[Federal Register Volume 59, Number 193 (Thursday, October 6, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24797]


[[Page Unknown]]

[Federal Register: October 6, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No 34-34745; File No. SR-NSCC-94-18]

 

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing and Order Granting Accelerated Approval 
on a Temporary Basis of a Proposed Rule Change Limiting the Use of 
Letters of Credit to Collateralize Clearing Fund Contributions

September 29, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 14, 1994, the 
National Securities Clearing Corporation (``NSCC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change (File No. SR-NSCC-94-18) as described below. The Commission is 
publishing this notice and order to solicit comments from interested 
persons and to grant accelerated approval of the proposed rule change 
through September 30, 1995.
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    \1\15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change increases the minimum cash clearing fund 
contribution for those members who use letters of credit as clearing 
fund collateral and sets a limit on the amount of a member's required 
clearing fund contribution that may be collateralized with letters of 
credit.\2\
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    \2\The proposed rule change was originally filed on October 27, 
1989, and was approved temporarily through December 31, 1990. 
Securities Exchange Act Release no. 27664 (January 31, 1990), 55 FR 
4297 [File No. SR-NSCC-89-16]. Subsequently, the Commission granted 
a number of extensions to the temporary approval to allow the 
Commission and NSCC sufficient time to review and assess the use of 
letters of credit as clearing fund collateral. Most recently 
temporary approval was granted until September 30, 1994. Securities 
Exchange Act Release No. 34304 (July 1, 1994), 59 FR 35542 [File No. 
SR-NSCC-94-10].
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NSCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NSCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    NSCC is seeking approval of a proposed rule change that modified 
the amount of a member's required clearing fund deposit that may be 
collateralized by letters of credit. Specifically, the proposed rule 
change increases the minimum cash contribution for any member who uses 
letters of credit from $50,000 to the greater of $50,000 or 10% of that 
member's required clearing fund deposit up to a maximum of $1,000,000. 
In addition, the rule change provided that only 70% of a member's 
required clearing fund deposit may be collateralized with letters of 
credit. The rule change also adds headings to the clearing fund formula 
section for purposes of clarity and includes other nonsubstantive 
drafting changes. The effect of the proposed rule change is to increase 
the liquidity of the clearing fund and to limit NSCC's exposure to 
unusual risks resulting from the reliance on letters of credit.
    Since obtaining temporary approval of the original filing in 1989, 
NSCC has filed clearing fund composition reports with the Commission. 
NSCC states that between December 31, 1989, and December 31, 1993, as a 
result of the new requirements, it has observed the following changes 
in the composition of the clearing fund:

1. cash deposits have increased by approximately 225%;
2. the value of securities deposited has increased by approximately 
205%;\3\ and
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    \3\Securities eligible for deposit as clearing fund collateral 
include U.S. or municipal bonds in the first or second rating of any 
nationally known statistical service. NSCC Rule 4, Sec. 1.
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3. letter of credit deposits have declined by approximately 40%.\4\
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    \4\In October of 1989 when the Commission initially granted 
temporary approval of NSCC's proposal, letters of credit accounted 
for 76% of the total dollar value of required clearing fund 
deposits. By May 28, 1993, letters of credit accounted for less than 
30%. During the period from June 1, 1992, to May 28, 1993, letters 
of credit accounted for an average of 30.49% of the total dollar 
value of required clearing fund deposits, and for no month during 
that period did the portion of letters of credit used for required 
clearing fund deposits rise above 34%. Letter from Karen L. 
Saperstein, Vice President/Director of Legal & Associate General 
Counsel, NSCC, to Jerry W. Carpenter, Branch Chief, Division of 
Market Regulation, Commission (June 10, 1993).
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    NSCC states that the proposal is consistent with its requirements 
under Section 17A of the Act because it enhances NSCC's ability to 
safeguard securities and funds in its custody or under its control.

B. Self-Regulatory Organization's Statement on Burden on Competition

    NSCC does not believe that the proposed rule will have an impact or 
impose a burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No new written comments have been solicited or received.\5\ NSCC 
will notify the Commission of any written comments it receives.
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    \5\Since the initial filing of the proposed rule change NSCC has 
received one letter of comment. In the letter Wedbush Morgan 
Securities, Inc. opposed NSCC's proposal because they believed it 
would increase the cost of posting collateral. Letter from Edward W. 
Wedbush, President, Wedbush Morgan Securities, Inc., to David F. 
Hoyt, Assistant Secretary, NSCC (November 9, 1989).
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Section 17A(b)(3)(F) of the Act requires that a clearing agency's 
rules be designed, among other things, to ensure the safeguarding of 
securities and funds in its possession or control or for which it is 
responsible and to protect investors and the public interest.\6\ NSCC's 
proposal to limit the use of letters of credit to collateralize 
clearing fund obligations should make NSCC's clearing fund more liquid. 
A liquid clearing fund is necessary to ensure the safety and soundness 
of a clearing agency. NSCC's proposal is therefore consistent with the 
requirements under the Act with regard to NSCC's obligation to 
safeguard securities and funds and to protect the interests of 
investors and of the public.
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    \6\15 U.S.C. 78q-1(b)(3)(F) (1988).
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    Although letters of credit are a useful means of funding clearing 
agency guarantee deposits, their unrestricted use may present risks to 
clearing agencies. Because letters of credit reflect the issuer's 
promise to pay funds upon presentation of stipulated documents by the 
holder, a clearing agency holding letters of credit will be exposed to 
risk should the issuer refuse to honor its promise to pay. Furthermore, 
because under the Uniform Commercial Code the issuer may defer honoring 
a payment request until the close of business on the third banking day 
following receipt of the required documents, the clearing agency either 
may have to await payment or may have to seek alternative short-term 
financing. This waiting period could reduce a clearing agency's 
liquidity and thereby could hinder its ability to meet its payment 
obligations on a timely basis.\7\
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    \7\While the Division of Market Regulation (``Division'') 
believes that NSCC's reducing from 100% to 70% the percentage of a 
clearing member's required clearing fund contribution that can be 
collateralized with letters of credit, the Division is still 
concerned that 70% may be too high a percentage. Consequently the 
Division and NSCC are continuing their reviewing of the 70% 
concentration limit and its effect on NSCC's clearing fund.
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    As indicated above, since the proposal first received temporary 
approval, NSCC has experienced over a 200% increase in both cash and 
securities deposited as clearing fund collateral. Because cash and 
securities are generally more liquid than letters of credit, the 
enhanced level of such deposits helps to ensure the liquidity of the 
clearing fund in the event of a major member insolvency, catastrophic 
loss, or major settlement loss. By reducing the risk associated with 
the use of letters of credit, the proposal is consistent with NSCC's 
responsibilities under the Act to safeguard securities or funds in its 
custody or control and to protect investors and the public in general.
    NSCC has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after the 
date of publication of notice of the filing. The Commission finds good 
cause for so approving because accelerated approval of the proposal 
will keep effective NSCC's rules that restrict member's usage of 
letters of credit as clearing fund deposits and thereby help reduce the 
exposure of NSCC's clearing fund to the potential liquidity risks 
associated with using letters of credit to collateralize member's 
clearing fund obligations. Moreover, since it was first introduced in 
1989, NSCC's proposal has been open for public comment and has elicited 
only one opposing comment. Thus the Commission does not foresee that 
approval of the proposal will elicit further opposition.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission any person, other than those that 
may be withheld from the public in accordance with provisions of 5 
U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of NSCC. All submissions 
should refer to File No. SR-NSCC-94-18 and should be submitted by 
October 27, 1994.

V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule filing is consistent with the Act and in particular with 
Section 17A of the Act.
    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (File No. SR-NSCC-94-18) be, and 
hereby is approved through September 30, 1995.

    \8\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.\9\
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    \9\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-24797 Filed 10-5-94; 8:45 am]
BILLING CODE 8010-01-M