[Federal Register Volume 72, Number 14 (Tuesday, January 23, 2007)]
[Notices]
[Pages 2915-2916]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-865]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55095; File No. SR-NSCC-2006-11]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change To Amend Its Rules 
and Procedures With Respect to Clearing Fund Collateral

 January 12, 2007.

I. Introduction

    On October 3, 2006, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') and on October 25, 2006, amended \1\ proposed rule 
change SR-NSCC-2006-11 pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'').\2\ Notice of the proposal was published 
in the Federal Register on December 6, 2006.\3\ No comment letters were 
received. For the reasons discussed below, the Commission is approving 
the proposed rule change as amended.
---------------------------------------------------------------------------

    \1\ The amendment was not substantive.
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ Securities Exchange Act Release No. 54822 (November 28, 
2006), 71 FR 70820.
---------------------------------------------------------------------------

II. Description

    NSCC is modifying its rules regarding Clearing Fund collateral 
requirements in order to improve liquidity and minimize risk for NSCC 
and its members. NSCC is also making certain technical corrections to 
the text of Rule 4 to conform the rule to actual practice.\4\
---------------------------------------------------------------------------

    \4\ For example, the reference in Rule 4, Section 1 to the 
``market value'' of Qualifying Bonds has been corrected to 
accurately reference the ``collateral value'' of Eligible Clearing 
Fund Securities.
---------------------------------------------------------------------------

    Under NSCC's Rules,\5\ members are required to make deposits to the 
Clearing Fund. The amount of each member's required deposit (``Required 
Deposit'') is fixed by NSCC in accordance with one or more formulas. 
Presently, a member's Required Deposit may be satisfied with a cash 
deposit, and a portion of a member's Required Deposit may be evidenced 
by an open account indebtedness secured by Qualifying Bonds and/or one 
or more irrevocable letters of credit issued under certain guidelines 
established within NSCC's Rules.\6\ Currently, NSCC haircuts the value 
that Qualifying Bonds receive when used to meet a member's Clearing 
Fund requirement and will not allow a letter of credit to be used if by 
doing so more than twenty percent of NSCC's total Clearing Fund would 
consist of letters of credit issued by that approved letter of credit 
issuing bank. Each member is entitled to any Clearing Fund interest 
earned or paid on Qualifying Bonds and cash deposits.
---------------------------------------------------------------------------

    \5\ Rule 4 (Clearing Fund), Procedure XV (Clearing Fund Formula 
and Other Matters), and Appendix 1 (Version 2 of Procedure XV--
Limited Applicability).
    \6\ Mutual Fund/Insurance Service Members are not permitted to 
use Qualifying Bonds or irrevocable letters of credit to satisfy 
their Required Deposits.
---------------------------------------------------------------------------

    NSCC is modifying its rules to: (1) Expand the types of instruments 
which NSCC may accept as Qualifying Bonds (``Eligible Clearing Fund 
Securities'') securing a member's open account Clearing Fund 
indebtedness and establish concentration requirements with regard to 
their use; (2) create a correlating range of haircuts to be applied to 
these expanded types of Eligible Clearing Fund Securities; and (3) 
eliminate letters of credit as a generally acceptable form of 
collateral securing the member's open account Clearing Fund 
indebtedness.

A. Revised Clearing Fund Components

(1) Cash
    The current Clearing Fund minimum cash deposit requirement will 
remain unchanged: Each member must contribute a minimum of $10,000 with 
the first forty percent but no less than $10,000 of a member's Required 
Deposit being in cash.\7\
---------------------------------------------------------------------------

    \7\ See supra note 6.
---------------------------------------------------------------------------

(2) Securities
    NSCC is replacing the term Qualifying Bonds \8\ with a new set of 
definitions for

[[Page 2916]]

Eligible Clearing Fund Securities. These securities will be unmatured 
bonds which are either an Eligible Clearing Fund Agency Security, 
Eligible Clearing Fund Mortgage-Backed Security, or Eligible Clearing 
Fund Treasury Security.\9\ An Eligible Clearing Fund Agency Security 
will be defined as a direct obligation of those U.S. agencies or 
government sponsored enterprises as NSCC may designate from time to 
time that satisfies such criteria set forth in notices issued by NSCC 
from time to time. An Eligible Clearing Fund Mortgage-Backed Security 
will be defined as a mortgage-backed pass through obligation issued by 
those U.S. agencies or government sponsored enterprises as NSCC may 
designate from time to time that satisfies such criteria set forth in 
notices issued by NSCC from time to time. An Eligible Clearing Fund 
Treasury Security will be defined as a direct obligation of the U.S. 
government that satisfies the criteria set forth in notices issued by 
NSCC from time to time.
---------------------------------------------------------------------------

    \8\ ``Qualifying Bonds'' is currently defined in Rule 4 as 
unmatured bonds that are either direct obligations of or obligations 
guaranteed as to principal and interest by the United States or its 
agencies.
    \9\ Initial eligibility criteria for each type of Eligible 
Clearing Fund Security will be announced to members in an Important 
Notice prior to the effective date of these proposed rule changes. 
Any future changes to the eligibility criteria will also be 
announced to members in Important Notices in advance of such changes 
becoming effective.
---------------------------------------------------------------------------

(3) Security Concentration Provisions
    NSCC is also establishing security concentration provisions for 
Clearing Fund deposits. As is currently required, each member must 
contribute a minimum of $10,000 with the first forty percent but no 
less than $10,000 of a member's Required Deposit being in cash.\10\ The 
remainder of a member's deposit may be secured by the pledge of 
Eligible Clearing Fund Securities in any combination of Eligible 
Clearing Fund Treasury Securities, Eligible Clearing Fund Agency 
Securities, and/or Eligible Clearing Fund Mortgage-Backed Securities, 
subject to the following two limitations. First, any deposits of 
Eligible Clearing Fund Agency Securities or Eligible Clearing Fund 
Mortgage-Backed Securities in excess of twenty-five percent of the 
member's Required Deposit will be subject to an additional haircut 
equal to twice the percentage noted in the haircut schedule. Second, no 
more than twenty percent of a member's Required Deposit secured by 
pledged Eligible Clearing Fund Agency Securities may be of a single 
issuer.\11\
---------------------------------------------------------------------------

    \10\ See supra note 6.
    \11\ No member may post as collateral Eligible Clearing Fund 
Agency Securities for which it is the issuer. However, a member may 
pledge Eligible Clearing Fund Mortgage-Backed Securities for which 
it is the issuer subject to a premium haircut. That haircut shall be 
fourteen percent as an initial matter, and if the member also 
exceeds the twenty-five percent concentration limit, the haircut 
shall be twenty-one percent.
---------------------------------------------------------------------------

(4) Letters of Credit and Other Adequate Assurances
    The provisions in NSCC's Rules that pertain to Letter of Credit 
Issuers are being modified to reflect that letters of credit are no 
longer a generally accepted form of Clearing Fund collateral.\12\ 
Effective April 1, 2007 (the regular expiration date of letters of 
credit), members that have letters of credit posted as collateral 
(other than members, if any, that have been required to post letters of 
credit for legal risk) will be required to replace the portion of the 
Clearing Fund collateralized by letters of credit with either cash or 
Eligible Clearing Fund Securities.
---------------------------------------------------------------------------

    \12\ NSCC has found that in practice letters of credit are not 
as liquid as cash and securities, and therefore potentially pose 
more risk to NSCC and its members when accepted by NSCC as Clearing 
Fund collateral. NSCC will, however, reserve the right to require 
letters of credit from members in those instances where a particular 
member has been found, by NSCC in its discretion, to present legal 
risk.
---------------------------------------------------------------------------

(5) Implementation Timeframes
    The foregoing rule changes will become effective thirty days after 
an Important Notice is issued to members informing them that NSCC's 
systems are ready to accommodate such changes. The corresponding 
changes to NSCC's rules will be made at that time. On April 1, 2007, 
changes pertaining to letters of credit will be made to NSCC's rules.

III. Discussion

    Section 19(b) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\13\ Section 17A(b)(3)(F) of the Act requires that the 
rules of a clearing agency be designed to assure the safeguarding of 
securities and funds which are in the custody or control of the 
clearing agency or for which it is responsible.\14\ The Commission 
finds that NSCC's rule change is consistent with this requirement 
because by revising its rules governing the acceptable forms of 
Clearing Fund collateral deposits to increase the liquidity of its 
Clearing Fund and to minimize risk to NSCC and its members, the 
proposed rule change should better enable NSCC to assure the 
safeguarding of securities and funds in its custody or control or for 
which it is responsible.\15\
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b).
    \14\ 15 U.S.C. 78q-1(b)(3)(F).
    \15\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(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,\16\ that the proposed rule change (File No. SR-NSCC-2006-11) be 
and hereby is approved.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

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

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-865 Filed 1-22-07; 8:45 am]
BILLING CODE 8011-01-P