21014 Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Notices

1 15 U.S.C. 78s(b)(1) (1988).

2Letter from Jeffrey F. Ingber, General Counsel

and Secretary, GSCC, to Jerry Carpenter, Assistant

Director, Division of Market Regulation

(‘‘Division’’), Commission (December 1, 1994).

3Securities Exchange Act Release No. 35061

(December 7, 1994), 59 FR 64720.

4Letter from Jeffrey F. Ingber, General Counsel

and Secretary, GSCC, to Christine Sibille, Staff

Attorney [sic], Division, Commission (February 10,

1995).

5Letter from Jeffrey F. Ingber, General Counsel

and Secretary, GSCC, to Jerry Carpenter, Assistant

Director, Division, Commission (April 20, 1995).

6Currently, no insurance companies are members

of GSCC’s Netting System.

7Section 2(a)(17) of the Investment Company Act

provides that ‘‘ ‘Insurance company’ means a

company which is organized as an insurance

company, whose primary and predominant

business activity is the writing of insurance or the

reinsuring of risks underwritten by insurance

companies, and which is subject to supervision by

the insurance commissioner or a similar official or

agency of a State; or any receiver or similar official

or any liquidating agent for such a company, in his

capacity as such.’’

8While only twenty states have adopted the

model law as of November 1994, the risk-based

capital report has been included in the NAIC

financial statement used by all states. As a result,

all insurance companies must disclose the risk

profile in their annual financial reports.

Date of Filing of Appeal Papers: April

17, 1995.

Categories of Issues Apparently

Raised:

1. Effect on postal services (39 U.S.C.

404(b)(2)(C)).

2. Effect on the community (39 U.S.C.

404(b)(2)(A)).

After the Postal Service files the

administrative record and the

Commission reviews it, the Commission

may find that there are more legal issues

than those set forth above. Or, the

Commission may fine that the Postal

Service’s determination disposes of one

or more of those issues.

The Postal Reorganization Act

requires that the Commission issue its

decision within 120 days from the date

this appeal was filed (39 U.S.C. 404

(b)(5)). In the interest of expedition, in

light of the 120-day decision schedule,

the Commission may request the Postal

Service to submit memoranda of law on

any appropriate issue. If requested, such

memoranda will be due 20 days from

the issuance of the request and the

Postal Service shall serve a copy of its

memoranda on the petitioners. The

Postal Service may incorporate by

reference in its briefs or motions, any

arguments presented in memoranda it

previously filed in this docket. If

necessary, the Commission also may ask

petitioners or the Postal Service for

more information.

The Commission orders:

(a) The Postal Service shall file the

record in this appeal by May 2, 1995.

(b) The Secretary of the Postal Rate

Commission shall publish this Notice

and Order and Procedural Schedule in

the Federal Register.

By the Commission.

Cyril J. Pittack,

Acting Secretary.

Appendix

April 17, 1995 Filing of Appeal letter

April 24, 1995 Commission Notice and

Order of Filing of Appeal

May 12, 1995 Last day of filing of petitions

to intervene [see 39 CFR 3001.111(b)]

May 22, 1995 Petitioners’ Participant

Statement or Initial Brief [see 39 CFR

3001.115 (a) and (b)]

June 12, 1995 Postal Service’s Answering

Brief [see 39 CFR 3001.115(c)]

June 27, 1995 Petitioners’ Relay Brief

should Petitioner choose to file one [see

39 CFR § 3001.115(d)]

July 5, 1995 Deadline for motions by any

party requesting oral argument. The

Commission will schedule oral argument

only when it is a necessary addition to

the written filings [see 39 CFR 3001.116]

August 15, 1995 Expiration of the

Commission’s 120-day decisional

schedule [see 39 U.S.C. 404(b)(5)]

[FR Doc. 95–10440 Filed 4–27–95; 8:45 am]

BILLING CODE 7710–FW–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–35640; File No. SR–GSCC

94–7]

Self-Regulatory Organizations;

Government Securities Clearing

Corporation; Order Approving a

Proposed Rule Change Relating to

Changes in Membership Standards

April 24, 1995.

On October 11, 1994, pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’),1 the

Government Securities Clearing

Corporation (‘‘GSCC’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) a proposed rule change

to establish minimum financial

standards for two current netting system

membership categories: insurance

companies and registered investment

companies. On December 5, 1994, GSCC

filed an amendment to the proposed

rule change.2 On December 15, 1994,

the Commission published notice of the

proposed rule change in the Federal

Register to solicit comment from

interested persons.3 On February 14,

1995, GSCC filed a second amendment

to the proposed rule change.4 The

amendment was a technical amendment

that did not require republication of

notice. On April 20, 1995, GSCC filed a

third amendment to the proposed rule

change.5 That amendment withdrew

that portion of the proposed rule change

relating to financial standards for

investment companies. No comments

were received. This order approves the

proposal as amended.

I. Description

The proposed rule change establishes

minimum financial standards for

insurance company applicants for

membership in GSCC’s Netting System.6

(A) Background

GSCC Rule 2, Section 1 currently

provides that insurance companies as

defined by Section 2(a)(17) of the

Investment Company Act of 1940

(‘‘Investment Company Act’’) are

eligible to become members of GSCC’s

Netting System if they are in good

standing with their primary regulator.7

Insurance companies are regulated

primarily by the states in which they

organize and operate. States generally

have imposed statutory and

administrative requirements for the

maintenance of reserves that are

intended to bear a reasonable

relationship to the risks presented by

the insurers’ outstanding contractual

obligations. These requirements appear

generally to have served to ensure that

insurance companies are financially

responsible.

In December 1992, the National

Association of Insurance Commissioners

(‘‘NAIC’’) adopted a model law that

establishes standards for the adequacy

of life and health insurance company

surplus levels based upon the risk

profile of their operations and

investments.8 The model law is to

replace the fixed dollar minimum

capital requirements under state law

with an authorized control level riskbased capital (‘‘RBC’’) at or below which

an insurance commissioner must act

and place an insurer under varying

degrees of increased state control.

The RBC is an adjusted capital

requirement based on four main risk

categories (asset risk, insurance risk,

interest rate risk, and business risk). The

asset risk category provides for risk of

default on investments held by

insurance companies by imposing

reductions in valuation ranging from

.3% of the value of obligations
Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Notices 21015

9 If a life or health insurance company’s RBC level

is between 150–200%, under the Model Act

regulators would require a company to file a plan

to increase the capital ratio to greater than 200%.

At a RBC level of 100–150%, regulators would do

an examination of the company and issue corrective

orders. At 70–100%, the regulators would be

authorized to take control of the company. Below

70%, the regulators would be reaquired to take

control of a company.

10Under the Model Act, at an RBC level at 28%

or less regulators would be required to take control

of a company.

11Best’s ratings are as follows:

A++ and A+=superior

A and A¥=excellent

B++ and B+=very good

B and B¥=good

C++ and C+=fair

C and C¥=marginal

D=below minimum standards

E=under state supervision

F=in liquidation

Currently, approximately one-third of all life

insurance companies rated by Best and over onehalf of all property and casualty insurance

companies rated by Best have a rating of A¥ or

better.

12A rating of below ‘‘A¥’’ or ‘‘A3’’ by one of the

other three major rating agencies generally indicates

some weakness.

13Currently, this standard encompasses roughly

the twenty-five largest life insurers and the twentyfive largest property and casualty insurers.

14 15 U.S.C. 78q–1(b)(3)(B) (1988).

15 15 U.S.C. 78q–1(b)(4)(B) (1988).

16Securities Exchange Act Release No. 16900

(June 17, 1980), 45 FR 41920.

guaranteed by the U.S. government to

30% of the value of common stock to

100% of the carrying value of foreign

domiciled subsidiaries. The insurance

risk category imposes capital levels with

respect to an insurer’s liabilities and

obligations. In general, liabilities under

health insurance policies require higher

capital levels than liabilities under life

insurance policies. The interest rate risk

category is designed to cover the risk of

losses from annuity and other deposit

type liabilities with interest guarantees

as a result of interest rate swings.

Capital requirements range from .75% to

3% of reserve amounts. The business

risk category is designed to account for

the risk of state guaranty fund

assessments and is a percentage of life

and annuity premiums.

An insurance company’s RBC level is

calculated using the company’s ‘‘total

adjusted capital’’ (which is the sum of

its statutory surplus, asset valuation

reserve, voluntary investment reserves,

and half of the annual dividend liability

as adjusted for the capital contribution

by subsidiaries) as the numerator and its

RBC number as the denominator. If an

insurance company’s RBC level is equal

to or greater than the ‘‘company action

level,’’ then no regulatory intervention

is required under the Model Act. A ratio

of 200 percent or more is necessary for

a life or health insurance company to

avoid any regulatory action.9

In December 1993, the NAIC adopted

similar risk-based standards for property

and casualty insurance companies.

These standards will take effect for the

1994 annual financial reports. The RBC

property and casualty insurance

companies is based on asset risk, credit

risk, loss reserve risk, and written

premium risk. The asset risk capital

represents the capital required to

support the risk of potential default of

invested assets. Credit risk capital

represents the capital required to

support the risk of default by reinsurers

and other creditors. Loss reserve risk

capital represents the capital required to

support the risk of adverse development

in excess of expected investment

income from loss reserves. Written

premium risk represents the capital

required to support the risk of

inadequate rates on business written

over the coming year. As with life and

health insurers, the RBC level for

property and casualty insurers is

calculated by dividing the insurer’s

surplus by its calculated RBC. The

‘‘company action level’’ for property

and casualty insurers is 80%.10

There are several private

organizations that rate insurance

companies. A.M. Best (‘‘Best’’) was the

first rating agency to report on the

condition of insurance companies.

Standards & Poor’s (‘‘S&P’’), Moody’s,

and Duff & Phelps (‘‘D&P’’) also rate

insurance companies.

(B) Membership Standards

As a result of the regulation of

insurance companies by the states, no

uniform regulatory financial standard

exists for insurance companies. Instead,

the proposed rule change relies on the

analysis and rating of each insurance

company provided by the rating

agencies as a proxy for such a uniform

standard. The proposal also establishes

a ‘‘size’’ test that at least initially only

insurance companies of substantial size

can meet and requires that insurance

company netting members have a

satisfactory RBC level.

Specifically, the proposal establishes

the following minimum financial

standards for insurance company

netting members to be accepted into

GSCC Netting System membership:

(1) A Best’s rating of ‘‘A¥’’ or better

(if the member is rated by Best),11

(2) A rating by at least one of the other

three major rating agencies (D&P,

Moody’s, or S&P) of at least ‘‘A¥’’ or

‘‘A3’’, as applicable (or an equivalent

rating by either a nationally-recognized

statistical rating organization or another

rating agency acceptable to GSCC),

(3) No rating by any one of the other

three major rating agencies of less than

‘‘A¥’’ or ‘‘A3’’, as applicable,12

(4) A RBC level equal to or greater

than the applicable ‘‘company action

level’’ as set forth in the Risk-Based

Capital for Insurers Model Act, and

(5) Statutory capital (consisting of

adjusted policyholders’ surplus plus the

company’s asset valuation reserve) of no

less than $500 million.13

(C) Reporting Requirements

Each applicant for membership in

GSCC’s Netting System that is an

insurance company will be required to

provide its two most recent annual

statements and three most recent

quarterly financial statements filed with

the NAIC, the Commission, and/or the

applicant’s regulatory authority in its

state of domicile. In order to monitor the

financial status of insurance company

netting members on an ongoing basis,

each such member will be required to

provide GSCC with copies of its

quarterly and annual financial

statements and any intervening

amendments and addendums thereto at

the time that such statements are filed

with the NAIC, the Commission, and/or

the member’s regulatory authority in its

state of domicile.

II. Discussion

Section 17A(b)(3)(B) of the Act 14

provides that the rules of a clearing

agency must provide that certain types

of entities, including insurance

companies, may become participants in

such clearing agency. Section

17A(b)(4)(B) of the Act 15 provides that

a registered clearing agency may deny

participation to or condition the

participation of any person if such

person does not meet such standards of

financial responsibility, operational

capacity, experience, and competence as

are prescribed by the rules of the

clearing agency.

In the Commission’s release adopting

standards for clearing agency

registration (‘‘Standards Release’’), the

Commission stated that although the

categories enumerated by Section

17A(b)(3)(B) are already subject to

regulation by various federal and state

authorities, such regulation does not

necessarily qualify an applicant for

participation in a clearing agency.16

Instead, a clearing agency may impose

such additional or higher standards as it

deems necessary to protect the clearing

agency and it participants from

unreasonable risks.

In its registration application, GSCC

requested an exemption from Sections

17A(b)(3)(B) and 17A(b)(4)(B) of the Act.

At that time GSCC’s rules did not
21016 Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Notices

17Securities Exchange Act Release No. 25740

(May 24, 1988), 53 FR 19639. 1 15 U.S.C. 78s(b)(1) (1988).

2Securities Exchange Act Release No. 34980,

(November 16, 1994), 59 FR 60177 [File No. SR–

ISCC–94–05].

3 15 U.S.C. 78s(b)(3)(A)(ii) (1988).

4 17 CFR 240.19b–4(e)(2) (1994).

enumerate all of the statutory categories

of membership. In addition, GSCC’s

rules did not include applicant and

membership financial standards as

contemplated by Section 17A(b)(4)(B) of

the Act. In its initial temporary

registration order,17 the Commission

stated that in developing member

financial and operation standards, GSCC

should ensure that the standards would

allow GSCC to allocate losses resulting

from member defaults in order to

support GSCC’s netting system. The

Commission believes that GSCC’s

experience in operating a clearing and

settlement facility for government

securities transactions has provided

GSCC with the necessary guidance to

develop applicant and continuing

membership standards for insurance

companies that are both fair and

adequate to protect GSCC and its

participants from unreasonable risk.

The proposals also limits Netting

System membership to the largest

insurance companies in existence. The

Standards Release notes that a clearing

agency may discriminate among persons

in the admission to the clearing agency

if such discrimination is based on

standards of financial responsibility,

operational capability, experience, and

competence. The Division believes that,

at least initially, the limitations on the

basis of capital appear to be reasonable

as demonstrations of greater financial

responsibility, operational capacity,

experience and competence.

III. Conclusion

For the reasons stated above, the

Commission finds that the proposed

rule change is consistent with Section

17A of the Act.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act, that the

proposed rule change (File No. SR–

GSCC–94–07) be and hereby is

approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–10485 Filed 4–27–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35638; File No. SR–ISCC–

95–2]

Self-Regulatory Organizations;

International Securities Clearing

Corporation; Notice of Filing and

Immediate Effectiveness of Proposed

Rule Change Relating to Service Fees

April 24, 1995.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934 1

(‘‘Act’’), notice is hereby given that on

April 3, 1995, 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 primarily by ISCC.

The Commission is publishing this

notice to solicit comments on the

proposed rule change from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

ISCC is filing the proposed rule

change to revise its fee schedule in

accord with its current service costs and

to make certain technical corrections

thereto.

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. Summaries are set

forth in sections (A), (B), and (C) below

of the most significant aspects of such

statements.

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

The purpose of the proposed rule

change is to adjust certain fees charged

to ISCC participants for services to

accurately reflect ISCC’s current cost of

providing such services. Fees for receipt

of transaction instructions have been

increased from $1.50 to $2.25 per item

for instructions transmitted by a

participant via computer platform and

from $3.00 to $5.00 per item for

instructions transmitted by a participant

via mail, facsimile, or telex. Reporting

fees for machine readable output, print

image output, and hardcopy (via telex or

mail) have doubled to $10.00, $20.00,

and $50.00 per report, respectively, and

duplicate copies of prior day reports

also have doubled to $50.00 per report

requested. Participants will be charged

for services in accordance with the new

fee structure effective April 1, 1995. In

addition, ISCC is deleting all references

to ‘‘PORTAL’’ in the fee schedule which

references should have been previously

removed in connection with the

elimination of the PORTAL program in

1994.2

The proposed rule change is

consistent with the requirements of

Section 17A of the Act and the rules and

regulations thereunder because it

provides for the equitable allocation of

dues, fees, and other charges among

ISCC’s participants.

(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

No written comments have been

solicited or received. ISCC will notify

the Commission of any written

comments received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The foregoing rule change has become

effective pursuant to Section

19(b)(3)(A)(ii) 3 of the Act, and pursuant

to Rule 19b–4(e)(2) 4 promulgated

thereunder, insofar as the proposed rule

change establishes or changes a due, fee,

or other charge imposed by a selfregulatory organization. At any time

within sixty days of the filing of such

rule change, the Commission may

summarily abrogate such rule change if

it appears to the Commission that such

action is necessary or appropriate in the

public interest, for the protection of

investors, or otherwise in furtherance of

the purposes of the Act.

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