[Federal Register Volume 69, Number 17 (Tuesday, January 27, 2004)]
[Notices]
[Pages 3988-3989]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1609]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49079; File No. SR-SCCP-2001-09]


Self-Regulatory Organizations; Stock Clearing Corporation of 
Philadelphia; Notice of Filing of Proposed Rule Change Relating to 
Establishing Risk Management Procedures for Short Settlement 
Transactions

January 14, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 30, 2001, the Stock 
Clearing Corporation of Philadelphia (``SCCP'') filed with the 
Securities and Exchange Commission (``Commission'') and on October 9, 
2001\2\ and September 20, 2002,\3\ amended the proposed rule change as 
described in Items I, II, and III below, which items have been prepared 
primarily by SCCP. 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).
    \2\ In October 2001, SCCP filed Amendment No. 1 to its original 
filing in order to replace its request for immediate effectiveness 
under Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(1) with a 
request for approval pursuant to Section 19(b)(2). Amendment No. 1 
also revised Rule 9 to reflect the addition of the schedule for late 
margin call payments which had previously been approved by the 
Commission in another SCCP rule filing. Securities Exchange Act 
Release No. 44722 (Aug. 20, 2001), 66 FR 44661 (Aug. 24, 2001) [SR-
SCCP-2001-04].
    \3\ In September 2002, SCCP filed Amendment No. 2 to its 
original filing whereby SCCP added the requirement that the SCCP 
Operations Committee or Board of Directors shall determine whether 
additional margin will be required prior to the settlement date for 
short settlement transactions.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change would require SCCP specialists and 
alternate specialists (``SCCP margin members'') to comply with certain 
procedures when engaging in short settlement transactions. These 
procedures would require the review of short settlement transactions by 
the SCCP Board of Directors or Operations Committee to determine 
whether additional margin will be required prior to settlement date 
from SCCP specialists and alternate specialists engaging in these 
transactions.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, SCCP 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. SCCP has prepared summaries, set forth in sections A, B, 
and C below, of the most significant aspects of such statements.\4\
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    \4\ The Commission has modified text of the summaries prepared 
by SCCP.
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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 rule change is to implement risk 
management procedures to protect SCCP from undue credit risk and short 
settlement risk when a SCCP margin member engages in a short settlement 
transaction.\5\ In the absence of explicit risk management procedures, 
SCCP may face unlimited credit risk with its lending institutions and 
short settlement risk in connection with its clearance and settlement 
of transactions with the National Securities Clearing Corporation 
(``NSCC'') through its omnibus clearing and settlement account.
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    \5\ As defined in SCCP's proposed rule, ``a short settlement 
transaction occurs when, for example, the buy (or sell) side of the 
trade (``opening transaction'') settles on T+1 or T+2 and the sell 
(or buy) side of the trade (``covering transaction'') settles on T+2 
or T+3.
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    SCCP provides margin services to SCCP margin members in accordance 
with Rule 9 of SCCP's by-laws and procedures and Regulation T of the 
Board of Governors of the Federal Reserve System. Pursuant to current-
Rule 9, SCCP guarantees the cash settlement obligations of the omnibus 
clearance and settlement account to NSCC.
    If a SCCP margin member executes a short settlement transaction, 
SCCP is obliged by NSCC's rules and procedures to finance the covering 
transaction until settlement on T+2 or T+3 because the SCCP margin 
member has already received the proceeds from the opening transaction 
on T+1 or T+2, respectively.\6\ This creates an additional cash 
settlement obligation from SCCP to NSCC which, for example in the case 
of large basket transactions, could be larger than the executing margin 
member's capital deposit with SCCP, and imposes additional market risk 
on SCCP should the securities decline in value prior to settlement. If 
SCCP does not have access to sufficient available funds through its 
existing credit facilities with its lending institutions, a short 
settlement transaction thereby exposes SCCP to credit risk that may 
result from the lack of available funds to cover the transaction. 
Additionally, if a SCCP margin member executes a short settlement 
transaction and SCCP cannot meet the cash settlement obligation to 
NSCC, under NSCC's rules and procedures NSCC is authorized to cease to 
act on SCCP's behalf and/or buy-in the open positions in the omnibus 
clearance and settlement account.\7\ Such a risk to SCCP is called 
``short settlement risk'' and includes exposure to market risk from a 
decrease in value of the securities during the financing period.
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    \6\ NSCC Rule 10, Section 4 and Rule 12, Section 1.
    \7\ NSCC's Rules 18 and 46.
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    Currently, Rule 9 provides, in part, that SCCP will provide margin 
accounts for SCCP margin members that clear and settle their 
transactions through SCCP's omnibus clearance and settlement account. 
Pursuant to Rule 9, SCCP may issue margin calls to any SCCP margin 
member when the margin requirement exceeds the account equity. In 
addition, Rule 9 provides that SCCP may require adequate assurances or 
additional margin (in addition to minimum margin thresholds) payable in 
Federal funds in order to protect SCCP in issues deemed by SCCP to 
warrant additional protection.
    Rule 9 also currently provides that any failure by a SCCP margin 
member to meet a margin call shall subject such delinquent SCCP margin 
member to the late margin call payment schedule contained in Rule 9 and 
to SCCP's Rule 22, which governs disciplinary proceedings and 
penalties. Moreover, pursuant to SCCP's Rules 9 and 15, SCCP may cease 
to act for the account of such delinquent SCCP margin member, and SCCP 
will retain a lien on all such SCCP margin member's accounts and 
securities therein to satisfy any capital deficiency of such margin 
member.
    SCCP proposes to amend Rule 9 to expressly shift the credit risk 
and the short settlement risk from short settlement transactions from 
SCCP to the SCCP margin member. The proposed rule change sets forth 
procedures that would require a SCCP margin member to notify SCCP on 
trade date (T) whenever the SCCP margin member executes a short 
settlement transaction. The purpose of this notification is to put SCCP 
on notice that a short settlement transaction has been executed, to 
allow SCCP to verify the SCCP margin member's net capital and net 
settlement cap, and to allow SCCP to calculate any net settlement 
obligations to NSCC. The

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proposed rule change would establish that there shall be a cap on net 
settlement obligations undertaken by any SCCP margin member of two 
times net capital. On the day following trade date (T+1), SCCP shall 
notify the SCCP margin member of any settlement obligations to NSCC 
exceeding the net settlement cap and whether the SCCP Board of 
Directors or Operations Committee has decided, in its sole discretion, 
that SCCP shall finance the increased settlement obligations on behalf 
of the SCCP margin member.
    Under the proposed rule change, a SCCP margin member must obtain 
approval from the SCCP Board of Directors or Operations Committee to 
continue carrying any transactions having an aggregate value above the 
net settlement cap. The SCCP Board of Directors or Operations Committee 
has the sole discretion to approve whether a margin member may continue 
to carry any transactions that exceed the net settlement cap. A SCCP 
margin member may only carry a short settlement transaction with an 
aggregate value above the net settlement cap until the clearance and 
settlement of such transaction with NSCC. The SCCP Board of Directors 
or Operations Committee shall determine, in its sole discretion, 
whether SCCP will finance the short settlement transaction in excess of 
the margin member's net settlement cap. If the SCCP Board of Directors 
or Operations Committee, as the case may be, determines that SCCP will 
not finance such short settlement transaction, the SCCP margin member 
shall be required to pay 100 percent of its settlement obligations to 
SCCP above the net settlement cap. In this manner, SCCP will satisfy 
its obligations to NSCC for the additional clearing funds caused by a 
net settlement transaction.
    The SCCP margin member shall have until 3 p.m. eastern time on the 
date following the initial notification (T+2) to provide sufficient 
funds to cover 100 percent of the settlement obligations above the SCCP 
margin member's net settlement cap. The net settlement cap related 
provisions are intended to require any SCCP margin member who executes 
a short settlement transaction to bear the credit risk from such 
transaction and to decrease associated risks to SCCP. Finally, the 
proposed rule change reminds SCCP margin members that SCCP has the 
authority to initiate a disciplinary proceeding or to cease to act on 
behalf of such SCCP margin member if sufficient funds are not provided 
by the T+2 deadline. These provisions currently appear in SCCP Rules 9 
and 15.
    No other aspect of Rule 9 is being modified. Rule 9 is being 
specifically interpreted to (i) Require notification of SCCP by the 
SCCP margin member in the event the SCCP margin member executes a short 
settlement transaction; (ii) require the SCCP margin member to finance 
100 percent of the net settlement obligation in the event SCCP's Board 
of Directors or Operations Committee, as the case may be, elects not to 
finance the opening transaction; and (iii) clarify that SCCP is 
authorized to bring a disciplinary proceeding against the SCCP margin 
member and to cease to act on behalf of such SCCP margin member if the 
firm continues to carry the short settlement transaction without 
providing sufficient capital to cover the margin member's net 
settlement obligation.
    SCCP believes that the proposed rule change should facilitate 
compliance with SCCP's rules regarding the carrying of securities in 
margin accounts and Regulation T and is, therefore, consistent with 
Section 17A(b)(3)(A) of the Act. In particular, SCCP believes that the 
proposed rule change is consistent with Section 17A(b)(3)(F) of the Act 
\8\ which requires that the rules of a clearing agency be designed to 
promote the prompt and accurate settlement of securities transactions, 
to remove impediments to and perfect the mechanism of a national 
system, and to protect SCCP, its members, investors, and the public 
interest.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    SCCP does not believe that the proposed rule change will impose any 
inappropriate 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 were either solicited or received.

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 SCCP consents, the Commission will:
    (a) By order approve the 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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-SCCP-2001-09. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your comments more efficiently, comments should be sent in 
hardcopy or by e-mail but not by both methods. 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 Section, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of such filing also will be available for inspection and copying 
at SCCP's principal office and on SCCP's Web site at http://www.phlx.com/exchange/memos/SCCP/memindex_sccpproposals.html. All 
submissions should refer to File No. SR-SCCP-2001-09 and should be 
submitted by February 17, 2004.

    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. 04-1609 Filed 1-26-04; 8:45 am]
BILLING CODE 8010-01-P