[Federal Register Volume 66, Number 94 (Tuesday, May 15, 2001)]
[Notices]
[Pages 26895-26897]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-12136]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44276; File No. SR-NSCC-2001-04]


Self-Regulatory Organizations; The National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change to Modify and 
Consolidate Clearing Fund Rules

May 8, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 24, 2001, the 
National Securities

[[Page 26896]]

Clearing Corporation (``NSCC'') filed with the Securities and Exchange 
Commission (``Commission'') and on April 30, 2001, amended 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 
parties.
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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

    NSCC seeks to modify and consolidate its clearing fund rules. As 
more fully described below, NSCC proposes to apply its current clearing 
fund requirements for settling members on surveillance (Addendum O) to 
all members and, for ease of reference, incorporate these requirements 
as well as the clearing fund requirements found in Addendum B into 
NSCC's Procedure XV.

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 sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by NSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Under current Addendum O,\3\ NSCC collects additional clearing fund 
deposits from settling members on surveillance pursuant to a risk-based 
margining (``RBM'') methodology that includes, but is not limited to, 
calculations based on portfolio volatility and, where applicable, 
market maker domination. This rule filing would extend these RBM 
requirements to all NSCC members in lieu of Procedure XV's current 
allocation [Section A.I.(a)(i)(a)] and liquidation [Section 
A.I.(a)(i)(c)] clearing fund requirements.\4\
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    \3\ Addedum O was temporarily approved by the Commission in 1996 
and approval has been extended consecutively on a temporary basis. 
Securities Exchange Act Release Nos. 37202 (May 10, 1996), 61 FR 
24993 [File No. SR-NSCC-93-17]; 38622 (May 19, 1997), 62 FR 27285 
[File No. SR-NSCC-97-04]; 40034 (May 27, 1998), 63 FR 30277 [File 
No. SR-NSCC-98-03]; 41478 (June 4, 1999), 64 FR 31664 [File No. SR-
NSCC-99-06]; 42864 (May 30, 2000), 65 FR 36204 [File No. SR-NSCC-99-
09] (Commission approval date corrected in Federal Register, 65 FR 
42065); and 44277 (May 8, 2001) [File No. NSCC-2001-05] (notice of 
filing and order granting accelerated approval of Addendum O through 
December 31, 2002).
    \4\ Procedure XV contains NSCC's clearing fund formulas.
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    Since the Commission's approval of Addendum O in 1996, NSCC has 
studied the impact of RBM on member firms. NSCC found that utilization 
of RBM more accurately reflects NSCC's exposure than the current 
allocation and liquidation formulae because it enables NSCC to more 
precisely identify the risks posed by a member's unsettled portfolio 
and, as a result, more quickly adjust and collect additional clearing 
fund requirements. NSCC management therefore recommended, and the 
Membership and Risk Management Committee concurred, that RBM 
methodologies should be applied to all NSCC members, not just those on 
surveillance.
    This rule change will modify Procedure XV as follows:
     With respect to clearing fund requirements for CNS 
transactions, Procedure XV's allocation [current Section A.I.(a)(i)(a)] 
and liquidation [current Section A.I.(a)(i)(c)] formulae will be 
replaced with RBM methodology, specifically volatility [new Section 
I.(A)(1)(a)] and market maker domination [new Section I.(A)(1)(c)] 
calculations, currently found in Addendum O. The volatility formula 
will continue to permit the NSCC to utilize any generally accepted 
portfolio volatility model to calculate volatility.
     In addition, the rule will continue to provide that NSCC 
may exclude from volatility calculations net unsettled positions in 
classes of securities whose volatility is (1) less amenable to 
statistical analysis, such as OTC Bulletin Board or Pink Sheet issues 
or issues trading below a designated dollar thresthold (e.g., five 
dollars), or (2) amenable to generally accepted statistical analysis 
only in a complex manner, such as municipal or corporate bonds. The 
amount of clearing fund required with respect to these net unsettled 
positions will be determined by multiplying the absolute value of the 
net unsettled positions by a percentage designated by NSCC. This 
percentage will not be less than 10% with respect to the positions 
covered by item (1) above and will not be less than 2% with respect to 
the positions covered by item (2) above.
     The clearing fund requirements for all when-issued and 
when-distributed transactions will be consolidated with the 
calculations for regular way transactions.
     The third prong of the CNS formula, the calculation of the 
difference between the contract price and the current market price of 
compared pending positions, will remain the same [current Sections 
I.(A)(i)(b) and I.(A)(2)(b)]; however, these calculations will be 
undertaken on a daily basis.
     All clearing fund and other deposit requirements will be 
required to be made by members within one hour of demand. However, to 
the extent a member is meeting its obligation with: (1) a deposit of 
cash, the cash deposit must be made by Federal Funds wire transfer and 
must be received no later than fifteen minutes prior to the close of 
the Federal Funds wire and (2) a delivery of eligible securities, the 
delivery of eligible securities must be received within the deadlines 
established by a qualified securities depository.\5\ The proposed rule 
further provides that, at the discretion of NSCC, these cash deposits 
may be included as part of the member's daily settlement obligation.
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    \5\ Under NSCC rules the only qualified securities depository is 
DTC.
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     Addendum B, among other things currently specifies 
thresholds pursuant to which NSCC will require additional clearing fund 
contributions. Procedure XV [new Section II.(C)] will now provide that 
additional clearing fund deposits shall not be requested where the 
amount of the deficiency for a: (1) Member on Class A or B Surveillance 
is equal to or less than $5,000 and such amount is less than 5% of such 
member's actual deposit; (2) member on Advisory Surveillance is equal 
to or less than $20,000 and such amount is less than 5% of such 
member's actual deposit; or (3) member not on any surveillance is equal 
to or less than $50,000 and such amount is less than 10% of the 
member's actual deposit.
     Other changes to Procedure XV result from relabeling and/
or moving the placement of NSCC's clearing fund requirements without 
altering their substantive nature.
    As described below, NSCC intends, subject to Commission approval, 
to begin implementing the proposed clearing fund changes on June 15, 
2001, and to conclude by December 31, 2002.
    Subject to Commission approval, members currently subject to 
Addendum O will be subject to these clearing fund changes on June 15, 
2001. Applicants approved for NSCC membership from and after April 24, 
2001, the date of this filing, will also be

[[Page 26897]]

immediately subject to these rule changes on June 15, 2001. Members who 
have a position which will subject them to a deposit requirement based 
on the market domination calculations will also be subject to these 
rule changes on June 15, 2001. NSCC will place every remaining member 
into deciles and will apply the revised clearing fund methodologies 
pursuant to a step-by-step, decile-by-decile plan based upon the 
volatility classification of each such member's unsettled portfolio. 
Accordingly, members with the most volatile portfolios will be subject 
to these rule changes first, on or shortly after June 15, 2001, 
provided, however, that to the extent any such member has significant 
CNS obligations resulting from options exercises and assignments or is 
a municipal securities brokers' broker, it will be subject to these 
rule changes in conjunction with or \6\ after all other members but in 
no event later than December 31, 2002.\7\
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    \6\ The April 27, 2001 amendment to the rule filing added the 
language ``in conjunction with or'' to the filing.
    \7\ NSCC will keep effective all rules affected by this filing 
until all members are subject to the revised rules.
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    NSCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \8\ and the rules and 
regulations thereunder applicable to NSCC because it will permit NSCC 
to assure the safeguarding of funds and securities for which it is 
responsible by allowing NSCC to more appropriately collect collateral 
to cover members' exposures.
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    \8\ 15 U.S.C. 78q-1.
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(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

    Written comments relating to the proposed rule change have not yet 
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 the self-regulatory organization 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 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of NSCC. All submissions 
should refer to File No. SR-NSCC-2001-04 and should be submitted by 
June 5, 2001.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-12136 Filed 5-14-01; 8:45 am]
BILLING CODE 8010-01-M