[Federal Register Volume 69, Number 22 (Tuesday, February 3, 2004)]
[Notices]
[Pages 5231-5232]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-2143]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49123; File No. SR-NSCC-2003-11]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Amend the 
Criteria Used To Place Members on Surveillance Status and To Eliminate 
Member and Applicant Financial Responsibility and Operational 
Capability Questionnaires

January 23, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 27, 2003, the National 
Securities Clearing Corporation (``NSCC'') filed with the Securities 
and Exchange Commission (``Commission'') and on June 17, 2003, and 
September 15, 2003, amended the proposed rule change 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 is seeking to amend the criteria it uses to place members on 
surveillance status and to eliminate member and applicant financial 
responsibility and operational capability questionnaires.

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

[[Page 5232]]

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 the current NSCC rules, management has the ability to place 
on surveillance status a member that is experiencing conditions which 
may have an adverse financial or operational impact on NSCC. Once 
placed on surveillance status, NSCC closely monitors the member's 
condition. The current criteria for placing members on surveillance 
status are broadly written and capture many NSCC members that pose 
minimal financial or operational risk to NSCC. This creates 
administrative burdens for NSCC staff who must more closely monitor 
these members who pose minimal risk.
    To remedy this problem, NSCC has developed new criteria for placing 
members on surveillance. Specifically, all full service firms for which 
NSCC guarantees their trades will be assigned a rating that is 
generated by entering financial data of the member into a matrix 
(``Matrix'') developed by Credit Risk staff.\3\ Those members with a 
``weak'' rating, which are deemed to pose a relatively higher degree of 
risk to NSCC, will be placed on an internal ``Watch List'' and will be 
monitored more closely by Credit Risk staff.\4\ Members placed on the 
Watch List may be required to submit additional financial reports and 
data and/or make additional Clearing Fund deposits.
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    \3\ NSCC's approach to the analysis of members will be based on 
a thorough quantitative analysis. A broker-dealer member's rating on 
the Matrix will be based on factors including size (i.e. total 
excess net capital), capital, leverage, liquidity, and 
profitability. Banks will be reviewed based on size, capital, asset 
quality, earnings, and liquidity.
    \4\ Members will also be evaluated based on their compliance 
with certain ``parameter breaks'' which will be determined based on 
applicable monthly and/or quarterly exception reports generated by 
Credit Risk staff. A member may be placed on the Watch List for 
failure to fall within, for example, prescribed excess net capital, 
excess liquid capital, aggregate indebtedness, leverage ratio, or 
financial membership requirement parameters.
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    Currently, Addendums B, I, Q, and R (Standards of Financial 
Responsibility and Operational Capability for Settling, Fund, Insurance 
Carrier, and Third Party Administrator members and applicants, 
respectively) include questionnaires that members and applicants are 
required to complete and return to NSCC. NSCC Rule 15, Section 2 also 
provides that NSCC has the authority to examine the financial 
responsibility and operational capability of members and applicants. In 
conducting such examinations, NSCC may require a member or applicant to 
furnish such information as deemed sufficient by NSCC to demonstrate 
its financial responsibility and operational capability.
    NSCC has determined to rely on its ability under Rule 15, Section 2 
to obtain pertinent information for members and applicants rather than 
require responses to specific questionnaires. NSCC will solicit such 
information in such form and within such timeframes as it may require 
from time to time.
    NSCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \5\ and the rules and 
regulations thereunder applicable to NSCC because it will facilitate 
the safeguarding of securities and funds which are in its custody or 
control or for which it is responsible and in general will protect 
investors and the public interest by improving NSCC's member 
surveillance process.
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    \5\ 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

    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 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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-NSCC-2003-11. 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 the principal office of NSCC and on NSCC's 
Web site at www.nscc.com/legal/.
    All submissions should refer to File No. SR-NSCC-2003-11 and should 
be submitted by February 24, 2004. 

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-2143 Filed 2-2-04; 8:45 am]
BILLING CODE 8010-01-P