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

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