[Federal Register Volume 62, Number 188 (Monday, September 29, 1997)]
[Notices]
[Pages 50978-50979]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-25690]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39110; File No. SR-NSCC-97-07]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of a Proposed Rule Change Relating to Changes in 
Membership Standards

September 22, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 5, 1997, 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. The Commission is publishing this 
notice to solicit comments from interested persons on the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change will amend NSCC's membership standards to 
increase the minimum excess net capital requirements imposed on members 
and applicants for membership.

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.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by NSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to amend NSCC's 
membership standards to increase the amount of net capital required 
over the Commission's minimum net capital requirements (``excess net 
capital'').\3\ Currently, the excess net capital requirement for all 
members is $50,000. The proposed amendments: (i) Will increase the 
excess net capital requirement for full service members to $500,000 
except for municipal securities brokers' brokers \4\ for which the 
excess net capital requirement will be $100,000 \5\ and (ii) will 
increase the excess net capital requirement for members that clear for 
other broker-dealers to $1,000,000.
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    \3\ The minimum net capital requirements are set forth in Rule 
13c3-1(a) under the Act. 17 CFR 240.15c3-1(a).
    \4\ ``Municipal securities brokers' broker'' is defined in Rule 
15c3-1(a)(8) under the Act. 17 CFR 240.15c3-1(a)(8).
    \5\ NSCC believes that this is consistent with the Commission's 
approach of maintaining separate capital rules for municipal 
securities brokers' brokers.
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    NSCC's current excess net capital requirements were implemented in 
1976 when NSCC was formed. The environment in which NSCC members 
operate has changed significantly since that time. In terms of the 
change in the value of money alone, $50,000 in 1976 dollars is worth 
nearly $150,000 today. Trading volumes and the average value of 
securities traded have increased even more significantly. The 
Commission also has changed its minimum net capital requirements for 
most NSCC members during this time period from $25,000 (i.e., one-half 
of NSCC's current excess net capital requirement) to $250,000 (i.e., 
one-half of NSCC's proposed excess net capital requirement).\6\
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    \6\ See 17 CFR 240.15c3-1(a)(2)(i).
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    As a result of the changing environment, it has been NSCC's recent 
experience that when a member with less than $500,000 in excess net 
capital has problems with even one transaction that would not be 
considered large by today's standards, concerns arise with respect to 
that member's ability to settle on a timely basis and to post 
additional required collateral with NSCC. Additionally, even though the 
size of the exposure due to the failure of any one of these small firms 
is relatively small, NSCC believes that the time and resources that it 
must spend addressing problems related to small firms is 
disproportionate to the magnitude of the potential loss and is 
unjustifiably disruptive of NSCC's daily surveillance process.
    NSCC also believes that the owners or principals of an NSCC member 
should have a meaningful amount of their own assets at stake to absorb 
losses before a member's excess net capital falls below regulatory 
minimums and the member is required to cease doing business. NSCC 
believes that this provides a strong motivation for firms to implement 
appropriate risk management controls on their own. In today's 
environment, NSCC does not believe that $50,000 is a meaningful amount 
and believes that $500,000 is a more appropriate amount.\7\
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    \7\ Under the proposed rule change, NSCC will maintain its 
current right to impose higher capital requirements on members 
depending on the circumstances and type of business that the member 
is in.
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    In addition, NSCC has recognized that members that clear for other 
broker-dealers present special risks to the clearance and settlement 
process. These firms become legally responsible for the settlement of 
transactions of other firms and generally do not have complete control 
over those transactions. Many of these firms have surveillance 
procedures and other risk controls in place and can cease clearing for 
a correspondent broker-dealer if they perceive that a risk has 
developed. But the clearing arrangements of these firms and marketplace 
rules generally require that the clearing firm (i.e., the NSCC member) 
take on settlement responsibility for most of the

[[Page 50979]]

correspondent broker-dealer's transactions before the clearing firm has 
had a chance to review such transactions. This increases the 
possibility that a clearing firm will be responsible for problematic or 
risky transactions. In light of the higher risk presented by these 
firms, NSCC believes that they should be subject to higher minimum 
capital standards.
    Currently, twenty-nine NSCC members do not meet the proposed 
$500,000 standard for full service members. For this reason, NSCC 
proposes that the new standard become effective on the later of (a) one 
year from the date of publication in the Federal Register of the notice 
of the filing of this rule change or (b) the date of Commission 
approval of this rule change. NSCC believes that this effective date 
will give those firms sufficient time to obtain appropriate capital 
infusions or make other clearing arrangements.
    In addition, two NSCC members that clear for other broker-dealers 
do not meet the $1,000,000 standard. Therefore, NSCC proposes that this 
new standard become effective on the later of (a) six months from the 
date of publication in the Federal Register of the notice of the filing 
of this rule change or (b) the date of Commission approval of this rule 
change. NSCC believes that this effective date will give those firms 
sufficient time to obtain appropriate capital infusions.
    During the interim period, if any, between Commission approval of 
this rule change and its effective date, NSCC will not consider 
applicants that do not meet the new minimum capital standards other 
than those firms applying for membership in connection with the 
agreement between NSCC and the Stock Clearing Corporation of 
Philadelphia (``SCCP'') under which SCCP has agreed to cease operations 
as a clearing corporation.
    In view of the facts that: (i) The costs of surveillance and of 
collateral collection procedures in both time and resources falls on 
NSCC and all of its members and that these costs are disproportionately 
high relative to the size of the potential loss for members with less 
than $500,000 in excess net capital, (ii) the default or insolvency of 
any settling member potentially imposes burdens and costs on NSCC and 
all of its members, and (iii) the changes proposed by this filing are 
meant to reduce these burdens and costs, NSCC believes that this filing 
is consistent with Section 17A of the Act \8\ and the rules and 
regulations thereunder.
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    \8\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change will impose a 
burden on competition. In fact, NSCC believes that the proposed rule 
change will rectify a burden on competition that has slowly developed 
due to changing circumstances by having the costs of risk management 
more equitably borne by all NSCC members and by requiring all firms to 
have a meaningful amount of capital at risk. NSCC believes the 
increased capital requirements better reflect current marketplace 
realities.

(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
    (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 also will be available for 
inspection and copying at the principal office of NSCC. All submissions 
should refer to File No. SR-NSCC-97-07 and should be submitted by 
October 20, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-25690 Filed 9-26-97; 8:45 am]
BILLING CODE 8010-01-M