94-2727. Self-Regulatory Organizations; Pacific Clearing Corporation; Order Approving a Proposed Rule Change to Revise PCC's Rules and to Adopt a Participant Agreement and a Clearing Fund Agreement  

  • [Federal Register Volume 59, Number 25 (Monday, February 7, 1994)]
    [Unknown Section]
    [Page 0]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 94-2727]
    
    
    [[Page Unknown]]
    
    [Federal Register: February 7, 1994]
    
    
    -----------------------------------------------------------------------
    
    SECURITIES AND EXCHANGE COMMISSION
    [Release No. 34-33547; File No. SR-PCC-92-1]
    
     
    
    Self-Regulatory Organizations; Pacific Clearing Corporation; 
    Order Approving a Proposed Rule Change to Revise PCC's Rules and to 
    Adopt a Participant Agreement and a Clearing Fund Agreement
    
    January 31, 1994.
        On September 1, 1992, Pacific Clearing Corporation (``PCC'') filed 
    with the Securities and Exchange Commission (``Commission'') under 
    section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'')\1\ a 
    proposed rule change (File No. SR-PCC-92-1) to revise PCC's rules and 
    to adopt a Participant Agreement and a Clearing Fund Agreement. On 
    December 12, 1992, PCC filed an amendment to the proposal.\2\ The 
    Commission published notice of the proposal in the Federal Register on 
    May 3, 1993.\3\ No written comments were received. On September 27, 
    1993, PCC filed an amendment that did not require republication of 
    notice.\4\ For the reasons discussed below, the Commission is approving 
    the proposal.
    ---------------------------------------------------------------------------
    
        \1\15 U.S.C. 78s(b)(1) (1988).
        \2\This amendment corrected a typographical error to the 
    Clearing Fund Agreement and added language to the filing to clarify 
    the types of services PCC performs for PSE. Letter from Rosemary A. 
    MacGuinness, Senior Counsel, PSE, to Richard C. Strasser, Attorney, 
    Division of Market Regulation (``Division''), Commission (December 
    7, 1992).
        \3\Securities Exchange Act Release No. 32212 (April 26, 1993), 
    58 FR 26372.
        \4\This amendment revised the language of paragraph 3.1(a) of 
    PCC's Participant Agreement to clarifying PCC's role in processing 
    trades. Letter from John C. Katovich, Senior Vice President, General 
    Counsel, and Director of Legal Affairs, PSE, to Richard C. Strasser, 
    Attorney, Division, Commission (September 20, 1993).
    ---------------------------------------------------------------------------
    
    I. Description
    
        In 1987, PCC transferred most of its clearing and depository 
    functions to the National Securities Clearing Corporation (``NSCC'') 
    and The Depository Trust Company (``DTC''). PCC now performs limited 
    services for specialists of the Pacific Stock Exchange Incorporated 
    (``PSE''). These services, which are set forth in PCC's revised rules 
    and in PCC's Participant Agreement include: (1) Clearing and settlement 
    services for PSE specialists' trades executed on the PSE directly or 
    through a registered clearing agency or a securities depository; (2) 
    custody services for securities not eligible for depository services at 
    DTC and receipt and delivery services for securities arising from 
    balance orders or ex-clearing transactions; (3) processing services 
    with respect to dividends, reorganizations, buy-ins for or against PSE 
    specialists, and cash and next day trades; and (4) preparation and 
    provision of reports containing information on trading and related 
    activity at each specialist's post.\5\
    ---------------------------------------------------------------------------
    
        \5\For instance, PCC will prepare and provide each specialist 
    with a security ledger that contains information on the specialist's 
    trading activities and positions, a security summary that contains a 
    report summarizing the security ledger, and a trial balance report 
    that contains a summary of the specialist's long and short 
    positions, bank balances, profits and losses, and expenses incurred. 
    PCC will reconcile specialists' bank statements and records daily 
    and at the end of the month. PCC also will prepare a daily liquid 
    asset valuation report for each specialist at the beginning of each 
    day to ensure that each specialist is meeting its minimum capital 
    requirement. Participant Agreement at 3.1.
    ---------------------------------------------------------------------------
    
        PCC currently interfaces with NSCC on behalf of PSE specialists. 
    PCC is a member of NSCC and maintains a clearing account at NSCC with 
    subaccounts for PSE specialists. PCC subcontracts with NSCC to provide 
    clearing and settlement services for each PSE specialist organization. 
    NSCC maintains subaccounts with DTC, which serves as the depository for 
    PSE specialists' positions,\6\ on behalf of the specialists. Under the 
    subcontract arrangement, PSE transmits compared trade information to 
    NSCC to allow NSCC to determine specialists' net settlement 
    obligations.\7\ NSCC then transmits these settlement obligations to 
    PCC. Based on NSCC's final settlement figures, PCC will use funds 
    received by PCC from specialists or will initiate payments against the 
    specialists' bank accounts to satisfy specialists' settlement 
    obligations to NSCC, DTC, or another entity as required.\8\
    ---------------------------------------------------------------------------
    
        \6\Pacific Securities Depository Trust Company, PCC's former 
    affiliated depository, no longer functions as a depository.
        \7\PSE specialists are responsible for correcting trade 
    differences in a timely manner. PCC will provide assistance in 
    correcting trade differences but will not be liable for losses 
    resulting from that assistance. PCC Participant Agreement at 3.1(b)
        \8\Each specialist firm must maintain funds sufficient for 
    purposes of settlement that are accessible to PCC, and each 
    specialist firm must maintain an account at a bank where PCC has the 
    ability to execute withdrawals and disbursements. PCC Rule 3.4.
    ---------------------------------------------------------------------------
    
        PCC will review the bank balance of each specialist post to 
    determine whether there are sufficient funds in the specialist firm's 
    account to satisfy the specialist's settlement obligations. If PCC 
    determines that there are insufficient funds for settlement, PCC either 
    (1) will transfer excess funds between specialist posts in the case of 
    intra-firm specialist posts or (2) will notify the specialist firm's 
    bank of the shortfall to enable the bank to furnish the settlement 
    funds pursuant to its loan agreement with the specialist firm. If these 
    procedures do not result in sufficient funds for settlement, PCC will 
    direct the specialist firm to make up the shortfall.
        (A) PCC Rules
        As a result of the substantial diminution of PCC's operations, PCC 
    revised its rules so they accurately reflect the actual functions and 
    services PCC performs. As revised, PCC's rules consist of fourteen 
    separate rules detailing participants' and PCC's rights and obligations 
    with respect to each other.
        Rule 1 sets out definitions. Rule 2 discusses membership 
    requirements, including financial responsibility requirements and 
    operational capacity requirements.\9\ Rule 3 details the types of 
    services performed by PCC for its participants.\10\ Rule 4 discusses 
    the procedures by which business operations are transacted between 
    participants and PCC.\11\ Rule 5 provides information on fees and 
    charges. Rule 6 requires annual auditing of PCC's financial statements. 
    Rule 7 describes PCC's clearing fund and the method for assessing 
    participants' contributions.\12\ Rule 8 is reserved for future use. 
    Rule 9 contains the provisions governing participants' termination of 
    their memberships with PCC and the conditions under which PCC may cease 
    to act for a particular participant. Rule 10 discusses procedures to be 
    followed in the case of a participant's insolvency. Rule 11 discusses 
    disciplinary procedures. Rule 12 discusses a participant's right to 
    appeal an adverse decision by PCC relating to the termination of the 
    participant's membership, the participant's insolvency, or a 
    disciplinary proceeding. Rule 13 describes various procedures relating 
    to such topics as PCC's authority to delegate its power,\13\ PCC's 
    suspension of its rules or procedures,\14\ and indemnification of PCC 
    against loss, liability, or expenses.\15\ Rule 14 requires PCC to use 
    its best efforts to maintain insurance of a type and coverage that the 
    board of directors deems appropriate.
    ---------------------------------------------------------------------------
    
        \9\PSE members registered as specialists must at all times 
    maintain for each specialist post a minimum of $150,000 in either 
    cash or marketable securities or an amount equal to 25% of the sum 
    of the market value of its securities position both long and short, 
    whichever is greater. A member organization operating more than one 
    specialist post shall be deemed to meet the requirements for minimum 
    post capital so long as the average capital per post operated by 
    such member organization is equal to or greater than the greater of 
    the two amounts stated above. PSE Rule 2.2, 3347.
        \10\Generally, as discussed above and in PCC's Participant 
    Agreement, PCC acts as an intermediary between NSCC and PCC 
    participants. PCC also provides various custodial services, which 
    are specified in the Participant Agreement, for its participants. 
    For a detailed description of the services performed by PCC for its 
    participants, refer to PCC Rule 3 and PCC Participant Agreement at 
    3.1.
        \11\For example, each PCC participant must make accessible to 
    PCC at least one representative who is authorized to sign on behalf 
    of the participant all necessary documents, to correct errors, and 
    to perform other necessary duties each day one-half hour prior to 
    the opening of trading and one-half hour after the close of trading 
    at PSE. PCC Rule 4.1(a).
        \12\The clearing fund is discussed in detail below.
        \13\PCC's Board of Directors may delegate PCC's authority to 
    PCC's chairman, president, an executive vice president, a vice 
    president, or other person provided such delegation is not 
    prohibited by PCC's rules or procedures or by the Act. PCC Rule 
    13.1.
        \14\The time fixed by PCC's rules or procedures for performing 
    any action may be extended or the performance of any act required by 
    PCC's rules may be waived or suspended by PCC's board of directors, 
    chairman, or president, whenever PCC deems such action to be a 
    necessary expedient. PCC Rule 13.4(a).
        Generally, a written report providing the detailings of such 
    extension, waiver, or suspension must be filed with PCC's records 
    and with the Commission and be available for inspection by any PCC 
    participant. PCC Rule 13.4(b).
        \15\PCC participants must indemnify PCC against any loss, 
    liability, or expense PCC sustains. Participants shall not be liable 
    for any losses arising from the negligent, fraudulent, or criminal 
    acts of PCC. PCC Rule 13.7.
    ---------------------------------------------------------------------------
    
    (B) Clearing Fund
    
        As described above, PCC interfaces with NSCC on behalf of its 
    participants and guarantees the performance of its participants' 
    obligations to NSCC. As a result, participants now are required to 
    contribute to a clearing fund established by PCC to ensure that PCC 
    maintains adequate funds to fulfill its guarantee obligations to NSCC 
    and to cover losses suffered by PCC or its participants which are 
    incident to PCC's clearance and settlement operations.\16\ In 
    connection with the contribution requirement, PCC and each of its 
    participants will enter into a Clearing Fund Agreement\17\ which sets 
    out PCC's and each participant's rights and obligations with respect to 
    the clearing fund.\18\
    ---------------------------------------------------------------------------
    
        \16\Each PCC participant is required to make a minimum 
    contribution to the clearing fund in an amount fixed by PCC. The 
    minimum contribution, which must be in cash, is currently $20,000. A 
    participant also may be required to contribute an amount in addition 
    to the minimum contribution as a result of calculations using PCC's 
    clearing fund formula. Currently, PCC has adopted the formula used 
    by NSCC to calculate clearing fund contributions. NSCC requires its 
    members to make a minimum cash contribution of $10,000. For a 
    discussion of the formula used by NSCC, refer to NSCC Rules and 
    Procedures, Section XV.
        \17\The Clearing Fund Agreement is attached as Exhibit C to the 
    PCC filing [File No. SR-PCC-92-1].
        \18\For example, PCC's investment of cash contained in the 
    clearing fund and PCC's permitted uses of the clearing fund are 
    governed by PCC Rules 7.4 and 7.5, respectively.
    ---------------------------------------------------------------------------
    
        If a PCC participant fails to discharge any liability to PCC or to 
    PSE, its clearing fund contribution or a portion thereof will be 
    applied to discharge the liability.\19\ If PCC suffers a loss due to a 
    participant's default and that loss exceeds the amount of the 
    participant's contribution to the clearing fund, PCC may satisfy the 
    remainder out of other participants' contributions to the clearing 
    fund. Any such loss charged to the clearing fund will be charged pro 
    rata against the required contribution of the nondefaulting 
    participants. The participants and the Commission will be notified of 
    the amount of and the reason for any charge against the clearing fund. 
    After pro rata charges are made against participants' required 
    contributions, each participant must pay immediately upon PCC's demand 
    the difference between the participant's minimum requirement and the 
    actual amount it has in the clearing fund.
    ---------------------------------------------------------------------------
    
        \19\Obligations of PCC participants to PSE are subordinated and 
    are junior to those of the participants to PCC and to other PCC 
    participants. PCC Rule 7.5(d).
    ---------------------------------------------------------------------------
    
    (C) Participant Agreement
    
        The Participant Agreement,\20\ an agreement between each PSE 
    specialist/specialist firm\21\ and PCC, sets out the rights and 
    obligations between PCC and each participant with respect to clearance 
    and settlement activities. Specialists' obligations include, among 
    other things, (1) maintaining the net capital requirements required by 
    PSE Rules, (2) ensuring the availability of funds for PCC's settlements 
    with NSCC and DTC, (3) reviewing and verifying all records of their 
    transactions provided by PCC, and (4) acting promptly upon receipt of 
    dividend, reorganization, and buy-in notices.
    ---------------------------------------------------------------------------
    
        \20\See Form 19b-4, Exhibit B, File No. SR-PCC-92-1.
        \21\PSE specialists are categorized as either individuals 
    registered as specialists with PSE or firms, referred to as backers, 
    registered as specialists with PSE. Only PSE specialists and PSE 
    specialist firms can be participants of PCC.
    ---------------------------------------------------------------------------
    
    II. Discussion
    
        The Commission believes PCC's proposal is consistent with the Act 
    and in particular with section 17A(b)(3)(F) thereunder.\22\ That 
    section requires that the rules of a clearing agency be designed (1) to 
    ensure the safeguarding of securities and funds in the clearing 
    agency's custody or control or for which it is responsible, (2) to 
    foster cooperation and coordination with persons engaged in the 
    clearance and settlement of securities transactions, and (3) to remove 
    impediments to and perfect the mechanism of a national system for the 
    prompt and accurate clearance and settlement securities transactions. 
    The Commission believes that PCC's rules and procedures, which are 
    designed to facilitate the clearance and settlement at PCC, NSCC, and 
    DTC of PSE specialists' securities transactions and which aid PCC in 
    acting as an intermediary between its participants and NSCC, are 
    consistent with PCC's requirements under the Act.
    ---------------------------------------------------------------------------
    
        \22\15 U.S.C. 78q-1(b)(3)(F) (1988).
    ---------------------------------------------------------------------------
    
        As discussed above, PCC's rules and procedures must be designed to 
    ensure the safekeeping of securities and funds in PCC's possession or 
    control or for which it is responsible. To achieve this aim, PCC 
    designed certain of its rules, procedures, and operations in a manner 
    that makes them consistent with those of other registered clearing 
    agencies and adopted for its own use certain methods of operation and 
    systems which previously have been approved by the Commission. For 
    instance, PCC is instituting the use of a clearing fund similar to 
    other clearing agencies and will use the same clearing fund formula 
    that is used by NSCC, a formula which the Commission has acknowledged 
    is consistent with a clearing agency's safekeeping responsibilities 
    under the Act.\23\ In addition, because PCC's rules and procedures are 
    designed to be consistent with those of other market participants, PCC 
    is fostering cooperation and coordination with others engaged in the 
    clearance and settlement of securities transactions and is removing 
    impediments to and helping perfect the mechanism of a national system 
    for the prompt and accurate clearance and settlement of securities 
    transactions as required under Section 17A of the Act.
    ---------------------------------------------------------------------------
    
        \23\Securities Exchange Act Release No. 32547 (June 29, 1993), 
    58 FR 36491 [File No. SR-NSCC-93-4] (order approving modifications 
    to NSCC's clearing fund formula).
    ---------------------------------------------------------------------------
    
        As discussed above, PCC's revised rules and procedures present a 
    more accurate reflection of PCC's current operations as a clearing 
    agency. The Commission stresses that it is of the utmost importance 
    that clearing agency rules and procedures be maintained so that they 
    present an accurate reflection of the clearing agency's rights and 
    responsibilities with regard to its participants. Such administrative 
    maintenance helps to ensure that disputes that may arise between 
    clearing agencies and their participants are fairly and quickly 
    resolved. Precise written rules and procedures also eliminate 
    uncertainty in the daily interactions between participants and among 
    participants and the clearing agency. Should PCC decide to modify its 
    clearance and settlement activities, PCC must file with the Commission 
    a proposed rule change pursuant to Section 19(b)(2) of the Act prior to 
    implementation of any such changes. In addition, PCC, as a registered 
    clearing agency, is required pursuant to Exchange Act Rule 17a-22 to 
    submit to the Commission all material it issues to its participants or 
    to other entities with which it has a significant relationship.\24\
    ---------------------------------------------------------------------------
    
        \24\17 CFR 240.17a-22 (1993).
    ---------------------------------------------------------------------------
    
    III. Conclusion
    
        On the basis of the foregoing, the Commission finds that the 
    proposed rule change is consistent with the Act and in particular with 
    section 17A thereunder.
        It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
    Act,\25\ that the proposed rule change (File No. SR-PCC-92-1) be, and 
    hereby is, approved.
    
        \25\15 U.S.C. 78s(b)(2) (1988).
    ---------------------------------------------------------------------------
    
        For the Commission by the Division of Market Regulation, 
    pursuant to delegated authority.\26\
    ---------------------------------------------------------------------------
    
        \26\17 CFR 200.30-3(a)(12) (1993).
    ---------------------------------------------------------------------------
    
    Margaret H. McFarland,
    Deputy Secretary.
    [FR Doc. 94-2727 Filed 2-4-94; 8:45 am]
    BILLING CODE 8010-01-M
    
    
    

Document Information

Published:
02/07/1994
Department:
Securities and Exchange Commission
Entry Type:
Uncategorized Document
Document Number:
94-2727
Pages:
0-0 (1 pages)
Docket Numbers:
Federal Register: February 7, 1994, Release No. 34-33547, File No. SR-PCC-92-1