[Federal Register Volume 60, Number 159 (Thursday, August 17, 1995)]
[Notices]
[Pages 42931-42932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20405]



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

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36091; File No. SR-NSCC-95-06]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving a Proposed Rule Change Establishing the 
Collateral Management Service

August 10, 1995.
    On May 22, 1995, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-NSCC-95-06) 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ On June 2, 1995, NSCC filed an amendment to the proposed 
rule change to clarify which entities may be permitted to participate 
in the proposed service.\2\ Notice of the proposal was published in the 
Federal Register on June 12, 1995.\3\ No comment letters were received. 
For the reasons discussed below, the Commission is approving the 
proposed rule change.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Letter from Anthony H. Davidson, Associate Counsel, NSCC, to 
Peter Geraghty, Division of Market Regulation, Commission (May 26, 
1995).
    \3\ Securities Exchange Act Release No. 35567 (June 5, 1995), 60 
FR 30912.
---------------------------------------------------------------------------

I. Description of the Proposal

    The purpose of the proposed rule change is to establish the 
Collateral Management Service (``CMS'') which will provide access to 
information regarding participants' clearing fund, margin, and other 
similar requirements and deposits, including excess or deficit amounts 
and comprehensive data on underlying collateral, (``CMS data'') at NSCC 
and other participating clearing entities. Participating clearing 
entities will include clearing agencies registered pursuant to Section 
17A of the Act \4\ and clearing organizations affiliated with or 
designated by contract markets trading specific futures products under 
the oversight of the Commodity Futures Trading Commission.

    \4\ 15 U.S.C. 78q-1 (1988).
---------------------------------------------------------------------------

    Participating clearing entities will be required to sign and 
execute NSCC's CMS agreement. The CMS agreement sets forth NSCC's 
authorization from participating clearing entities to collect and 
provide information relating to participant's clearing fund and margin 
requirements, and participants' clearing fund and margin deposits as 
contained in the Securities Clearing Group's (``SCG'') \5\ data base 
and in the Chicago Board of Trade Clearing Corporation's Pay Collect 
System (``BOTCC System'') \6\ and additional information provided by 
the participating clearing entities. The CMS agreement also addresses 
such matters as the confidentiality of CMS Data, additional parties, 
costs, and limitation of liability.

    \5\ The SCG was established in 1989 as a result of developments 
surrounding the October Market Break and subsequent studies on the 
causes of the Market Break. The stated purpose of the SCG is to 
increase cooperation and coordination among securities clearing 
entities and to facilitate the sharing of certain clearance and 
settlement information regarding surveillance and member risk 
monitoring. For a further description of the SCG, refer to 
Securities Exchange Act Release No. 27044 (July 25, 1989), 54 FR 
30963 [File Nos. SR-DTC-88-20, SR-MCC-88-10, SR-MSTC-88-07, SR-NSCC-
88-09, SR-OCC-89-02, SR-Philadep-89-01, and SR-SCCP-89-01] (order 
approving the establishment of the SCG).
    \6\ The Chicago Board of Trade through BOTCC established the 
Shared Pay Collect System which disseminates the daily pay/collects 
of all futures clearing firms which are affiliated with 
participating futures exchanges.
---------------------------------------------------------------------------

    NSCC will provide CMS data to participating NSCC participants,\7\ 
to participating clearing entities, and if a participating clearing 
entity requests to participants of such participating clearing entity. 
Each participant that desires access to the CMS data will be required 
to complete a CMS participation application form. A participant's 
access to CMS data will be limited to the participant's own 
information. Similarly, a participating clearing entity's access to CMS 
data will be limited to only the CMS data of participants of such 
entity. A participant may request that NSCC exclude data relating to 
such participant 

[[Page 42932]]
from the CMS by completing a request to exclude data form.

    \7\ NSCC Rule 49 currently authorizes NSCC to release clearing 
data relating to participants' clearance and settlement activity at 
NSCC.
---------------------------------------------------------------------------

    At this time, The Depository Trust Company (``DTC''), the MBS 
Clearing Corporation, the Stock Clearing Corporation of Philadelphia 
(``SCCP''), the Philadelphia Depository Trust Company (``Philadep'') 
and the Participants Trust Company have signed CMS agreements. The 
Options Clearing Corporation has agreed in principle to participate in 
the CMS.

II. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds in the custody or control of the clearing agency or for which 
it is responsible.\8\ As discussed below, the Commission believes that 
the proposed rule change is consistent with NSCC's obligation under the 
Act because the CMS should help clearing agencies and their 
participants to better monitor clearing fund, margin, and other similar 
required deposits that protect a clearing agency against loss should a 
member default on its obligations to the clearing agency. Consequently, 
the CMS should assist clearing agencies in assuring the safeguarding of 
securities and funds in their custody or control.

    \8\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
---------------------------------------------------------------------------

    Many clearing participants currently maintain memberships at 
multiple clearing entities. The type of clearing entities at which a 
single firm may maintain memberships can vary a great deal and can 
include securities clearing corporations and depositories regulated by 
the Commission and futures clearing entities that are not regulated by 
the Commission. Whether a securities or futures clearing entity, all 
such clearing entities require that members post deposit in some form 
of a participants fund contribution and/or margin requirement to 
protect the clearing entity from losses should the member default on 
its obligations to the clearing entity. Consequently, clearing 
participants generally maintain required deposits at several different 
clearing entities. The CMS is intended to help clearing participants to 
more efficiently manage their various clearing fund and/or margin 
deposits by providing access to such information, including 
comprehensive data on underlying collateral at such multiple clearing 
entities, in a consolidated manner through a computer network.
    The CMS also will provide participating clearing entities with the 
ability to view common members' clearing fund and/or margin deposits at 
other participating clearing entities. This will be especially 
beneficial to those participating clearing entities that have executed 
cross-guaranty agreements \9\ or have other cross-guarantee 
arrangements.\10\ The Commission supports the use of cross-guaranty 
agreements and other similar arrangements among clearing agencies as a 
method of reducing clearing agencies' risk of loss due to a common 
participant's default.

    \9\ Currently, DTC and NSCC are the only clearing agencies 
registered with the Commission that have executed a cross-guaranty 
agreement. The agreement provides that in the event of a default of 
a common member, any resources remaining after the failed common 
member's obligations to the guaranteeing clearing agency have been 
satisfied will be made available to the other clearing agency. The 
guaranty is not absolute but rather is limited to the extent of the 
resources relative to the failed member remaining at the 
guaranteeing clearing agency. The principal resources will be 
settlement net credit balances and the failed member's deposits to 
the clearing agencies' clearing funds. For a complete description of 
DTC's and NSCC's agreement, refer to Securities Exchange Act Release 
No. 33548 (January 31, 1994), 59 FR 5638 [File Nos. SR-DTC-93-08 and 
SR-NSCC-93-07] (order approving proposed rule change).
    \10\ Pursuant to Section 3, Rule 2, Article VI of the Midwest 
Securities Trust Company's (``MSTC'') Rules, a defaulting 
participant's obligations at MSTC or the Midwest Clearing 
Corporation will be discharged by application of that participant's 
deposits at either clearing agency if that participant is a common 
member to both clearing agencies. Similarly, pursuant to Section 4, 
Rule 4 of SCCP's Rules, SCCP will make available any portion of a 
defaulting participant's contribution to its participants fund to 
offset a loss suffering by Philadep by reason of that participant's 
default. Philadep's Rules contain an identical provision.
---------------------------------------------------------------------------

    Participants' access to CMS information will be limited to a 
participant's own information, and participants will not have the 
ability to submit data directly to NSCC. All CMS data will be submitted 
by participating clearing entities. Consequently, the Commission is 
satisfied that the confidentiality and accuracy of participant data 
will be maintained.
    The Commission also believes that the proposed rule change is 
consistent with Section 17A(a)(2)(A)(ii) of the Act which directs the 
Commission to facilitate linked or coordinated facilities for clearance 
and settlement of transactions in equities, options, and futures.\11\ 
Furthermore, the Commission believes that the proposed rule change is 
consistent with the Division of Market Regulation's conclusion in its 
1987 Market Break Report that information coordination among clearing 
entities should include commodity futures clearing corporations and 
other appropriate futures entities to assure complete coordination and 
dissemination of information on common members.\12\ NSCC's CMS will 
provide access in a consolidated manner to information regarding 
clearing fund, margin, and other similar requirements and deposits at 
both securities and futures clearing entities. Coordination of 
information among clearing entities concerning common members is a 
critical element in clearing entities' ability to protect and safeguard 
funds and securities.

    \11\ 15 U.S.C. 78q-1(a)(2)(A)(ii) (1988).
    \12\ Division of Market Regulation, The October 1987 Market 
Break 10-21 (February 1988).
---------------------------------------------------------------------------

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of 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 proposed rule change (File No. SR-NSCC-95-06) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\13\

    \13\ 17 CFR 200.30-3(a)(12) (1994).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-20405 Filed 8-16-95; 8:45 am]
BILLING CODE 8010-01-M