[Federal Register Volume 60, Number 231 (Friday, December 1, 1995)]
[Notices]
[Pages 61722-61724]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29320]



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

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36511; File No. SR-MCC-95-04]


Self-Regulatory Organizations; Midwest Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to Midwest Clearing 
Corporation's Decision To Withdraw From the Clearance and Settlement 
Business

November 27, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 16, 1995, the 
Midwest Clearing Corporation (``MCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which items have been prepared 
primarily by MCC. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change involves proposed arrangements relating to 
a decision by the Chicago Stock Exchange, Incorporated (``CHX'') to 
withdraw from the clearance and settlement, securities depository, and 
branch receive businesses conducted through its subsidiaries, MCC, 
Midwest Securities Trust Company (``MSTC''), and the Securities Trust 
Company of New Jersey (``STC/NJ'').\2\ Parties to the proposed 
arrangements are The Depository Trust Company (``DTC''), CHX, MSTC, the 
National Securities Clearing Corporation (``NSCC''), MCC, and STC/NJ. 
The proposed arrangements as they relate to MCC, would provide for the 
following:

    \2\ STC/NJ is a wholly-owned subsidiary of CHX that currently 
provides certain services, including a securities custody service. 
STC/NJ is not a clearing agency as defined in the Act and therefore 
is not required to register with the Commission.
---------------------------------------------------------------------------

    (1) MCC would cease providing securities clearing services by 
January 15, 1996.
    (2) NSCC would offer MCC participants an opportunity to become NSCC 
participants if they meet NSCC's qualifications.
    (3) Open positions of MCC participants that are or that become NSCC 
participants and that authorize the transfer of their open positions 
will be transferred to the books of NSCC.
    (4) DTC and NSCC would make certain payments to MCC.
    (5) In general, for a period of ten years MCC would not engage in 
the business from which it has decided to withdraw (i.e., the 
securities clearing business). However, MCC would be free to provide 
specified securities clearing-related services and products to CHX 
members and certain third-parties under certain circumstances.\3\

    \3\ A more detailed description of these proposed arrangements 
is contained in Exhibit 2 to the filing. A copy of the filing and 
all exhibits is available for copying and inspection in the 
Commission's Public Reference Room.
---------------------------------------------------------------------------

    The proposed rule change also seeks to modify MCC's By-Laws to 
reduce the size of its Board of Directors.\4\

    \4\ The text of these proposed changes is contained in Exhibit A 
to the filing. A copy of the filing and all exhibits is available 
for copying and inspection in the Commission's Public Reference 
Room.
---------------------------------------------------------------------------

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

    In its filing with the Commission, the MCC included statements 
concerning 

[[Page 61723]]
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. 
MCC has prepared summaries, set forth in section (A), (B), and (C) 
below, of the most significant aspects of such statements.\5\

    \5\ The Commission has modified the text of the summaries 
prepared by MCC.
---------------------------------------------------------------------------

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

    CHX has determined to close its clearance and settlement and 
securities depository business in order to focus its resources on the 
operations of the exchange. The primary purpose of the proposed 
arrangements is to permit CHX and MCC to achieve this objective while 
affording MCC participants an opportunity to become NSCC participants. 
MCC participants, however, would be free to utilize any other service 
provider of their choosing. This is consistent with the industry's 
effort to eliminate redundant infrastructure costs associated with 
operating separate organizations.
    The timing of the proposal is related to the industry's planned 
conversion to same-day funds settlement.\6\ Currently, transactions in 
equities, corporate debt, and municipal debt are settled in next-day 
funds.\7\ Transactions in commercial paper and other money market 
instruments are settled in same-day funds. As the Commission is aware, 
the registered clearing agencies have been working with the industry 
over the least few years to develop a system that will provide for the 
settlement of virtually all securities transactions in same-day funds. 
These efforts have been encouraged by the Commission, the Board of 
Governors of the Federal Reserve System, and the Federal Reserve Banks 
of New York and Chicago, and these plans have been monitored by the 
staffs of these regulatory bodies.\8\ Under the conversion plan, all 
issues currently settling in DTC's next-day funds settlement system 
will be transferred to DTC's same-day funds settlement system on a 
single day. Several months ago, an industry consensus was reached that 
the conversion date will be February 22, 1996. As a result of this 
scheduled conversion date, CHX and MCC have determined to cease 
providing securities clearing services by January 15, 1996.

    \6\ The term ``same-day funds'' refers to payment in funds that 
are immediately available and generally are transferred by 
electronic means.
    \7\ The term ``next-day funds'' refers to payment by means of 
certified check that is for value on the following day.
    \8\ In approving certain modifications of DTC's existing system 
in order to accommodate the overall conversion to same-day funds 
settlement, the Commission stated that it ``believes that the 
overall conversion to an SDFS system will help reduce systemic risk 
by eliminating overnight credit risk. The SDFS system also will 
reduce risk by achieving closer conformity with the payment methods 
used in the derivatives markets, government securities markets and 
other markets.'' Securities Exchange Act Release No. 35720 (May 16, 
1995) 60 FR 27360 [File No. SR-DTC-95-06] (order granting 
accelerated approval to proposed rule change modifying the same-day 
funds settlement system).
---------------------------------------------------------------------------

    The proposed arrangements should result in substantial savings for 
the securities industry. In connection with this proposal, former sole 
MCC participants may become NSCC participants if they qualify or 
utilize any other clearing service provider. Moreover, clearing 
interfaces involve the maintenance of substantial facilities, 
communications networks, and account reconciliation mechanisms. As a 
result of the proposal, the substantial costs incurred by both NSCC and 
MCC in operating an interface would be eliminated.
    Another purpose of the proposed rule change is to reduce the size 
of MCC's board of directors. This reduction conforms with the 
simultaneous reductions in the size of the boards of directors of MSTC 
and CHX. Because of their withdrawal from the businesses described 
above, CHX and MCC no longer believe it is necessary to maintain such a 
large board of directors. As a result, MCC is elimination of the 
Participant Governor positions. Those current board members whose slots 
have been eliminated, however, may serve out the remainder of their 
terms.
    MCC believes 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 the industry's 
conversion to same-day funds settlement for virtually all securities 
transactions and thereby facilitate the prompt and accurate clearance 
and settlement of such transactions. The proposal will provide 
qualified sole MCC participants with access to NSCC's facilities and 
will be implemented consistently with the safeguarding of securities 
and funds in MCC's custody and control. In addition, the proposal will 
foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions.

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

    MCC believes the proposed arrangements will not impose any burden 
on competition not necessary or appropriate in furtherance of the 
purposes of the Act. Securities clearing corporations registered under 
Section 17A of the Act are not conventional businesses but utilities 
created to serve members of the securities industry for the purpose of 
providing certain services that are ancillary to the businesses in 
which industry members compete with one another. Operating a securities 
clearing corporation requires a substantial and continuing investment 
in infrastructure, including telecommunications links with users, data 
centers, and disaster recovery facilities in order to meet the 
increasing needs of participants and respond to regulatory 
requirements. Both the Boston Stock Exchange in 1981 and the Pacific 
Stock Exchange in 1987 substantially terminated the operation of their 
securities clearing corporations.
    After consummation of the proposed arrangements, securities 
industry members will continue to have access to high-quality, low-cost 
clearing services provided under the mandate of the Act. The overall 
cost to the industry of having such services available will be reduced 
thereby permitting a more efficient and productive allocation of 
industry resources. Furthermore, because most of a clearing 
corporation's interface costs must be mutualized, thereby requiring 
some participants to subsidize costs incurred by others, CHX's and 
MCC's withdrawal from maintaining clearing facilities will reduce costs 
to participants and thereby remove impediments to competition. Finally, 
CHX's ability to focus its resources on the operations of the exchange 
should help enhance competition among securities markets.

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

    Written comments on the proposal have not been solicited or 
received.

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

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the self-regulatory 

[[Page 61724]]
organization consents, the Commission will:
    (A) by order approve such proposed rule change or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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, NW., Washington, DC 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. Sec. 552 will be available for inspection and copying in 
the Commission's Public Reference Room, 450 Fifth Street, NW., 
Washington, DC. Copies of such filing also will be available for 
inspection and copying at the principal office of MCC. All submissions 
should refer to the file number SR-MCC-95-04 and should be submitted by 
December 22, 1995.
    For the Commission by the Division of Market Regulation, pursuant 
to delegated authority.\9\

    \9\ 17 CFR 200.30-3(a)(12) (1994).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29320 Filed 11-30-95; 8:45 am]
BILLING CODE 8010-01-M