01-12136. Self-Regulatory Organizations; The National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change to Modify and Consolidate Clearing Fund Rules

May 8, 2001.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),^[1] notice is hereby given that on April 24, 2001, the National Securities Clearing Corporation (“NSCC”) filed with the Securities and Exchange Commission (“Commission”) and on April 30, 2001, amended 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 on the proposed rule change from interested parties.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

NSCC seeks to modify and consolidate its clearing fund rules. As more fully described below, NSCC proposes to apply its current clearing fund requirements for settling members on surveillance (Addendum O) to all members and, for ease of reference, incorporate these requirements as well as the clearing fund requirements found in Addendum B into NSCC's Procedure XV.

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 these statements.^[2]

(A) Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

Under current Addendum O,^[3] NSCC collects additional clearing fund deposits from settling members on surveillance pursuant to a risk-based margining (“RBM”) methodology that includes, but is not limited to, calculations based on portfolio volatility and, where applicable, market maker domination. This rule filing would extend these RBM requirements to all NSCC members in lieu of Procedure XV's current allocation [Section A.I.(a)(i)(a)] and liquidation [Section A.I.(a)(i)(c)] clearing fund requirements.^[4]

Since the Commission's approval of Addendum O in 1996, NSCC has studied the impact of RBM on member firms. NSCC found that utilization of RBM more accurately reflects NSCC's exposure than the current allocation and liquidation formulae because it enables NSCC to more precisely identify the risks posed by a member's unsettled portfolio and, as a result, more quickly adjust and collect additional clearing fund requirements. NSCC management therefore recommended, and the Membership and Risk Management Committee concurred, that RBM methodologies should be applied to all NSCC members, not just those on surveillance.

This rule change will modify Procedure XV as follows:

• With respect to clearing fund requirements for CNS transactions, Procedure XV's allocation [current Section A.I.(a)(i)(a)] and liquidation [current Section A.I.(a)(i)(c)] formulae will be replaced with RBM methodology, specifically volatility [new Section I.(A)(1)(a)] and market maker domination [new Section I.(A)(1)(c)] calculations, currently found in Addendum O. The volatility formula will continue to permit the NSCC to utilize any generally accepted portfolio volatility model to calculate volatility.
• In addition, the rule will continue to provide that NSCC may exclude from volatility calculations net unsettled positions in classes of securities whose volatility is (1) less amenable to statistical analysis, such as OTC Bulletin Board or Pink Sheet issues or issues trading below a designated dollar thresthold (e.g., five dollars), or (2) amenable to generally accepted statistical analysis only in a complex manner, such as municipal or corporate bonds. The amount of clearing fund required with respect to these net unsettled positions will be determined by multiplying the absolute value of the net unsettled positions by a percentage designated by NSCC. This percentage will not be less than 10% with respect to the positions covered by item (1) above and will not be less than 2% with respect to the positions covered by item (2) above.
• The clearing fund requirements for all when-issued and when-distributed transactions will be consolidated with the calculations for regular way transactions.
• The third prong of the CNS formula, the calculation of the difference between the contract price and the current market price of compared pending positions, will remain the same [current Sections I.(A)(i)(b) and I.(A)(2)(b)]; however, these calculations will be undertaken on a daily basis.
• All clearing fund and other deposit requirements will be required to be made by members within one hour of demand. However, to the extent a member is meeting its obligation with: (1) a deposit of cash, the cash deposit must be made by Federal Funds wire transfer and must be received no later than fifteen minutes prior to the close of the Federal Funds wire and (2) a delivery of eligible securities, the delivery of eligible securities must be received within the deadlines established by a qualified securities depository.^[5] The proposed rule further provides that, at the discretion of NSCC, these cash deposits may be included as part of the member's daily settlement obligation.

• Addendum B, among other things currently specifies thresholds pursuant to which NSCC will require additional clearing fund contributions. Procedure XV [new Section II.(C)] will now provide that additional clearing fund deposits shall not be requested where the amount of the deficiency for a: (1) Member on Class A or B Surveillance is equal to or less than $5,000 and such amount is less than 5% of such member's actual deposit; (2) member on Advisory Surveillance is equal to or less than $20,000 and such amount is less than 5% of such member's actual deposit; or (3) member not on any surveillance is equal to or less than $50,000 and such amount is less than 10% of the member's actual deposit.
• Other changes to Procedure XV result from relabeling and/or moving the placement of NSCC's clearing fund requirements without altering their substantive nature.

As described below, NSCC intends, subject to Commission approval, to begin implementing the proposed clearing fund changes on June 15, 2001, and to conclude by December 31, 2002.

Subject to Commission approval, members currently subject to Addendum O will be subject to these clearing fund changes on June 15, 2001. Applicants approved for NSCC membership from and after April 24, 2001, the date of this filing, will also be immediately subject to these rule changes on June 15, 2001. Members who have a position which will subject them to a deposit requirement based on the market domination calculations will also be subject to these rule changes on June 15, 2001. NSCC will place every remaining member into deciles and will apply the revised clearing fund methodologies pursuant to a step-by-step, decile-by-decile plan based upon the volatility classification of each such member's unsettled portfolio. Accordingly, members with the most volatile portfolios will be subject to these rule changes first, on or shortly after June 15, 2001, provided, however, that to the extent any such member has significant CNS obligations resulting from options exercises and assignments or is a municipal securities brokers' broker, it will be subject to these rule changes in conjunction with or ^[6] after all other members but in no event later than December 31, 2002.^[7]

NSCC believes that the proposed rule change is consistent with the requirements of Section 17A of the Act ^[8] and the rules and regulations thereunder applicable to NSCC because it will permit NSCC to assure the safeguarding of funds and securities for which it is responsible by allowing NSCC to more appropriately collect collateral to cover members' exposures.

(B) Self-Regulatory Organization's Statement on Burden on Competition

NSCC does not believe that the proposed rule change will have an impact on or impose a burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others

Written comments relating to the proposed rule change have not yet 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 the self-regulatory organization 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, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 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-2001-04 and should be submitted by June 5, 2001.

For the Commission by the Division of Market Regulation, pursuant to delegated authority.^[9]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  The Commission has modified the text of the summaries prepared by NSCC.

3.  Addedum O was temporarily approved by the Commission in 1996 and approval has been extended consecutively on a temporary basis. Securities Exchange Act Release Nos. 37202 (May 10, 1996), 61 FR 24993 [File No. SR-NSCC-93-17]; 38622 (May 19, 1997), 62 FR 27285 [File No. SR-NSCC-97-04]; 40034 (May 27, 1998), 63 FR 30277 [File No. SR-NSCC-98-03]; 41478 (June 4, 1999), 64 FR 31664 [File No. SR-NSCC-99-06]; 42864 (May 30, 2000), 65 FR 36204 [File No. SR-NSCC-99-09] (Commission approval date corrected in Federal Register, 65 FR 42065); and 44277 (May 8, 2001) [File No. NSCC-2001-05] (notice of filing and order granting accelerated approval of Addendum O through December 31, 2002).

4.  Procedure XV contains NSCC's clearing fund formulas.

5.  Under NSCC rules the only qualified securities depository is DTC.

6.  The April 27, 2001 amendment to the rule filing added the language “in conjunction with or” to the filing.

7.  NSCC will keep effective all rules affected by this filing until all members are subject to the revised rules.

8.  15 U.S.C. 78q-1.

9.  17 CFR 200.30-3(a)(12).