[Federal Register Volume 60, Number 201 (Wednesday, October 18, 1995)]
[Notices]
[Pages 53945-53946]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-25821]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36360; File No. SR-NSCC-95-12]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Granting Temporary Approval of a Proposed Rule
Change Limiting the Use of Letters of Credit To Collateralize Clearing
Fund Contributions
October 11, 1995.
On August 21, 1995, the National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change (File No. SR-NSCC-95-12)
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'').\1\ Notice of the proposal was published in the Federal
Register on September 8, 1995.\2\ No comment letters were received. For
the reasons discussed below, the Commission is approving the proposed
rule change on a temporary basis through September 30, 1996.\3\
\1\15 U.S.C. 78s(b0(1) (1988).
\2\Securities Exchange Act Release No. 36172 (August 31, 1995),
60 FR 46878.
\3\The proposed rule change was originally filed on October 27,
1989, and was approved temporarily through December 31, 1990.
Securities Exchange Act Release No. 27664 (January 31, 1990), 55 FR
4297 [File No. SR-NSCC-89-16]. Subsequently, the Commission granted
a number of extensions to the temporary approval to allow the
Commission and NSCC sufficient time to review and assess the use of
letters of credit as clearing fund collateral. Most recently, the
Commission extended temporary approval through September 30, 1995.
Securities Exchange Act Release No. 34745 (September 29, 1994), 59
FR 50949 [File No. SR-NSCC-94-18].
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I. Description
NSCC's rule change modifies the amount of a member's required
clearing fund deposit that may be collateralized by letters of credit.
Specifically, the rule change increases the minimum cash contribution
for any member that uses letters of credit from $50,000 to the greater
of $50,000 or 10% of that member's required clearing fund deposit up to
a maximum of $1,000,000. In addition, the rule change provides that
only 70% of a member's required clearing fund deposit may be
collateralized with letters of credit. The rule change also adds
headings to the clearing fund formula section of NSCC's rules for
purposes of clarity and includes other nonsubstantive drafting changes.
The effect of the rule change is to increase the liquidity of the
clearing fund and to limit NSCC's exposure to unusual risks resulting
from the reliance on letters of credit.
When NSCC first filed this change, the impetus was to improve
NSCC's liquidity resources by requiring additional deposits of cash and
cash equivalents. Since that time, NSCC has obtained additional
liquidity resources through a line of credit with a major New York
clearinghouse bank. NSCC currently has a three hundred million dollar
line of credit that can be used for liquidity purposes, and the letters
of credit in the NSCC clearing fund are available as collateral for
this line of credit.
II. Discussion
Section 17A(b)(3)(F) of the Act requires that a clearing agency's
rules be designed to ensure the safeguarding of securities and funds in
its custody or control or for which it is responsible and to protect
investors and the public interest.\4\ The Commission believes NSCC's
proposal to limit the use of letters of credit to collateralize
clearing fund obligations should make NSCC's clearing fund more liquid.
A liquid clearing fund is necessary to ensure the safety and soundness
of a clearing agency. Therefore, NSCC's proposal is consistent with the
requirements under the Act with regard to NSCC's obligation to
safeguard securities and funds and to protect the interests of
investors and of the public.
\4\15 U.S.C. 78q-1(b)(3)(F) (1988).
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Although letters of credit are a useful means of funding clearing
agency guarantee deposits, their unrestricted use may present risks to
clearing agencies. Because letters of credit reflect the issuer's
promise to pay funds upon presentation of stipulated documents by the
holder, a clearing agency holding letters of credit will be exposed to
risk should the issuer refuse to honor its promise to pay. Furthermore,
because under the Uniform Commercial Code the issuer may defer honoring
a payment request until the close of business on the third banking day
following receipt of the required documents, a clearing agency making a
payment request either may have to await payment or may have to seek
alternative short-term financing. This waiting period could reduce a
clearing agency's liquidity and thereby could hinder its ability to
meet its payment obligations on a timely basis.\5\
\5\The Division of market Regulation (``Division'') is still
concerned that 70% may be too high a percentage of a member's
clearing fund deposit that may be collateralized with letters of
credit. Consequently, the Division is continuing its review of the
70% concentration limit and its effect on NSCC's clearing fund.
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NSCC has experienced over a 200% increase in both cash and
securities deposited as clearing fund collateral since the proposal
first received temporary approval. Because cash and securities are
generally more liquid than letters of credit, the enhanced level of
such deposits should help to ensure the liquidity of the clearing fund
in the event of a major member insolvency, catastrophic loss, or major
settlement loss. By reducing the risk associated with the use of
letters of credit, the proposal is consistent with NSCC's
responsibilities under the Act to safeguard securities or funds in its
custody or control and to protect investors and the public in general.
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and
particularly with Section 17A(b)(3)(F) 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-95-12) be and hereby is
approved on a temporary basis through September 30, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\6\
\6\17 CFR 200.30-3(a)(12) (1994).
[[Page 53946]]
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-25821 Filed 10-17-95; 8:45 am]
BILLING CODE 8010-01-M
