[Federal Register Volume 61, Number 161 (Monday, August 19, 1996)] [Notices] [Pages 42927-42929] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 96-21053] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-37549; File No. SR-NSCC-96-13] Self Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change Relating to the Guarantee of When-Issued and Balance Order Trades August 9, 1996. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ notice is hereby given that on June 21, 1996, the National Securities Clearing Corporation (``NSCC'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I, II, and III below, which items have been prepared primarily by NSCC. On August 1, 1996, NSCC amended the proposed rule change.\2\ The Commission is publishing this notice to solicit [[Page 42928]] comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1) (1988). \2\ Letter from Julie Beyers, Associate Counsel, NSCC, to Jerry Carpenter, Assistant Director, Division of Market Regulation, Commission (August 1, 1996). --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change NSCC proposes to modify its rules and procedures to guarantee when- issued and when-distributed (collectively ``when-issued'') and balance order trades as of midnight on the day the trades are reported to members as compared/recorded. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, NSCC 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. NSCC has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.\3\ --------------------------------------------------------------------------- \3\ The Commission has modified the text of these statements. --------------------------------------------------------------------------- A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change NSCC does not currently guarantee when-issued or balance order trades. The purpose of the proposed rule change is to extend NSCC's guarantee for members to these trades. NSCC proposes to guarantee when- issued and balance order trades at the same point in the clearance and settlement process as it guarantees regular-way trades in the Continuous Net Settlement (``CNS'') accounting operation. Regular-way CNS trades are guaranteed as of midnight on the day the trades are reported to members as compared/recorded. The proposed guarantee of when-issued and balance order trades is intended to provide NSCC's members with greater certainty in the settlement of such trades. NSCC intends to collateralize its increased exposure from guaranteeing when-issued and balance order trades by collecting clearing fund based on market risk and liquidation risk.\4\ With respect to CNS trades, the calculation of the market risk component is based on a rolling average of the prior twenty days' mark-to-market differential. This is the method NSCC proposes to use for balance order trades. NSCC proposes to use the market risk component for when-issued trades based on the mark-to-market differential for the previous business day only. A mark-to-market differential based on the previous business day only for when-issued trades is necessary because of the typically more volatile nature of when-issued trades. --------------------------------------------------------------------------- \4\ The market risk component of the CNS portion of the clearing fund formula requires that each NSCC member contribute to the clearing fund an amount approximately equal to 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 exercise and assignments which have not as yet reached settlement. In addition, to protect against liquidation risk, NSCC will collect .25% of the net of all guaranteed pending CNS trades and open CNS positions. NSCC Procedure XV, Sections A.1.(a)(1)(b) AND a.1.(A)(1)(c). --------------------------------------------------------------------------- With respect to CNS trades, the calculation of the liquidation risk component is based on all pending trades and failed trades. The liquidation risk component for when-issued trades will be based only upon pending when-issued trades. The liquidation risk component for balance order trades will be based on all pending balance order trades and failed trades to the extent the contra-party to any such failed trade is a regional interface account. Accordingly, NSCC proposes to modify Addendum M to its Rules and Procedures, Statement of Policy in Relation to the Completion of Pending CNS Trades, to delete the language that excepts when-issued trades from NSCC's policy of guaranteeing the completion of CNS trades as of midnight of the day the trades are reported to members as compared. NSCC further proposes modifying Addendum M to include a statement of its policy of guaranteeing the completion of when-issued trades as of midnight of the day trades are reported to members as compared/recorded. NSCC also proposes to modify Addendum K to its Rules and Procedures, Interpretation of the Board of Directors--Application of Clearing Fund, to reflect that NSCC will guarantee the completion of balance order trades as of midnight of the day such trades are reported to members as compared/recorded through the close of business of T+3, regardless of whether the member could have made delivery on T+3. Addendum K will be modified further to include a statement of its policy of guaranteeing the completion of when-issued trades as of midnight of the day the trades are reported to members as compared/ recorded. NSCC also proposes to modify Addendum K to state that it will consider all when-issued trades of members as if the trades were CNS transactions for purposes of clearing fund calculations and surveillance regardless of the accounting operation in which the trades ultimately settle. Because NSCC is guaranteeing three different types of transactions, Procedure XV, Clearing Fund Formula and Other Matters, is being modified to specifically include the calculations described above for when-issued and balance order trades. NSCC also proposes to modify Addendum B, Standards of Financial Responsibility-Operational Capability, to eliminate the use of the previous twenty business days' activity as a basis to determine whether additional clearing fund deposit must be collected when a member's clearing fund requirement for CNS activity exceeds the previous month-end requirement by a certain percentage threshold. NSCC believes the proposed rule change is consistent with the requirements of Section 17A of the Act,\5\ and the rules and regulations thereunder because it is designed to assure the safeguarding of securities and funds in the custody or control of NSCC or for which it is responsible and, in general, to protect investors and the public interest. --------------------------------------------------------------------------- \5\ 15 U.S.C. 78q-1 (1988). --------------------------------------------------------------------------- B. Self-Regulatory Organization's Statement on Burden on Competition NSCC 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 No written comments relating to the proposed rule change have been solicited or received. NSCC will notify the Commission of any written comments received by NSCC. 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 NSCC consents, the Commission will: (A) By order approve such proposed rule change or [[Page 42929]] (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. 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 NSCC. All submissions should refer to File No. SR-NSCC-96-13 and should be submitted by September 9, 1996. For the Commission by the Division of Market Regulation, pursuant to delegated authority.\6\ --------------------------------------------------------------------------- \6\ 17 CFR 200.30-3(a)(12) (1995). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 96-21053 Filed 8-16-96; 8:45 am] BILLING CODE 8010-01-M