[Federal Register Volume 59, Number 119 (Wednesday, June 22, 1994)] [Unknown Section] [Page 0] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 94-15140] [[Page Unknown]] [Federal Register: June 22, 1994] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-34222; International Series Release No. 674; File No. SR-ISCC-94-1] Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by International Securities Clearing Corporation Relating to an Amendment to ISCC's Clearing Fund Formula June 16, 1994. Pursuant to Section 19(b)(1) of the Securities and Exchange Act of 1934 (``Act''),\1\ notice is hereby given that on June 9, 1994, International Securities Clearing Corporation (``ISCC'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I, II, and III below, which Items have been prepared by ISCC. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\15 U.S.C. Sec. 78s(b)(1). --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The text of the proposed rule change is as follows: [indicates deletion] indicates addition indicates previously underlined material Rule 4. Clearing Fund * * * * * Sec. 7. Except for Members subject to surveillance and except for increases due to currency fluctuation adjustments for which any proposed increase may be required to be paid in less than [10] 3 business days, the Corporation shall give at least [10] 3 business days' prior written notice of a Member of any proposed increase in his Required Deposit. If a Member fails to give written notice to the Corporation of his election to terminate his business with the Corporation within [10] 3 business days after notice of the increase was given to him, he shall deposit in the Clearing Fund that which is necessary to satisfy the increase in his Required Deposit; in such event the Member's obligation to so deposit shall not be affected by his subsequent cessation of membership, whether voluntary or involuntary. At the time the increase becomes effective, the Member's obligations to the Corporation shall be determined in accordance with the increased Required Deposit whether or not the increase in his Required Deposit has been made. * * * * * Addendum A A. Clearing Fund Formula Each Member of the Corporation is required to contribute to the Clearing Fund maintained by the Corporation an amount approximately equal to: [(i) 3% of the Member's average daily settlement debits] (Gross Debit Value) x (Market Risk Factor)+(Foreign Exchange Factor) The Gross Debit Value shall equal the largest single daily gross debit value minus 15% of the INS receive value for that day, calculated in dollars, based on debit values for the calendar week following the week in which the calculation is performed. The Market Risk Factor shall be the largest calculated percentage change over 11 days in the Financial Times Index over a minimum of 365 days. The Foreign Exchange Factor shall be equal to: (Gross Debit Value x Estimated Foreign Exchange Volatility) minus (Gross Debit Value x Market Risk Factor x Estimated Foreign Exchange Volatility) The Estimated Foreign Exchange Volatility shall be the largest one day percentage change in the US Dollar--British Pound foreign exchange rate over a minimum of 365 days. [p]Provided, however, that each Member shall be required to contribute a minimum of $50,000 (the ``minimum contribution''). The first $50,000 of a Member's contribution is required to be in cash unless all or part of the Member's open account indebtedness is collateralized with Letters of Credit, in which case, the first $100,000 of the Member's contribution is required to be in cash. * * * * * Addendum B Standards of Financial Responsibility and Operational Capability * * * * * III. Guidelines for Computing Clearing Fund Deposits for Members on Surveillance Status A. Clearing Fund deposits for Members on surveillance status shall be computed on a daily basis; B. The Market Risk Factor and Foreign Exchange Factor used in determining Clearing Fund deposits for Members on ``Advisory'' Surveillance Status shall be [comprised of 3% or] increased, in the discretion of the Corporation, by a maximum of 3 [up to 6% of the average daily debits to the Member's settlement account]; C. The Market Risk Factor and Foreign Exchange Factor used in determining Clearing Fund deposits for Members on Class ``A'' Surveillance Status shall be [comprised of 4% or] increased, in the discretion of the Corporation, by a maximum of 5 [up to 8% of the average daily debits to the Member's settlement account]; D. The Market Risk Factor and Foreign Exchange Factor used in determining Clearing Fund deposits for Members on Class ``B'' Surveillance Status shall be [comprised of 5% or] increased, in the discretion of the Corporation, by a maximum of 7 [up to 10% of the average daily debits to the Member's settlement account]; * * * * * II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, ISCC 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. ISCC has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statement. A. Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change (a) The proposed rule change consists of a change of ISCC's clearing fund formula. ISCC's responsibility to the London Stock Exchange under the linkage agreement is to pay for securities delivered. ISCC has no responsibility to complete open pending trades. ISCC's current Clearing Fund calculation therefore is based on the ISCC member's average daily gross settlement debits and takes into consideration purchases due for settlement and purchases which have failed to settle. To cover ISCC's market risk exposure, ISCC has been collecting 2\1/ 2\% of the average gross settlement value over two account periods (this 2\1/2\% reflected the calculated market risk exposure in 1986). Because trades are executed in pounds and ISCC would be required to purchase pounds to meet the settlement obligation, ISCC also has been collecting a percentage of the gross settlement value to cover the foreign exchange risk. This has amounted to .5%. Since trades currently settle on a fortnightly settlement basis, the Clearing Fund has been calculated and collected on a bi-weekly basis. When the London Stock Exchange moves to a ten day rolling settlement cycle on July 18, 1994, trades will settle on a daily basis ten days after trade date. ISCC will continue to be obligated to pay for securities which are delivered to members in the event that the members are unable to complete their settlement obligation. ISCC still will have market risk and foreign exchange risk, but the period of time to which ISCC will be subject to these risks will change. To adequately cover ISCC's exposure, the clearing fund deposit will be calculated and collected on a weekly basis. The formula will be based on trades which are due to settle in the week following the calculation. Calculations will be made each Tuesday, and ISCC members will be required to deposit additional amounts within three days. This process will permit ISCC to collect clearing fund deposits prior to the settlement of the transactions. The formula will take into consideration the largest daily gross debit obligation, for trades due to settle in the week following the calculation, offset by a percentage for Institutional Net Settlement Participant (``INSP'') redeliveries. The debits will be offset only partially since these items may be reclaimed by the receiver, and in such circumstance ISCC will be liable to the London Stock Exchange for the full value of the reclamation. ISCC will apply a market risk factor and foreign exchange risk factor to this debit obligation. Initially the factors will be determined as set forth below and will be reviewed annually thereafter. To determine the appropriate percentage for market risk, ISCC will review the Financial Times Index and assume that it will take one day to sell all positions. Based on a ten day settlement cycle this will result in 11 days elapsing from trade date to close out date. Accordingly, the formula will take into consideration the largest price movement over an 11 day period. Initially ISCC will use the largest price movement in 1993 of 7% for the market risk factor component of the formula. To calculate the foreign exchange risk, ISCC will review the daily rate fluctuation for the exchange rate between the British Pound and U.S. Dollars. Initially, ISCC will use data from the 1989-1992 period and the maximum fluctuation during that time was 4.445%. This number will be used on the foreign exchange factor component of the formula. Currently, Clearing Fund Requirements for ISCC members on surveillance are increased, in the discretion of the Corporation, by requiring up to an additional 3%, 5%, and 7% of average daily debits for members on Advisory, Class A, and Class B surveillance, respectively. The same increases (of three, five, and seven percent for Advisory, Class A, and Class B surveillance) will be retained under the new formula, only they will be added to the Market Risk Factor and Foreign Exchange Risk Factor. (b) The proposed rule changes will permit ISCC to safeguard securities and funds in its custody or control and is therefore consistent with Section 17A of the Act. B. Self-Regulatory Organization's Statement on Burden on Competition ISCC does not believe that the proposed rule change imposes any burden on competition. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members. Participants, or Others ISCC has received no written comments. ISCC will notify the Commission of any written comments received by ISCC. 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 the 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. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 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. Sec. 552, will be available for inspection and copying in the Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C., 20549. Copies of such filing also will be available for inspection and copying at the principal office of the above- mentioned self-regulatory organization. All submissions should refer to File No. SR-ISCC-94-1 and should be submitted by July 13, 1994. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. Margaret H. McFarland, Deputy Secretary. [FR Doc. 94-15140 Filed 6-21-94; 8:45 am] BILLING CODE 8010-01-M