[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]


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

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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \2\ The Commission has modified parts of these statements.
---------------------------------------------------------------------------

 (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\
---------------------------------------------------------------------------

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

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-15357 Filed 6-16-99; 8:45 am]
BILLING CODE 8010-01-M