[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
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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