03-846. Self-Regulatory Organizations; National Securities Clearing Corporation; Order Granting Accelerated Approval of a Proposed Rule Change Relating to New Clearing Fund Valuation of Deposited Securities

January 7, 2003.

On October 3, 2002, the National Securities Clearing Corporation (“NSCC”) filed with the Securities and Exchange Commission (“Commission”) pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) ^[1] a proposed rule change (File No. NSCC-2002-08). Notice of the proposal was published in the Federal Register on December 16, 2002.^[2] On January 6, 2003, NSCC amended its proposed rule change.^[3] No comment letters were received.^[4] For the reasons discussed below, the Commission is approving the proposed rule change on an accelerated basis.

I. Description

The proposed rule change will modify Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund Formula and Other Matters) of NSCC's Rules and Procedures to establish haircuts for securities posted by NSCC members as clearing fund collateral. Under Rule 4, NSCC members are required to make deposits to NSCC's clearing fund.^[5] Rule 4 also states that NSCC, at its discretion, may permit part of a member's (with the exception of “mutual fund/insurance services members”) clearing fund deposit to be evidenced by an open account indebtedness secured by (a) unmatured bearer bonds that are either direct obligations of or obligations guaranteed as to principal and interest by the United States or its agencies (“qualifying bonds”) and/or (b) one or more irrevocable letters of credit under certain guidelines established within NSCC's rules.^[6]

In its efforts to ensure that it has adequate collateral to cover its members' obligations, NSCC has decided to haircut the value of securities deposited to meet clearing fund requirements. The proposed haircut percentages will range from 2% to 5% and will be based on the type of security deposited, its market risk, and years to maturity.^[7] The proposed haircuts are similar to those currently applied by The Depository Trust Company as a part of its risk management controls. These percentages may change from time to time. Should NSCC decide to change the haircut schedule, it will communicate such changes to its participants.

NSCC intends to implement this change no sooner than thirty days after the Commission's approval of this proposed rule filing provided, however, that NSCC would like to make this change effective concurrent with the changes made pursuant to proposed rule change File No. SR-NSCC-2002-05.^[8]

II. Discussion

The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder and particularly with the requirements of section 17 A(b)(3)(A) ^[9] of the Act, which requires that the rules of a clearing agency be designed to safeguard securities and funds in its custody or control or for which it is responsible. The Commission finds that by providing a cushion to protect against downward fluctuations in the value of securities pledged as clearing fund collateral, the proposed rule change is consistent with this obligation because it will help to ensure that NSCC has adequate clearing fund assets in the event that NSCC must liquidate the collateral of an insolvent participant.

NSCC has requested that the Commission find good cause for approving the proposed rule change prior to the thirtieth day after the date of publication of notice of filing so that it can give its participants thirty days after approval of this filing to become compliant with the changes being made and can implement the changes to the clearing fund requirements concurrently with the changes made by SR-NSCC-2002-05.^[10] The Commission finds good cause for approving the proposed rule change prior to the thirtieth day after the date of publication of notice of filing because such approval will allow NSCC to give its participants thirty days to implement the changes and to implement the changes concurrently with those made by SR-NSCC-2002-05.

III. Conclusion

On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act and in particular with the requirements of Section 17A of the Act and the rules and regulations thereunder.

It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (File No. SR-NSCC-2002-08) be, and hereby is, approved.

For the Commission by the Division of Market Regulation, pursuant to delegated authority.^[11]

J. Lynn Taylor,

Assistant Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  Securities Exchange Act Release No. 46958 (Dec. 6, 2002), 67 FR 77123.

3.  The purpose of this amendment was to conform the language of this rule filing to an earlier NSCC proposed rule change that the Commission has approved. Securities Exchange Act Release No. 46931 (Nov. 27, 2002), 67 FR 72714 (Dec. 6, 2002) [File No. SR-NSCC-2002-05]. Because this amendment is technical in nature, republication of notice is not required.

4.  This proposed rule change had a fifteen-day comment period.

5.  The amount of each member's required deposit is determined by NSCC in accordance with one or more formulas.

6.  The Commission recently approved a NSCC proposed rule change (File No. SR-NSCC-2002-05) that increased the minimum amount of cash that must be deposited by members (with the exception of “mutual fund/insurance services members”) to satisfy clearing fund requirements and that limited the amount of a deposit that may be collateralized with letters of credit. Securities Exchange Act Release Nos. 46931 (Nov. 27, 2002) and 46389 (Aug. 21, 2002), 67 FR 55053 (Aug. 27, 2002).

7.  NSCC's proposed haircut schedule for U.S. Treasury and agency securities is: Interest bearing with remaining terms to maturity of up to 10 years—2%; Interest bearing with remaining terms to maturity in excess of 10 years—5%; Zero coupon with remaining terms to maturity of up to 5 years—2%; Zero coupon with remaining terms to maturity in excess of 5 years—5%.

8.  Supra note 5.

9.  15 U.S.C. 78q-1(b)(3)(A).

10.  Supra note 5.

11.  17 CFR 200.30-3(a)(12).