[Federal Register Volume 60, Number 140 (Friday, July 21, 1995)]
[Notices]
[Pages 37698-37699]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17940]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35970; International Securities Release No. 828; File 
No. SR-ISCC-95-03]


Self-Regulatory Organizations; International Securities Clearing 
Corporation; Notice of Filing and Order Granting Accelerated Approval 
on a Temporary Basis of Proposed Rule Change Relating to Modification 
of the Calculation of Its Clearing Fund Formula

July 13, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 5, 1995, the 
International Securities Clearing Corporation (``ISCC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change (File No. SR-ISCC-95-03) as described in Items I and II below, 
which items have been prepared primarily by ISCC. The Commission is 
publishing this notice and order to solicit comments on the proposed 
rule change from interested persons and to grant accelerated approval 
of the proposed rule change through August 1, 1996.

    \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 Changes

    ISCC proposes to modify some of the factors used in the calculation 
of its clearing fund formula. The modification is being made to 
accommodate the five day rolling settlement cycle recently instituted 
by the London Stock Exchange (``LSE'').

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

    In its filing with the Commission, ISCC 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. The self-regulatory organization has prepared summaries, 
set forth in sections (A), (B), and (C) below, of the most significant 
aspects of such statements.\2\

    \2\ The Commission has modified the text of the summaries 
prepared by ISCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    On June 26, 1995, the LSE moved from a ten day rolling settlement 
period to a five day rolling settlement period.\3\ In response to this 
change in the standard settlement cycle, ISCC is adjusting its method 
of calculating its clearing fund requirements.\4\ ISCC's clearing fund 
formula requires ISCC members to deposit an amount based upon the 
following weekly calculation: (Gross Debit Value)  x  (Market Risk 
Factor) + (Foreign Exchange Factor). Under the proposal, ISCC is not 
modifying its clearing fund formula but is modifying the calculations 
used to derive factors used in the clearing fund formula. ISCC is 
modifying the calculation of the Gross Debit Value and Market Risk 
Factor because the determination of these factors relies in part upon 
the applicable settlement period. ISCC also is adding to its clearing 
fund formula procedures a requirement that each member must deposit the 
greater of (a) the largest clearing fund deposit requirement imposed 
over the previous fifty-two week period or (b) the current weekly 
calculated clearing fund requirement.\5\

    \3\ In 1986, ISCC and the 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 delivered. ISCC has no requirement to complete open 
pending trades. On July 18, 1994, the LSE moved to a ten day rolling 
settlement cycle with trades settling ten days after trade date. 
Previously, the LSE settled trades on a fortnightly basis with all 
trades that occurred during a two-week period settling on the same 
day. In response to the change to a rolling settlement cycle, ISCCA 
adjusted its method of calculating its clearing fund requirements. 
Securities Exchange Act Release Act Release No. 34392, International 
Series Release No. 687 (July 15, 1994), 50 FE 37798.
    \4\ When ISCC amended its clearing fund formula rule last year 
to accommodate the change from a fortnightly system to a ten day 
rolling settlement system, the rule filing was approved on a 
temporary basis until July 18, 1995. Securities Exchange Act Release 
No. 34392, International Series Release No. 687 (July 15, 1995), 59 
FR 37798. ISCC cannot request an extension of the approval because 
the current formula is not appropriate for a five day settling 
system. ISCC therefore is seeking approval of the proposed change on 
an expedited basis.
    \5\ Members will continue to be required to contribute a minimum 
of $50,000 to the clearing fund.
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    The Gross Debit Value currently is the largest single daily gross 
debit value, based on debit values for the calendar week following the 
week in which the calculation is performed,\6\ less 15% of the 
Institutional Net Settlement (``INS'') receive value for that same 
day.\7\ Under a five day settlement standard, it is no longer feasible 
for ISCC to calculate the required deposit using the existing formula 
because at the time of the calculation ISCC only will know of the 
trades settling on one day of the following week.\8\ Accordingly, ISCC 
will now base the Gross Debit Value on the largest single daily gross 
debit value, based on debit values for five consecutive business days 
including the day on which the calculation is performed, less 15% of 
the INS receive value for that day.

    \6\ Currently, ISCC calculates the Gross Debit Value each 
Tuesday.
    \7\ Under the INS system, redeliveries of securities from ISCC 
members to institutional participants can occur automatically 
through the LSE. Therefore, ISCC generally is not required to pay 
the LSE for these securities. The debits arising from these 
redeliveries may be offset only partially because these securities 
may be reclaimed (i.e., returned) by the receiver, and in such 
circumstance, ISCC is liable to the LSE for the full value of the 
reclamation.
    \8\ ISCC calculates and collects the required deposit on a 
weekly basis. If ISCC calculates a member's clearing fund 
requirement on Tuesday, August 2, only the settlements for trades 
conducted on Monday, August 1, and settling on Monday, August 8, 
will be available for consideration. An ISCC member has three 
business days after notice of an increase in its clearing fund 
contribution to pay such increase. Under the prior ten day rolling 
settlement system, the clearing fund formula was based on the actual 
largest daily obligation of a member during the relevant time 
period, and the clearing fund deposit could be calculated and 
collected prior to the settlement day. However, under the five day 
rolling settlement cycle, because an ISCC member has three business 
days after the calculation to make additional deposits, ISCC will be 
calculating and collecting clearing fund contributions generally 
based on the prior week's trades which already have settled.
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    The five day settlement standard also requires modification to the 
Market Risk Factor component of the formula. The formula currently uses 
a Market Risk Factor based on the largest calculated percentage change 
in the Financial Times Index over an eleven day period over a minimum 
of 365 days. This calculation was based on the premise that there could 
be eleven days from the day a member executed a trade until ISCC 
liquidated the position.\9\ Applying the same reasoning to the five day 
settlement environment, the Market

[[Page 37699]]
Risk Factor is being amended to reflect that it will be based on the 
largest percentage change in the Financial Times Index over a six day 
period over a minimum of 365 days. Initially, the Market Risk Factor 
will continue to be set at 7%.

    \9\ ISCC bases its clearing fund calculations on the assumption 
that it will take one day to sell all of a defaulting participant's 
positions. Under a ten day settlement period, this resulted 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 is a one day exposure for foreign 
exchange risk because ISCC converts U.S. dollars to British pounds 
on the settlement date and converts the proceeds from the sale of 
the positions to U.S. dollars the following day.
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    No change is required to be made to the formula used to derive the 
Foreign Exchange Factor. This factor is based in part on the Estimated 
Foreign Exchange Volatility, an amount that is equal to the largest one 
day percentage change in the U.S. dollar/British pound foreign exchange 
rate over a minimum of 365 days and that is unaffected by the change in 
the standard settlement period.\10\ The Estimated Foreign Exchange 
Volatility will continue to be set at 4%.\11\

    \10\ The Foreign Exchange Factor is the product of the Gross 
Debit Value and the Estimated Foreign Exchange Volatility less the 
product of the Gross Debit Value times the Market Risk Factor times 
the Estimated Foreign Exchange Volatility.
    \11\ During the period from 1989 to 1992, the maximum 
fluctuation in the U.S. Dollar-British Pound exchange rate was 
4.445%. ISCC will continue to review annually the foreign exchange 
risk factor.
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    ISCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act and the rules and regulations 
thereunder because the rule proposal will facilitate ISCC's ability to 
safeguard securities and funds in its custody or control.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    ISCC does not believe that the proposed rule changes will have an 
impact on 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

    ISCC will notify the Commission of any written comments it 
receives.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Section 17A(b)(3)(F) \12\ of the Act requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible. The Commission believes that ISCC's 
proposal to amend certain factors used in its clearing fund formula 
should enhance the safeguarding of securities and funds which are in 
the custody or control of ISCC or for which it is responsible because 
the modifications will result in a more feasible means of determining 
ISCC's risks under the shorter standard settlement cycle. Because of 
the effect of a five day settlement cycle on the calculation of the 
clearing fund requirements, the proposal will enable ISCC to require 
members to deposit the greater of (a) the current calculation amount or 
(b) the largest calculation amount over the prior fifty-two weeks. 
Collection of the larger amount for deposit to the clearing fund should 
provide additional protection to compensate for the change in the 
calculations of the Gross Debit Value and Market Risk Factor which 
generally will be based upon previously settled trades rather than 
outstanding obligations.

    \12\ 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.\13\ 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.\14\ The clearing fund formula 
continues to be based upon the risk factors created by LSE's method of 
settlement (i.e., time, market, and foreign exchange risks). 
Furthermore, ISCC's proposed changes do not alter the uniform 
application of the clearing fund formula to all ISCC members in 
accordance with their usage of the LSE link established by the linkage 
agreement between ISCC and LSE.\15\

    \13\ Securities Exchange Act Release No. 16900 (June 17, 1980), 
45 FR 41920.
    \14\ ISCC has agreed that prior to the expiration of this order 
it will report to the Commission the average level of clearing fund 
deposits for each participant under the ten day settlement cycle and 
the five day settlement cycle. In addition, ISCC has agreed to 
report to the Commission how frequently it required each participant 
to deposit the largest clearing fund deposit over the prior fifty-
two weeks rather than the current calculation amount.
    \15\ The linkage agreement between ISCC and LSE, dated December 
22, 1988, allows ISCC to obtain comparison and settlement services 
in the United Kingdom from the LSE on behalf of ISCC members.
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    ISCC 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 the proposed rule change because (i) approval of 
the current clearing fund formula will expire on July 18, 1995, (ii) 
the LSE already has implemented the five day rolling settlement system, 
and (iii) application of an amended clearing fund formula is critical 
to the clearance and settlement of transactions under the shorter T+5 
settlement time frame.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submission 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington D.C. 20549. 
Copies of the submissions, 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 and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 5th Street, N.W., 
Washington, D.C. 20549. Copies of such filings will also be available 
for inspection and copying at the principal office of ISCC. All 
submissions should refer to the file number SR-ISCC-95-03 and should be 
submitted by August 11, 1995.

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-ISCC-95-03) be, and hereby 
is, temporarily approved through August 1, 1996.


    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\16\

    \16\ 17 CFR 200.30-3(a)(12) (1994).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-17940 Filed 7-20-95; 8:45 am]

BILLING CODE 8010-01-M