[Federal Register Volume 61, Number 132 (Tuesday, July 9, 1996)]
[Notices]
[Pages 36096-36097]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17356]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37390; International Series Release No. 999; File No. 
SR-ISCC-96-03]


Self-Regulatory Organizations; International Securities Clearing 
Corporation; Notice of Filing of a Proposed Rule Change Relating to the 
Clearing Fund Formula

July 1, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 16, 1996, the 
International Securities Clearing Corporation (``ISCC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change (File No. SR-ISCC-96-03) as described in Items I, II, and III 
below, which items have been prepared primarily by ISCC. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Changes

    ISCC is filing the proposed rule change to extend approval of its 
clearing fund formula.\2\
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    \2\ The Commission temporarily approved two previous ISCC 
proposed rule changes amending ISCC's clearing fund formula. 
Securities Exchange Act Release No. 35970 (July 13, 1995), 60 FR 
37698 [File No. SR-ISCC-95-03] (notice of filing and order granting 
accelerated approval on a temporary basis of ISCC's clearing fund 
formula) and Securities Exchange Act Release No. 34392 (July 15, 
1994), 59 FR 37798 [File No. SR-ISCC-94-1] (order temporarily 
approving on an accelerated basis ISCC's clearing fund formula).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    In its filing with the Commission, ISCC included statements 
concerning 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. ISCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\3\
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    \3\ The Commission has modified these summaries.

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[[Page 36097]]

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

    The purpose of the proposed rule is to extend approval of ISCC's 
clearing fund formula.\4\ ISCC is obligated to the London Stock 
Exchange (``LSE'') to pay for all securities delivered to ISCC through 
the ISCC-LSE link. ISCC has no responsibility to complete open pending 
trades (i.e., once a member fails, ISCC no longer accepts delivery of 
securities for such member through the link). To adequately cover 
ISCC's exposure, each member's clearing fund deposit requirement is 
calculated and collected on a weekly basis. Each member is required to 
deposit the greater of (a) the largest deposit requirement imposed over 
the last 365 day period or (b) the deposit that would be required based 
on the clearing fund calculation using trades due to settle over the 
next week. Calculations are made each Tuesday, and members are required 
to deposit additional clearing fund amounts within three days.\5\
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    \4\ In 1986, ISCC and the London Stock Exchange (``LSE'') 
entered into a linkage agreement which allows ISCC to obtain 
comparison and settlement services in the United Kingdom from the 
LSE on behalf of ISCC members. At that time, the LSE settled trades 
on a fornightly basis with all trades that occurred during a two 
week period settling on the same day. On July 18, 1994, the LSE 
moved to a ten day rolling settlement cycle with trades settling ten 
days after trade date. On June 26, 1995, the LSE moved to a five day 
rolling settlement period. In response to the change to a rolling 
settlement cycle, ISCC adjusted its method of calculating its 
clearing fund requirements.
    \5\ For example, ISCC calculates a member's clearing fund 
requirement on Tuesday, August 2, based on trades due to settle on 
Tuesday, August 2, through Monday, August 8 (i.e., trades conducted 
on Tuesday, July 26, through Monday, August 1). Because an ISCC 
member has three business days after the calculation to make 
additional deposits, under the five day rolling settlement cycle, 
ISCC generally is calculating and collecting clearing fund 
contributions based on trades which already have settled. Under the 
prior ten day rolling settlement system, the clearing fund formula 
was based on the actual largest daily obligation of a member during 
the relevant time period, and the clearing fund deposit could be 
calculated and collected prior to the settlement day.
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    ISCC's clearing fund formula is: (Gross Debit Value) x (Market Risk 
Factor) + (Foreign Exchange Factor).\6\ The Gross Debit Value is a 
member's largest single daily gross debit value based on debit values 
for five consecutive business days including the day on which the 
calculation is performed less 15% of the Institutional Net Settlement 
(``INS'') receive value for that same day.\7\ The Market Risk Factor is 
based on the largest calculated percentage change in the Financial 
Times Index over a six day period over a minimum of 365 days.\8\ The 
Market Risk Factor will continue to be set at 7%. The Foreign Exchange 
Factor is based in part on the Estimated Foreign Exchange Volatility, 
which is an amount that is equal to the largest one day percentage 
change in the U.S. dollar/British pound foreign exchange rate over a 
minimum of 365 days.\9\ The Estimated Foreign Exchange Volatility will 
continue to be set at 4%.\10\ The Market Risk Factor and Foreign 
Exchange Risk Factor for members on surveillance can be increased in 
the discretion of ISCC by 3%, 5%, and 7% for members on Advisory, Class 
A, and Class B surveillance, respectively.
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    \6\ Members will continue to be required to contribute a minimum 
of $50,000 to the clearing fund.
    \7\ Under the INS system, redeliveries of securities from ISCC 
members to institutional participants can occur automatically 
through the LSE. Therefore, ISCC generally is not required to pay 
the LSE for these securities. The debits arising from these 
redeliveries may be offset only partially because these securities 
may be reclaimed (i.e., returned) by the receiver, and in such 
circumstance, ISCC is liable to the LSE for the full value of the 
reclamation.
    \8\ ISCC bases its clearing fund calculations on the assumption 
that it will take one day to sell all of a defaulting participant's 
positions. Under a five day settlement period, this results in a six 
day exposure for market risk with five days between trade date and 
settlement date and one day between settlement date and close out of 
positions. There also is a one day exposure for foreign exchange 
risk because ISCC converts U.S. dollars to British pounds on the 
settlement date and converts the proceeds from the sale of the 
positions to U.S. dollars the following day.
    \9\ The Foreign Exchange Factor is the product of the Gross 
Debit Value and the Estimated Foreign Exchange Volatility less the 
produce of the Gross Debit Value times the Market Risk Factor times 
the Estimated Foreign Exchange Volatility.
    \10\ During the period from 1989 to 1992, the maximum 
fluctuation in the U.S. dollar-British pound exchange rate was 
4.445%. ISCC will continue to review annually the foreign exchange 
risk factor.
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    The proposed rule change will permit ISCC to safeguard securities 
and funds in its custody or control and is therefore consistent with 
Section 17A of the Act \11\ and the rules and regulations thereunder.
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    \11\ 15 U.S.C. Sec. 78q-1 (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    ISCC does not believe that the proposed rule change will have an 
impact on 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

    ISCC will notify the Commission of any written comments received by 
ISCC.

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 ISCC 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 submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 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 Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of ISCC. All submissions 
should refer to the file number (ISCC-96-03) and should be submitted 
by: July 30, 1996.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12) (1995).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-17356 Filed 7-8-96; 8:45 am]
BILLING CODE 8010-01-M