[Federal Register Volume 62, Number 199 (Wednesday, October 15, 1997)]
[Notices]
[Pages 53681-53684]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27278]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39223; File No. SR-SCCP-97-07]


Self-Regulatory Organizations; Stock Clearing Corporation of 
Philadelphia; Notice of Filing of Proposed Rule Change Relating to 
Revision and Limitation of Clearing Services

October 8, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 25, 1997, Stock 
Clearing Corporation of Philadelphia (``SCCP'') filed with the 
Securities and Exchange

[[Page 53682]]

Commission (``Commission'') and on September 30, 1997, amended the 
proposed rule change as described in Items I, II and III below, which 
items have been prepared primarily by SCCP. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested parties.
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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 Philadelphia Stock Exchange, Inc. (``PHLX''), SCCP, 
Philadelphia Depository Trust Company (``Philadep''), the National 
Securities Clearing Corporation (``NSCC'') and The Depository Trust 
Company (``DTC'') have entered into an agreement dated as of June 18, 
1997 (``Agreement'') under which SCCP has agreed (i) to cease providing 
full securities clearing services, (ii) to make available to SCCP 
participants access to the facilities of one or more other 
organizations providing securities clearing services, and (iii) to 
transfer to the books of such other organizations the continuous net 
settlement (``CNS'') system open positions of SCCP participants that 
are shown on SCCP's books. In addition, under the terms of the 
Agreement Philadep has agreed (i) to cease providing securities 
depository services, (ii) to make available to its participants access 
to the facilities of one or more other organizations providing 
securities depository services, and (iii) to transfer to the custody of 
such other organizations the securities that are held in the custody of 
Philadep for the accounts of such participants. Pursuant to the 
Agreement, SCCP and Philadep have agreed not to compete for a period of 
five years with DTC and NSCC in providing securities depository 
services or securities clearing services.
    The Agreement contemplates that SCCP will continue to provide an 
interface between certain of its floor members and specialists and a 
registered clearing agency.\2\ The Agreement further contemplates that 
SCCP will continue to provide margin services to (i) PHLX equity 
specialists for their specialists and alternate specialists 
transactions and for their proprietary transactions and for their 
proprietary transactions in securities for which they are not appointed 
as specialists or alternate specialists and (ii) two PHLX members 
listed on a schedule that are not PHLX equity specialists for their 
proprietary transactions. The clearing services contemplated to be 
conducted by SCCP after the closing date of the Agreement\3\ will be 
carried out through an omnibus account that SCCP will maintain at NSCC 
for such purpose and will not include the maintenance or offering of 
CNS accounts for its participants.
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    \2\ The term clearing agency is defined in section 3(a)(23) of 
the Act. 15 U.S.C. 78c(a)(23).
    \3\ The effective date of the proposed rule change described is 
proposed to be the ``closing date'' as defined in the Agreement. The 
parties to the Agreement tentatively have scheduled the closing date 
for November 14, 1997, but this date may be adjusted by mutual 
consent of the parties.
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    The proposed rule change incorporates the Agreement as it relates 
to SCCP into SCCP's rules and procedures. In addition, the proposed 
rule change will amend SCCP's rules in a manner consistent with 
undertakings agreed to by SCCP in settling a recent administrative 
proceeding with the Commission.\4\
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    \4\ The text of the proposed rule change was submitted with 
SCCP's rule filing and is available for inspection and copying at 
the Commission's Public Reference Room and through the principal 
office of SCCP.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, SCCP 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. SCCP has prepared summaries, set forth in sections (A), 
(B) and (C) below, of the most significant aspects of these 
statements.\5\
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    \5\ The Commission has modified the text of the summaries 
prepared by SCCP.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    PHLX has decided to limit the clearance and settlement business 
provided by SCCP and to close its securities depository business 
offered through Philadep.\6\ The Agreement provides for an orderly 
process to enable PHLX, SCCP, and Philadep to achieve this objective, 
while affording participants of SCCP or Philadep the opportunity to 
become participants of NSCC or DTC, respectively, or to utilize the 
services of other providers of clearing services or depository 
services.
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    \6\ Philadep has submitted a rule filing [File No. SR-Philadep-
97-04] describing the way in which Philadep will exit the depository 
business.
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    After the closing date, SCCP no longer will maintain its CNS system 
for conducting settlements between SCCP and its participants. As a 
result, SCCP is proposing to cease providing the cash settlement 
services attendant to Philadep's same-day funds settlement services 
attendant to Philadep's same-day funds settlement (``SDFS'') system and 
the Philadep settlement process. However, pursuant to the Agreement 
SCCP may continue to offer limited clearing and settlement services to 
PHLX members. SCCP intends to provide trade confirmation and recording 
services for PHLX members that carry out transactions through regional 
interface operations (``RIO'') accounts and ex-clearing accounts. Under 
the amended versions of SCCP Rules 10 and 11, SCCP will not provide 
clearing guarantees to such transactions.
    SCCP will continue to offer margin accounts for certain 
participants in a special account established by SCCP at NSCC.
    Pursuant to the Agreement, SCCP will establish an omnibus clearance 
and settlement account at NSCC and abide by NSCC rules and procedures 
as a participant of NSCC. Under the Agreement, SCCP may offer margin 
accounts only to: (i) PHLX equity specialists for their specialists and 
alternate specialists transactions, as well as for their proprietary 
transactions in securities for which they are not appointed as 
specialists or alternate specialists and (ii) two PHLX members listed 
on a schedule who are not PHLX equity specialists for their proprietary 
transactions. Under the Agreement, SCCP may add other PHLX members to 
the schedule referred to in item (ii) above subject to NSCC's approval.
    A new definition of ``margin member'' will be established in SCCP 
Rule 1 to reflect those PHLX floor firms entitled to clear through a 
SCCP margin account.\7\ Pursuant to the amended version of SCCP Rule 9, 
SCCP may provide margin accounts for margin members that clear and 
settle their transactions through SCCP's omnibus clearance and 
settlement account. SCCP will margin such accounts based on its 
Procedures and on Regulation T of the Board of Governors of the Federal 
Reserve System.\8\
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    \7\ Under the proposed rule change, the term ``margin member'' 
will be defined to include participants that are PHLX specialists, 
alternate specialists, and other PHLX floor members specifically 
approved by NSCC to effect trading in a margin account.
    \8\ 12 CFR 220.
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    SCCP may demand at any time that a margin member provide additional 
margin based upon SCCP's review of such margin member's security 
positions held by SCCP. SCCP will retain the margin thresholds 
currently specified in its procedures and may require adequate 
assurances or

[[Page 53683]]

additional margin in addition to the minimum margin thresholds in order 
to protect SCCP in issues deemed by SCCP to warrant additional 
protection. SCCP may demand any such margin payments in federal funds 
in accordance with its procedures.
    SCCP may issue margin calls to any margin member whose margin 
requirement exceeds the account equity of the margin member's margin 
account.\9\ SCCP may waive any amount that would trigger a margin call 
not exceeding $500. A margin member that fails to meet a margin call 
will be subject to SCCP Rule 22 (formerly SCCP Rule 23) which governs 
disciplinary proceedings and penalties. SCCP may cease to act for 
delinquent margin members and will retain a lien on all delinquent 
margin members' accounts and securities therein.
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    \9\ Under the proposed rule change, SCCP Rule 1 will define the 
term ``account equity'' as the total net current market value of 
security positions held in the margin account plus or minus cash 
balances in such account.
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    SCCP will segregate and maintain records on each individual margin 
account and will maintain the omnibus clearance and settlement account 
so as to reflect all positions in SCCP's margin accounts. SCCP also 
will guarantee the settlement obligations of the omnibus clearance and 
settlement account to NSCC. In turn, pursuant to the Agreement, PHLX 
will guarantee SCCP's obligations to NSCC.
    SCCP's books and records for the omnibus clearance and settlement 
account will reflect all activity that occurs in the account at NSCC 
and DTC. At any time prior to midnight (Philadelphia time) on the next 
business day after SCCP receives a margin member's trade, SCCP will be 
entitled to reverse such a trade from such member's account. SCCP will 
settle the omnibus clearance and settlement account with NSCC each 
business day in accordance with NSCC's rules and procedures. 
Accordingly, SCCP will be subject to NSCC's rules including but not 
limited to the following: (i) Daily mark-to-market requirements, (ii) 
allocations of long and short securities positions, (iii) dividend and 
reorganization settlement activities, and (iv) pledging of collateral 
and stock loans. Dividends, reorganizations, adjustments, and buy-ins, 
will be passed through to margin members in accordance with SCCP's 
procedures. SCCP will continue to provide margin members with purchase 
and sales reports, bookkeeping reports, dividend and reorganization 
reports, and preliminary equity reports in accordance with SCCP's 
procedures.
    Through the omnibus clearance and settlement account, SCCP will 
have one composite settlement per day with NSCC. SCCP will maintain 
line of credit (``LOC'') arrangements with one or more commercial banks 
sufficient to support anticipated funding needs of the underlying 
margin accounts. SCCP currently is negotiating with lending 
institutions to replace its existing LOCs. During the past four months, 
SCCP has not exceeded an aggregate $6 million debit with respect to the 
margin members targeted to remain in SCCP following the closing date. 
In order to cover all such margin debits, SCCP anticipates obtaining an 
aggregate of $5 million in committed and $5 million in uncommitted LOCs 
from each of two separate lending institutions, totaling $20 million.
    SCCP proposes to amend SCCP Rule 14 (formerly SCCP Rule 15) to 
provide that mark-to-market funds may not be used to finance margin 
members' account activity. SCCP also is amending Rule 14 to provide 
that any mark-to-market funds collected by SCCP will be segregated and 
invested in accordance with analogous procedures set forth in SCCP Rule 
4. Under the amended version of SCCP Rule 13, SCCP will pass through 
any buy-ins submitted by NSCC to SCCP or by a SCCP participant to NSCC 
in accordance with NSCC's buy-in rules and procedures.
    To ensure that margin members have an efficient way to obtain 
securities depository services after the closure of Philadep's 
depository service, NSCC will sponsor SCCP in opening a depository 
account at DTC to benefit margin members. In the event that margin 
members carry out trades in securities not eligible for custodial 
services in DTC's book-entry system, SCCP will utilize NSCC's direct 
clearing service to settle the transactions. SCCP will continue to 
perform bookkeeping and reconciliation services for the omnibus 
clearance and settlement account and its related DTC custody account 
pursuant to SCCP procedures.
    In accordance with NSCC's participants fund formulae, SCCP, as a 
NSCC participant and a sponsored participant of DTC, will be required 
to provide NSCC and DTC with participants fund contributions for the 
omnibus clearance and settlement account. With respect to SCCP's own 
participants fund formulae, SCCP will delete its participants fund 
formulae applicable to inactive accounts, full service CNS accounts, 
and layoff accounts. SCCP proposes to establish a fixed $35,000 
contribution for each of the following account categories: specialist 
margin and non-specialist margin. No changes will be made to the RIO 
account formula. Accordingly, RIO account participants will continue to 
be subject to a contribution of $10,000 to $75,000 depending upon 
monthly trading activity. SCCP will continue to use its current 
procedure under which participant engaging in more than one account 
type activity will be subject to only the formula that would generate 
the highest participants fund contribution.
    SCCP may allocate any portion of its participants fund to satisfy 
NSCC's DTC's participants fund requirements with respect to the omnibus 
clearance and settlement account. Any excess SCCP participants fund 
cash not used to fund SCCP's NSCC and DTC participants fund 
requirements will be segregated and invested by SCCP in accordance with 
SCCP Rule 4. At the present time, SCCP estimates that its revised 
participants fund formulae will generate participants fund 
contributions in excess of the amount required to fund SCCP's 
participants fund contributions with NSCC and DTC. If SCCP's 
participants fund formulae do not provide for contributions that equal 
those which would be required pursuant to the NSCC and DTC participants 
fund formulae, SCCP reserves the right to collect from each participant 
an additional pro rata charge to meet any such deficit.
    SCCP proposes to amend SCCP Rule 4 to specify that no participants 
fund contributions may be used in financing margin members' margin 
account activity.\10\ In addition SCCP proposes to amend Rule 4 to 
provide for the establishment of SCCP and Philadep of a reserve fund 
that will be used to provide a liquid fund to draw on as necessary to 
meet certain specified expenses. The reserve fund will be funded with 
deposits of $1,000,000 by August 11, 1998; $1,000,000 by August 11, 
1999; and $1,000,000 by August 11, 2000. The reserve fund will be held 
and invested in accordance with the same procedures set forth in SCCP 
Rule 4 for the holding and investment of the participants fund. Amounts 
drawn from the reserve fund must be replenished within sixth days 
following the date of each such withdrawal. SCCP Rule 4 also will be 
amended to provide that no portion of the reserve fund may be used in 
financing margin members' margin account activity.
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    \10\ As previously stated, SCCP is establishing separate sources 
of funding, including bank LOCs, to serve the operation of its 
margin members' margin accounts.
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    SCCP is amending its schedule of fees to delete those fees 
associated with

[[Page 53684]]

services no longer to be offered. SCCP also will charge RIO Accounts 
the applicable value fees of $0.05 per $1,000 of contract value.
    SCCP believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act \11\ and the rules and 
regulations thereunder because the restructuring of SCCP's business as 
contemplated by the proposed rule change will promote the prompt and 
accurate clearance and settlement of securities transactions by 
integrating and consolidating clearing services available to the 
industry and will assure the safeguarding of securities and funds in 
the custody or control of SCCP or for which SCCP is responsible.
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    \11\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    SCCP does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act. Securities clearing agencies registered under 
Section 17A of the Act are not conventional businesses but utilities 
created to serve members of the securities industry for the purpose of 
providing certain services that are ancillary to the businesses in 
which industry members compete with one another. Operating a securities 
clearing agency requires a substantial and continuing investment in 
infrastructure including telecommunications links with users, data 
centers, and disaster recovery facilities in order to meet the 
increasing needs of participants and respond to regulatory 
requirements. To date, other exchanges, including the Boston Stock 
Exchange, the Pacific Exchange, and the Chicago Stock Exchange have 
substantially terminated the operation of their securities clearing 
corporations.
    After consummation of the proposed arrangements, securities 
industry members shall continue to have access to high quality, low 
cost clearing services provided under the mandate of the Act. The 
overall cost to the industry of having such services available may be 
reduced thereby permitting a more efficient and productive allocation 
of industry resources. Furthermore, because most of a clearing 
corporation's interface costs must be mutualized, thereby requiring 
some participants to subsidize costs incurred by others, SCCP's 
withdrawal from maintaining clearing facilities should reduce costs to 
participants and thereby should remove impediments to competition. 
Finally, PHLX's ability to focus its resources on the operations of the 
Exchange should help enhance competition among securities markets.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received with respect 
to the proposed rule change.

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 SCCP 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, 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 SCCP. All 
submissions should refer to File No. SR-SCCP-97-04 and should be 
submitted by November 5, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-27278 Filed 10-14-97; 8:45 am]
BILLING CODE 8010-01-M