[Federal Register Volume 59, Number 119 (Wednesday, June 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15140]
[[Page Unknown]]
[Federal Register: June 22, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34222; International Series Release No. 674; File No.
SR-ISCC-94-1]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by International Securities Clearing Corporation Relating to an
Amendment to ISCC's Clearing Fund Formula
June 16, 1994.
Pursuant to Section 19(b)(1) of the Securities and Exchange Act of
1934 (``Act''),\1\ notice is hereby given that on June 9, 1994,
International Securities Clearing Corporation (``ISCC'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by ISCC. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\15 U.S.C. Sec. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The text of the proposed rule change is as follows:
[indicates deletion]
indicates addition
indicates previously underlined material
Rule 4. Clearing Fund
* * * * *
Sec. 7. Except for Members subject to surveillance and except for
increases due to currency fluctuation adjustments for which any
proposed increase may be required to be paid in less than [10] 3
business days, the Corporation shall give at least [10] 3 business
days' prior written notice of a Member of any proposed increase in his
Required Deposit. If a Member fails to give written notice to the
Corporation of his election to terminate his business with the
Corporation within [10] 3 business days after notice of the increase
was given to him, he shall deposit in the Clearing Fund that which is
necessary to satisfy the increase in his Required Deposit; in such
event the Member's obligation to so deposit shall not be affected by
his subsequent cessation of membership, whether voluntary or
involuntary. At the time the increase becomes effective, the Member's
obligations to the Corporation shall be determined in accordance with
the increased Required Deposit whether or not the increase in his
Required Deposit has been made.
* * * * *
Addendum A
A. Clearing Fund Formula
Each Member of the Corporation is required to contribute to the
Clearing Fund maintained by the Corporation an amount approximately
equal to:
[(i) 3% of the Member's average daily settlement debits]
(Gross Debit Value) x (Market Risk Factor)+(Foreign Exchange Factor)
The Gross Debit Value shall equal the largest single daily gross
debit value minus 15% of the INS receive value for that day, calculated
in dollars, based on debit values for the calendar week following the
week in which the calculation is performed.
The Market Risk Factor shall be the largest calculated percentage
change over 11 days in the Financial Times Index over a minimum of 365
days.
The Foreign Exchange Factor shall be equal to: (Gross Debit
Value x Estimated Foreign Exchange Volatility) minus (Gross Debit
Value x Market Risk Factor x Estimated Foreign Exchange Volatility)
The Estimated Foreign Exchange Volatility shall be the largest one
day percentage change in the US Dollar--British Pound foreign exchange
rate over a minimum of 365 days.
[p]Provided, however, that each Member shall be required to
contribute a minimum of $50,000 (the ``minimum contribution''). The
first $50,000 of a Member's contribution is required to be in cash
unless all or part of the Member's open account indebtedness is
collateralized with Letters of Credit, in which case, the first
$100,000 of the Member's contribution is required to be in cash.
* * * * *
Addendum B
Standards of Financial Responsibility and Operational Capability
* * * * *
III. Guidelines for Computing Clearing Fund Deposits for Members on
Surveillance Status
A. Clearing Fund deposits for Members on surveillance status shall
be computed on a daily basis;
B. The Market Risk Factor and Foreign Exchange Factor used in
determining Clearing Fund deposits for Members on ``Advisory''
Surveillance Status shall be [comprised of 3% or] increased, in the
discretion of the Corporation, by a maximum of 3 [up to 6% of the
average daily debits to the Member's settlement account];
C. The Market Risk Factor and Foreign Exchange Factor used in
determining Clearing Fund deposits for Members on Class ``A''
Surveillance Status shall be [comprised of 4% or] increased, in the
discretion of the Corporation, by a maximum of 5 [up to 8% of the
average daily debits to the Member's settlement account];
D. The Market Risk Factor and Foreign Exchange Factor used in
determining Clearing Fund deposits for Members on Class ``B''
Surveillance Status shall be [comprised of 5% or] increased, in the
discretion of the Corporation, by a maximum of 7 [up to 10% of the
average daily debits to the Member's settlement account];
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, ISCC 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. ISCC has prepared summaries, set forth in sections A, B,
and C below, of the most significant aspects of such statement.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
(a) The proposed rule change consists of a change of ISCC's
clearing fund formula. ISCC's responsibility to the London Stock
Exchange under the linkage agreement is to pay for securities
delivered. ISCC has no responsibility to complete open pending trades.
ISCC's current Clearing Fund calculation therefore is based on the ISCC
member's average daily gross settlement debits and takes into
consideration purchases due for settlement and purchases which have
failed to settle.
To cover ISCC's market risk exposure, ISCC has been collecting 2\1/
2\% of the average gross settlement value over two account periods
(this 2\1/2\% reflected the calculated market risk exposure in 1986).
Because trades are executed in pounds and ISCC would be required to
purchase pounds to meet the settlement obligation, ISCC also has been
collecting a percentage of the gross settlement value to cover the
foreign exchange risk. This has amounted to .5%. Since trades currently
settle on a fortnightly settlement basis, the Clearing Fund has been
calculated and collected on a bi-weekly basis.
When the London Stock Exchange moves to a ten day rolling
settlement cycle on July 18, 1994, trades will settle on a daily basis
ten days after trade date. ISCC will continue to be obligated to pay
for securities which are delivered to members in the event that the
members are unable to complete their settlement obligation. ISCC still
will have market risk and foreign exchange risk, but the period of time
to which ISCC will be subject to these risks will change.
To adequately cover ISCC's exposure, the clearing fund deposit will
be calculated and collected on a weekly basis. The formula will be
based on trades which are due to settle in the week following the
calculation. Calculations will be made each Tuesday, and ISCC members
will be required to deposit additional amounts within three days. This
process will permit ISCC to collect clearing fund deposits prior to the
settlement of the transactions.
The formula will take into consideration the largest daily gross
debit obligation, for trades due to settle in the week following the
calculation, offset by a percentage for Institutional Net Settlement
Participant (``INSP'') redeliveries. The debits will be offset only
partially since these items may be reclaimed by the receiver, and in
such circumstance ISCC will be liable to the London Stock Exchange for
the full value of the reclamation. ISCC will apply a market risk factor
and foreign exchange risk factor to this debit obligation. Initially
the factors will be determined as set forth below and will be reviewed
annually thereafter.
To determine the appropriate percentage for market risk, ISCC will
review the Financial Times Index and assume that it will take one day
to sell all positions. Based on a ten day settlement cycle this will
result in 11 days elapsing from trade date to close out date.
Accordingly, the formula will take into consideration the largest price
movement over an 11 day period. Initially ISCC will use the largest
price movement in 1993 of 7% for the market risk factor component of
the formula.
To calculate the foreign exchange risk, ISCC will review the daily
rate fluctuation for the exchange rate between the British Pound and
U.S. Dollars. Initially, ISCC will use data from the 1989-1992 period
and the maximum fluctuation during that time was 4.445%. This number
will be used on the foreign exchange factor component of the formula.
Currently, Clearing Fund Requirements for ISCC members on
surveillance are increased, in the discretion of the Corporation, by
requiring up to an additional 3%, 5%, and 7% of average daily debits
for members on Advisory, Class A, and Class B surveillance,
respectively. The same increases (of three, five, and seven percent for
Advisory, Class A, and Class B surveillance) will be retained under the
new formula, only they will be added to the Market Risk Factor and
Foreign Exchange Risk Factor.
(b) The proposed rule changes will permit ISCC to safeguard
securities and funds in its custody or control and is therefore
consistent with Section 17A of the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
ISCC does not believe that the proposed rule change imposes any
burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members. Participants, or Others
ISCC has received no written comments. ISCC will notify the
Commission of any written comments received by ISCC.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period: (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which the self-regulatory organization consents,
the Commission will:
A. By order approve the proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
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, 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 Section, 450 Fifth Street, N.W.,
Washington, D.C., 20549. Copies of such filing also will be available
for inspection and copying at the principal office of the above-
mentioned self-regulatory organization. All submissions should refer to
File No. SR-ISCC-94-1 and should be submitted by July 13, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-15140 Filed 6-21-94; 8:45 am]
BILLING CODE 8010-01-M
