[Federal Register Volume 62, Number 95 (Friday, May 16, 1997)] [Notices] [Pages 27091-27093] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 97-12827] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-38594; File No. SR-MCC-97-01] Self-Regulatory Organizations; Midwest Clearing Corporation; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to the Return of Sponsored Account Fund Deposits May 9, 1997. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ notice is hereby given that on March 27, 1997, Midwest Clearing Corporation, (``MCC'') 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 MCC. The Commission is publishing this notice to solicit comments from interested persons on the proposed rule change. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The purpose of the proposed rule change is to adopt a form of indemnity agreement in accordance with Article XI, Rule 2, Section 11 of MCC's rules. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, MCC 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. MCC has prepared summaries, set forth in sections A, B, [[Page 27092]] and C below, of the most significant aspects of such statements.\2\ --------------------------------------------------------------------------- \2\ The Commission has modified the text of the summaries prepared by MCC. --------------------------------------------------------------------------- A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change On January 5, 1996, the Commission approved a proposed rule change filed by MCC relating to its withdrawal from the securities clearance and settlement business in conjunction with an agreement with the National Securities Clearing Corporation (``NSCC'').\3\ Under the agreement, MCC became an NSCC member and agreed to sponsor at NSCC certain floor members and member organizations (``sponsored participants'') of MCC's parent corporation, the Chicago Stock Exchange (``CHX''). The purpose of sponsoring participants was to provide specialists, market makers, and floor brokers of CHX that are not members of a registered clearing agency (other than MCC) with access to the services of a registered clearing agency. As of January 21, 1997, MCC had 33 sponsored participants. --------------------------------------------------------------------------- \3\ For a description of the agreement, refer to Securities Exchange Act Release No. 36684 (January 5, 1996), [File No. SR-MCC- 95-04] (order approving proposed rule change). --------------------------------------------------------------------------- To reduce MCC's exposure to the sponsored participant's trading activity, Article XI, Rule 11 of MCC's rules require sponsored participants to contribute to a sponsored account fund. All contributions to the sponsored account fund must be in cash. If MCC ceases to act on behalf of a sponsored participant for any reason, Article XI, Rule 11(h) and Article IX, Rule 2, Section 11 of MCC's rules permit MCC to retain the sponsored participant's sponsored account fund deposit until the sponsored participant satisfies certain requirements.\4\ A sponsored participant may choose the method by which to protect MCC from potential losses. One method is by entering into a form of indemnity agreement acceptable to MCC. --------------------------------------------------------------------------- \4\ Article XI, Rule 11(h) states that the return of sponsored account fund deposits is governed by Article IX, Rule 2, Section 11. Generally, Article IX, Rule 2, Section 11 provides that whenever a sponsored participant ceases to be a participant, the amount of its contribution to the sponsored account fund must be returned to it ninety days after: (i) All transactions open at the time it ceases to be a sponsored participant from which losses or payments chargeable to the sponsored participants fund might result have been closed, (ii) All obligations, contingent or otherwise, that are chargeable or may become chargeable against its contributions pursuant to MCC's rules have been satisfied or, at the discretion of MCC, have been deducted, and (iii) Either another sponsored participant has been substituted, with the approval of MCC, on all transactions and obligations of the sponsored participant, or the participant has presented to MCC such indemnities or guarantees as MCC deems satisfactory. If the sponsored participant does not satisfy all the requirements set forth in paragraph (iii) above, MCC may retain for up to four years, the greater of: (a) 25 percent of a sponsored participant's average sponsored account fund requirement over the twelve months immediately prior to the date the sponsored participant ceases to be such, or (b) $100,000 (or the Participant's entire Participants Fund deposit if the actual deposit is less than $100,000). --------------------------------------------------------------------------- The purpose of the proposed rule change is to adopt an acceptable form of indemnity agreement.\5\ Under the form of indemnity agreement, a sponsored participant agrees to indemnify and hold MCC and its officers, directors, and certain other personnel harmless from any loss (including attorneys' fees) caused by the sponsored participant. The sponsored participant also agrees to indemnify MCC, its officers, and certain other personnel for other losses that could be charged against the sponsored account fund generally to the same, or in certain cases, a lesser extent, than if the sponsored participant had not received its deposit back. --------------------------------------------------------------------------- \5\ A copy of the form agreement is attached as Exhibit A to MCC's proposed rule change which is available for inspection and copying at the Commission's Public Reference Room or through MCC. --------------------------------------------------------------------------- Pursuant to the form of indemnity agreement, the amount owing for these other losses (i) Will not exceed the amount the sponsored participant had on deposit at the time of the sponsored participant's withdrawal from MCC and (ii) will not be applicable if the underlying conduct giving rise to the loss occurred after the withdrawal. In addition, the indemnity will cease in its entirety after four years from the date the indemnity is signed. While MCC believes that the form of indemnity agreement will be deemed satisfactory in many cases, MCC still reserves the right to require, in its discretion, additional indemnities and guarantees above and beyond the form of indemnity agreement or to decline to accept any indemnity agreement or guarantee in lieu of retaining sponsored account fund deposits. This may be necessary, for example, if the withdrawing sponsored participant is on the verge of bankruptcy or insolvency. MCC believes that the proposed rule change is consistent with Section 17A(b)(3)(f) \6\ of the Act in that it will facilitate the prompt and accurate clearance and settlement of securities transactions and will assure the safeguarding of securities and funds which are in MCC's custody or control or for which MCC is responsible. --------------------------------------------------------------------------- \6\ 15 U.S.C. 78q-1(b)(3)(F). --------------------------------------------------------------------------- B. Self-Regulatory Organization's Statement on Burden on Competition MCC does not believe that the proposed rule change will impose any burden on competition. C. Self-Regulatory Organization's Statement on comments on the Proposed Rule Change Received From Members, Participants or Others MCC has neither solicited nor received written comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3) (A)(i) \7\ of the Act and pursuant to Rule 19b-4(e)(1) \8\ promulgated thereunder because the proposal constitutes a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule of MCC. At any time within sixty days of the filing of such rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. --------------------------------------------------------------------------- \7\ 15 U.S.C. 78s(b)(3)(A)(ii). \8\ 17 CFR 240.19b-4(e)(1). --------------------------------------------------------------------------- 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, N.W., Washington, D.C. 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, N.W., Washington, D.C. 20549. Copies of such filing also will be available for inspection and copying at the principal office of MCC. All submissions should [[Page 27093]] refer to File No. SR-MCC-97-01 and should be submitted by June 6, 1997. For the Commission by the Division of Market Regulation, pursuant to delegated authority.\9\ --------------------------------------------------------------------------- \9\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 97-12827 Filed 5-15-97; 8:45 am] BILLING CODE 8010-01-M