[Federal Register Volume 60, Number 201 (Wednesday, October 18, 1995)]
[Notices]
[Pages 53945-53946]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-25821]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36360; File No. SR-NSCC-95-12]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Granting Temporary Approval of a Proposed Rule 
Change Limiting the Use of Letters of Credit To Collateralize Clearing 
Fund Contributions

October 11, 1995.
    On August 21, 1995, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-NSCC-95-12) 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ Notice of the proposal was published in the Federal 
Register on September 8, 1995.\2\ No comment letters were received. For 
the reasons discussed below, the Commission is approving the proposed 
rule change on a temporary basis through September 30, 1996.\3\

    \1\15 U.S.C. 78s(b0(1) (1988).
    \2\Securities Exchange Act Release No. 36172 (August 31, 1995), 
60 FR 46878.
    \3\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, the 
Commission extended temporary approval through September 30, 1995. 
Securities Exchange Act Release No. 34745 (September 29, 1994), 59 
FR 50949 [File No. SR-NSCC-94-18].
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I. Description

    NSCC's rule change modifies the amount of a member's required 
clearing fund deposit that may be collateralized by letters of credit. 
Specifically, the rule change increases the minimum cash contribution 
for any member that 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 provides 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 of NSCC's rules for 
purposes of clarity and includes other nonsubstantive drafting changes. 
The effect of the 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.
    When NSCC first filed this change, the impetus was to improve 
NSCC's liquidity resources by requiring additional deposits of cash and 
cash equivalents. Since that time, NSCC has obtained additional 
liquidity resources through a line of credit with a major New York 
clearinghouse bank. NSCC currently has a three hundred million dollar 
line of credit that can be used for liquidity purposes, and the letters 
of credit in the NSCC clearing fund are available as collateral for 
this line of credit.

II. Discussion

    Section 17A(b)(3)(F) of the Act requires that a clearing agency's 
rules be designed to ensure the safeguarding of securities and funds in 
its custody or control or for which it is responsible and to protect 
investors and the public interest.\4\ The Commission believes 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. Therefore, NSCC's proposal is 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.

    \4\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, a clearing agency making a 
payment request 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.\5\

    \5\The Division of market Regulation (``Division'') is still 
concerned that 70% may be too high a percentage of a member's 
clearing fund deposit that may be collateralized with letters of 
credit. Consequently, the Division is continuing its review of the 
70% concentration limit and its effect on NSCC's clearing fund.
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    NSCC has experienced over a 200% increase in both cash and 
securities deposited as clearing fund collateral since the proposal 
first received temporary approval. Because cash and securities are 
generally more liquid than letters of credit, the enhanced level of 
such deposits should help 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.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and 
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 proposed rule change (File No. SR-NSCC-95-12) be and hereby is 
approved on a temporary basis through September 30, 1996.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\

    \6\17 CFR 200.30-3(a)(12) (1994).

[[Page 53946]]

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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-25821 Filed 10-17-95; 8:45 am]
BILLING CODE 8010-01-M