[Federal Register Volume 61, Number 194 (Friday, October 4, 1996)]
[Pages 52073-52074]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25505]


[Release No. 34-37753; File No. SR-NSCC-96-14]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Granting Approval of a Proposed Rule Change Relating 
to the Use of Letters of Credit as Clearing Fund Collateral

September 30, 1996.
    On July 25, 1996, the National Securities Clearing Corporation 
(``NSCC'') filed a proposed rule change (File No. SR-NSCC-96-14) with 
the Securities and Exchange Commission (``Commission'') pursuant to 
Section 19(b) of the Securities Exchange Act of 1934 (``Act'').\1\ 
Notice of the proposal was published in the Federal Register on August 
26, 1996, to solicit comments from interested persons.\2\ No comments 
were received. As discussed below, this order approves the proposed 
rule change.

    \1\ 15 U.S.C. 78s(b) (1988).
    \2\ Securities Exchange Act Release No. 37582 (August 19, 1996), 
61 FR 43800.

I. Description

    With this order, the Commission is granting full approval to NSCC's 
rule filing concerning participants' use of letters of credit as 
clearing fund collateral. Previously, the Commission granted temporary 
approval to the proposed rule change.\3\ Specifically, the rule change 
increases the minimum cash contribution for any member that uses 
letters of credit to collateralize its clearing fund required deposit 
from $50,000 to the greater of $50,000 or 10% of that member's required 
clearing fund deposit up to a maximum of $1,000,000. In addition, the 
rule change provides that only 70% of a member's required clearing fund 
deposit may be collateralized with letters of credit. The rule change 
also adds headings to the clearing fund formula section for clarity and 
made other nonsubstantive drafting changes.

    \3\ The proposed rule change was originally filed on October 27, 
1989, and on January 31, 1990, was approved temporarily through 
December 31, 1990. Securities Exchange Act Release No. 27664 
(January 31, 1990), 55 FR 4297 [File No. SR-NSCC-89-16]. 
Subsequently, the Commission granted a number of extensions to the 
temporary approval to allow the Commission and the NSCC sufficient 
time to review and to assess the use of letters of credit as 
clearing fund collateral. Most recently, the Commission extended 
temporary approval through September 30, 1996. Securities Exchange 
Act Release No. 36360 (October 11, 1995), 60 FR 53945 [File No. SR-

II. Discussion

    Section 17A(b)(3)(F) of the Act requires that a clearing agency's 
rules be designed to ensure the safeguarding of securities and funds in 
its custody or control or for which it is responsible and to protect 
investors and the public interest.\4\ The Commission believes NSCC's 
proposal to increase the minimum cash contribution for those 
participants using letters of credit to collateralize their clearing 
fund obligations should make NSCC's clearing fund more liquid which 
should enable NSCC to meet its obligation to safeguard securities and 
funds and to protect the interests of investors and of the public.

    \4\ 15 U.S.C. 78q-1(b)(3)(F) (1988).

    Although letters of credit are useful means of funding clearing 
agency guarantee deposits, their unrestricted use may present risks to 
clearing agencies. Because letters of credit reflect the issuer's 
promise to pay funds upon presentation of stipulated documents by the 
holder, a clearing agency holding letters of credit will be exposed to 
risk should the issuer refuse to honor its promise to pay. Furthermore, 
because under the Uniform Commercial Code the issuer may defer honoring 
a payment request until the close of business on the third banking day 
following receipt of the required documents, a clearing agency making a 
payment request may have to either await payment or seek alternative 
short-term financing. This waiting period could reduce a clearing 
agency's liquidity and thereby could hinder its ability to meet its 
payment obligations on a timely basis.\5\

    \5\ To compensate for risks such as issuer defaults and delays 
in honoring letters of credit, NSCC currently has a $4,000,000 line 
of credit that can be sued for liquidity purposes. Under the terms 
of NSCC's line of credit the letters of credit in the NSCC clearing 
fund may be used as collateral.


[[Page 52074]]

    While the Commission is approving NSCC's filing, the Commission 
continues to believe that it is prudent for clearing agencies that 
accept letters of credit as clearing fund contributions to limit their 
exposures by imposing concentration limits on the use of letters of 
credit to prevent any one issuer's letters of credit from constituting 
too large a percentage of their total required clearing fund 
contributions. Therefore, the Commission urges NSCC to review its 
clearing fund policies and procedures for the acceptance of letters of 
credit with respect to concentration limits.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and 
particularly with Section 17A(b)(3)(F) of the Act and the rules and 
regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
\6\ that the proposed rule change (File No. SR-NSCC-96-14) be and 
hereby is approved.

    \6\ 15 U.S.C. 78s(b)(2) (1988)

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\

    \7\ 17 CFR 200.30(a)(12) (1996).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-25505 Filed 10-3-96; 8:45 am]