[Federal Register Volume 59, Number 141 (Monday, July 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18026]


[[Page Unknown]]

[Federal Register: July 25, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34392; International Series Release No. 687; File No. 
SR-ISCC-94-1]

 

Self-Regulatory Organizations; International Securities Clearing 
Corporation; Order Temporarily Approving on an Accelerated Basis a 
Proposed Rule Change Amending ISCC's Clearing Fund Formula

July 15, 1994.
    On June 9, 1994, International Securities Clearing Corporation 
(``ISCC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'').\1\ The Commission 
published notice of the proposed rule change in the Federal Register on 
June 22, 1994.\2\ No comments were received on the notice. As discussed 
below, the Commission is temporarily approving the proposed rule change 
on an accelerated basis through July 18, 1995.
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    \1\15 U.S.C. 78s (b)(1) (1988).
    \2\Securities Exchange Act Release No. 34222, International 
Series Release No. 674 (June 16, 1994), 59 FR 32254.
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I. Description

    In 1986, ISCC and the London Stock Exchange (``LSE'') entered into 
a linkage agreement which allows ISCC to obtain comparison and 
settlement services in the United Kingdom from the LSE on behalf of 
ISCC members. Pursuant to this linkage agreement, ISCC is responsible 
for paying for all securities believed. ISCC has no requirement to 
complete open pending trades.\3\ On July 18, 1994, the LSE is moving to 
a ten day rolling settlement cycle with trades settling ten days after 
trade date.\4\ In response to this change, ISCC is adjusting its method 
of calculating its clearing fund requirements.\5\
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    \3\ISCC is not responsible for trades that are scheduled to 
settle after the day of default of an ISCC member. Agreement, dated 
December 22, 1988, between ISCC and LSE.
    \4\Currently, the LSE settles trades on a fortnightly basis with 
all trades that occur during a two-week period settling on the same 
day.
    \5\Currently, ISCC collects three percent of member's average 
gross settlement value over two account periods on a biweekly basis. 
This figure represents both market risk and foreign exchange risk. 
As of July 18, 1994, the clearing fund deposit will be calculated 
and collected on a weekly basis. The calculation will be made on 
Tuesday and collected within three days. Therefore, ISCC will 
collect clearing fund deposits prior to the settlement day.
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    ISCC bases its clearing fund calculations on the assumption that it 
will take one day to sell all of a defaulting participant's positions. 
This results in an eleven day exposure for market risk with ten days 
between trade date and settlement date and one day between settlement 
date and close out of positions. There also will be a one day exposure 
for foreign exchange risk. (ISCC will convert U.S. dollars into British 
pounds on settlement day and will convert the proceeds from the close 
out of positions into U.S. dollars the next day.) The formula, 
therefore, is the sum of two components--the amount collected to cover 
market risk and the foreign exchange factor.
    To calculate the amount of clearing fund deposit attributable to 
market risk, ISCC establishes a market risk factor which is the largest 
percentage change over eleven days in the Financial Times Index over a 
minimum of 365 days. Initially, the market risk factor will be set at 
seven percent.\6\ The market risk factor is multiplied by the largest 
single daily gross debit value for the applicable week less 15% of the 
Institutional Net Settlement (``INS'') receive value for that day based 
on debit values for the calendar week following the week in which the 
calculation is performed (``adjusted gross debit value'').\7\
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    \6\ISCC will review annually the market risk factor.
    \7\Under the INS system, redeliveries of securities from the 
ISCC member to institutional participants can occur automatically 
through the LSE. Therefore, ISCC generally is not required to pay 
the LSE for these securities. These debits are offset only partially 
because these items may be reclaimed by the receiver, and in such 
circumstance, ISCC is liable to the LSE for the full value of the 
reclamation.
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    The foreign exchange factor is calculated by multiplying the 
adjusted gross debit value by the largest one day percentage change in 
the U.S. Dollar-British Pound foreign exchange rate over a minimum of 
365 days (``estimated foreign exchange volatility'').\8\ The product is 
then reduced by the product of the adjusted gross debit value times the 
estimated foreign exchange volatility times the market risk factor. The 
reduction is made because the risk of foreign exchange is on the amount 
of money converted into U.S. dollars after sale of the securities not 
on the entire amount of dollars ISCC originally converted into British 
pounds.
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    \8\During the period from 1989 to 1992, the maximum fluctuation 
in the U.S. Dollar-British Pound exchange rate was 4.445%. 
Initially, this number will be used in calculating the foreign 
exchange factor. ISCC will review annually the foreign exchange risk 
factor.
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    Previously for ISCC members on surveillance status, the market risk 
factor and the foreign exchange factor of the clearing fund formula 
were increased, in the discretion of ISCC, by requiring up to an 
additional 3%, 5%, and 7% of average daily debits for members on 
Advisory, Class A, and Class B surveillance, respectively. Under the 
new formula, both the market risk factor and the foreign exchange 
factor may be increased by a maximum of 3%, a maximum of 5%, and a 
maximum of 7% for members on Advisory, Class A, and Class B 
surveillance, respectively.

II. Discussion

    The Commission believes the proposed rule change is consistent with 
Section 17A of the Act and, therefore, is approving the proposal. 
Specifically, the Commission believes the proposal is consistent with 
Section 17A(b)(3)(F)\9\ of the Act in that it better enables ISCC to 
safeguard securities and funds for which it is responsible. ISCC's 
adjustments to its clearing fund formula will result in a more accurate 
reflections of its risks. Instead of basing the formula on past 
obligations of the ISCC member, the formula is now based on the actual 
obligations of such member during the relevant time period. This should 
provide ISCC increased protection when an ISCC member has unusually 
heavy trading activity. In addition, the previous ISCC clearing fund 
formula relied on a calculation of market risk factor and of foreign 
exchange risk factor that is now outdated. ISCC's increase in the size 
of these factors provides ISCC with greater protection consistent with 
likely movements in securities prices and in foreign exchange rates.
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    \9\15 U.S.C. 78q-1(b)(3)(F) (1988).
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    On June 17, 1980, the Commission issued a release announcing the 
standards to be used by the Division of Market Regulation in connection 
with the registration of clearing agencies.\10\ In that release, the 
Commission stated that it is appropriate for a clearing agency to 
establish an appropriate level of clearing fund contributions based, 
among other things, on its assessment of the risks to which it is 
subject. In addition, contributions to the clearing fund should be 
based on a formula that applies to users on a uniform, 
nondiscriminatory basis. The Commission believes that ISCC's proposal 
is consistent with these guidelines. The new clearing fund formula is 
based on the risks (i.e., time, market, and foreign exchange risks) 
created by the LSE's method of settlement. In addition, the formula is 
applied uniformly to all ISCC members in accordance with their usage of 
the LSE link.
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    \10\Securities Exchange Act Release No. 16900 (June 17, 1980), 
45 FR 41920.
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    The Commission preliminarily finds that the proposal is consistent 
with Section 17A of the Act. The Commission believes that in light of 
its significance to ISCC and its members, the proposed revisions to 
ISCC's clearing fund formula should be carefully monitored before they 
become a permanent feature. For this reason, the Commission is 
approving the proposal on a temporary basis through July 18, 1995.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of the 
notice of filing. The LSE is scheduled to move to its new settlement 
cycle on July 18, 1994. ISCC needs to have its new clearing fund 
formula in place at the same time in order to sufficiently cover its 
new risks. The Commission therefore believes that it is appropriate to 
accelerate approval of the proposal.

III. Conclusion

    It is therefore ordered pursuant to section 19(b)(2) of the Act 
that the proposed rule change (File No. SR-ISCC-94-01) be, and hereby 
is, temporarily approved through July 18, 1955.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Director.
[FR Doc. 94-18026 Filed 7-22-94; 8:45 am]
BILLING CODE 8010-01-M