[Federal Register Volume 59, Number 193 (Thursday, October 6, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24797]
[[Page Unknown]]
[Federal Register: October 6, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No 34-34745; File No. SR-NSCC-94-18]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing and Order Granting Accelerated Approval
on a Temporary Basis of a Proposed Rule Change Limiting the Use of
Letters of Credit to Collateralize Clearing Fund Contributions
September 29, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on September 14, 1994, the
National Securities Clearing Corporation (``NSCC'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change (File No. SR-NSCC-94-18) as described below. The Commission is
publishing this notice and order to solicit comments from interested
persons and to grant accelerated approval of the proposed rule change
through September 30, 1995.
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\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 increases the minimum cash clearing fund
contribution for those members who use letters of credit as clearing
fund collateral and sets a limit on the amount of a member's required
clearing fund contribution that may be collateralized with letters of
credit.\2\
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\2\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
temporary approval was granted until September 30, 1994. Securities
Exchange Act Release No. 34304 (July 1, 1994), 59 FR 35542 [File No.
SR-NSCC-94-10].
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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.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
NSCC is seeking approval of a proposed rule change that modified
the amount of a member's required clearing fund deposit that may be
collateralized by letters of credit. Specifically, the proposed rule
change increases the minimum cash contribution for any member who 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 provided 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 for purposes of clarity and includes other nonsubstantive
drafting changes. The effect of the proposed 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.
Since obtaining temporary approval of the original filing in 1989,
NSCC has filed clearing fund composition reports with the Commission.
NSCC states that between December 31, 1989, and December 31, 1993, as a
result of the new requirements, it has observed the following changes
in the composition of the clearing fund:
1. cash deposits have increased by approximately 225%;
2. the value of securities deposited has increased by approximately
205%;\3\ and
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\3\Securities eligible for deposit as clearing fund collateral
include U.S. or municipal bonds in the first or second rating of any
nationally known statistical service. NSCC Rule 4, Sec. 1.
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3. letter of credit deposits have declined by approximately 40%.\4\
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\4\In October of 1989 when the Commission initially granted
temporary approval of NSCC's proposal, letters of credit accounted
for 76% of the total dollar value of required clearing fund
deposits. By May 28, 1993, letters of credit accounted for less than
30%. During the period from June 1, 1992, to May 28, 1993, letters
of credit accounted for an average of 30.49% of the total dollar
value of required clearing fund deposits, and for no month during
that period did the portion of letters of credit used for required
clearing fund deposits rise above 34%. Letter from Karen L.
Saperstein, Vice President/Director of Legal & Associate General
Counsel, NSCC, to Jerry W. Carpenter, Branch Chief, Division of
Market Regulation, Commission (June 10, 1993).
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NSCC states that the proposal is consistent with its requirements
under Section 17A of the Act because it enhances NSCC's ability to
safeguard securities and funds in its custody or under its control.
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 new written comments have been solicited or received.\5\ NSCC
will notify the Commission of any written comments it receives.
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\5\Since the initial filing of the proposed rule change NSCC has
received one letter of comment. In the letter Wedbush Morgan
Securities, Inc. opposed NSCC's proposal because they believed it
would increase the cost of posting collateral. Letter from Edward W.
Wedbush, President, Wedbush Morgan Securities, Inc., to David F.
Hoyt, Assistant Secretary, NSCC (November 9, 1989).
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Section 17A(b)(3)(F) of the Act requires that a clearing agency's
rules be designed, among other things, to ensure the safeguarding of
securities and funds in its possession or control or for which it is
responsible and to protect investors and the public interest.\6\ 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. NSCC's proposal is therefore 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.
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\6\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, the clearing agency 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.\7\
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\7\While the Division of Market Regulation (``Division'')
believes that NSCC's reducing from 100% to 70% the percentage of a
clearing member's required clearing fund contribution that can be
collateralized with letters of credit, the Division is still
concerned that 70% may be too high a percentage. Consequently the
Division and NSCC are continuing their reviewing of the 70%
concentration limit and its effect on NSCC's clearing fund.
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As indicated above, since the proposal first received temporary
approval, NSCC has experienced over a 200% increase in both cash and
securities deposited as clearing fund collateral. Because cash and
securities are generally more liquid than letters of credit, the
enhanced level of such deposits helps 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.
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 the filing. The Commission finds good
cause for so approving because accelerated approval of the proposal
will keep effective NSCC's rules that restrict member's usage of
letters of credit as clearing fund deposits and thereby help reduce the
exposure of NSCC's clearing fund to the potential liquidity risks
associated with using letters of credit to collateralize member's
clearing fund obligations. Moreover, since it was first introduced in
1989, NSCC's proposal has been open for public comment and has elicited
only one opposing comment. Thus the Commission does not foresee that
approval of the proposal will elicit further opposition.
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, NW., Washington, DC 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 any person, other than those that
may be withheld from the public in accordance with provisions of 5
U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of NSCC. All submissions
should refer to File No. SR-NSCC-94-18 and should be submitted by
October 27, 1994.
V. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule filing is consistent with the Act and in particular with
Section 17A of the Act.
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\8\ that the proposed rule change (File No. SR-NSCC-94-18) be, and
hereby is approved through September 30, 1995.
\8\15 U.S.C. 78s(b)(2) (1988).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-24797 Filed 10-5-94; 8:45 am]
BILLING CODE 8010-01-M
