[Federal Register Volume 62, Number 188 (Monday, September 29, 1997)]
[Notices]
[Pages 50978-50979]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-25690]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39110; File No. SR-NSCC-97-07]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of a Proposed Rule Change Relating to Changes in
Membership Standards
September 22, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on August 5, 1997, the
National Securities Clearing Corporation (``NSCC'') 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 primarily by NSCC. The Commission is publishing this
notice to solicit comments from interested persons on the proposed rule
change.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change will amend NSCC's membership standards to
increase the minimum excess net capital requirements imposed on members
and applicants for membership.
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.\2\
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\2\ The Commission has modified the text of the summaries
prepared by NSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The purpose of the proposed rule change is to amend NSCC's
membership standards to increase the amount of net capital required
over the Commission's minimum net capital requirements (``excess net
capital'').\3\ Currently, the excess net capital requirement for all
members is $50,000. The proposed amendments: (i) Will increase the
excess net capital requirement for full service members to $500,000
except for municipal securities brokers' brokers \4\ for which the
excess net capital requirement will be $100,000 \5\ and (ii) will
increase the excess net capital requirement for members that clear for
other broker-dealers to $1,000,000.
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\3\ The minimum net capital requirements are set forth in Rule
13c3-1(a) under the Act. 17 CFR 240.15c3-1(a).
\4\ ``Municipal securities brokers' broker'' is defined in Rule
15c3-1(a)(8) under the Act. 17 CFR 240.15c3-1(a)(8).
\5\ NSCC believes that this is consistent with the Commission's
approach of maintaining separate capital rules for municipal
securities brokers' brokers.
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NSCC's current excess net capital requirements were implemented in
1976 when NSCC was formed. The environment in which NSCC members
operate has changed significantly since that time. In terms of the
change in the value of money alone, $50,000 in 1976 dollars is worth
nearly $150,000 today. Trading volumes and the average value of
securities traded have increased even more significantly. The
Commission also has changed its minimum net capital requirements for
most NSCC members during this time period from $25,000 (i.e., one-half
of NSCC's current excess net capital requirement) to $250,000 (i.e.,
one-half of NSCC's proposed excess net capital requirement).\6\
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\6\ See 17 CFR 240.15c3-1(a)(2)(i).
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As a result of the changing environment, it has been NSCC's recent
experience that when a member with less than $500,000 in excess net
capital has problems with even one transaction that would not be
considered large by today's standards, concerns arise with respect to
that member's ability to settle on a timely basis and to post
additional required collateral with NSCC. Additionally, even though the
size of the exposure due to the failure of any one of these small firms
is relatively small, NSCC believes that the time and resources that it
must spend addressing problems related to small firms is
disproportionate to the magnitude of the potential loss and is
unjustifiably disruptive of NSCC's daily surveillance process.
NSCC also believes that the owners or principals of an NSCC member
should have a meaningful amount of their own assets at stake to absorb
losses before a member's excess net capital falls below regulatory
minimums and the member is required to cease doing business. NSCC
believes that this provides a strong motivation for firms to implement
appropriate risk management controls on their own. In today's
environment, NSCC does not believe that $50,000 is a meaningful amount
and believes that $500,000 is a more appropriate amount.\7\
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\7\ Under the proposed rule change, NSCC will maintain its
current right to impose higher capital requirements on members
depending on the circumstances and type of business that the member
is in.
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In addition, NSCC has recognized that members that clear for other
broker-dealers present special risks to the clearance and settlement
process. These firms become legally responsible for the settlement of
transactions of other firms and generally do not have complete control
over those transactions. Many of these firms have surveillance
procedures and other risk controls in place and can cease clearing for
a correspondent broker-dealer if they perceive that a risk has
developed. But the clearing arrangements of these firms and marketplace
rules generally require that the clearing firm (i.e., the NSCC member)
take on settlement responsibility for most of the
[[Page 50979]]
correspondent broker-dealer's transactions before the clearing firm has
had a chance to review such transactions. This increases the
possibility that a clearing firm will be responsible for problematic or
risky transactions. In light of the higher risk presented by these
firms, NSCC believes that they should be subject to higher minimum
capital standards.
Currently, twenty-nine NSCC members do not meet the proposed
$500,000 standard for full service members. For this reason, NSCC
proposes that the new standard become effective on the later of (a) one
year from the date of publication in the Federal Register of the notice
of the filing of this rule change or (b) the date of Commission
approval of this rule change. NSCC believes that this effective date
will give those firms sufficient time to obtain appropriate capital
infusions or make other clearing arrangements.
In addition, two NSCC members that clear for other broker-dealers
do not meet the $1,000,000 standard. Therefore, NSCC proposes that this
new standard become effective on the later of (a) six months from the
date of publication in the Federal Register of the notice of the filing
of this rule change or (b) the date of Commission approval of this rule
change. NSCC believes that this effective date will give those firms
sufficient time to obtain appropriate capital infusions.
During the interim period, if any, between Commission approval of
this rule change and its effective date, NSCC will not consider
applicants that do not meet the new minimum capital standards other
than those firms applying for membership in connection with the
agreement between NSCC and the Stock Clearing Corporation of
Philadelphia (``SCCP'') under which SCCP has agreed to cease operations
as a clearing corporation.
In view of the facts that: (i) The costs of surveillance and of
collateral collection procedures in both time and resources falls on
NSCC and all of its members and that these costs are disproportionately
high relative to the size of the potential loss for members with less
than $500,000 in excess net capital, (ii) the default or insolvency of
any settling member potentially imposes burdens and costs on NSCC and
all of its members, and (iii) the changes proposed by this filing are
meant to reduce these burdens and costs, NSCC believes that this filing
is consistent with Section 17A of the Act \8\ and the rules and
regulations thereunder.
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\8\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition
NSCC does not believe that the proposed rule change will impose a
burden on competition. In fact, NSCC believes that the proposed rule
change will rectify a burden on competition that has slowly developed
due to changing circumstances by having the costs of risk management
more equitably borne by all NSCC members and by requiring all firms to
have a meaningful amount of capital at risk. NSCC believes the
increased capital requirements better reflect current marketplace
realities.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
No written comments relating to the proposed rule change have been
solicited or received. NSCC will notify the Commission of any written
comments received by NSCC.
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 NSCC consents, the Commission will:
(A) By order approve such 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, 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 and any person, other than those
that may be withheld from the public in accordance with the 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 also will be available for
inspection and copying at the principal office of NSCC. All submissions
should refer to File No. SR-NSCC-97-07 and should be submitted by
October 20, 1997.
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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-25690 Filed 9-26-97; 8:45 am]
BILLING CODE 8010-01-M
