Self-Regulatory Organizations; International Securities Clearing Corporation; Notice of Filing of a Proposed Rule Change Relating to the Clearing Fund Formula

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-37390; International Series Release No. 999; File No.

SR-ISCC-96-03]

Self-Regulatory Organizations; International Securities Clearing

Corporation; Notice of Filing of a Proposed Rule Change Relating to the

Clearing Fund Formula

July 1, 1996.

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

(``Act''),\1\ notice is hereby given that on May 16, 1996, the

International Securities Clearing Corporation (``ISCC'') filed with the

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

change (File No. SR-ISCC-96-03) as described in Items I, II, and III

below, which items have been prepared primarily 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) (1988).

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I. Self-Regulatory Organization's Statement of the Terms of

Substance of the Proposed Rule Changes

ISCC is filing the proposed rule change to extend approval of its

clearing fund formula.\2\

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\2\ The Commission temporarily approved two previous ISCC

proposed rule changes amending ISCC's clearing fund formula.

Securities Exchange Act Release No. 35970 (July 13, 1995), 60 FR

37698 [File No. SR-ISCC-95-03] (notice of filing and order granting

accelerated approval on a temporary basis of ISCC's clearing fund

formula) and Securities Exchange Act Release No. 34392 (July 15,

1994), 59 FR 37798 [File No. SR-ISCC-94-1] (order temporarily

approving on an accelerated basis ISCC's clearing fund formula).

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

Statutory Basis for, the Proposed Rule Changes

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

statements.\3\

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\3\ The Commission has modified these summaries.

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[[Page 36097]]

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

Statutory Basis for, the Proposed Rule Change

The purpose of the proposed rule is to extend approval of ISCC's

clearing fund formula.\4\ ISCC is obligated to the London Stock

Exchange (``LSE'') to pay for all securities delivered to ISCC through

the ISCC-LSE link. ISCC has no responsibility to complete open pending

trades (i.e., once a member fails, ISCC no longer accepts delivery of

securities for such member through the link). To adequately cover

ISCC's exposure, each member's clearing fund deposit requirement is

calculated and collected on a weekly basis. Each member is required to

deposit the greater of (a) the largest deposit requirement imposed over

the last 365 day period or (b) the deposit that would be required based

on the clearing fund calculation using trades due to settle over the

next week. Calculations are made each Tuesday, and members are required

to deposit additional clearing fund amounts within three days.\5\

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\4\ In 1986, ISCC and the London Stock Exchange (``LSE'')

entered into a linkage agreement which allows ISCC to obtain

comparison and settlement services in the United Kingdom from the

LSE on behalf of ISCC members. At that time, the LSE settled trades

on a fornightly basis with all trades that occurred during a two

week period settling on the same day. On July 18, 1994, the LSE

moved to a ten day rolling settlement cycle with trades settling ten

days after trade date. On June 26, 1995, the LSE moved to a five day

rolling settlement period. In response to the change to a rolling

settlement cycle, ISCC adjusted its method of calculating its

clearing fund requirements.

\5\ For example, ISCC calculates a member's clearing fund

requirement on Tuesday, August 2, based on trades due to settle on

Tuesday, August 2, through Monday, August 8 (i.e., trades conducted

on Tuesday, July 26, through Monday, August 1). Because an ISCC

member has three business days after the calculation to make

additional deposits, under the five day rolling settlement cycle,

ISCC generally is calculating and collecting clearing fund

contributions based on trades which already have settled. Under the

prior ten day rolling settlement system, the clearing fund formula

was based on the actual largest daily obligation of a member during

the relevant time period, and the clearing fund deposit could be

calculated and collected prior to the settlement day.

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ISCC's clearing fund formula is: (Gross Debit Value) x (Market Risk

Factor) + (Foreign Exchange Factor).\6\ The Gross Debit Value is a

member's largest single daily gross debit value based on debit values

for five consecutive business days including the day on which the

calculation is performed less 15% of the Institutional Net Settlement

(``INS'') receive value for that same day.\7\ The Market Risk Factor is

based on the largest calculated percentage change in the Financial

Times Index over a six day period over a minimum of 365 days.\8\ The

Market Risk Factor will continue to be set at 7%. The Foreign Exchange

Factor is based in part on the Estimated Foreign Exchange Volatility,

which is an amount that is equal to the largest one day percentage

change in the U.S. dollar/British pound foreign exchange rate over a

minimum of 365 days.\9\ The Estimated Foreign Exchange Volatility will

continue to be set at 4%.\10\ The Market Risk Factor and Foreign

Exchange Risk Factor for members on surveillance can be increased in

the discretion of ISCC by 3%, 5%, and 7% for members on Advisory, Class

A, and Class B surveillance, respectively.

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\6\ Members will continue to be required to contribute a minimum

of $50,000 to the clearing fund.

\7\ Under the INS system, redeliveries of securities from ISCC

members to institutional participants can occur automatically

through the LSE. Therefore, ISCC generally is not required to pay

the LSE for these securities. The debits arising from these

redeliveries may be offset only partially because these securities

may be reclaimed (i.e., returned) by the receiver, and in such

circumstance, ISCC is liable to the LSE for the full value of the

reclamation.

\8\ ISCC bases its clearing fund calculations on the assumption

that it will take one day to sell all of a defaulting participant's

positions. Under a five day settlement period, this results in a six

day exposure for market risk with five days between trade date and

settlement date and one day between settlement date and close out of

positions. There also is a one day exposure for foreign exchange

risk because ISCC converts U.S. dollars to British pounds on the

settlement date and converts the proceeds from the sale of the

positions to U.S. dollars the following day.

\9\ The Foreign Exchange Factor is the product of the Gross

Debit Value and the Estimated Foreign Exchange Volatility less the

produce of the Gross Debit Value times the Market Risk Factor times

the Estimated Foreign Exchange Volatility.

\10\ During the period from 1989 to 1992, the maximum

fluctuation in the U.S. dollar-British pound exchange rate was

4.445%. ISCC will continue to review annually the foreign exchange

risk factor.

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The proposed rule change will permit ISCC to safeguard securities

and funds in its custody or control and is therefore consistent with

Section 17A of the Act \11\ and the rules and regulations thereunder.

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\11\ 15 U.S.C. Sec. 78q-1 (1988).

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

ISCC 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

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 ISCC 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. Sec. 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 ISCC. All submissions

should refer to the file number (ISCC-96-03) and should be submitted

by: July 30, 1996.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\12\

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\12\ 17 CFR 200.30-3(a)(12) (1995).

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Jonathan G. Katz,

Secretary.

[FR Doc. 96-17356 Filed 7-8-96; 8:45 am]

BILLING CODE 8010-01-M