[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