use of a factor. The primary 
purpose of the additional clearing fund deposits and the use of a 
factor was to better protect NSCC against the risks presented by the 
envelope settlement systems (i.e., that securities delivered through 
the envelope settlement systems would not be available for return to 
the deliverer in the event the receiver were to become insolvent and be 
unable to pay for the delivery). However, NSCC did not limit the 
application of the factor to only the calculation of clearing fund 
requirements for physical envelope deliveries but also applied it in 
the calculation of clearing fund requirements associated with the DTC 
settlement activity of sponsored members.
---------------------------------------------------------------------------

    \5\Securities Exchange Act Release No. 18852 (June 18, 1982), 47 
FR 29426 [File No. SR-NSCC-82-10] (order approving proposed rule 
change).
---------------------------------------------------------------------------

    NSCC believes that its current clearing fund formula, as applied to 
sponsored members, can result in excessive clearing fund requirements. 
NSCC believes that the risk associated with sponsored members' DTC 
settlement activities will be adequately addressed without the 
application of a factor. The proposed rule change, while eliminating 
the use of a factor in determining a sponsored member's clearing fund 
requirement with respect to DTC settlement activity, gives NSCC the 
ability to place a sponsored member on advisory surveillance status 
with an increased clearing fund requirement under the circumstances 
where previously the factor would have been applied. Furthermore, NSCC 
will continue to collect from each sponsored member a clearing fund 
deposit based not only on the member's NSCC settlement activities but 
also based on its DTC settlement activities. The portion of NSCC's 
clearing fund deposit based on DTC settlement activities generally will 
be the same amount the sponsored member would be required to deposit 
with DTC for that DTC settlement activity if the sponsored member had a 
regular account at DTC.

II. Discussion

    For the reasons discussed below, the Commission believes the 
proposal is consistent with the Act and particularly Section 
17A(b)(3)(F) of the Act.\6\ Section 17A(b)(3)(F) requires that the 
rules of clearing agencies be designed to assure the safeguarding of 
funds in the custody or control of clearing agencies or for which they 
are responsible.
---------------------------------------------------------------------------

    \6\15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
---------------------------------------------------------------------------

    The Commission agrees with NSCC that the elimination of the factor 
in determining a sponsored member's clearing fund requirement with 
respect to DTC settlement activity will more appropriately reflect the 
relevant risks and that it will be consistent with the way in which DTC 
addresses settlement risks for its members. At the same time, the 
Commission believes that the modified NSCC clearing fund formula 
provides for the collection of deposits adequate to protect NSCC from 
the risks associated with the DTC settlement activities of sponsored 
members. Accordingly, the modified clearing fund formula should result 
in a more equal distribution of the financial burdens placed on NSCC 
sponsored members while allowing NSCC to fulfill its statutory 
safekeeping obligation.

III. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposed rule change is consistent with the Act, particularly with 
Section 17A(b)(3)(F) of the Act, and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the above-mentioned proposed rule change (File No. SR-NSCC-94-06) 
be, and hereby is, approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
---------------------------------------------------------------------------

    \7\17 CFR 200.30-3(a)(12) (1993).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17863 Filed 7-21-94; 8:45 am]
BILLING CODE 8010-01-M