[Federal Register Volume 69, Number 65 (Monday, April 5, 2004)]
[Notices]
[Pages 17724-17725]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-7540]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49491; File No. SR-SCCP-2001-09]


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

March 29, 2004.
    On August 30, 2001, the Stock Clearing Corporation of Philadelphia 
(``SCCP'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change File No. SR-SCCP-2001-09 pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and on October 9, 2001,\2\ and September 20, 2002,\3\ amended the 
proposed rule change. Notice of the proposal was published in the 
Federal Register on January 27, 2004.\4\ No comment letters were

[[Page 17725]]

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\ 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 SCCP 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.
    \4\ Securities Exchange Act Release No. 49079 (Jan. 14, 2004), 
69 FR 3988.
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I. Description

    The proposed rule change will require SCCP specialists and 
alternate specialists (``SCCP margin members'') to comply with certain 
new procedures when they engage in short settlement transactions.\5\ 
Specifically, SCCP will add supplementary material to Rule 9 to require 
a SCCP margin member to notify SCCP on trade date (``T'') whenever the 
SCCP margin member executes a short settlement transaction. This will 
enable 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 the National Securities Clearing Corporation (``NSCC''). 
The new rule establishes a cap on net settlement obligations undertaken 
by any SCCP margin member of two times net capital. On the day after 
the trade date (``T+1''), SCCP will notify the SCCP margin member of 
any settlement obligations to NSCC exceeding the net settlement cap or 
whether the SCCP Board of Directors or Operations Committee has 
decided, in its sole discretion, that SCCP will finance the increased 
settlement obligations on behalf of the SCCP margin member.
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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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    Under the 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. 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 its 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 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.

II. Discussion

    Section 17A(b)(3)(F) of the Act \6\ requires, among other things, 
that the rules of a clearing agency be designed to assure the 
safeguarding of securities and funds that are in the custody or control 
of the clearing agency or for which it is responsible. The Commission 
finds that the proposed rule change is consistent with this requirement 
because the new procedures should help protect SCCP from the credit 
risk and settlement risk associated with SCCP margin members' short 
settlement transactions. In the absence of explicit risk management 
procedures, SCCP would otherwise potentially face unlimited credit risk 
with its lending institutions and settlement risk in connection with 
its clearance and settlement of transactions with NSCC.
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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 \7\ and the 
rules and regulations thereunder.
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    \7\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-SCCP-2001-09) be, and hereby 
is, approved.
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    \8\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-7540 Filed 4-2-04; 8:45 am]
BILLING CODE 8010-01-P