[Federal Register Volume 70, Number 51 (Thursday, March 17, 2005)]
[Notices]
[Pages 13059-13060]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1163]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51359; File No. SR-NSCC-2004-07]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Granting Approval of a Proposed Rule Change To Amend 
the Membership Standards Required of Insurance Companies

March 11, 2005.

I. Introduction

    On October 26, 2004, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change File No. SR-NSCC-2004-07 pursuant 
to Section

[[Page 13060]]

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 
January 24, 2005.\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. 34-51035 (January 13, 
2005), 70 FR 3413.
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II. Description

    The proposed rule change amends NSCC's Rules regarding the 
membership standards required of insurance companies. As a general 
matter, the current membership standards for insurance companies are 
based in part on ratings provided by rating agencies. The proposed rule 
replaces these standards in relevant part with a measure based on Risk-
Based Capital (``RBC'') ratios.
    The RBC model was developed by the National Association of 
Insurance Commissioners (``NAIC''), the organization of insurance 
regulators from the 50 States, the District of Columbia, and the four 
U.S. territories. State insurance regulators created the NAIC in 1871 
to address the need to coordinate regulation of multistate insurers. 
The NAIC has developed uniform financial reporting by insurance 
companies and an RBC model. The NAIC's RBC model is designed to 
calculate the minimum amount of capital that an insurer needs to 
support its overall business operations based on the degree of risk 
taken by the insurer and to protect the policyholders and business 
against adverse developments. Currently substantially all of the U.S. 
State insurance jurisdictions have adopted laws, regulations, or 
bulletins that are considered to be substantially similar to the NAIC's 
RBC for Insurers Model Act.
    The calculation of the RBC ratio is based on an insurer's Total 
Adjusted Capital (``TAC''). TAC is comprised primarily of capital plus 
surplus divided by a capital level determined by the RBC formula called 
the Authorized Control Level Risk-Based Capital (``ACL RBC''). The ACL 
RBC is comprised of asset risk, credit risk, underwriting risk, and 
business risk.
    In general, State regulatory authorities require no corrective 
action so long as an insurance company maintains an RBC ratio over 
200%. NSCC's membership requirement would be an RBC ratio of 250% as 
derived from financial data reported by the insurance company to its 
State regulatory authority as part of its annual statutorily-required 
financial statements. All current insurance company members of NSCC 
would meet the proposed 250% requirement.
    Insurance companies will be required to submit the relevant data to 
NSCC on an annual basis at which time their compliance with the minimum 
standard will be reviewed by NSCC. In addition, any insurance company 
that fell below the 250% ratio during the course of the year will be 
required to notify NSCC immediately of this fact.
    NSCC believes that the RBC standard is preferable to the existing 
NSCC requirements of using third-party ratings for the following 
reasons. First, the RBC standard should accurately represent the 
financial strength of an insurer because the RBC system is based on 
statutorily-required financial statements and it takes into account 
asset risks, credit risks, underwriting and pricing risks and the risk 
that the return from assets are not aligned with the requirements of 
the company's liabilities and general business risk. Second, the RBC 
standard is the industry benchmark. Third, the information needed to 
calculate the RBC ratio is readily available in the statutorily-
required financial statements, which are to be provided to NSCC 
annually.

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.\3\ The Commission finds that NSCC's proposed rule change 
is consistent with this requirement because it enhances NSCC's 
standards of financial responsibility applicable to insurance companies 
and therefore should help NSCC protect itself and its members from 
undue risk.
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    \3\ 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 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,\4\ that the proposed rule change (File No. SR-NSCC-2004-07) be and 
hereby is approved.
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    \4\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-1163 Filed 3-16-05; 8:45 am]
BILLING CODE 8010-01-P