Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change Modifying Clearing Fund Requirements

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34084; File No. SR-NSCC-94-06]

Self-Regulatory Organizations; National Securities Clearing

Corporation; Notice of Filing of Proposed Rule Change Modifying

Clearing Fund Requirements

May 18, 1994.

Pursuant to section 19(b)(1) of the Securities Exchange Act of

1934,\1\ notice is hereby given that on April 4, 1994, the National

Securities Clearing Corporation (``NSCC'') filed with the Securities

and Exchange Commission (``Commission'') the proposed rule changes as

described in Items I, II, and III below, which Items have been prepared

by primarily NSCC. The Commission is publishing this notice to solicit

comments on the proposed rule changes from interested persons.

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\1\15 U.S.C. 78s(b)(1) (1988).

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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 modify NSCC's clearing fund

requirements with respect to Depository Trust Company (``DTC``)

activity in order to more accurately reflect risk.

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.

A. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

NSCC currently applies a factor to the clearing fund requirement

for members' non-CNS activity. The Depository Trust Company (``DTC'')

settlement activity of members which NSCC sponsors into DTC

(``sponsored members'') is included in the non-CNS calculation. The

factor is applicable when certain amounts owed by the member to NSCC

exceed the member's excess net capital. For the reasons set forth

below, NSCC desires to eliminate application of the factor to the

sponsored member's DTC settlement activity. In lieu thereof, NSCC has

determined to add an additional advisory surveillance criteria to cover

the circumstance where the debit activity of the sponsored member is

greater that its excess net capital.\2\

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\2\``Advisory surveillance status'' permits NSCC, among other

things, to increase on a discretionary basis the member's clearing

fund requirement with respect to non-CNS activity up to sum of 5% of

the member's average daily non-CNS debits plus 2-\1/2\% of the

member's average daily non--CNS credits.

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In File No. SR-NSCC-82-10,\3\ NSCC amended its clearing fund

formula to permit the collection of additional clearing fund deposits

from members using the envelope settlement systems. Prior to that

filing, NSCC's clearing fund formula required each member to contribute

an amount equal to 2\1/2\% of the member's average daily debits and

credits with NSCC. The amendment set forth in File No. SR-NSCC-82-10

broke out the debits and credits associated with the envelope

settlement systems and required clearing fund deposits with respect to

activity in those systems as follows:

\3\NSCC's proposed rule change set forth in File No. SR-NSCC-82-

10 was approved in Securities Exchange Act Release No. 18852 (June

18, 1982), 47 FR 29426.

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Each Member would have to contribute an amount equal to 2\1/

2\NSCC of its average daily envelope settlement systems debits and

credits or 5% of its average daily envelope settlement systems

debits, whichever was greater. In each case, the amount would be

multiplied by a factor which represented the number of times, if

any, by which the Member's average daily settlement debits exceeded

its excess net capital.

The factor was initially capped at twenty but was later limited to

three in File No. SR-NSCC-82-24.\4\

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\4\NSCC's proposed rule change set forth in File No. SR-NSCC-82-

24 was approved in Securities Exchange Act Release No. 19147

(October 18, 1982), 47 FR 47351.

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As indicated in the File No. SR-NSCC-82-10, the primary purpose of

the factor was to better protect NSCC against the risks presented by

the envelope settlement systems (i.e., that securities delivered

through the envelope settlement systems would not be available for

return to the deliverer in the event the receiver were to become

insolvent and be unable to pay for the delivery). The concern at the

time of File No. SR-NSCC-82-10 arose from the stock loan business that

was settled through the envelope settlement system. NSCC did not,

however, limit the application of the factor to just physical envelope

deliveries but also applied it to the DTC settlement activity of

sponsored members.

NSCC believes that the current clearing fund formula, as applied to

sponsored members, can result in excessive clearing fund requirements.

This is because the formula seeks to cover a risk relating to DTC

activity which NSCC believes can be adequately addressed without the

application of the factor. The proposed rule change, while eliminating

the factor in determining a sponsored member's clearing fund

requirement with respect to DTC activity, gives NSCC the ability to

place a sponsored member on advisory surveillance status under the

circumstances where the factor previously would have been applied and

therefore will allow NSCC to continue to assess the risks associated

with sponsored members' DTC settlement activity.

The elimination of the application of a factor in determining a

sponsored member's clearing fund requirement with respect to DTC

activity will more appropriately reflect the risks associated with such

activity and will be consistent with the way DTC addresses such risks

for dual NSCC/DTC members. Thus, it will result in a more equitable

distribution of the financial burdens placed on NSCC sponsored members.

Therefore, NSCC believes that this rule change is consistent with the

requirements of the Act, particularly section 17A of the Act,\5\ and

the rules thereunder.

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\5\15 U.S.C. 78q-1 (1988).

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B. Self-Regulatory Organization's Statement on Burden on Competition

NSCC believes that the proposed rule changes will not have any

impact 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

NSCC has neither solicited nor received any written comments

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 approved.

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 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 will also be available for

inspection and copying at the principal office of NSCC. All submissions

should refer to File No. SR-NSCC-94-06 and should be submitted by June

15, 1994.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\6\

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\6\17 CFR 200.30-3(a)(12) (1992).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-12747 Filed 5-24-94; 8:45 am]

BILLING CODE 8010-01-M