[Federal Register Volume 61, Number 39 (Tuesday, February 27, 1996)]
[Notices]
[Pages 7290-7293]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4351]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36866; File No. SR-NSCC-96-03]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing and Order Granting Accelerated Approval 
of a Proposed Rule Change to Modify NSCC's Rules and Procedures to 
Accommodate Same-Day Funds Settlement

February 21, 1996.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on January 16, 1996, the 
National Securities Clearing Corporation (``NSCC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change (File No. SR-NSCC-96-03) as described in Items I and II below, 
which items have been prepared primarily by NSCC. On January 17, 1996, 
and January 31, 1996, NSCC filed amendments to the proposed rule 
change.\2\ The Commission is publishing this notice and order to 
solicit comments from interested persons and to grant accelerated 
approval of the proposed rule change.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ Letters from Julie Buyers, Associate Counsel, NSCC, to Jerry 
Carpenter, Esq., Associate Director, Division of Market Regulation, 
Commission (January 17, 1996, and January 31, 1996).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The purpose of the proposed rule change is to modify NSCC's rules 
and procedures and to amend the current Netting Contract and Limited 
Cross-Guarantee agreement between NSCC and The Depository Trust Company 
(``DTC'') (``NSCC/DTC Agreement'') to accommodate the conversion from a 
next-day funds settlement (``NDFS'') system to a same-day funds 
settlement (``SDFS'') system.

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 that 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.\3\

    \3\ The Commission has modified the text of the summaries 
submitted by NSCC.

[[Page 7291]]

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

    NSCC Rule 1 (``Definitions'') is being amended to add a definition 
for the term ``refusal.'' The term ``refusal'' is defined as when a 
settling bank refuses to settle for one or more of its settling members 
or fund members.
    Currently, NSCC calculates and collects clearing fund deposits from 
sponsored account members based on their activity at DTC.\4\ Upon the 
implementation of SDFS, DTC will calculate sponsored account members' 
initial SDFS participants fund deposit. DTC will collect the required 
amount by including it in the sponsored account members' initial SDFS 
settlement amount at DTC. DTC will maintain the funds as part of DTC's 
participants fund. NSCC will not include this amount in determining the 
required deposit or the minimum cash requirement at NSCC for those 
sponsored account members. Accordingly, Rule 4 (``Clearing Fund'') and 
Procedure XV (``Clearing Fund Formula and Other Matters'') will reflect 
this revised policy. In addition, Rule 4 is being modified to reflect 
that interest paid on clearing fund deposits held at DTC will be paid 
at such rate or rates as DTC pays to its participants. The procedures 
also are being revised to require that cash deposits to the clearing 
fund be made by a same-day funds wire transfer.

    \4\ Pursuant to its Procedure IX(B), NSCC makes available to 
participants that do not maintain a direct membership in a qualified 
securities depository the facilities of a qualified securities 
depository through the use of a sponsored account. The account is 
under the jurisdiction of NSCC, and NSCC is solely responsible for 
all liabilities arising from the use of the account including the 
payment of fees to the qualified securities depository.
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    Rule 9 (``Delivery and Receipt of Securities'') and Addendum D 
(``Statement of Policy, Envelope Settlement Service'' [``ESS'']) are 
being revised to address liquidity and credit risk concerns. The 
proposed changes restrict the use of ESS to those items which are 
currently eligible for delivery through ESS. This will preclude the use 
of ESS for any security that currently settles in same-day funds.
    Rule 12 (``Settlement'') and Procedure VIII (``Money Settlement 
Service'') are being revised to accommodate the conversion from an NDFS 
system to an SDFS system. Under the proposed rule change, settling 
members and fund members must settle through a settling bank by a 
federal funds wire transfer. The proposed rule change also specifies 
that a settling member or a fund member is deemed to have failed to 
settle when NSCC receives a refusal from the participant's settling 
bank or when a participant's settling bank has failed to pay its net 
debit obligation. In addition, changes are being made to incorporate 
into participant's settlement statements, which reflect a participant's 
net debit and/or credit obligations for each business day, net 
settlement debits or credits arising through NSCC's cross-guaranty 
agreement.\5\

    \5\ Infra note 8 and accompanying text.
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    NSCC's ability to fine a member currently is found in Rule 26 
(``Bills Rendered'') which governs NSCC's billing policy. Because NSCC 
may fine members on a daily basis rather than a monthly basis, the fine 
procedures will be moved from Rule 26 to new Rule 17 (``Fine 
Payments'') to permit NSCC to impose fines on members, including 
settling bank only members, at such frequency as determined by NSCC 
from time to time. In addition, a new Addendum P (``SDFS Failure-to-
Settle Fines'') sets forth the fine schedule for an SDFS system failure 
to settle.
    NSCC Rules 32, 33, 36 and 37 are being modified to accommodate the 
addition of settling bank only members.\6\ Rule 39 (``Special 
Representatives/Index Receipt Agent'') is being amended to delete the 
duplicative language in the second paragraph regarding the form of an 
instruction on which NSCC may rely from a special representative or an 
index receipt agent. The forms of instructions from a special 
representative or an index receipt agent are the same forms as those on 
which NSCC may rely when it receives instructions directly from a 
participant; therefore, NSCC moved the reference to special 
representatives and index receipt agents into the same paragraph 
governing forms of instructions received from participants.

    \6\ Rule 32 governs the use of facsimile signatures by NSCC 
participants; Rule 33 provides NSCC's Board of Directors or its 
delegates the authority to prescribe NSCC procedures; Rule 36 
relates to proposed rule changes and notification of proposed rule 
changes; and Rule 37 provides procedures by which hearings are 
requested and conducted.
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    Rule 41 (``Funds Only Settlement Service'' [``FOSS'']) is being 
amended to explicitly state that settlement of money payments arising 
out of FOSS are to be made in accordance with Rule 12 regarding 
settlement of money payments.
    Rule 52 (``Mutual Fund Services'') is being amended to clarify that 
settlement with respect to mutual fund services is governed by Rule 12 
and to delete conflicting language. Currently, fund members have an 
earlier payment deadline with respect to their mutual fund services 
payment obligations. Concurrently with the implementation of SDFS, NSCC 
is establishing a uniform payment deadline for all members, including 
fund members, so that settling banks will not have to bifurcate their 
payment obligations.
    Rule 54 (``Settling Bank Only Members'') is being modified to 
permit a bank that meets the financial requirements established by NSCC 
to become a settling bank if it is either a member of the Federal 
Reserve System or it has direct access to the Federal Reserve System.
    Rule 55 (``Settling Banks'') is being amended to clarify that in 
the event of the insolvency of a settling bank which has failed to pay 
its net-net debit obligation, members that are represented by such 
insolvent bank will be charged pro rata for amounts owed by the 
insolvent bank.
    NSCC Procedure IX (``Special Services'') is being revised to 
indicate that even though SDFS is being implemented, NSCC will retain 
the right to effect payments on a direct clearing member's behalf, 
other than for NSCC money settlement, either through the use of checks 
or by initiating wire transfer instructions.
    Addendum B (``Standards of Financial Responsibility and Operational 
Capability'') is being revised to clarify that the criteria set forth 
therein with respect to bank applicants do not apply to applicants for 
settling bank only membership. Settling bank only members are required 
to meet the operational and financial requirements set forth in 
Addendum B(I)(A) and other requirements established by NSCC.\7\

    \7\ NSCC requires settling bank only members to have a short-
term obligation rating of at least A-2 by Standard and Poor's 
Corporation or P-2 by Moody's Investors Services Incorporated. For a 
further description of the financial responsibility and operational 
capability requirements for settling bank only members, refer to 
Securities Exchange Act Release No. 36714 (January 16, 1996), 61 FR 
1807 [File No. SR-NSCC-95-13] (order approving proposed rule change 
enabling members settling mutual fund transactions in same-day funds 
to settle through a settling bank).
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    NSCC believes that its short term funding resources are adequate 
and that it is extraordinarily unlikely that it would need to implement 
any liquidity contingency plan. Nevertheless, the rule change includes 
a revised Addendum F (``Statement of Policy in Relation to Same Day 
Funds Settlement'') which sets forth a liquidity contingency plan to be 
employed in the event that funding resources are insufficient. The 
statement permits NSCC to reverse debits and credits arising from non-
guaranteed services to the extent necessary to 

[[Page 7292]]
eliminate the liquidity problem, as determined by NSCC. It also permits 
NSCC to spread its obligations to make payments over such period of 
time as is necessary to eliminate the liquidity crisis. If the 
liquidity problem arises as a result of CNS deliveries, the policy 
statement permits NSCC to return CNS deliveries to the delivering 
member until such time as NSCC is able to pay for the deliveries. NSCC 
will reimburse members whose securities are returned for the financing 
costs incurred during the intervening period.
    NSCC recognizes that its requirement that each member appoint a 
settling bank may impose an undue burden on fund members or mutual fund 
services members, which members use only non-guaranteed services. 
Therefore, Addendum F includes a provision which allows NSCC on a case 
by case basis to waive the requirement that a member appoint a settling 
bank to the extent that this requirement creates an undue burden on 
such a member.
    The converion to SDFS also requires NSCC to make certain amendments 
to the current NSCC/DTC Agreement.\8\ The current NSCC/DTC Agreement 
provides that with respect to participants common to both entities 
(``common members''), DTC and NSCC agree to net daily a common member's 
final net settlement debit or credit at one entity with the common 
member's final net settlement credit or debit at the other entity. In 
most instances, the result will be either one net debit obligation 
payable to either DTC or NSCC or one net credit receivable from either 
DTC or NSCC.\9\ In the event of a default of a common member, the 
current NSCC/DTC Agreement also provides that 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 the 
failed member's settlement net credit balances and its deposits to the 
clearing agencies' clearing funds.

    \8\ For a complete description of DTC's and NSCC's current 
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).
    \9\ If a common member has either a net settlement debit at both 
DTC and NSCC or a net settlement credit at both DTC and NSCC, the 
common member will make payments to both DTC and NSCC or receive 
payments from both DTC and NSCC.
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    The proposed rule change amends the current NSCC/DTC Agreement to 
include cross-guaranties of NSCC and DTC arising from transactions 
effected through NSCC's continuous net settlement (``CNS'') system. 
NSCC's CNS system continually nets all trades due to settle the next 
day against each other and against prior days' unsettled long and short 
positions in the same securities. NSCC is the contraparty to each CNS 
transaction. Thus, NSCC participants obligated to deliver securities 
deliver the securities to NSCC as free, book-entry movements at DTC 
(``short covers''). NSCC participants obligated to receive securities 
will receive the securities from NSCC as free, book-entry movements at 
DTC (``long allocation'').
    Certain cross-guarantees between NSCC and DTC are being established 
to permit transactions to flow smoothly between DTC's system and the 
CNS system in a collateralized SDFS environment. Under the amended 
NSCC/DTC Agreement, DTC will provide a guarantee to NSCC of all long 
allocations, and NSCC will provide a guarantee to DTC for all short 
covers. These guarantees will ensure, among other things, that debits 
created in DTC's system continue to be collateralized when the 
securities serving as collateral are delivered into the CNS system as 
short covers and will reduce risk at NSCC by ensuring that long 
allocations or the approximate value of long allocations will be made 
available to NSCC to cover certain exposures.
    When securities received versus payment in DTC's system are turned 
into CNS short covers, NSCC will provide a guarantee to DTC equal to 
the prior day's closing price of the securities.\10\ If CNS short 
covers are satisfied from securities that were not received versus 
payment in DTC's system, NSCC will provide a guarantee to DTC equal to 
the prior day's closing market value less an applicable haircut. DTC 
will take this guarantee into account for collateral monitor purposes.

    \10\ The guarantee from NSCC to DTC is calculated on a per share 
basis.
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    When long allocations to participants are redelivered in DTC's 
system, DTC will provide a guarantee to NSCC equal to the prior day's 
closing price of the long allocations less an applicable haircut. The 
guarantee will serve as a collateral substitute for long allocations 
and only will be called on to the extent a participant fails to settle 
due to insolvency and NSCC's own internal close-out procedures result 
in a net loss to NSCC. DTC will apply its normal collateralization 
controls to the value of its guarantee to NSCC to ensure that it has 
sufficient collateral to cover potential guarantee obligations to NSCC 
as the result of a participant redelivering CNS long allocations in 
DTC's system.
    It is the industry's intention that the conversion SDFS take effect 
on February 22, 1996; therefore, NSCC is seeking approval of these 
changes to coincide with this date.
    NSCC 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 promote the prompt and 
accurate clearance and settlement of securities transactions.

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

    NSCC does not believe that the proposed rule change will 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 written comments have been solicited or received. NSCC will 
notify the Commission of any written comments received by NSCC.

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

    Section 17A(b)(3)(F) of the Act \11\ requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions, 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, and to 
foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions.

    \11\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
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    The Commission believes that NSCC's proposed rule change is 
consistent with NSCC's obligations under Section 17A(b)(3)(F) to 
facilitate the prompt and accurate clearance and settlement of 
securities transactions because the proposed rule change should 
facilitate NSCC's conversion to an entirely SDFS system by including 
provisions in NSCC's rules relating to an SDFS system. The conversion 
to a SDFS system should help reduce systemic risk by eliminating 
overnight credit risk. The SDFS system also should reduce risk by 
achieving closer conformity with the payment methods used in the 
derivatives markets, government securities markets, and other markets.

[[Page 7293]]

    The Commission also believes the proposal is consistent with NSCC's 
obligations to assure the safeguarding of securities and funds in its 
custody or control and to foster cooperation and coordination with 
persons engaged in the clearance and settlement of securities 
transactions because the proposed rule change should further reduce 
NSCC's and DTC's risk exposure by amending the NSCC/DTC Agreement to 
include cross-guaranties for transactions effected through NSCC's CNS 
system. The guaranties should, among other things, ensure that debits 
created in DTC's system continue to be collateralized when the 
securities serving as collateral are delivered into the CNS system as 
short covers. Additionally, the guarantees also should reduce risk at 
NSCC by ensuring that long allocations or the appropriate value of long 
allocations will be available to NSCC to cover certain exposures.
    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 filing. The Commission finds good 
cause for so approving the proposed rule change because the proposed 
rule change modifies NSCC's rules and the NSCC/DTC Agreement in 
anticipation of NSCC's and the securities industry's conversion to SDFS 
on February 22, 1996. Accelerated approval of the proposal will allow 
NSCC to effect the conversion and to implement the safeguards provided 
under the NSCC/DTC Agreement on that date.

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, N.W., Washington, D.C. 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 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, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of NSCC. All 
submissions should refer to the file number SR-96-03 and should be 
submitted by March 19, 1996.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-NSCC-96-03) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority. \12\

    \12\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-4351 Filed 2-26-96; 8:45 am]
BILLING CODE 8010-01-M