[Federal Register Volume 63, Number 236 (Wednesday, December 9, 1998)]
[Notices]
[Pages 67962-67964]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32668]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40740; File No. SR-NSCC-98-10]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Granting Approval of a Proposed Rule Change 
Authorizing the Modification of NSCC's Collateral Management Service

December 3, 1998.
    On July 22, 1998, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change (File No. SR-NSCC-98-10) 
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 October 16, 1998.\2\ For the reasons discussed below, the 
Commission is approving the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 40536 (October 8, 1998) 
63 FR 55664.
---------------------------------------------------------------------------

I. Description

    NSCC's Collateral Management Service (``CMS'') provides automated 
access to information on participants' clearing fund, margin, and other 
deposits at NSCC and other participating clearing entities.\3\ The 
purpose of this rule change is to add an interactive messaging feature 
to CMS. Specifically, NSCC is modifying CMS to: (i) enable 
participating clearing entities and participants to send and receive 
messages regarding collateral on an automated basis through CMS; (ii) 
enable participants that elect to participate in CMS to request a 
withdrawal of excess collateral on a daily basis, including an intraday 
withdrawal of excess cash collateral; and (iii) address the movement of 
collateral based on CMS messages. The modifications primarily affect 
Rule 53 (Collateral Management Service) of NSCC's Rules and Procedures.
---------------------------------------------------------------------------

    \3\ For a detailed description of CMS, refer to Securities 
Exchange Act Release No. 36091 (August 10, 1995) 60 FR 42931 [File 
No. SR-NSCC-95-06].
---------------------------------------------------------------------------

    NSCC intends to implement the modifications to CMS upon approval of 
the proposed rule change. Other participating clearing entities will be 
able to make the CMS modifications relating to clearing fund and margin 
deposits available on a phased-in basis at a time determined by each 
clearing entity.\4\
---------------------------------------------------------------------------

    \4\ Each participating clearing entity will need to review its 
rules and to file any necessary proposed rule changes under Section 
19(b) before making available to its participants the ability to 
move and withdraw collateral.
---------------------------------------------------------------------------

CMS Message Processing

    NSCC is modifying NSCC Rule 53 to enable NSCC, participating 
clearing entities, and participating participants to send and receive 
interactive messages regarding their respective CMS information (``CMS 
messages''). CMS messages include the following: (i) a request by NSCC 
or a participating clearing entity to a participant for additional 
collateral; (ii) a request by a participant to NSCC or to a 
participating clearing entity to return excess collateral; (iii) a 
request by a participant to NSCC or to a participating clearing entity 
to use excess cash collateral to satisfy a settlement deficit at the 
entity where there is excess cash collateral; (iv) a request by a 
participant to NSCC or to a participating clearing entity to substitute 
collateral; and (v) a request by a participant to NSCC or to a 
participating clearing entity to use excess cash collateral to satisfy 
a clearing fund or margin deficit at an entity other than where there 
is excess cash collateral.
    NSCC, participating clearing entities, and participating 
participants will send and receive CMS messages on an automated basis 
by using CMS message screens. Generally, the CMS massage screens will 
contain fields to identify

[[Page 67963]]

the requesting entity, the entity or entities receiving the CMS 
message, the type of request, the request amount, the type of 
collateral, and the date of the request. CMS will transmit the request 
to the entity or entities identified in the request. All requests by a 
participant to NSCC and to participating clearing entities will require 
approval of the clearing entity.
    NSCC is adding Procedure XVI to its rules and procedures to set 
forth the procedures for processing each of the five basic types of CMS 
messages. First, Procedure XVI provides that NSCC and participating 
clearing entities may submit a request for additional collateral to a 
participant through CMS.\5\ The request will be transmitted to the 
participant identified in the request. Second, Procedure XVI provides 
that a participant may submit a request for the return of excess 
collateral to NSCC or to a participating clearing entity through 
CMS.\6\ The requesting participant will receive a message from the 
clearing entity indicating the approval or rejection of the request and 
in the case of a rejection the reason(s) for the rejection. Third, 
Procedure XVI provides that a participant may submit a request to NSCC 
or to a participating clearing entity to use excess cash collateral to 
satisfy a settlement deficit at the clearing entity where there is 
excess cash collateral.\7\ The request will be transmitted to the 
clearing entity identified in the request for approval or rejection. 
The requesting participant will receive a message indicating the 
approval or rejection of the request and in the case of a rejection the 
reason(s) for the rejection.
---------------------------------------------------------------------------

    \5\ The request must include the identity of the requesting 
clearing entity, the identity of the participant, the total amount 
of the request, the type of collateral (i.e., cash, securities, and/
or letters of credit), the date of the request, and such other 
information as may be required or permitted.
    \6\ The request must include the identity of the requesting 
participant, the identity of the appropriate clearing entity, the 
total amount of the request, the type of collateral (i.e., cash, 
securities, and/or letters of credit), the date of the request, and 
such other information as may be required or permitted.
    \7\ The request must include the identity of the requesting 
participant, the identity of the appropriate clearing entity, the 
total amount of the request, the date of the request, and such other 
information as may be required or permitted.
---------------------------------------------------------------------------

    Fourth, Procedure XVI provides that a participant may submit a 
request to NSCC or to a participating clearing entity to substitute 
collateral.\8\ The request will be transmitted to the clearing entity 
identified in the request for approval or rejection. The requesting 
participant will receive a message indicating the approval or rejection 
of the request and in the case of a rejection the reason(s) for the 
rejection.
---------------------------------------------------------------------------

    \8\ The request must include the identity of the requesting 
participant, the identity of the appropriate clearing entity, the 
total amount and type of the collateral (i.e., cash, securities, 
and/or letters of credit) to be returned to the participant, the 
total amount and type of collateral (i.e., cash, securities, and/or 
letters of credit) to be substituted by the participant, the date of 
the request, and such other information as may be required or 
permitted.
---------------------------------------------------------------------------

    Fifth, Procedure XVI provides that a participant may submit a 
request to use excess cash collateral at one participating clearing 
entity or NSCC to satisfy a clearing fund or margin deficit at another 
participating clearing entity or NSCC.9 The request will be 
transmitted to both clearing entities identified in the request for 
approval or rejection. The requesting participant will receive a 
message from each clearing entity indicating the approval or rejection 
of the request and in the case of a rejection the reason(s) for the 
rejection.
---------------------------------------------------------------------------

    \9\ The request must include the identity of the requesting 
participant, the identity of the clearing entity from which the 
excess cash collateral is to be sent, the identity of the clearing 
entity to which the excess cash collateral is to be sent, the total 
amount of the request, the date of the request, and such other 
information as may be required or permitted.
---------------------------------------------------------------------------

    Procedure XVI also provides that requests must be submitted by such 
times on each processing day as may be established by NSCC and 
participating clearing entities. A request by a participant to NSCC or 
to a participating clearing entity that is not fully approved on the 
day that it is submitted will not be carried forward to the next 
processing day. However, CMS provides for ``today for tomorrow'' 
requests that will pend and will be incorporated into the next day's 
processing if so designated.

Withdrawal of Excess Collateral on a Daily Basis

    The rule change also modifies Rule 53 and makes conforming changes 
to other rules and procedures to allow participating participants to 
request a withdrawal of excess collateral on a daily basis, including 
an intraday withdrawal of excess cash collateral. This modification is 
an exception to NSCC's general rule that permits a participant to 
request the return of excess collateral no more frequently than monthly 
and is also an exception to the general rule that permits certain 
participants on surveillance status to request the return of excess 
collateral no more frequently than quarterly. Although the rule change 
allows participants to make daily requests for return of excess 
collateral, NSCC still has discretion to deny such requests.

Movement of Collateral Based on CMS Messages

    The rule change modifies Rule 53 to address the movement of 
collateral based on CMS messages. The actual movement of collateral 
based on a CMS message and will be made between the appropriate 
clearing entity and the participant pursuant to the rules and 
procedures of the appropriate clearing entity. However, under the rule 
change the movement of collateral based on a participant's request to 
use excess cash collateral at one clearing entity to satisfy a clearing 
fund or margin deficit at another clearing entity will be made directly 
between the clearing entities daily on a bilateral net basis or as 
otherwise may be determined by the clearing entities.
    Currently, an agreement authorizing use of data for CMS (``CMS 
Agreement'') addresses NSCC's authorization from participating clearing 
entities to collect and provide clearing fund and margin requirement 
and deposit information. Under an amendment to the CMS Agreement, NSCC 
and participating clearing entities will agree to make payments in 
accordance with their respective rules and procedures based on approved 
participant requests to use excess cash collateral at one clearing 
entity to satisfy a clearing fund or margin deficit at another clearing 
entity daily on a bilateral net basis or as otherwise may be determined 
by the clearing entities.10 From the perspective of a 
participant, excess cash collateral will be treated as moved at the 
time both clearing entities approve the participant's request or at 
such other time as the clearing entities may mutually agree.
---------------------------------------------------------------------------

    \10\ Participating clearing entities other than NSCC will be 
required to execute the amendment to the CMS Agreement when they 
begin to phase in the CMS modifications. Participating clearing 
entities may also need to file proposed rule changes in connection 
with executing the amendment to the CMS Agreement.
---------------------------------------------------------------------------

    The movement of excess cash collateral from NSCC to an NSCC 
participant based on a CMS message will be included in NSCC's money 
settlement process unless the participant requests an intraday wire 
transfer of funds. The rule change also makes a technical modification 
to Section 6 of Rule 53 to add references to CMS messages.

II. Discussion

    Section 17A(b)(3)(F) \11\ of the Act requires that the rules of a 
clearing agency be designed to foster cooperation and coordination with 
persons engaged in the clearance and settlement of

[[Page 67964]]

securities transactions. The Commission believes the NSCC's new 
interactive messaging feature should increase the efficiency of 
collateral movements in and among clearing entities by establishing a 
standardized and automated system to request the movement or withdrawal 
of collateral. Further, the CMS modifications will give NSCC and 
participants information regarding participants' requests for movement 
or withdrawal of collateral which should help participating clearing 
entities to better monitor their participants' collateral positions. 
Therefore, the Commission believes that the change is consistent with 
NSCC's obligations under Section 17A(b)(3)(F).
---------------------------------------------------------------------------

    \11\ 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 
thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-NSCC-98-10) be and hereby is 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

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

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32668 Filed 12-8-98; 8:45 am]
BILLING CODE 8010-01-M