[Federal Register Volume 64, Number 116 (Thursday, June 17, 1999)]
[Notices]
[Pages 32586-32588]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-15357]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41504; File No. SR-NSCC-98-14]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of a Proposed Rule Change Relating to
Ceasing To Act for a Member
June 9, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on December 8, 1998, the
National Securities Clearing Corporation (``NSCC'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change, as described in Items I, II, and III below, which items have
been prepared primarily by NSCC. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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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 proposed rule change will amend NSCC's rules to eliminate the
distinction between those instances where NSCC ceases to act on behalf
of a member as a result of the member's insolvency or for another
reason and to permit NSCC to complete certain open receipt versus
payment and delivery versus payment transactions (``RVP/DVP
transactions'').
[[Page 32587]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NSCC 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. NSCC has prepared summaries, set forth in section (A),
(B), and (C) below, of the most significant aspects of such
statements.\2\
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\2\ The Commission has modified parts of these statements.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The purpose of the proposed change is to eliminate the distinction
between those instances where NSCC declines or ceases to act for a
member because the member is insolvent and where NSCC declines or
ceases to act for a member for another reason. The proposed rule change
also would permit NSCC to complete certain open RVP/DVP transactions of
an insolvent broker-dealer that is a member or clears through a member.
Declining or Ceasing To Act
According to NSCC, there is no substantive reason for continuing
the distinction in Rule 18 between those instances where NSCC ceases to
act because a member has become insolvent and those instances where
NSCC ceases to act for another reason. NSCC's procedures for ceasing to
act for an insolvent member are set forth in Section 3 of Rule 18 and
its procedures for ceasing to act when the member is not insolvent are
set forth in Section 2 of Rule 18. Therefore, the proposed rule change
merges these two Sections.
Currently, Sections 2(a) and (b) (non-insolvency scenario) and
Sections 3(a) and (b) (insolvency scenario), set forth the transactions
which may be eliminated by NSCC from its processing when it ceases to
act for a member. Generally, these sections provide that if NSCC gives
notice that it is ceasing to act for a member before NSCC issues the
security balance orders in a pending balance order accounting operation
or the consolidated trade summary in a pending continuous net
settlement accounting operation for that member's pending trades, NSCC
may, in its discretion, exclude that member's trades from the balance
order or continuous net settlement accounting operation, as
appropriate. This means that any trade not guaranteed by NSCC before
NSCC ceases to act could be eliminated from NSCC's clearance and
settlement systems. As a result the parties to the trade would have to
settle the trade on their own outside of NSCC.
Proposed Sections 2(a) (i) and (ii) would replace Sections 2 (a)
and (b) and Sections 3 (a) and (b) and would specifically tie the
exclusion of a trade to NSCC's guaranty. Proposed Section 2(a)(iii)
would address the elimination of security orders issued with respect to
``special trades'' and transactions in foreign securities. Currently,
the elimination of these trades is only addressed in the insolvency
portion of NSCC's rules, Section 3(c)(iii).
Section 2(c) currently sets forth how NSCC would handle envelope
transactions when it ceases to act for a solvent member. However,
Section 3 of NSCC's rules does not address how Envelope transactions
are handled when NSCC ceases to act for an insolvent member. To remedy
this situation, proposed Section 4 would mirror current Section 2(c)
and would address the completion of envelope transactions of a member
for whom NSCC has declined or ceased to act, regardless of the solvency
status of the member.
Sections 2(d)(i) and (ii) and Section 3(b)(ii) pertain to the
completion of CNS trades. According to NSCC, when it ceases to act for
a member, it completes CNS trades through a qualified securities
depository regardless of whether the member was solvent or insolvent.
However, only Section 2 specifically addresses the completion of these
trades through a qualified securities depository. Accordingly, proposed
Section 5 clarifies that CNS transactions would be completed through a
qualified securities depository regardless of the solvency status of
the relevant member, unless, in an insolvency scenario, the rules of
the relevant insolvency regime did not allow NSCC to take certain
actions with respect to the completion of CNS trades.
Sections 2(d)(iii) and 3(c)(ii) currently address the closing out
of any remaining CNS transactions. Under the proposed rule change,
these sections would be merged into proposed Section 6(a).
Sections 2(b) and 3(c)(ii) pertain to the completion of balance
order transactions after NSCC ceases to act for a member. According to
NSCC, when it ceases to act for a solvent or insolvent member, the
procedures for completing a balance order transaction are the same.
However, only Section 3 details how NSCC would close out balance order
transaction and the procedure for members to submit related close-out
losses to NSCC. To remedy this deficiency, the proposed rule change
proposes new Section 6(b), which is similar to current Sections 3(c)
and (d). Proposed Section 6(b) would cover the close-out of balance
order transactions regardless of whether an insolvency situation
exists. Proposed Section 6(b) also contains new language that requires
that a member that desires to submit a loss to NSCC satisfy the terms
and conditions, if any, imposed by NSCC on the close out of the
relevant balance order transaction.
The language contained in current Section 2(e) technically only
applies non-insolvency scenarios. Under the proposed rule change the
language would apply to both insolvency and non-insolvency scenarios
and would appear once, in Section 7(a). The language set forth in
current Section 2(f) is also set forth in Section 3(f). Under the
proposal, it would appear once, in Section 7(f).
The proposed rule change also would add the following terms to NSCC
rules: ``CNS Position''; ``Net Close Out Position''; ``RVP/DVP
transaction''; and ``RVP/DVP customer''.
DVP/RVP Transactions
The proposed rule change adds a new Section 3, which pertains to
CNS or balance order transactions that are wholly executory, RVP/DVP
transactions. The RVP/DVP transactions covered by proposed Section 3
are those in which the customer (``RVP/DVP customer'') has executed its
purchase and sale transaction with the defaulting broker-dealer
(directly, if such defaulting party is a member or through a clearing
member if it is not a member) and would have taken delivery of the
underlying cash or securities from the defaulting broker-dealer on an
RVP/DVP basis at its custodian bank or other depository agent in the
absence of the defaulting broker's liquidation.
After NSCC has declined or ceased to act for a member, NSCC would
attempt to complete (1) all open RVP/DVP transactions, of which NSCC is
aware, to the extent they would not increase the size of the position
in any security that NSCC would have to close-out, and (2) any
additional open RVP/DVP transactions to the extent deemed appropriate
by NSCC's Board of Directors. NSCC's obligation set forth in (1) holds
regardless of whether NSCC would gain or lose money by completing such
transactions, and any determinations by the NSCC Board to close-out
additional RVP/DVP transactions would be made without regard to the
potential profit or loss for NSCC in any individual transaction. In
[[Page 32588]]
either case, NSCC would have no obligation to complete any open RVP/DVP
transaction if: (1) NSCC believe it could not complete all RVP/DVP
transactions in the same issue that it would be obligated to attempt to
complete under this new provision; (2) there were allegations of fraud
with respect to such trades or such trades are otherwise questionable;
or (3) NSCC believed such trades could not be completed on a timely
basis.
The proposed rule change would require NSCC to provide notice to
the trustee or receiver of the member (if, in the case of an insolvent
member, one has been appointed) and the relevant RVP/DVP customers or
the RVP/DVP customer's depository agent or its depository agent's
depository, of the RVP/DVP transactions NSCC intends to attempt to
complete. This notice would alert the RVP/DVP customer that completion
of any such transaction with NSCC constitutes a presumed waiver by the
RVP/DVP customer of any claim arising out of such transactions against
the member for whom the NSCC has declined or ceased to act, or in the
case of an insolvent member, the receiver or trustee (or any successor
trustee) or SIPC. This notice would typically be sent via The
Depository Trust Company's electronic message dissemination system.
NSCC believes, that, by allowing it to complete open transactions
in an insolvency scenario, the bankrupt estate's market exposure from
the open positions would be limited, the potentially large
administrative burden of liquidating the open transactions and
processing claims by the RVP/DVP customers would be reduced, and the
disruptive effect of the liquidation on the affected market
participants would be minimized. In addition, any delay in the
completion of open RVP/DVP transactions by NSCC during a liquidation,
especially in the event of the insolvency of one of NSCC's largest
members, would create extremely large and unnecessary short term
funding obligations for NSCC.
NSCC believes the proposed rule change is consistent with Section
17A of the Act because the revisions to Rule 18 clarify the actions
that NSCC is permitted to take when it declines or ceases to act for a
member.
(B) Self-Regulatory Organization's Statement on Burden on Competition
NSCC does not believe that the proposed rule change will have an
impact on or impose a burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
No written comments relating to the proposed rule change have been
solicited or received. NSCC will notify the Commission of any written
comments received by NSCC.
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 NSCC 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, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street NW, Washington, DC 20549-0609.
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 Room in Washington, DC. Copies of such
filing will also be available for inspection and copying at the
principal office of NSCC. All submissions should refer to the File No.
SR-NSCC-98-14 and should be submitted by July 8, 1999.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\3\
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\3\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-15357 Filed 6-16-99; 8:45 am]
BILLING CODE 8010-01-M