[Federal Register Volume 61, Number 130 (Friday, July 5, 1996)]
[Notices]
[Pages 35289-35291]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17146]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37381; File Nos. SR-NSCC-96-09; SR-SCCP-96-02]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Stock Clearing Corporation of Philadelphia; Notice of 
Filing and Order Granting Permanent Approval on an Accelerated Basis of 
Proposed Rule Changes Relating to the Guarantee of Trades in Continuous 
Net Settlement Systems

June 28, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that the National Securities 
Clearing Corporation (``NSCC'') and Stock Clearing Corporation of 
Philadelphia (``SCCP'') (collectively referred to as ``Clearing 
Corporations'') filed with the Securities and Exchange Commission 
(``Commission'') on April 3, 1996, and May 8, 1996, respectively, the 
proposed rule changes as described in Items I and II below, which items 
have been prepared primarily by the Clearing Corporations. On May 8, 
1996, SCCP filed an amendment to the proposed rule change to remove 
from consideration certain proposed amendments to its clearing fund 
calculations.\2\ The proposals seek permanent approval of rule changes 
relating to the guarantee of trades in the Clearing Corporations' 
continuous net settlement (``CNS'') systems. The Commission is 
publishing this notice and order to solicit comments on the proposed 
rule changes from interested persons and to grant accelerated permanent 
approval of the proposed rule changes.
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    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Letter from J. Keith Kessel, Compliance Officer, SCCP, to 
Peter R. Geraghty, Senior Counsel, Commission (May 8, 1996). The 
amendment also requested permanent approval of SCCP's CNS guarantee 
procedures.
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I. Self-Regulatory Organizations' Statement of the Terms of Substance 
of the Proposed Rule Changes

    The proposals seek permanent approval of proposed rule changes to 
which the Commission has granted temporary approval.\3\ The proposals 
authorize the Clearing Corporations to guarantee at an earlier time the 
settlement of participant trades in their CNS systems. In addition, 
NSCC's

[[Page 35290]]

proposal seeks approval of its revised clearing fund calculations 
designed to protect against any increased risk caused by such earlier 
guarantees.\4\
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    \3\ The proposals, along with a similar proposal submitted by 
the Midwest Clearing Corporation (``MCC''), were originally approved 
on a temporary basis in 1989. For a complete discussion of these 
proposals, refer to Securities Exchange Act Release Nos. 27192 
(August 29, 1989), 54 FR 37010 (approving File Nos. SR-NSCC-87-04, 
SR-MCC-87-03, and SR-SCCP-87-03 until December 31, 1990). In 
addition, the Commission has temporarily extended the respective 
proposals on six previous occasions in Securities Exchange Act 
Release Nos. 28728 (December 31, 1990), 56 FR 717 (approving File 
Nos. SR-NSCC-90-25, SR-MCC-90-08, and SR-SCCP-90-03 until June 30, 
1991); 29388 (June 28, 1992), 56 FR 30951 (approving File Nos. SR-
NSCC-91-06, SR-MCC-91-03, and SR-SCCP-91-03 through June 30, 1992); 
30879 (July 1, 1992), 57 FR 30279 (approving File Nos. SR-NSCC-92-
04, SR-MCC-92-07, and SR-SCCP-92-02 through June 30, 1993); 32547 
(June 29, 1993), 58 FR 36491 (approving File Nos. SR-NSCC-93-04, SR-
MCC-93-02, and SR-SCCP-93-02 through June 30, 1994); and 33996 (June 
27, 1994), 59 FR 33996 (approving File Nos. SR-NSCC-94-09, SR-MCC-
94-06, and SR-SCCP-94-02 through June 30, 1995); and 35916 (June 28, 
1995), 60 FR 35575 (July 10, 1995) (approving File Nos. SR-NSCC-95-
04, SR-MCC-95-02, and SR-SCCP-95-03). On January 5, 1996, MCC 
withdrew from the securities clearance business. Securities Exchange 
Act Release No. 36684 (January 5, 1996), 61 FR 1195 (order approving 
File No. SR-MCC-95-04).
    \4\ In its original filing with the Commission, SCCP proposed 
revisions to its program governing the guarantee of CNS trades and 
its clearing fund calculations. Supra note 2. Because the Commission 
has recently granted temporary approval to the proposed revisions to 
SCCP's clearing fund calculations in connection with a different 
filing in a separate order, SCCP, as noted above, amended its 
proposal to eliminate the proposed amendments to its clearing fund 
calculations. For a complete description of SCCP's formula, refer to 
Securities Exchange Act Release No. 36875 (February 22, 1996), 61 FR 
7846 [SR-SCCP-95-06] (order approving proposed rule change).
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II. Self-Regulatory Organizations' Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    In their filings with the Commission, the Clearing Corporations 
included statements concerning the purpose of and basis for the 
proposed rule changes and discussed any comments they received on the 
proposed rule changes. The text of these statements may be examined at 
the places specified in Item IV below. The Clearing Corporations have 
prepared summaries, set forth in sections (A), (B), and (C) below, of 
the most significant aspects of such statements.\5\
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    \5\ The Commission has modified the language in these sections.
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(A) Self-Regulatory Organizations' Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    The proposed rule changes seek permanent approval of the Clearing 
Corporations' procedures whereby they guarantee the settlement of all 
pending CNS trades as of midnight on the day after the trade date for 
locked-in or automatically compared trades and as of midnight on the 
day trades are reported to members as compared for all other trades.\6\ 
NSCC's proposal also seeks approval of revisions to the CNS portion of 
its clearing fund formula.\7\ This revision is designed to protect 
against increased risk associated with earlier guarantees.\8\
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    \6\ Until the Clearing Corporations guarantee settlement of a 
trade, each side to the trade bears the risk of the contraside 
defaulting if the Clearing Corporations cease to act for a 
defaulting member. Once the Clearing Corporations guarantee 
settlement, the original contractual obligations between the two 
parties are discharged and replaced by contracts between the 
Clearing Corporations and each of the original parties.
    \7\ NSCC's revised CNS clearing fund formula includes the 
following components (a) 2% of the member's projected total long CNS 
positions plus (b) the net of each day's difference between the 
contract price of pending, compared CNS trades, exclusive of trades 
reported by The Options Clearing Corporation (``OCC'') which are the 
result of options exercises and assignments, and the current market 
price for all guaranteed pending CNS trades, exclusive of trades 
reported by OCC which are the result of options exercises and 
assignments which have not yet reached settlement plus (c) .25% of 
the net of all guaranteed pending CNS trades and open CNS positions. 
The specific changes being made to NSCC's clearing fund formulas and 
other procedures are set forth in Exhibit A to NSCC's proposed rule 
change. A copy of the proposal with Exhibit A is available through 
the Commission's Public Reference Room or through NSCC.
    \8\ For a more detailed discussion of the proposal, refer to 
Securities Exchange Act Release Nos. 34261, 32547, 30879, 29388, 
28728, and 27192 and the accompanying rule filings, supra note 4.
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    The Clearing Corporations believe that the proposed rule changes 
are consistent with the Act and particularly with Section 17A of the 
Act because the proposed changes will help the Clearing Corporations to 
assure the safeguarding of securities and funds which are in their 
custody or control or for which they are responsible.\9\
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    \9\ 15 U.S.C. 78q-1 (1988).
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(B) Self-Regulatory Organizations' Statement on Burden on Competition

    The Clearing Corporations believe that the proposed rule change 
will not impose a burden on competition.

(C) Self-Regulatory Organizations' Statement on Comments on the 
Proposed Rule Changes Received from Members, Participants or Others

    The Clearing Corporations have neither solicited nor received any 
comments on the proposed rule changes.

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

    Section 17A(b)(3)(F) of the Act \10\ 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 and be designed to remove impediments to 
and perfect the national system for the clearance and settlement of 
securities transactions. The Commission believes that the Clearing 
Corporations' procedures for earlier guarantees and NSCC's revised 
formula for calculating CNS clearing fund contributions are consistent 
with the Clearing Corporations' obligations under Section 17A(b)(3)(F) 
because the proposals should help the Clearing Corporations increase 
certainty as to settlement of securities transactions by reducing the 
time that clearing members are exposed to the risk of counterparty 
default. The Commission further believes that the proposals achieve 
that goal without compromising the safeguarding of securities and funds 
in the Clearing Corporations' custody or control or for which they are 
responsible.
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    \10\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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    The Commission also believes that NSCC's revised CNS formula,\11\ 
as well as its additional existing safeguards such as monitoring member 
financial condition, reviewing member settlement activity in relation 
to prior activity, monitoring securities settled in its system for 
volatility, and the ability to collect additional fund deposits, should 
reduce the risk that a member purchasing securities will be unable to 
pay for the securities upon delivery and protects NSCC if the market 
price of compared trades moves away from their contract price before 
settlement. Thus, the Commission believes the NSCC proposal is also 
consistent with Section 17A(b)(3)(F) \12\ of the Act because it should 
help NSCC reduce its risk of loss and thereby should enhance its 
ability to safeguard securities and funds under its control.
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    \11\ Supra notes 7 and 8.
    \12\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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    Because the Commission was concerned about the ability of the 
proposed CNS clearing fund formulas to guard against increased risk 
posed by an earlier CNS guarantee,\13\ the Commission originally 
approved the proposed rule changes on a temporary basis in order that 
the procedures and formulas could be carefully monitored before they 
were approved permanently. The Commission is now permanently approving 
the Clearing Corporations' earlier guarantee procedures and NSCC's 
revised CNS formula because during the temporary approval period, the 
Commission has not received any reports of problems caused by NSCC's 
CNS clearing fund formula or the earlier CNS guarantees.
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    \13\ In addition, the Commission was concerned that daily 
clearing fund calculations based on mark-to-market average exposure 
for a rolling twenty-day period would not reflect actual mark-to-
the-market exposure as well as, for example, daily collection of 
marks-to-the-market.
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    The Clearing Corporations have requested that the Commission find 
good cause for approving the proposed rule changes 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 changes 
because the Commission has noticed the proposals on seven separate 
occasions without receiving any comment letters and does not expect to 
receive any with regard to the current proposals. Furthermore, 
accelerated approval will allow the Clearing Corporations to continue 
to

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utilize the procedures without any disruption when the current 
temporary approval expires on June 28, 1996.

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 changes that are filed 
with the Commission, and all written communications relating to the 
proposed rule changes 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 Room, 450 Fifth Street, 
N.W., Washington, D.C. 20549. Copies of such filings will also be 
available for inspection and copying at the principal offices of NSCC 
and SCCP. All submissions should refer to file numbers SR-NSCC-96-09 
and SR-SCCP-96-02 and should be submitted by July 26, 1996.
    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule changes, as amended (File Nos. SR-NSCC-96-09 and 
SR-SCCP-96-02), be, and hereby are, permanently approved on an 
accelerated basis.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12) (1995).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-17146 Filed 7-3-96; 8:45 am]
BILLING CODE 8010-01-M