[Federal Register Volume 66, Number 120 (Thursday, June 21, 2001)]
[Notices]
[Pages 33280-33281]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-15623]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44431; File No. SR-NSCC-2001-04]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving a Proposed Rule Change To Modify and 
Consolidate Clearing Fund Rules

June 15, 2001.
    On April 24, 2001, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') and on April 30, 2001, amended a proposed rule change 
(File No. SR-NSCC-2001-04) 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 May 15, 2001.\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. 44276 (May 8, 2001), 66 
FR 26895.
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I. Description

    Under the proposal, NSCC will consolidate its clearing fund rules 
and standards of financial responsibility and operational capacity, 
currently found in various rules and procedures, into Procedure XV \3\ 
of its Rules and Procedures.
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    \3\ NSCC's main clearing fund formulas are found in its 
Procedure XV.
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    Under Addendum O,\4\ NSCC collects additional clearing fund 
deposits from settling members on surveillance. The additional clearing 
fund deposits are based on a risk-based margining (``RBM'') methodology 
that includes, but is not limited to, calculations based on portfolio 
volatility and, where applicable, market maker domination. The rule 
change extends these RBM requirements to all NSCC members in

[[Page 33281]]

lieu of NSCC's current allocation and liquidation clearing fund 
requirements.
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    \4\ Securities Exchange Act Release Nos. 37202 (May 10, 1996), 
61 FR 24993 [File No. SR-NSCC-95-17]; 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].)
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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 allocation and 
liquidation formulae being replaced 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 deposits. 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.
    The rule change modifies NSCC's clearing fund requirements 
(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 NSCC to utilize any generally accepted 
portfolio volatility model to calculate volatility.
     In addition, the clearing fund requirements will continue 
to provide that NSCC may exclude from volatility calculations net 
unsettled positions in classes of securities whose volatility is (1) 
less amendable to statistical analysis, such as OTC Bulletin Board or 
Pink Sheet issues or issues trading below a designated dollar threshold 
(e.g., five dollars) or (2) amendable 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)(1)(b) and I.(A)(2)(b)]; however, these calculations will now be 
undertaken on a daily basis instead of on a twenty day rolling basis.
     Members will be required to make within one hour of demand 
all clearing fund and other required deposits. 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 
or (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 rule change 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, currently 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 
deposits. 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 to begin implementing the revised 
clearing fund methodologies on June 15, 2001, and to have all members 
subject to them by December 31, 2002. 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 the proposed rule change filing, will also be 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 
maker 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 after all other members but in no event later than 
December 31, 2002.

II. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible.\6\ The Commission believes that the 
approval of NSCC's rule change is consistent with this section because 
utilization of RBM should enable 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 than 
the current allocation and liquidation formulae. As a result NSCC is 
better protected from the possibility of a member's default because the 
clearing fund deposits it collects more accurately reflect NSCC's 
exposure.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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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-2001-04) 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 H. McFarland,
Deputy Secretary.
[FR Doc. 01-15623 Filed 6-20-01; 8:45 am]
BILLING CODE 8010-01-M