[Federal Register Volume 69, Number 238 (Monday, December 13, 2004)]
[Notices]
[Pages 72238-72240]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3604]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50797; File No. SR-NSCC-2003-22]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Amend the 
Standards of Financial Responsibility Required of Mutual Fund and 
Insurance Services Applicants and Members That Are Banks, Trust 
Companies, or Broker-Dealers

December 6, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 10, 2003, the 
National Securities Clearing Corporation (``NSCC'') filed with the 
Securities and Exchange Commission (``Commission'') and on November 29, 
2004, 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

    The purpose of the proposed rule change is to amend the standards 
of financial responsibility required of applicants and members that are 
banks, trust companies, or broker-dealers using or applying to use 
NSCC's non-guaranteed services as Mutual Fund/Insurance Services 
Members under Rule 2 and Fund Members under Rule 51.

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

    The proposed rule change amends Addendum B, ``Standards of 
Financial Responsibility and Operational Capability,'' and Addendum I, 
``Standards of Financial Responsibility and Operational Capability For 
Fund Members,'' of NSCC's Rules and Procedures to enhance the standards 
of financial responsibility required of applicants and members that are 
banks, trust companies, and broker-dealers using or applying to use 
NSCC's non-guaranteed services as Mutual Fund/Insurance Services 
Members under Rule 2 and Fund Members under Rule 51.\3\ Addendum B 
establishes financial criteria applicable to Mutual Fund/Insurance 
Services Members and applicants admitted or seeking admission under 
Rule 2. Addendum I establishes the financial criteria applicable to 
Fund Members and applicants admitted or seeking admission under Rule 
51.\4\
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    \3\ Mutual Fund Services and Insurance Processing Services are 
non-guaranteed services.
    \4\ NSCC has revised Addendum B (Version 1) as set forth in 
Appendix 1 to NSCC's Rules (Version 2 of Addendum B). Version 1 uses 
allocation and liquidation components to determine participant 
clearing fund and Version 2 uses risk-based margining to determine 
participant clearing fund. NSCC is informing members on a rolling 
basis when Version 2 is applicable to them. The provisions of 
Addendum B, which are the subject of this proposed rule change, are 
identical in Version 1 and Version 2. This proposed rule change 
would amend both the text of Addendum B (Version 1) and Appendix 1 
(Version 2 of Addendum B). Securities Exchange Act Release No. 44431 
(June 14, 2001), 66 FR 33280.
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    The proposed rule change (i) raises the minimum excess net capital 
requirement applicable to such broker-dealer applicants and members 
from $25,000 in excess net capital to $50,000 in excess net capital and 
(ii) changes the standards of financial responsibility required of 
banks and trust companies by reference to different types of criteria 
than currently used for this purpose. The effective date for the 
proposed rule change as applied to current members will be one year 
from the date of Commission approval. The one year period, arrived at 
after consultations with the affected members, is necessary to allow 
members that do not meet the increased or changed capital requirements 
sufficient time to evaluate their options and implement any necessary 
changes without undue disruption to their customers. The proposed rule 
change also seeks to amend Addendum I to require an established 
business history of six months instead of three years which is 
consistent with the required established business history for 
applicants for other types of membership in NSCC.
1. Increase of Minimum Excess Net Capital Required of Broker-Dealers 
Using Mutual Fund and Insurance Services
    NSCC's current minimum excess net capital requirement applicable to 
broker-dealer applicants and members using non-guaranteed services was 
implemented in 1993.\5\ In 1998, NSCC increased its minimum excess net 
capital requirements under Rule 2 for broker-dealer applicants and 
members using NSCC guaranteed services from $50,000 to $500,000 subject 
to certain limited exceptions.\6\ At that time, no change was made to 
the financial requirements applicable to the use of non-guaranteed 
services. NSCC now believes it is appropriate to do so because of 
increased transaction volumes and settlement obligations.
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    \5\ Securities Exchange Act Release No. 33525 (January 26, 
1994), 59 FR 9805.
    \6\ Securities Exchange Act Release No. 40081 (June 10, 1998), 
63 FR 32905. A municipal securities broker under Rule 15c3-1(a)(8) 
of the Act is required to maintain $100,000 in excess net capital, 
and a clearing broker is required to maintain $1,000,000 in excess 
net capital.
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    NSCC currently has 290 broker-dealer members to which the increased 
excess

[[Page 72239]]

net capital requirement would apply. Thirteen of the 290 broker-dealer 
members have been identified as not meeting the increased capital 
requirement. The purpose of delaying effectiveness of the proposed rule 
change is to allow these thirteen members time in which to obtain and 
apply additional excess net capital or make alternate arrangements such 
as clearing through another NSCC member without disruption to their 
businesses.
    NSCC currently requires a larger clearing fund deposit from broker-
dealer members which have a minimum excess net capital of less than 
$50,000 (i.e., a minimum of $10,000-$20,000-$40,000 as compared to 
$5,000-$10,000-$20,000 depending upon settlement debit history). When 
the proposed minimum excess net capital requirement is increased to 
$50,000, the minimum clearing fund requirements currently imposed would 
no longer be applicable because $50,000 in excess net capital would be 
required of these broker-dealers in all instances.
2. Amendment to Standards of Financial Responsibility Applied to Banks 
and Trust Companies Using Mutual Fund Services and Insurance Processing 
Service
    Addendum B currently requires that banks and trust companies that 
are applying to be or are Mutual Fund/Insurance Services Members under 
Rule 2 have $100,000 minimum excess net capital over the capital 
requirement imposed by the applicable state or federal regulatory 
authority. Addendum I is silent on the criteria applicable to banks and 
trust companies for purposes of being Fund Members under Rule 51.
    Under the proposed rule change, the standards of financial 
responsibility applicable to banks and trust company applicants and 
members applying to use or using Mutual Fund Services and Insurance 
Processing Services would be applicable both to Mutual Fund/Insurance 
Services Members under Rule 2 and to Fund Members under Rule 51.
    Under the proposed standard, a bank or trust company would be 
required to have a Tier 1 risk-based capital ratio of at least 6% or 
greater. A trust company which is not required to calculate a risk-
based capital ratio by its regulators will be required to have at least 
$2,000,000 in capital.
    As applied to banks, the revised criteria will apply the standard 
adopted by the Federal Deposit Insurance Corporation (``FDIC'') to 
compute risk-based capital ratios. The proposed standard of a minimum 
Tier 1 risk-based capital ratio of 6% is currently categorized as 
``well-capitalized'' under the guidelines issued by the Board of 
Governors of the Federal Reserve System. All current NSCC Mutual Fund/
Insurance Services Members and Fund Members that are banks exceed this 
requirement.
    With respect to trust companies, the current standard of $100,000 
in excess capital over the capital required by applicable state or 
federal regulations would be replaced by a requirement that the trust 
company have $2,000,000 in capital. Since state regulations vary in 
their respective capital requirements and some states do not a have a 
capital requirement, the proposed revised criteria would provide a 
uniform and consistent standard to all trust companies regardless of 
whether they are members of the Federal Reserve System or subject to 
nonuniform state regulatory requirements. The proposed $2,000,000 
capital requirement is the same capital standard required for 
membership in The Depository Trust Company.
    Some trust companies which are not required to calculate a Tier 1 
risk-based capital ratio pursuant to FDIC or Federal Reserve Act 
requirements calculate this ratio for other purposes. NSCC would 
therefore accept as an alternative to the minimum $2,000,000 capital 
requirement the 6% Tier 1 risk-based capital ratio from those trust 
companies which provide this calculation for regulatory purposes.\7\
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    \7\ The proposed rule change seeks to make a technical amendment 
to Addendum B regarding the capital standards applicable to bank 
applicants for full membership under NSCC Rule 2. In particular, the 
proposed rule change amends Section I.B.2.(a)(i) by replacing the 
listed components of bank capital with a reference to bank capital 
as it is defined in the Consolidated Report of Condition (``CALL 
Report'').
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    NSCC currently has sixty-six bank/trust company members to which 
the revised capital requirements would apply. Only one trust company 
has been identified as not meeting the new standard.
    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 assure the 
safeguarding of securities and funds which are in the custody or 
control of NSCC by enhancing the standards of financial responsibility 
applicable to NSCC members using NSCC's Mutual Fund Services and 
Insurance Processing Service and thereby should help NSCC protect 
itself and its participants from undue financial risk.
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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 believes that the proposed rule change will not impose a 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.

(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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an E-mail to [email protected]. Please include 
File Number SR-NSCC-2003-22 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609. All submissions should refer to File Number 
SR-NSCC-2003-22. 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, please use only one method. The Commission 
will post all comments on the Commission's Internet Web site

[[Page 72240]]

(http://www.sec.gov/rules/sro.shtml). 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 http://www.nscc.com/legal/. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly.
    All submissions should refer to File Number SR-NSCC-2003-22 and 
should be submitted on or before January 3, 2005.
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    \9\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E4-3604 Filed 12-10-04; 8:45 am]
BILLING CODE 8010-01-P