[Federal Register Volume 61, Number 154 (Thursday, August 8, 1996)]
[Notices]
[Pages 41436-41437]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20181]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37510; International Series Release No. 1012; File No.
SR-ISCC-96-03]
Self-Regulatory Organizations; International Securities Clearing
Corporation; Order Granting Temporary Approval on a Accelerated Basis
of a Proposed Rule Change Relating to the Clearing Fund Formula
August 1, 1996.
On May 16, 1996 the International Securities Clearing Corporation
(``ISCC'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change (File No. SR-ISCC-96-03)
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'').\1\ Notice of the proposal was published in the Federal
Register on July 9, 1996.\2\ No comment letters were received. For the
reasons discussed below, the Commission is granting accelerated
approval of the proposed rule change through August 1, 1997.\3\
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\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ Securities Exchange Act Release No. 37390 (July 1, 1996), 61
FR 36096.
\3\ 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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I. Description
The proposed rule change extends approval of ISCC's clearing fund
formula. 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.\4\ ISCC is obligated to the 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 clearing
fund calculation 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.\5\ Calculations are made each
Tuesday, and members are required to deposit additional clearing fund
amounts within three days.\6\
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\4\ At that time, the LSE settled trades on a fortnightly 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\ During the eight week period ending April 23, 1996, the
weekly clearing fund calculation exceeded the 365 day high in only
three out of twenty-four calculations. Letter to Jerry Carpenter,
Assistant Director, Division of Market Regulation, Securities and
Exchange Commission, from Julie Beyers, ISCC (May 16, 1996).
\6\ 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 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 ).\7\ 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.\8\ 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.\9\ The
Market
[[Page 41437]]
Risk Factor is 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.\10\ The
estimated foreign exchange volatility is set at 4%.\11\ The Market Risk
Factor and Foreign Exchange Factor for members on surveillance may 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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\7\ Members are required to contribute a minimum of $50,000 to
the clearing fund.
\8\ 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.
\9\ 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.
\10\ The Foreign Exchange Factor is the product of the Gross
Debit Value and the estimated foreign exchange volatility less the
product of the Gross Debit Value times the Market Risk Factor times
the estimated foreign exchange volatility.
\11\ 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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II. Discussion
Section 17A(b)(3)(F) of the Act \12\ requires that the rules of a
clearing agency be designed to assure the safeguarding of securities
and funds which are in the custody of the clearing agency or for which
it is responsible. The Commission believes that ISCC's proposal helps
to assure the safeguarding of securities and funds in ISCC's custody or
control or for which it is responsible because the proposal is designed
to protect ISCC's settlement obligations under the LSE linkage should a
participant default. The formula is based upon the risks to which ISCC
is subject (i.e., time market, and foreign exchange risks) and should
assist ISCC in assuring the safety of the funds and securities being
transferred through the LSE link. ISCC's requirement that members
deposit the greater of (a) the largest clearing fund calculation 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 should provide additional protection to compensate for the
clearing fund calculations based upon previously settled trades rather
than outstanding obligations.
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\12\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
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ISCC 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 approving the proposed rule change prior to the thirtieth day
after the date of publication of notice of filing because approval of
ISCC's current clearing formula will expire on August 1, 1996. The
Commission believes that the proposed rule change should continue to be
approved on a temporary basis in order to determine the adequacy of the
formula in practice. The temporary approval will give ISCC the
opportunity to study this further.
III. Conclusion
On the basis of the foregoing, the Commission finds that ISCC's
proposal is consistent with the requirements of the Act and in
particular with Section 17A of the Act and the rules and regulations
thereunder.
It is therefore ordered, pursuant to section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-ISCC-96-03) be, and hereby
is temporarily approved on an accelerated basis through August 1, 1997.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12)(1995).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-20181 Filed 8-7-96; 8:45 am]
BILLING CODE 8010-01-M