[Federal Register Volume 70, Number 32 (Thursday, February 17, 2005)]
[Notices]
[Pages 8121-8123]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-655]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51174; File No. SR-NSCC-2003-22]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Granting Approval of a 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

February 9, 2005.

I. Introduction

    On November 10, 2003, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') and on November 29, 2004, amended proposed rule change 
File No. SR-NSCC-2003-22 pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'').\1\ Notice of the proposed rule change 
was published in the Federal Register on December 13, 2004.\2\ No 
comment letters were received. For the reasons discussed below, the 
Commission is now granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 50797 (December 6, 
2004), 69 FR 72238.
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II. Description

    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

[[Page 8122]]

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.
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    \3\ Mutual Fund Services and Insurance Processing Services are 
non-guaranteed services.
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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 to $50,000 and (ii) changes the standards of financial 
responsibility required of banks and trust companies by referring to 
different types of criteria than are currently used for this purpose. 
The effective date for the proposed rule change as applied to current 
members is 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 amends 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.\4\ 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.\5\ 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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    \4\ Securities Exchange Act Release No. 33525 (January 26, 
1994), 59 FR 9805.
    \5\ 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 net capital requirement will 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 to 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. When the proposed minimum excess net capital requirement is 
increased to $50,000, the minimum clearing fund requirements currently 
imposed will no longer be applicable because $50,000 in excess net 
capital will 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 
applying to use and members using Mutual Fund Services and Insurance 
Processing Services will 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 will 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 will be replaced by a requirement that all trust 
companies have $2,000,000 in capital. Because State regulations vary in 
their respective capital requirements and because some States do not a 
have a capital requirement, the revised criteria will 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 will 
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.\6\
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    \6\ The proposed rule change makes 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 will apply. Only one trust company has 
been identified as not meeting the new standard.

III. Discussion

    Section 17A(b)(3)(F) of the Act requires among other things that 
the rules of a clearing agency be designed to assure the safeguarding 
of securities and funds in its custody or control or for which it is 
responsible.\7\ The Commission finds that NSCC's proposed rule change 
is consistent with this requirement because by enhancing the standards 
of financial responsibility applicable to NSCC members using NSCC's 
Mutual Fund Services and Insurance Processing Service, it should help 
NSCC protect itself and its members from undue financial risk. As a 
result, the proposal should help NSCC assure the safeguarding of 
securities and funds which are in its custody or control.
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    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed

[[Page 8123]]

rule change is consistent with the requirements of the Act and in 
particular Section 17A of the Act and the rules and regulations 
thereunder.
    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (File No. SR-NSCC-2003-22) be and 
hereby is approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    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. E5-655 Filed 2-16-05; 8:45 am]
BILLING CODE 8010-01-P