[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