Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change Limiting the Use of Letters of Credit to Collateralize Clearing Fund Contributions

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36172; File No. SR-NSCC-95-12]

Self-Regulatory Organizations; National Securities Clearing

Corporation; Notice of Filing of Proposed Rule Change Limiting the Use

of Letters of Credit to Collateralize Clearing Fund Contributions

August 31, 1995.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ notice is hereby given that on August 21, 1995, the

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

Securities and Exchange Commission (``Commission'') the proposed rule

change (File No. SR-NSCC-95-12) as described below. The Commission is

publishing this notice to solicit comments from interested persons.

\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 increases the minimum cash clearing fund

contribution for those members that use letters of credit as clearing

fund collateral and sets a limit on the amount of a member's required

clearing fund contribution that may be collateralized with letters of

credit.\2\

\2\ The proposed rule change was originally filed on October 27,

1989, and was approved temporarily through December 31, 1990.

Securities Exchange Act Release No. 27664 (January 31, 1990), 55 FR

4297 [File No. SR-NSCC-89-16]. Subsequently, the Commission granted

a number of extensions to the temporary approval to allow the

Commission and NSCC sufficient time to review and assess the use of

letters of credit as clearing fund collateral. Most recently, the

Commission extended temporary approval through September 30, 1995.

Securities Exchange Act Release No. 34745 (September 29, 1994), 59

FR 50949 [File No. SR-NSCC-94-18].

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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.\3\

\3\ 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

NSCC is seeking permanent approval of a proposed rule change that

modifies the amount of a member's required clearing fund deposit that

may be collateralized by letters of credit. Specifically, the proposed

rule change increases the minimum cash contribution for any member that

uses letters of credit from $50,000 to the greater of $50,000 or 10% of

that member's required clearing fund deposit up to a maximum of

$1,000,000. In addition, the rule change provides that only 70% of a

member's required clearing fund deposit may be collateralized with

letters of credit. The rule change also adds headings to the clearing

fund formula section of NSCC's rules for purposes of clarity and

includes other nonsubstantive drafting changes. The effect of the

proposed rule change is to increase the liquidity of the clearing fund

and to limit NSCC's exposure to unusual risks resulting from the

reliance on letters of credit.

The current status of NSCC's clearing fund \4\ as a result of the

change in the required clearing fund deposit is that approximately

31.46% of the clearing fund is in cash, approximately 29.32% of the

clearing fund is in securities, and approximately 39.22% of the

clearing fund is in letters of credit.\5\

\4\ These statistics are current as of July 31, 1995.

Conversation between Anthony H. Davidson, Esq., NSCC, and Margaret

R. Blake, Attorney, Division of Market Regulation, Commission

(August 23, 1995).

\5\ In October of 1989 when the Commission initially granted

temporary approval of NSCC's proposal, letters of credit accounted

for 76% of the total dollar value of required clearing fund

deposits. By May 28, 1993, letters of credit accounted for less than

30%. During the period from June 1, 1992, to May 28, 1993, letters

of credit accounted for an average of 30.49% of the total dollar

value of required clearing fund deposits, and for no month during

that period did the portion of letters of credit used for required

clearing fund deposits rise above 34%. Letter from Karen L.

Saperstein, Vice President/Director of Legal & Associate General

Counsel, NSCC, to Jerry W. Carpenter, Branch Chief, Division of

Market Regulation, Commission (June 10, 1993).

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When NSCC first filed this change the impetus was to improve NSCC's

liquidity resources by requiring additional deposits of cash and cash

equivalents. Since that time, NSCC has obtained additional liquidity

resources through a line of credit with a major New York clearinghouse

bank. NSCC currently has a three hundred million dollar line of credit

that can be used for liquidity purposes, and the letters of credit in

the NSCC clearing fund are available as collateral for this line of

credit. Accordingly, NSCC believes that

[[Page 46879]]

it has adequate liquidity resources and requests permanent approval of

the change limiting the use of letters of credit to no more than 70% of

a member's deposit.

NSCC believes that the proposal is consistent with its requirements

under Section 17A of the Act \6\ because it enhances NSCC's ability to

safeguard securities and funds in its custody or under its control.

\6\ 15 U.S.C. 78q-1 (1988).

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

NSCC does not believe that the proposed rule will have an 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

No new written comments have been solicited or received.\7\ NSCC

will notify the Commission of any written comments it receives.

\7\ Since the initial filing of the proposed rule change NSCC

has received one letter of comment. In the letter Wedbush Morgan

Securities, Inc. opposed NSCC's proposal because they believed it

would increase the cost of posting collateral. Letter from Edward W.

Wedbush, President, Wedbush Morgan Securities, Inc., to David F.

Hoyt, Assistant Secretary, NSCC (November 9, 1989).

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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 reason 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. 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-95-12 and should be submitted by

September 29, 1995.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\8\

\8\ 17 CFR 200.30-3(a)(12) (1994).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-22241 Filed 9-7-95; 8:45 am]

BILLING CODE 8010-01-M