[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]


-----------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12)(1995).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. 96-20181 Filed 8-7-96; 8:45 am]
BILLING CODE 8010-01-M