[Federal Register Volume 63, Number 207 (Tuesday, October 27, 1998)]
[Pages 57346-57347]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28638]



[Release No. 34-40582; File No. SR-NSCC-98-4]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Granting Approval of a Proposed Rule Change Adopting 
an Interpretation of the Board of Directors Regarding NSCC's Obligation 
To Continuously Review Participants To Determine If Participants Are 
Required To Reapply for Membership Due to a Material Change in 

October 20, 1998.
    On April 24, 1998, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change (File No. SR-NSCC-98-4) 
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 June 19, 1998.\2\ No comment letters were received. For the 
reasons discussed below, the Commission is approving the proposed rule 

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 40086 (June 12, 1998), 
63 FR 33750.

I. Description

    New Addendum T to NSCC Rules allow NSCC: (i) to reexamine a 
participant who has undergone a material change in circumstances,\3\ 

[[Page 57347]]

to reconsider the participant's continuing status as a participant as 
if such entity was initially applying for membership when conditions 
originally in existence at the time a participant was accepted for 
membership have materially changed; and (iii) to require the 
participant to satisfy any concerns NSCC may have as to the 
participant's ongoing membership in NSCC as part of such reevaluation. 
In addition, new Addendum T explicitly states that participants have 
the affirmative obligation to advise NSCC if such material change 

    \3\ New Addendum T sets forth three categories where changes may 
warrant reconsideration: (1) material changes in ownership, control 
or management, (2) material changes in business lines, including but 
not limited to, new business lines undertaken, or (3) participation 
as a defendant in litigation which could reasonably have a direct 
negative impact on the participant's business. Addendum T states 
that these categories are listed as examples and should not be 
viewed as exclusive in the process.

    When a material change occurs with respect to an existing 
participant's ownership, control or management, mix of business, use of 
third party service providers, or regulatory history, among other 
areas, NSCC is faced with a different risk perspective than it faced at 
the time it approved such participant's application for membership. The 
NSCC board has concluded that it is in the best interests of NSCC and 
its membership as a whole that NSCC address these types of changes, 
including the ability to require the participant to reapply for 
membership, as if the participant was not already a participant. If 
NSCC did not have the ability to continually reexamine participants' 
status, the purpose behind scrutinizing applications and the comfort 
level provided by such process, would be undermined.

II. Discussion

    Section 17A(b)(3)(F) of the Act \4\ requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible. The Commission believes that new Addendum 
T to NSCC Rules will clarify NSCC's right to continuously review its 
participants to make sure that they have not experienced a material 
change in circumstances which may result in a material change in a 
participant's risk profile. Therefore, the Commission believes that the 
proposed rule change is consistent with NSCC's obligation under Section 
17A(b)(3)(F) to safeguard securities and funds.

    \4\ 15 U.S.C. 78q-1(b)(3)(F).

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular with Section 17A of the Act and the rules and regulations 
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-NSCC-98-4) be and hereby is 

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\

    \5\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28638 Filed 10-26-98; 8:45 am]