[Federal Register: August 19, 2008 (Volume 73, Number 161)]
[Notices]
[Page 48413-48414]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19au08-76]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58344; File No. SR-NSCC-2007-15]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Granting Approval of a Proposed Rule Change Relating
to the Admission of Foreign Entities
August 12, 2008.
I. Introduction
On November 16, 2007, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2006-15 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\
Notice of the proposal was published in the Federal Register on March
10, 2008.\2\ No comment letters were received. For the reasons
discussed below, the Commission is granting approval of the proposed
rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 57391 (February 27,
2008), 71 FR 76414.
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II. Description
The proposed rule change establishes a policy statement regarding
the admission of entities that are organized in a foreign country and
are not subject to U.S. federal or state regulation (``foreign
entities'') as members of NSCC.\3\ NSCC Rule 2 and Addendum B to NSCC's
Rules address the admission of applicants as NSCC members. NSCC's Rules
provide that admission as a member is subject to an applicant's
demonstration that it meets NSCC's standards of financial
responsibility, operational capability, and character. Additionally,
each member must continue to be in a position to demonstrate to NSCC
that it meets these standards. The purpose of the proposed rule change
is to establish admission criteria that will permit well-qualified
foreign entities to become NSCC members and thereby obtain direct
access to NSCC's services while assuring that the unique risks
associated with the admission of foreign entities are adequately
addressed.
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\3\ The Depository Trust Company (``DTC'') filed and the
Commission has granted approval of a similar proposed rule change
that would permit DTC to adopt a similar policy statement with
respect to the admission of foreign entities as participants.
Securities Exchange Act Release No. 58345 (August 12, 2008) (File
No. SR-DTC-2007-16).
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The admission of foreign entities as members raises a number of
unique risks and issues, including that (1) the entity is not subject
to U.S. federal or state regulation, (2) the operation of the laws of
the entity's home country and time zone differences \4\ may impede the
successful exercise of NSCC's rights and remedies particularly in the
event of the entity's failure to settle, and (3) financial information
about the foreign entity made available to NSCC for monitoring purposes
may be less adequate than information about U.S.-based entities.
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\4\ Time zone differences could complicate communications
between the foreign member and its U.S. Settling Bank with respect
to the timely payment of the member's net debit to NSCC, including
intraday demands for payment. These differences could also delay
NSCC's receipt of information available in the member's home country
to others (including its other creditors) about the member's
financial condition on the basis of which NSCC would have taken
steps to protect the interests of NSCC and its members.
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[[Page 48414]]
The proposed rule change adds a new Policy Statement \5\ to NSCC's
Rules that in addition to requiring execution of the standard NSCC
Membership Agreement requires a foreign entity to enter into a series
of undertakings and agreements that are designed to address
jurisdictional concerns and to assure that NSCC is provided with
audited financial information that is acceptable to NSCC.\6\ These
include that a premium on the financial requirements for a member that
submits audited financial statements prepared in other than U.S.
generally accepted account principles (``GAAP''). The premiums are as
follows:
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\5\ NSCC's proposed ``Policy Statement on the Admission of Non-
U.S. Entities as Direct Clearing Corporation Members'' is attached
as Exhibit 5 to its filing, which can be found at http://
www.dtcc.com/downloads/legal/rule_filings/2007/nscc/2007-15.pdf .
\6\ In the Policy Statement, NSCC has reserved the right to
waive certain of the criteria where such criteria are inappropriate
to a particular applicant or class of applicants (e.g., a foreign
government or international securities clearing corporation).
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(i) For financial statements prepared in accordance with
International Financial Reporting Standards (``IFRS''), the Companies
Act of 1985 (``UK GAAP''), or Canadian GAAP--a premium of 1\1/2\ times
the existing requirement;
(ii) For financial statements prepared in accordance with a
European Union (``EU'') country GAAP other than UK GAAP--a premium of 5
times the existing requirement; and
(iii) For financial statements prepared in accordance with any
other type of GAAP a premium of 7 times the existing requirement.
The requirements in the Policy Statement also include that each
non-U.S. entity agree to certain conditions with respect to actions
brought by NSCC to enforce the entity's obligations under NSCC's
Members Agreement, such as irrevocably waiving all immunity from NSCC's
attachment of the entity's assets in the U.S. Each non-U.S. entity will
also be required to obtain an opinion of reputable foreign counsel
satisfactory to NSCC providing, among other things, that the agreements
described in the Policy Statement may be enforced against the foreign
entity in the courts of its home country or other jurisdictions where
the entity or its property may be found.\7\ Each non-U.S. entity would
have to be subject to regulation in its home country and its home
country regulator must have entered into a Bilateral Information
Sharing Arrangement or Memoranda of Understanding with the U.S.
Securities and Exchange Commission regarding the sharing or exchange of
information and each non-US entity must be in compliance with the
financial reporting and responsibility standards of its home country
regulator. Finally, the Policy Statement requires that each non-U.S.
entity must provide sufficient information to NSCC in order to evaluate
AML risk, including whether the non-U.S. entity is subject to
comparable AML requirements to those imposed in the U.S. in its home
country jurisdiction.
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\7\ NSCC reserves the right to require the entity to deposit
additional amounts to the clearing fund and to post a letter of
credit in an instance where NSCC, in its sole discretion, believes
the entity presents legal risk.
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III. Discussion
Section 17A(b)(3)(F) of the Act provides that the rules of a
clearing agency should be designed to promote the prompt and accurate
clearance and settlement of securities transactions and to safeguard
securities and funds which are in the custody or control of the
clearing agency or for which it is responsible.\8\ By expanding the
types of entities that are eligible for membership in NSCC, the
proposed rule change will increase the direct access to and use of
NSCC's clearance and settlement services and therefore should promote
the prompt and accurate clearance and settlement of securities
transactions. However, because these entities are organized outside of
the U.S. and are not subject to U.S. regulation, the Policy Statement
includes a number of requirements that are designed to address legal,
financial, and information sharing risk that may result from the
entity's non-U.S. status. These requirements include (1) the entity
make certain waivers and agreements, including a foreign legal opinion,
to ensure that NSCC may enforce the member's obligations under its
Members Agreement; (2) the entity provide audited financial statements
prepared in accordance with generally accepted accounting principles
(``GAAP''), with an increase to the member's minimum financial
requirements where non-U.S. GAAP is used; and (3) the entity is subject
to regulation in its home country, there is an information sharing
agreement with the home country regulator and the Commission, and the
entity is in compliance with the financial reporting and responsibility
standards of its home country regulator. The Commission believes that
the additional requirements in the Policy Statement are designed to
address the legal, financial, and information sharing risks presented
by non-U.S. members and that, therefore, the proposed rule change is
designed to assure the safeguarding of securities and funds which are
in NSCC's control or for which it is responsible.
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\8\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
in particular Section 17A of the Act and the rules and regulations
thereunder.\9\
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\9\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-NSCC-2006-15) be and hereby
is approved.
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-19128 Filed 8-18-08; 8:45 am]
BILLING CODE 8010-01-P