[Federal Register Volume 61, Number 206 (Wednesday, October 23, 1996)]
[Notices]
[Pages 55060-55062]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-27093]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37829; File No. SR-NSCC-96-13]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving a Proposed Rule Change Relating to the 
Guarantee of When-Issued and Balance Order Trades

October 16, 1996.
    On June 21, 1996, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-

[[Page 55061]]

NSCC-96-13) pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'') \1\ to modify its rules and procedures to guarantee 
when-issued and when-distributed (collectively, ``when-issued''), and 
balance order trades. On August 2, 1996, NSCC amended the proposal 
(``Amendment No. 1'').\2\ Notice of the proposal was published on 
August 19, 1996, in the Federal Register to solicit comments on the 
proposed rule change.\3\ On August 6 and August 9, NSCC amended the 
filing to clarify certain terms (``Amendment No. 2'' and ``Amendment 
No. 3''),\4\ and on August 14, 1996, NSCC submitted an amendment 
replacing Exhibit A to the original filing as amended by Amendment No. 
1.\5\ No comment letters were received. For the reasons discussed 
below, the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ Letter from Julie Beyers, Associate Counsel, NSCC, to Jerry 
Carpenter, Commission (August 1, 1996).
    \3\ Securities Exchange Act Release No. 37549 (August 9, 1996), 
61 FR 92927.
    \4\ Letters from Julie Beyers, Associate Counsel, to Peggy 
Blake, Commission (August 6, 1996, and August 9, 1996). The 
Commission did not notice the amendments for comment because they 
were technical in nature and not substantive.
    \5\ Letter from Julie Beyers, Associate Counsel, NSCC, to Jerry 
Carpenter, Assistant Director, Division of Risk Management and 
Control, Commission (August 13, 1996).
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I. Description

    NSCC's proposed rule change modifies NSCC's rules and procedures to 
guarantee when-issued \6\ 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.\7\ NSCC will collateralize its increased exposure resulting 
from the modification of its guarantee of when-issued and balance order 
trades by collecting clearing fund based on market risk and liquidation 
risk.\8\ Generally, with respect to CNS trades, the calculation of the 
market risk component is based on a rolling average of the prior twenty 
days market-to-market differential. This is the method NSCC will use 
for calculating market risk for balance order trades. For when-issued, 
NSCC will base its calculation of market risk on the market-to-market 
differential for the previous business day only. A market-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.
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    \6\ NSCC Amendment No. 3 defines a when-issued transaction as a 
transaction in a security which has occurred prior to the issuance 
of such security and is determined to be a when-issued transaction 
by the marketplace or exchange on which it trades.
    NSCC Amendment No. 3 defines a when-distributed transaction as a 
transaction in a security which has occurred prior to the initial 
distribution of such security and is determined to be a when-
distributed transaction by the marketplace or exchange on which it 
trades.
    \7\ Regular-way CNS trades are guaranteed as of midnight on the 
day the trades are reported to members as compared/recorded.
    \8\ In File No. SR-NSCC-96-11, NSCC amended Procedure XV, 
Clearing Fund Formula and Other Matters, to define the market risk 
component of the CNS portion of the clearing fund formula as 
requiring each NSCC member to 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 which have 
not as yet reached settlement and the current market price for such 
trades provided that they will exclude any trades for which under a 
clearing agency cross-guarantee agreement NSCC has either obtained 
coverage for such difference or undertaken an obligation to provide 
coverage for such difference. In addition to protect against 
liquidation risk, NSCC will collect .25% of the net of all compared 
pending CNS trades and open CNS positions. Securities Exchange Act 
Release No. 37731 (September 26, 1996), 61 FR 51731 (Order approving 
proposed rule change relating to an amended restated options 
exercise settlement agreement between The Options Clearing 
Corporation and NSCC). See also current NSCC Procedure XV, Sections 
A.1.(a)(1)(b) and A.1.(a)(1)(c).
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    The calculation of the liquidation risk component for CNS trades is 
based on all pending trades and failed trades. For when-issued trades, 
NSCC will base its calculation of the liquidation risk component only 
upon pending when-issued trades. For balance order trades, NSCC will 
base its calculation of the liquidation risk component 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 is modifying 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 is 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 is modifying 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 is 
modifying 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 is modifying Addendum 
B, Standards of Financial Responsibility-Operational Capability. NSCC 
is adding language to Procedure XV, Clearing Fund Formula and Other 
Matters, to clarify that unless it determines otherwise, the mark-to-
market component of the clearing fund formula for when-issued and when-
distributed transactions is the daily market differential while CNS and 
balance order trades use a rolling twenty day average of such mark-to-
market differential.

II. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder and particularly with the requirements of Sections 17A(b)(3) 
(A) and (F).\9\ Sections 17A(b)(3) (A) and (F) require that the rules 
of a clearing agency be designed to safeguard securities and funds in 
its custody or control or for which it is responsible.
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    \9\ 15 U.S.C. Secs. 78q-1(b)(3) (A) and (F) (1988).
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    The Commission believes that by guaranteeing when-issued trades and 
balance order trades, NSCC is providing its members with greater 
certainty in the settlement of such trades. Furthermore, NSCC is 
collateralizing the increased exposure of guaranteeing when-issued and 
balance order trades as of midnight on the day trades are reported to 
members as compared by collecting clearing fund on those trades based 
on market and liquidation risk. The Commission believes that the 
collection of clearing fund for these trades will reduce the risk to 
NSCC and its participants with regard to member default thereby 
assuring the safeguarding of securities and funds in the custody or 
control of NSCC or for which it is responsible.

[[Page 55062]]

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with Sections 17A(b)(3) (A) and (F) 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-NSCC-96-13) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-27093 Filed 10-22-96; 8:45 am]
BILLING CODE 8010-01-M