[Federal Register Volume 61, Number 49 (Tuesday, March 12, 1996)]
[Notices]
[Pages 10051-10053]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-5844]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36930; File No. SR-NSCC-95-17]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of a Proposed Rule Change To Establish
Additional Procedures for Placing Settling Members on Class A
Surveillance and Collecting Clearing Fund and Other Collateral Deposits
for Settling Members
March 6, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on December 20, 1995, the
National Securities Clearing Corporation (``NSCC'') 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 primarily by NSCC. The Commission is publishing this
notice to solicit comments from interested persons.
\1\ 15 U.S.C. 78s(b)(1) 1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change seeks to establish additional procedures
in connection with placing NSCC members on Class A surveillance. The
proposal also seeks approval of special clearing fund deposit and other
collateral requirements for NSCC members placed on Class A
surveillance.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NSCC 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. NSCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\2\
\2\ The Commission has modified the text of the summaries
prepared by NSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
Rule 15, Section 3 of NSCC's rules provides that any settling
member \3\ shall furnish NSCC such adequate assurances of its financial
responsibility and operational capability as NSCC may at any time or
from time to time deem necessary or advisable in order to protect NSCC.
Section 4 of rule 15 further states that such adequate assurances may
include, but are not be limited to, requiring increased clearing fund
deposits of settling members. Section III.B.1.o. of Addendum B to
NSCC's rules permits NSCC to place any settling member on Class A
surveillance status due to the presence of any condition which could
materially impact the operational or financial viability of a settling
member which increases or may potentially increase exposure to NSCC.
\3\ NSCC Rule 1 defines a ``settling member'' as any NSCC member
or non-clearing member, and except where a contrary intent is
expressed in the rules, settling member includes a special
representative.
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NSCC's Board of Directors has determined that settling members can
materially impact their financial viability by conducting significant
clearing business for over-the-counter (``OTC'') market makers or by
engaging in OTC market making. In turn, this could potentially increase
exposure to NSCC when the market maker, either along or acting in
concert with other market makers, takes net street-side trading
positions that constitute a disproportionately large percentage of the
total net street-side buys or net street-side sells in any issue (i.e.,
the market maker dominates one side of the market in the issue) and has
insufficient capital or access to capital to support the positions in
dominated issues.
The potential for increased exposure to NSCC becomes greater to the
extent that one or more additional risk factors are present. These
additional risk factors include, without limitation:
(1) Concentrated short selling in dominated issues;
(2) Undue concentration of inventory in the market maker(s) for
dominated issues;
(3) Dominated issues also being IPSs less than six months past
initial issuance particularly when the current value of the issue is
significantly different from its initial sales price or there is undue
concentration of inventory in the managing underwriter(s); and
(4) Clearing positions of market makers in dominated issues away
from their primary clearing brokers.
To the extent that a market maker's net street-side trading
positions in dominated issues result from legitimate customer orders,
the potential adverse impact on the financial viability of a settling
member and the potential for increased exposure to NSCC would be
mitigated.
In light of the foregoing, NSCC has filed for approval its policy
of placing settling members on Class A surveillance if they clear for
or are themselves OTC market makers, and they do not have sufficient
capital or access to capital to support either potential increases in
market making activity in dominated issues of the type described above
or if there is the presence of the additional risk factors described
above in current volumes of market marker activity. At it discretion,
NSCC may elect not to place settling members on Class A surveillance if
it has obtained sufficient assurances of a high degree of mitigating
circumstances. However, the mere fact that a market maker has a large
customer base may not necessarily constitute the necessary mitigating
circumstances especially if the customers are retail and/or the market
maker has a history of customer complaints or other adverse regulatory
or disciplinary actions.
Pursuant to Rule 15, NSCC has filed for approval its proposed
interim collateralization policy which would permit NSCC, in its
discretion, to require settling members placed on
[[Page 10052]]
Class A surveillance who clear for or are themselves OTC market makers
to meet special collateralization requirements as follows.
(1) To the extent that the sum of the absolute values of the net
unsettled trading positions of any such settling member in all the
securities dominated \5\ by a market maker exceeds the market maker's
excess net capital, NSCC may require the settling member to deposit the
amount of the excess with NSCC at such times and in such manner as NSCC
may designate, including an immediate deposit of same-day funds.\6\ In
determining the size of net unsettled trading positions, NSCC may take
into account offsetting, pending (i.e., non-fail) institutional
delivery (``ID'') transactions that have been confirmed, and when NSCC
deems appropriate, affirmed \7\ through the ID system of a clearing
agency registered under Section 17A of the Act (``registered clearing
agency'').\8\ In addition, if a market maker's net unsettled trading
positions in dominated issues are cleared by one or more other settling
members, including any settling member on Class A surveillance, NSCC
will have the discretion, for purposes of calculating the special
collateral deposit, of treating those positions as if they were all
cleared by a settling member on Class A surveillance.
\5\ Domination will be determined according to criteria
specified by NSCC from time to time.
\6\ The term ``same-day funds'' refers to payment in funds that
are immediately available and generally are transferred by
electronic means.
\7\ In determining net unsettled trading positions, NSCC in its
discretion under certain circumstances may elect to take into
account offsetting pending confirmed ID transactions only if such
transactions also have been affirmed. Moreover, NSCC may decline to
consider any ID transaction if it has reason to believe that the
institutional counterparty may not or cannot settle such
transaction.
\8\ 15 U.S.C. Sec. 78q-1 (1988).
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(2) To the extent that the unsettled positions referred to in
paragraph (1) above are short (i.e., net sells), NSCC may in its
discretion collect more than 100% of the market maker's excess net
capital or may require or accept in lieu of cash collateral a book-
entry delivery of securities to NSCC sufficient to cover the short
position.
(3) NSCC will reserve the right at all times to accept alternative
arrangements for its protection in any of the above situations. NSCC
may require special collateral deposits with respect to trading
positions in issues dominated by a market maker even when the value of
those positions do not exceed the market maker's excess net capital.
NSCC may also choose to forego collecting such special collateral even
when the value of those positions exceed the market maker's excess net
capital (but do not exceed some higher threshold) as the situation may
warrant depending upon, among other things, the presence or absence of
additional risk factors or mitigating circumstances.
The special collateralization requirements described above are
interim measures for settling members on Class A surveillance which
will be in effect until NSCC has gained enough experience in
surveillance of OTC market maker trading activities to impose permanent
special collateralization requirements. Additionally, if there is
concentrated short selling in dominated issues, NSCC will maintain its
right to collect special collateral deposits from the settling members
clearing the short sales without regard to their surveillance status.
Special collateral collected from any settling member pursuant to the
above procedures will be in addition to the settling member's clearing
fund deposit computed in accordance with the formulae set forth in NSCC
Procedure XV or in accordance with the alternative method set forth
below.
NSCC also recognizes that settling members on Class A surveillance
have been determined to present a higher than normal risk of default
and insolvency. As a result, NSCC has proposed that such settling
members be required to make clearing fund deposits keyed to the close-
out risk presented by their unsettled positions in NSCC's systems.
Therefore, pursuant to Rule 15 NSCC proposes that it shall have the
discretion to compute the continuous net settlement (``CNS'') clearing
fund requirements for any settling member on Class A surveillance
without regard to particular individual circumstances and in accordance
with the following alternative method rather than as set forth in NSCC
Procedure XV.
(1) NSCC may calculate on a daily or periodic basis the volatility
of any such settling member's net unsettled trading positions in CNS
eligible issues (``net CNS trading positions''). Such positions shall
be determined after taking into account offsetting pending (i.e., non-
fail) ID transactions that have been confirmed, and when NSCC deems
appropriate, affirmed \9\ through the ID system a registered clearing
agency. Such calculation will be made in accordance with the Capital
Asset Pricing Model or any other generally accepted portfolio
volatility model including without limitation any margining formula
employed by any other registered clearing agency provided, however,
that not less than two standard deviations' volatility shall be
calculated under any model chosen. Such calculation will be made
utilizing such assumptions and based on such historical data as NSCC
deems reasonable and shall cover such range of historical volatility as
NSCC from time to time deems appropriate. If such volatility is
calculated on a periodic basis, it may be expressed as a percentage of
the sum of the absolute values of the firm's net CNS trading positions.
Any such calculations, whether expressed as a dollar value or
percentage, may be rounded as NSCC deems appropriate.
\9\ Id.
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(2) NSCC shall have the discretion to exclude from the above
calculations net CNS trading positions in classes of securities whose
volatility is (i) less amendable to statistical analysis, such as OTC
bulletin board or pink sheet issues or issues trading below a
designated dollar threshold (e.g., five dollars), or (ii) amenable to
generally accepted statistical analysis only in a complex manner (e.g.,
municipal or corporate bonds). The amount of clearing fund required
with respect to net CNS trading positions in such issues shall be
determined by multiplying the absolute value of such positions by a
percentage designated by NSCC, which percentage may vary depending on
such factors as NSCC deems relevant.
(3) The amounts calculated in accordance with the immediately
preceding two numbered paragraphs will be substituted for the amount
calculated in accordance with paragraph (1)(c) of Sections A.I.(a),
A.II.(a), and A.II.(b) of Procedure XV set forth in NSCC's rules. In
addition, NSCC may in its discretion reduce or eliminate the amount
calculated in accordance with paragraph (1)(a) of such sections.
(4) NSCC in its discretion also may calculate the total clearing
fund requirement of any settling member on a daily basis instead of a
twenty day rolling average basis and may collect deficiencies at such
times and in such manner as specified by NSCC from time to time,
including immediate collection of same-day funds.
Nothing in the foregoing rule proposal should be construed to limit
NSCC's discretion with respect to placing settling members on Class A
surveillance or requiring settling members to furnish adequate
assurances of financial responsibility or operational capability as set
forth in NSCC's Rules.
NSCC believes that the proposed rule change is consistent with the
requirements of Section 17A(b)(3)(F) \10\ of the Act and the rules and
regulations
[[Page 10053]]
thereunder applicable to NSCC because the default or insolvency of any
settling member potentially imposes burdens and costs on NSCC and all
of its members and that the procedures described above are designed to
reduce these burdens and costs.
\10\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
NSCC does not believe that the proposed rule will have an impact or
impose a burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
No written comments relating to the rule filing have been solicited
or received. NSCC will notify the Commission of any written comments
received.
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 NSCC consents, the Commission will:
(a) By order approve such 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 submission
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington D.C. 20549.
Copies of the submissions, 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 Room, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filings will also be available
for inspection and copying at the principal office of NSCC. All
submissions should refer to the file number SR-NSCC-95-17 and should be
submitted by April 2, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\11\
\11\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-5844 Filed 3-11-96; 8:45 am]
BILLING CODE 8010-01-M