[Federal Register Volume 70, Number 53 (Monday, March 21, 2005)]
[Notices]
[Pages 13562-13563]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1209]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51362; File No. SR-NSCC-2003-11]


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

March 11, 2005.

I. Introduction

    On May 27, 2003, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') and on June 17, 2003, September 15, 2003, December 20, 
2004, and March 3, 2005,\1\ amended proposed rule change File No. SR-
NSCC-2003-11 pursuant to section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act'').\2\ Notice of the proposed rule change was 
published in the Federal Register on February 3, 2004.\3\ No comment 
letters were received. For the reasons discussed below, the Commission 
is now granting approval of the proposed rule change.
---------------------------------------------------------------------------

    \1\ In the December 20, 2004, and March 3, 2005, amendments, 
NSCC elaborated on how it will apply and monitor the matrix. The 
amendments did not modify the substance of the proposed rule change 
and therefore did not require republication of notice.
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ Securities Exchange Act Release No. 49123 (January 23, 
2004), 69 FR 5231.
---------------------------------------------------------------------------

II. Description

A. Risk Matrix

    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. 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 risk assessment matrix 
(``Matrix''). 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. Members placed 
on the watch list may be required to submit additional financial 
reports and data and/or make additional clearing fund deposits.
    The Matrix is used by NSCC and its affiliated clearing agency, 
Fixed Income Clearing Corporation (``FICC''). Specifically, in order to 
run the Matrix, credit risk staff uses the financial data of each 
applicable NSCC member and the financial data of each applicable member 
of FICC. In this way, each applicable member of FICC and NSCC is rated 
against other applicable members of FICC and NSCC. Credit risk staff 
approaches its analysis of members pursuant to the new procedures in 
the following manner. First, as mentioned above, domestic broker-
dealers and domestic banks are run through the Matrix and assigned a 
rating. Low-rated members are placed on the watch list. At this point, 
credit risk staff may downgrade a particular member's score based on 
various qualitative factors. (For example, one qualitative factor might 
be that the member in question received a

[[Page 13563]]

qualified audit opinion on its annual audit.) In order to protect NSCC 
and its other members, it is important that credit risk staff maintain 
the discretion to downgrade a member's rating on the Matrix and thus 
subject the member to closer monitoring and possibly additional 
reporting and/or additional clearing fund requirements. All rated 
members, including those on the watch list, are monitored monthly or 
quarterly, depending upon the member's financial filing frequency, 
against basic minimum financial requirements and other parameters.
    All broker-dealer members included on the watch list are monitored 
more closely. This means that they are also monitored for various 
parameter breaks which may include but are not limited to such things 
as a defined decline in excess net capital over a one month or three 
month period, a defined period loss, a defined aggregate indebtedness/
net capital ratio, a defined net capital/aggregate debit items ratio, 
and a defined net capital/regulatory net capital ratio. All bank 
members included on the watch list are also monitored more closely for 
watch list parameter breaks which may include but are not limited to 
such things as a defined quarter loss, a defined decline in equity, a 
defined tier one leverage ratio, a defined tier one risk-based capital 
ratio, and a defined total risk-based capital ratio. Monitoring for the 
above more stringent parameter breaks is done only for those members 
placed on the watch list.
    NSCC will continually evaluate the methodology and its 
effectiveness and will make such changes as it deems prudent and 
practicable within such time frame as is determined to be appropriate 
by NSCC. NSCC will update the Commission staff on its evaluations of 
the Matrix pursuant to a schedule developed by FICC, NSCC, and 
Commission staff.

B. Questionnaire

    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 
currently required to complete and to return to NSCC. NSCC Rule 15 also 
provides that NSCC has the authority to examine and to require adequate 
assurance of the financial responsibility and operational capability of 
members and applicants. Because NSCC routinely receives information 
related to its members' and applicants' financial responsibility and 
operational capability and has the authority to request additional 
information as the need arises, NSCC is eliminating these 
questionnaires from its Rules and Procedures. Furthermore, NSCC has 
found the information contained in the questionnaires to be duplicative 
of the other information it routinely receives throughout the year.
    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.

III. Discussion

    Section 17A(b)(3)(F) of the Act requires among other things that 
the rules of a clearing agency be designed to 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.\4\ The Commission finds that NSCC's 
proposed rule change is consistent with this requirement because it 
improves NSCC's member surveillance process which should better enable 
NSCC to safeguard the securities and funds which are in its custody or 
control or for which it is responsible.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

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,\5\ that the proposed rule change (File No. SR-NSCC-2003-11) be and 
hereby is approved.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\
---------------------------------------------------------------------------

    \6\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-1209 Filed 3-18-05; 8:45 am]
BILLING CODE 8010-01-P