[Federal Register Volume 59, Number 141 (Monday, July 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18026]
[[Page Unknown]]
[Federal Register: July 25, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34392; International Series Release No. 687; File No.
SR-ISCC-94-1]
Self-Regulatory Organizations; International Securities Clearing
Corporation; Order Temporarily Approving on an Accelerated Basis a
Proposed Rule Change Amending ISCC's Clearing Fund Formula
July 15, 1994.
On June 9, 1994, International Securities Clearing Corporation
(``ISCC'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'').\1\ The Commission
published notice of the proposed rule change in the Federal Register on
June 22, 1994.\2\ No comments were received on the notice. As discussed
below, the Commission is temporarily approving the proposed rule change
on an accelerated basis through July 18, 1995.
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\1\15 U.S.C. 78s (b)(1) (1988).
\2\Securities Exchange Act Release No. 34222, International
Series Release No. 674 (June 16, 1994), 59 FR 32254.
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I. Description
In 1986, ISCC and the London Stock Exchange (``LSE'') entered into
a linkage agreement which allows ISCC to obtain comparison and
settlement services in the United Kingdom from the LSE on behalf of
ISCC members. Pursuant to this linkage agreement, ISCC is responsible
for paying for all securities believed. ISCC has no requirement to
complete open pending trades.\3\ On July 18, 1994, the LSE is moving to
a ten day rolling settlement cycle with trades settling ten days after
trade date.\4\ In response to this change, ISCC is adjusting its method
of calculating its clearing fund requirements.\5\
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\3\ISCC is not responsible for trades that are scheduled to
settle after the day of default of an ISCC member. Agreement, dated
December 22, 1988, between ISCC and LSE.
\4\Currently, the LSE settles trades on a fortnightly basis with
all trades that occur during a two-week period settling on the same
day.
\5\Currently, ISCC collects three percent of member's average
gross settlement value over two account periods on a biweekly basis.
This figure represents both market risk and foreign exchange risk.
As of July 18, 1994, the clearing fund deposit will be calculated
and collected on a weekly basis. The calculation will be made on
Tuesday and collected within three days. Therefore, ISCC will
collect clearing fund deposits prior to the settlement day.
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ISCC bases its clearing fund calculations on the assumption that it
will take one day to sell all of a defaulting participant's positions.
This results in an eleven day exposure for market risk with ten days
between trade date and settlement date and one day between settlement
date and close out of positions. There also will be a one day exposure
for foreign exchange risk. (ISCC will convert U.S. dollars into British
pounds on settlement day and will convert the proceeds from the close
out of positions into U.S. dollars the next day.) The formula,
therefore, is the sum of two components--the amount collected to cover
market risk and the foreign exchange factor.
To calculate the amount of clearing fund deposit attributable to
market risk, ISCC establishes a market risk factor which is the largest
percentage change over eleven days in the Financial Times Index over a
minimum of 365 days. Initially, the market risk factor will be set at
seven percent.\6\ The market risk factor is multiplied by the largest
single daily gross debit value for the applicable week less 15% of the
Institutional Net Settlement (``INS'') receive value for that day based
on debit values for the calendar week following the week in which the
calculation is performed (``adjusted gross debit value'').\7\
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\6\ISCC will review annually the market risk factor.
\7\Under the INS system, redeliveries of securities from the
ISCC member to institutional participants can occur automatically
through the LSE. Therefore, ISCC generally is not required to pay
the LSE for these securities. These debits are offset only partially
because these items may be reclaimed by the receiver, and in such
circumstance, ISCC is liable to the LSE for the full value of the
reclamation.
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The foreign exchange factor is calculated by multiplying the
adjusted gross debit value by the largest one day percentage change in
the U.S. Dollar-British Pound foreign exchange rate over a minimum of
365 days (``estimated foreign exchange volatility'').\8\ The product is
then reduced by the product of the adjusted gross debit value times the
estimated foreign exchange volatility times the market risk factor. The
reduction is made because the risk of foreign exchange is on the amount
of money converted into U.S. dollars after sale of the securities not
on the entire amount of dollars ISCC originally converted into British
pounds.
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\8\During the period from 1989 to 1992, the maximum fluctuation
in the U.S. Dollar-British Pound exchange rate was 4.445%.
Initially, this number will be used in calculating the foreign
exchange factor. ISCC will review annually the foreign exchange risk
factor.
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Previously for ISCC members on surveillance status, the market risk
factor and the foreign exchange factor of the clearing fund formula
were increased, in the discretion of ISCC, 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. Under the
new formula, both the market risk factor and the foreign exchange
factor may be increased by a maximum of 3%, a maximum of 5%, and a
maximum of 7% for members on Advisory, Class A, and Class B
surveillance, respectively.
II. Discussion
The Commission believes the proposed rule change is consistent with
Section 17A of the Act and, therefore, is approving the proposal.
Specifically, the Commission believes the proposal is consistent with
Section 17A(b)(3)(F)\9\ of the Act in that it better enables ISCC to
safeguard securities and funds for which it is responsible. ISCC's
adjustments to its clearing fund formula will result in a more accurate
reflections of its risks. Instead of basing the formula on past
obligations of the ISCC member, the formula is now based on the actual
obligations of such member during the relevant time period. This should
provide ISCC increased protection when an ISCC member has unusually
heavy trading activity. In addition, the previous ISCC clearing fund
formula relied on a calculation of market risk factor and of foreign
exchange risk factor that is now outdated. ISCC's increase in the size
of these factors provides ISCC with greater protection consistent with
likely movements in securities prices and in foreign exchange rates.
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\9\15 U.S.C. 78q-1(b)(3)(F) (1988).
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On June 17, 1980, the Commission issued a release announcing the
standards to be used by the Division of Market Regulation in connection
with the registration of clearing agencies.\10\ In that release, the
Commission stated that it is appropriate for a clearing agency to
establish an appropriate level of clearing fund contributions based,
among other things, on its assessment of the risks to which it is
subject. In addition, contributions to the clearing fund should be
based on a formula that applies to users on a uniform,
nondiscriminatory basis. The Commission believes that ISCC's proposal
is consistent with these guidelines. The new clearing fund formula is
based on the risks (i.e., time, market, and foreign exchange risks)
created by the LSE's method of settlement. In addition, the formula is
applied uniformly to all ISCC members in accordance with their usage of
the LSE link.
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\10\Securities Exchange Act Release No. 16900 (June 17, 1980),
45 FR 41920.
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The Commission preliminarily finds that the proposal is consistent
with Section 17A of the Act. The Commission believes that in light of
its significance to ISCC and its members, the proposed revisions to
ISCC's clearing fund formula should be carefully monitored before they
become a permanent feature. For this reason, the Commission is
approving the proposal on a temporary basis through July 18, 1995.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of the
notice of filing. The LSE is scheduled to move to its new settlement
cycle on July 18, 1994. ISCC needs to have its new clearing fund
formula in place at the same time in order to sufficiently cover its
new risks. The Commission therefore believes that it is appropriate to
accelerate approval of the proposal.
III. Conclusion
It is therefore ordered pursuant to section 19(b)(2) of the Act
that the proposed rule change (File No. SR-ISCC-94-01) be, and hereby
is, temporarily approved through July 18, 1955.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Director.
[FR Doc. 94-18026 Filed 7-22-94; 8:45 am]
BILLING CODE 8010-01-M
