[Federal Register Volume 65, Number 91 (Wednesday, May 10, 2000)]
[Notices]
[Pages 30170-30171]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11608]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42747; File No. SR-NSCC-98-14]


Self-Regulatory Organization; National Securities Clearing 
Corporation; Order Approving a Proposed Rule Change Relating to Ceasing 
to Act for a Member

May 2, 2000.
    On December 8, 1998, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-NSCC-98-14) 
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 17, 1999.\2\ No comment letters were received. 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. 41504 (June 9, 1999), 64 
FR 32586 (June 17, 1999).
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I. Description

    The rule change eliminates 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 rule change also permits NSCC to complete certain 
open RVP/DVP transactions of an insolvent broker-dealer that is a 
member or clears through a member.

a. Declining or Ceasing To Act

    NSCC's procedures for ceasing to act for an insolvent member were 
set forth in former Section 3 of Rule 18. Its procedures for ceasing to 
act when the member is not insolvent were set forth in Section 2 of 
Rule 18. Former Sections 2(a) and (b) (non-insolvency scenario) and 
Sections 3(a) and (b) (insolvency scenario) set forth the transactions 
which could be eliminated by NSCC from its processing when it ceased to 
act for a member. Generally, these sections provided that if NSCC gave 
notice that it was ceasing to act for a member before NSCC issued the 
security balance orders in a pending balance order accounting operation 
or before NSCC issued the consolidated trade summary in a pending 
continuous net settlement accounting operation for that member's 
pending trades. NSCC could in its discretion exclude that member's 
trades from the balance order or continuous net settlement accounting 
operation. Trades so executed would have to be settled between the 
parties outside of NSCC.
    Under the rule change, new Sections 2(a)(i) and (ii) replace 
Sections 2(a) and (b) and Sections 3(a) and (b) and specifically tie 
the exclusion of a trade to whether or not the trade has been 
guaranteed by NSCC. New Section 2(a)(iii) addresses the exclusion of 
security orders issued with respect to ``special trades'' and 
transactions in foreign securities. Prior to the rule change, the 
exclusion of these trades was only addressed in the insolvency portion 
of NSCC's rules, former Section 3(c)(iii).
    Former Section 2(c) set forth NSCC's procedures for handling 
envelope transactions when it ceased to act for a solvent member. 
Former Section 3 of NSCC's rules did not address envelop transactions 
when NSCC ceased to act for an insolvent member. New Section 4 mirrors 
former Section 2(c) and addresses the completion of envelope 
transactions of a member for whom NSCC has ceased to act regardless of 
the solvency status of the member.
    Former Sections 2(d)(i) and (ii) and Section 3(b)(ii) governed 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. However, only 
former Section 2 (non-insolvency scenario) specifically addressed the 
completion of these trades through a qualified securities depository. 
Accordingly, new Section 5 clarifies that CNS transactions will 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 doe not allow NSCC to take 
certain actions with respect to the completion of CNS trades.
    Former Sections 2(d)(iii) and 3(c)(ii) addressed the closing out of 
any remaining CNS transactions. Under the rule change, this is now 
covered in new Section 6(a).
    Former Sections 2(b) and 3(c)(ii) pertained to the completion of 
balance order transactions after NSCC ceases to act for a member. 
Although NSCC's procedures for completing balance order transactions 
are the same regardless of whether NSCC is ceasing to act for a solvent 
or insolvent member, only former Section 3 detailed how NSCC would 
close-out balance order transactions and how members were to submit 
related close-out losses to NSCC. The rule change adopts new Section 
6(b), which is similar to former Sections 3(c) and (d). New Section 
6(b) governs the close-out of balance order transactions regardless of 
whether an insolvency situation exists.
    The language contained in former Section 2(e), which set forth 
NSCC's rights with respect to any balance due to it from a member after 
NSCC had ceased to act for the member, technically only applied in non-
insolvency scenarios. Under the rule change, the language of Section 
2(e) now appears in Section 7(a) and applies to both insolvency and 
non-insolvency scenarios. The language set forth in former Sections 
2(f) and (f), which provided that NSCC would maintain a lien on all 
property a member places with NSCC as security for any and all 
liabilities of the member to NSCC now appears in Section 7(f).

[[Page 30171]]

    The rule change also adds the following terms to NSCC Rule 1 
(Definition and Description): ``CNS Position,'' ``New Close Out 
Position,'' ``RVP/DVP Transaction,'' and ``RVP/DVP Customer.''

b. DVP/RVP Transactions

    The rule change adds a new Section 3 to Rule 18, which pertains to 
CNS or balance order RVP/DVP transactions.\3\ The RVP/DVP transactions 
covered by proposed Section 3 are those in which the RVP/DVP customer 
\4\ (1) has executed an RVP/DVP transaction with the NSCC member for 
which NSCC has ceased to act or with an introducing broker-dealer which 
clears through an NSCC member for which NSCC has ceased to act and (2) 
would have taken delivery of the cash or securities from the broker-
dealer for which NSCC has ceased to ace on an RVP/DVP basis at its 
custodian bank or other depository agent in the absence of the default.
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    \3\ The term ``RVP/DVP transaction'' is defined in NSCC Rule 1 
to mean any wholly executory receipt-versus-payment or delivery-
versus-payment transaction between an NSCC member and an RVP/DVP 
customer. The term ``RVP/DVP customer'' is defined in Rule 1 to mean 
a party who has executed a RVP/DVP transaction with an NSCC member 
for whom NSCC has declined or ceased to act, or with an introducing 
broker who clears through an NSCC member for whom NSCC has declined 
or ceased to act.
    \4\ Supra note 3.
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    Under the new rule, after NSCC has ceased to act for a member, NSCC 
will attempt to complete: (1) All open RVP/DVP transactions of which 
NSCC is aware prior to ceasing to act but only to the extent that the 
completion of the RVP/DVP transactions 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) remains regardless of whether NSCC would gain or lose money by 
completing such transactions, and any determinations by the NSCC Board 
to complete any additional RVP/DVP transactions would be made without 
regard to the potential profit or loss for NSCC in any individual 
transaction. In either case, NSCC would have no obligation to complete 
any open RVP/DVP transaction in an issue if: (1) NSCC believed it could 
not complete all RVP/DVP transactions in such issue that it would be 
obligated to attempt to complete under this new provision; (2) there 
were allegations of fraud or other questionable activities with respect 
to an issue; or (3) NSCC believed that the completion of an RVP/DVP 
transaction in an issue could not be completed.
    The rule change requires NSCC to provide notice of NSCC's intent to 
complete the RVP/DVP transactions to the trustee or receiver of the 
member for whom NSCC has ceased to act (if one has been appointed) and 
to the relevant RVP/DVP customers or the RVP/DVP customers' depository 
agents or their depository agents' depositories. This notice will 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 NSCC has 
ceased to act, its receiver or trustee (or any successor trustee), or 
SIPC.\5\
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    \5\ This notice would typically be sent via The Depository Trust 
Company's electronic message dissemination system.
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II. Discussion

    Section 17A(b)(3)(F) \6\ of the Act requires that the rules of a 
clearing agency be designed among other things, to protect investors 
and the public interest. As set forth below, the Commission finds that 
NSCC's rule change is consistent with this obligation under the Act.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission finds that allowing NSCC to complete RVP/DVP 
transactions after it ceases to act for an insolvent member could 
benefit customers, counterparties, and creditors of the insolvent 
broker-dealer by minimizing the disruptive market effects and the large 
administrative burdens and costs associated with the insolvency of a 
broker-dealer. The Commission also finds that the merging within NSCC's 
rules of the actions NSCC will take when it ceases to act for a member, 
regardless of whether it ceases to act because of the insolvency of the 
member or for some other reason, simplifies and makes clearer NSCC 
rules without effecting any real changes to its rules. As such, the 
Commission finds that NSCC's proposed rule change is consistent with 
NSCC's statutory obligation to protect investors and the public 
interest.

III. 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-98-14) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret McFarland,
Deputy Secretary.
[FR Doc. 00-11608 Filed 5-9-00; 8:45 am]
BILLING CODE 8010-01-M