[Federal Register Volume 63, Number 115 (Tuesday, June 16, 1998)]
[Notices]
[Pages 32905-32906]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15943]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40081; File No. SR-NSCC-97-07]


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

June 10, 1998.
    On August 5, 1997, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-NSCC-97-07) 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ Notice of the proposal was published in the Federal 
Register on September 29, 1997.\2\ Four comment letters were 
received.\3\ For the reasons discussed below, the Commission is 
approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 39110 (September 22, 
1997), 62 FR 50978.
    \3\ Letters from William C. Alsover, President, Centennial 
Securities Company (October 29, 1997); John G. Woodhead, President, 
Phelps & Woodhead, Inc. (January 8, 1998); Ronald E. Berti, 
Secretary-Treasurer, Wall Street Equities, Inc. (January 15, 1998); 
and Robert P. VanderWal, President, Peninsular Securities Company 
(March 2, 1998).
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I. Description

    The rule change revises NSCC's financial membership standards

[[Page 32906]]

imposed on its broker-dealer members. Specifically, the rule change (1) 
increases NSCC's capital requirements for full service members from 
$50,000 in excess net capital to $500,000 in excess net capital except 
for municipal securities brokers' brokers \4\ for which NSCC's capital 
requirement will be increased from $50,000 in excess net capital to 
$100,000 in excess net capital and (2) increases NSCC's capital 
requirements for members that clear for other broker-dealers from 
$50,000 in excess net capital to $1,000,000 in excess net capital.\5\
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    \4\ ``Municipal securities brokers' broker'' is defined in Rule 
15c3-1(a)(8) under the Act. 17 CFR 240.15c3-1(a)(8).
    \5\ Excess net capital is the amount of net capital a broker-
dealer has in addition to that required by the Commission's uniform 
net capital rule. The Commission's uniform net capital rule is set 
forth in Rule 15c3-1 under the Act. 17 CFR 240.15c3-1.
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    NSCC's current excess net capital requirements were implemented in 
1976 when NSCC was formed. Trading volumes and the average value of 
securities traded have increased significantly since then. The 
Commission also has changed its minimum net capital requirements for 
most NSCC members during this time period from $25,000 to $250,000.\6\
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    \6\ 17 CFR 240.15c3-1(a)(2)(i).
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    As of the end of 1997, twenty-six out of the approximately 350 NSCC 
members would not have met a $500,000 standard for full service 
members.\7\ For this reason, the $500,000 standard will become 
effective on September 29, 1998, which is one year after the date of 
publication in the Federal Register of the Commission's notice of this 
rule change.\8\
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    \7\ Telephone conversation between Peter J. Axilrod, Managing 
Director, NSCC, and Theodore R. Lazo, Attorney, Division of Market 
Regulation, Commission (February 9, 1998).
    \8\ The $100,000 standard applicable to municipal securities 
brokers' brokers also will become effective on September 29, 1998.
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    As of the end of 1997, two out of approximately one hundred NSCC 
members that clear for other broker-dealers would not have met a 
$1,000,000 standard.\9\ For this reason, NSCC has agreed that the 
effective date of the $1,000,000 standard will be on September 29, 
1998, in order to coincide with that of the $500,000 standard.\10\
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    \9\ Supra note 7.
    \10\ Conversation between Karen L. Saperstein, Deputy General 
Counsel, NSCC, and Jerry W. Carpenter, Assistant Director, Division 
of Market Regulation, Commission (June 9, 1998). NSCC originally 
intended to make the $1,000,000 standard effective on the later of 
six months from the date of publication in the Federal Register of 
the notice of the filing or the date of Commission approval of the 
rule change.
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II. Comment Letters

    The Commission received four comment letters. Three of the 
commenters stated that they believe the increase in the excess net 
capital requirement from $50,000 to $500,000 is unnecessarily high 
although one of these commenters agreed that NSCC should increase its 
excess net capital requirement. In addition, these three commenters 
stated that they settle their trades in a timely fashion and that they 
should not be placed in the same category of risk with unreliable 
firms. One of these commenters also stated that it believed that each 
member of NSCC should be evaluated on its own merit. The fourth 
commenter stated that it fully supports the increase to NSCC's excess 
net capital requirement and objected, as discussed below, only to the 
proposed effective dates.
    Two of the four commenters (one that opposed the increase and the 
one that supported it) stated that they believe that the increase in 
the excess net capital requirement to $500,000 should be implemented 
over a longer period of time than NSCC proposed. One of these two 
commenters stated that the increase should take effect after twelve 
months notice and then be phased in over an additional twelve month 
period. The other commenter (the one in favor of the increase) stated 
that NSCC's increase in required excess net capital should be 
implemented in three steps over a one year period after Commission 
approval. None of the commenters discussed the implementation of the 
$1,000,000 standard for NSCC members that clear for other broker-
dealers.

III. Discussion

    Section 17A(b)(3)(F) of the Act \11\ requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in its custody or control or for which it is 
responsible. The Commission believes that NSCC's proposed rule change 
is consistent with its obligations under Section 17A(b)(3)(F) because 
it will help to ensure that only entities that are highly capitalized 
will be allowed to be members of NSCC. As a result, NSCC should be able 
to reduce the payment-related risks associated with its clearing 
operations.
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
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    In addition, under the standards that the Commission's Division of 
Market Regulation has published regarding registration of clearing 
agencies, a clearing agency may impose on its participants financial 
standards which are higher than those already imposed by applicable 
federal and state regulations if it deems such higher standards 
necessary to protect the clearing agency and its participants from 
unreasonable risks.\12\ Because the Commission believes that NSCC's 
proposed rule change establishes reasonable standards of financial 
responsibility carefully designed to protect NSCC and its participants 
from unreasonable risk while still providing for broad access to its 
services, the Commission believes that the proposed rule change is 
consistent with the requirements of the Act.
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    \12\ Securities Exchange Act Release No. 16900 (June 17, 1980), 
45 FR 41920.
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    Contrary to the commenters' suggestions, the Commission believes 
that the amount of the increase to NSCC's excess net capital 
requirement is reasonable and appropriate. Furthermore the Commission 
does not believe that NSCC should be obligated to evaluate excess net 
capital requirements on a case by case basis because such an evaluation 
could be contrary to the requirement contained in Section 17A(b)(3)(F) 
of the Act \13\ that a clearing agency's rules not be designed to 
permit unfair discrimination in the admission of participants. The 
Commission further believes that NSCC should be permitted to institute 
the increase to its excess net capital requirements on a timely basis 
and that the rule change is being phased in over a sufficient period of 
time to allow NSCC's members to comply with the increased excess net 
capital requirements.
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. 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 the requirements of Section 17A 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-97-07) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-15943 Filed 6-15-98; 8:45 am]
BILLING CODE 8010-01-M