[Federal Register Volume 61, Number 41 (Thursday, February 29, 1996)]
[Notices]
[Pages 7846-7848]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4578]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36875; File Nos. SR-SCCP-95-06]
Self-Regulatory Organizations; Stock Clearing Corporation of
Philadelphia; Notice of Filing of Amendments and Order Granting
Accelerated Partial Permanent Approval and Accelerated Partial
Temporary Approval of a Proposed Rule Change to Convert the Settlement
System for Securities Transactions to a Same-Day Funds Settlement
System
February 22, 1996.
On November 3, 1995, the Stock Clearing Corporation of Philadelphia
(``SCCP'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change (File Nos. SR-SCCP-95-06)
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'').\1\ On December 19, 1995, SCCP filed an amendment to the
proposed rule change.\2\ Notice of the proposal as amended was
published in the Federal Register on January 9, 1996.\3\ On January 24,
1996, SCCP filed an amendment to the proposed rule change to clarify
which participants fund formulas were additive and which were not
additive, to remove the maximum contribution in the formula for full
service continuous net settlement (``CNS'') activity, and to make a
technical correction to Rule 4, Section 8.\4\ On February 5, 1996, SCCP
filed an amendment to the proposed rule change to remove certain
proposed amendments made to Rule 4, Sections 1 and 2, regarding the
maintenance and investment of the participants fund and to remove
allocation procedures between the SCCP participants fund and the
Philadelphia Depository Trust Company (``Philadep'') participants
fund.\5\ No comment letters were received. For the reasons discussed
below, the Commission is granting accelerated temporary approval
through August 31, 1996, of the portion of the proposed rule change
relating to SCCP's participants fund formulas and is granting
accelerated permanent approval of the remainder of the proposed rule
change.
\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ Letter from J. Keith Kessel, Compliance Officer, SCCP, to
Peter R. Geraghty, Esq., Division of Market Regulation
(``Division''), Commission (December 14, 1995).
\3\ Securities Exchange Act Release No. 36671 (January 3, 1996),
61 FR 677.
\4\ Letter from William W. Uchimoto, SCCP, to Jerry Carpenter,
Esq., Assistant Director, Division, Commission (January 24, 1996).
\5\ Letter from J. Keith Kessel, Compliance Officer, SCCP, to
Peter R. Geraghty, Esq., Division, Commission (February 5, 1996).
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I. Description of the Proposal
The purpose of the proposed rule change is to amend SCCP's rules
and procedures to convert SCCP's money settlement system from a next-
day funds settlement (``NDFS'') system to a same-day funds settlement
(``SDFS'') system. SCCP intends to support Philadep in providing
participants full SDFS clearing and depository services for all
eligible securities.\6\
\6\ For a description of Philadep's SDFS system, refer to
Securities Exchange Act Release No. 36681 (January 4, 1996), 61 FR
7451 [File No. SR-Philadep-95-08] (notice of filing of a proposed
rule change).
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SCCP evaluated the impact of converting to an SDFS system with
respect to the operational requirements, liquidity requirements, and
overall risk on a joint SCCP/Philadep basis.\7\ Pursuant to a joint
agency agreement between SCCP and Philadep, SCCP, among other things,
effects daily money settlements on behalf of Philadep and its
participants for securities received into and delivered out of
participants accounts. SCCP on behalf of Philadep also processes
continuous net settlement (``CNS'') movements from one participant to
another, processes all SCCP and Philadep dividend and reorganization
settlements, and prepares and renders bills for Philadep and collects
fees from Philadep participants for depository services.
\7\ SCCP and Philadep are wholly-owned subsidiaries of the
Philadelphia Stock Exchange, Inc. SCCP and Philadep have a
substantial overlap of participants and strategic business
objectives.
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SCCP is amending several of its rules and procedures to accomplish
the conversion to SDFS. SCCP Rule 1, which defines terms used
throughout SCCP's rules, is being amended to add certain definitions
related to the conversion to an SDFS system.\8\
\8\ The specific terms being defined in SCCP's rules are
attached as Exhibit B to File No. SR-SCCP-95-06. The file is
available for review in the Commission's Public Reference Room and
at the principal office of SCCP.
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SCCP Rule 10, which governs money settlements, is being amended to
provide that all payments must be in same-day funds. Rule 27, regarding
SCCP acting as agent for Philadep, currently provides that SCCP will
act to effect daily money settlements on behalf of those organizations
or entities which are participants of both SCCP and Philadep. SCCP Rule
27 is being amended to further clarify that SCCP will serve as the
agent for money settlements for all participants transacting business
with either SCCP or Philadep.
Rule 4, governing SCCP's participants fund, and the procedures
regarding the participants fund formulas are being amended to respond
to SCCP's increased liquidity needs. Together, Rule 4 and the
procedures are being amended to provide for an all cash participants
fund. The all cash requirement applies to both the required deposit and
any additional or voluntary deposits that participants may make.
Participants that choose to make voluntary deposits in most situations
will be able to increase their level of activity at SCCP and will
receive interest rebates from SCCP for deposits in excess of $50,000.
SCCP also has modified the size of the fund by amending the
participants fund formulas. Together, Rule 4 and the procedures now
require all SCCP participants to maintain a minimum cash deposit of
$10,000 in the SCCP participants fund. Under its procedures, SCCP will
calculate participants' required cash deposits pursuant to the
following formulas:
(a) Inactive Account--The contribution of an Inactive
Participant is set at a uniform rate of $10,000. Inactive is defined
as twenty or fewer trades on average per month.
(b) Full Service (``CNS'') Account--The contribution of a CNS
Participant is based upon the larger of: (1) The participant's
monthly average of trading activity during the preceding quarter,
$1,000 for every twenty-five trading units of one hundred shares; or
(2) the participant's aggregate dollar amount of all long trades at
their execution price for each quarter divided by the number of days
in such quarter multiplied by two percent. The required
contributions are rounded upward to $5,000 increments, and the
average is a rolling average.
[[Page 7847]]
(c) Regional Interface Operations (``Rio'') Account--The
contribution of a RIO Participant is based on the participant's
monthly average of trading activity during the preceding quarter,
$1,000 for every twenty-five trading units of one hundred shares
(with a $10,000 minimum and a $75,000 maximum contribution). The
required contributions are rounded upward to $5,000 increments. RIO
is defined as a participant account whereby the participant elects
to settle with a clearing corporation other than SCCP.
(d) Layoff Account--The contribution of a Layoff Participant is
set at a uniform rate of $25,000. A Layoff Participant is defined as
a participant account whereby the participant elects to settle with
a clearing corporation other than SCCP for trades not executed on
the Philadelphia Stock Exchange.
(e) Specialist Margin Account--The contributions of a Specialist
Margin Participant is set at a uniform rate of $35,000.
(f) Non-Specialist Margin Account--The contribution of a Non-
Specialist Margin Participant is set at a uniform rate of $35,000.
SCCP will recalculate each participant's fund deposit requirement
at the end of each month based on the previous three months prior to
the most recent month. SCCP will notify its participants of any
required deposit increases and the amount of such additional deposit
within ten business days of the end of the month. Participants whose
deposit requirements have decreased will be notified at least quarterly
although they may inquire and withdraw excess deposits monthly.
Participants may leave excess cash deposits in the participants fund.
SCCP estimates that at the time of implementing the proposed
modifications, SCCP and Philadep will have combined liquidity resources
of over $73 million consisting of $7.3 million in the SCCP participants
fund, $1.1 million in the Philadep participants fund, $4.7 million in
unrestricted capital, and $60 million in lines of credit.\9\ SCCP will
routinely monitor these amounts and assess the need to increase
liquidity resources over time based on SCCP and Philadep activity
levels.
\9\ As of the date of this order, SCCP and Philadep have secured
$20 million in uncommitted lines of credit and $40 million in
committed lines of credit.
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II. Discussion
Section 17A(b)(3)(F) of the Act \10\ requires that the rules of a
clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions and to assure the
safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible. The
Commission believes that SCCP's proposed rule change is consistent with
SCCP's obligations under Section 17A(b)(3)(F) to promote the prompt and
accurate clearance and settlement of securities transactions because
the proposal converts SCCP's money settlement system from a NDFS system
to a SDFS system. The conversion to a SDFS system should help reduce
risk by, among other things, eliminating overnight participant credit
risk. The SDFS system also should reduce risk by achieving closer
conformity with the payment methods used in the derivatives markets,
government securities markets, and other markets.
\10\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
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The Commission believes the proposal is consistent with SCCP's
obligations to assure the safeguarding of securities and funds in its
custody or control because the proposed rule change converts SCCP's
participants fund to an all cash fund which should increase the
liquidity of the fund. In addition, SCCP has increased its liquidity
resources by retaining additional committed and uncommitted lines of
credit totaling $60 million.
However, the Commission continues to be concerned about (1) The
adequacy of SCCP's participants fund formulas in providing a sufficient
source of cash liquidity and (2) the formulas' conformity with the
standards set forth by the Division.\11\ The Commission believes that
clearing agencies operating SDFS systems must have a sufficient
liquidity from combination of cash and lines of credit to ensure that
settlement occurs at the end of the business day even if a participant
fails to settle with the clearing agency or if the clearing agency
experiences a systems problem. The Commission further believes that a
clearing agency must have on hand an amount of accessible cash which
will enable the clearing agency to fund settlement for most participant
failures or systems problems without having to immediately draw on its
lines of credit (i.e., a clearing agency's lines of credit should be
its secondary source of liquidity and not its primary source). The
Commission is concerned with the level of cash provided by SCCP's
formulas and whether that level of cash liquidity is sufficient given
the increased demand for liquidity under an SDFS environment and SCCP's
use of the participants fund to finance specialists purchases.\12\
\11\ Securities Exchange Act Release No. 16900 (June 17, 1980),
45 FR 41920 (order approving standards for clearing agency
registration).
\12\ For a complete description of SCCP's specialist financing
program, refer to Securities Exchange Act Release No. 20221
(September 23, 1983), 48 FR 45167 (order approving full registration
of DTC, SCCP, MSTC, OCC, MCC, PSDTC, PCC, NSCC, and Philadep).
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The Commission believes that clearing agencies must establish an
appropriate level of clearing fund contributions based on, among other
things, its assessment of the risks to which it is subject.\13\
Although SCCP submitted to the Commission its assessment of the risks
presented by its conversion to an SDFS system and the risks posed by
its participants and their clearing activities, the Commission desires
a more thorough analysis. For example, the Commission believes SCCP's
recent clearing arrangement with the West Canada Clearing Corporation
(``WCCC'') presents additional risks that were not present when SCCP
conducted its original risk assessment. Historically, WCCC's activity
at the Midwest Clearing Corporation (``MCC'') was mostly net sell
transactions which meant WCCC often had an obligation to deliver a
large volume of securities to MCC. Under the proposed rule change,
SCCP's participants fund formulas do not take into consideration a
participant's short positions and the risks the short positions pose to
SCCP. Therefore, the Commission is temporarily approving through August
31, 1996, the portion of the proposed rule change relating to the
participants fund formulas.
\13\ Supra note 11.
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During the period of temporary approval, the Commission will
monitor and analyze the adequacy of the participants fund formulas in
an SDFS environment. In this regard, the Commission requests that SCCP
submit prior to filing for permanent approval of the participants fund
formulas a detailed report including (1) a description of the different
types of participants at SCCP, the types of clearing activities the
participants conduct, and the number of each type of participant, and
(2) a detailed discussion of the types of risks these participants and
their activities pose and the measures SCCP will take to mitigate the
risks. Furthermore, the Commission requests that SCCP submit a complete
risk assessment analysis that calculates the cumulative risks
associated with SDFS, specialist financing, increased short position
activity, and increased clearing activity of over-the-counter
securities.
SCCP 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 of amendments. The Commission
finds good cause for approving the proposed
[[Page 7848]]
rule change prior to the thirtieth day after the date of publication of
notice of filing of amendments because the proposed rule change
modifies SCCP's rules in anticipation of SCCP's conversion to an SDFS
system on February 22, 1996. Accelerated approval of the proposal will
allow SCCP to effect the conversion and to implement the procedures
provided under the proposed rule change on that date.
III. 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 Room, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of SCCP. All
submissions should refer to the file number SR-SCCP-95-06 and should be
submitted by March 21, 1996.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File Nos. SR-SCCP-95-06) be, and hereby
is, temporarily approved through August 31, 1996, for those sections of
the proposal relating to the participants fund formulas and permanently
approved for the remainder of the proposed rule change.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
\14\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-4578 Filed 2-28-96; 8:45 am]
BILLING CODE 8010-01-M
