[Federal Register: November 22, 2005 (Volume 70, Number 224)]
[Notices]
[Page 70647-70648]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22no05-114]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52772; File No. SR-NSCC-2005-13]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change To Modify and
Consolidate Clearing Fund Rules
November 14, 2005.
I. Introduction
On September 20, 2005, the National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2005-13 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 October
11, 2005.\2\ On October 21, 2005, NSCC amended the proposed rule
change.\3\ The Commission received one comment letter in response to
the proposed rule change.\4\ For the reasons discussed below, the
Commission is approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 52552 (October 3, 2005),
70 FR 59112.
\3\ The amendment was clarifying in nature and made no
substantive changes to the proposed rule change as originally filed.
Therefore, republication of notice is not required.
\4\ Letter from Dennis A. Young, Vice President and Treasurer,
Cosse International Securities, Inc. (November 1, 2005). The comment
letter did not address the proposed rule change.
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II. Description
1. Clearing Fund Formula Enhancements
NSCC's clearing fund formula consists of a number of components
designed to calculate NSCC's exposure to participants' unsettled
portfolios. For CNS and Balance Order transactions, the clearing fund
formula includes, among other components, a mark-to-market calculation
and a volatility calculation.\5\
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\5\ The other components for CNS and Balance Order activity are
a CNS fail charge, a charge for market maker domination, and special
charges.
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The current mark-to-market calculation includes trades that have
not yet reached settlement date but excludes from the calculation
trades that have reached T + 3 and CNS fail positions (i.e., net
positions that did not settle on settlement date). NSCC is enhancing
the mark-to-market calculation to include trades that have reached
settlement date and net CNS fail positions. This is intended to enable
NSCC to more accurately cover its mark-to-market exposure to
participants' unsettled portfolios in the event of an intraday
insolvency of a participant. When making this calculation, NSCC may but
is not required to take into account securities that a participant has
delivered to CNS in the night cycle.\6\
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\6\ The October 21, 2005, amendment clarified that while NSCC
generally intends to take such deliveries into account when making
this calculation, it will not do so if it would otherwise cause
operational or administrative problems, and it reserves the right
not to do so based upon the financial or operational condition of a
particular participant at the time such calculation is made.
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The volatility component of the clearing fund formula rule provides
that NSCC may exclude from volatility calculations net unsettled
positions in classes of securities whose volatility is either less
amenable to statistical analysis, such as OTC Pink Sheet issues trading
below $5.00, or amenable to such analysis only in a complex manner,
such as municipal or corporate bonds. The amount of clearing fund
required to satisfy the volatility component for these positions is
determined as a percentage haircut (currently 2% for municipal and
corporate bonds).
NSCC is enhancing its volatility component and is replacing the 2%
haircut for corporate and municipal bonds with a fixed income
volatility calculation. NSCC will continue to use a haircut for fixed
income securities in circumstances it deems appropriate, such as where
sufficient market or security information is not available.
2. Technical Clarifications
When NSCC revised its clearing fund formula in 2001 to move to a
risk-based calculation,\7\ it applied the revised formula to
participants on a rolling basis. To accommodate this transition, NSCC's
rules retained two versions of Addendum B (Standards of Financial
Responsibility and Operational Capability) and two versions of
Procedure XV (Clearing Fund Formula and Other Matters). Version 1 of
both Addendum B and Procedure XV was non-risk-based and Version 2 was
risk-based. Version 2 is currently located in Appendix 1.
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\7\ Securities Exchange Act Release No. 44431 (June 15, 2001),
66 FR 33280.
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With limited exception, all participants are now subject to the
clearing fund provisions of Version 2 of Procedure XV and Version 2 of
Addendum B. Accordingly, in order to simplify the rules and enable
participants to locate provisions applicable to them more readily, NSCC
is restructuring its Addendums, Procedures, and Rules.
As Version 1 of Procedure XV now has limited applicability, NSCC is
redesignating it as Version 2 of Procedure XV and moving it to Appendix
1. NSCC will retain only those provisions thereof (and of Version 1 of
Addendum B \8\) that remain applicable. Because Version I of Procedure
XV always contained a mark-to-market component, it is also being
revised to include in the mark-to-market calculation trades that have
reached T +
[[Page 70648]]
3 and CNS fail positions. The provisions of Appendix 1 (Version 2 of
Procedure XV and Version 2 of Addendum B) will be moved into the body
of the rules in place of Version 1 of Procedure XV and Version 1 of
Addendum B where they will appear in numerical order.
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\8\ Both versions of Addendum B are substantially identical with
the exception of certain provisions of current Version 1 relating to
the timing for calculating and collecting clearing fund. The
substance of those provisions of Version 1 of Addendum B are added
as a note to Version 1 of Procedure XV that will be moved to
Appendix 1 and will be renamed Version 2. The rest of Version 1 of
Addendum B will be deleted. All participants remain subject to the
provisions of Version 2 of Addendum B, which NSCC is moving to the
body of its rules from Appendix 1 and redesignating Version 1.
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As part of these clarifications, Rule 4 (Clearing Fund) is also
being corrected to make clear that participants may request a return of
any excess clearing fund on any day that NSCC has determined that the
participant's actual deposit exceeds its required deposit. Finally,
certain technical corrections are being made to Rule 4 and to the
clearing fund formula to provide consistent terminology and delete
obsolete references.
III. Discussion
Section 19(b) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization. Section 17A(b)(3)(F) of the Act requires that the rules
of a clearing agency be designed to assure the safeguarding of
securities and funds which are in its custody or control or for which
it is responsible.\9\ The Commission believes that NSCC's rule change
is consistent with this Section because it will permit NSCC to better
assure the safeguarding of funds and securities which are in its
custody or control or for which it is responsible by allowing NSCC to
more precisely identify the risks posed by a participant's unsettled
portfolio and more quickly adjust and collect additional needed
clearing fund collateral than it could using the old formula. As a
result NSCC should be better protected from the risk associated with a
participant's default because the clearing fund deposits it collects
should more accurately reflect NSCC's exposure.
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\9\ 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.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-NSCC-2005-13) be and hereby
is approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-6410 Filed 11-21-05; 8:45 am]
BILLING CODE 8010-01-P