[Federal Register Volume 61, Number 18 (Friday, January 26, 1996)]
[Notices]
[Pages 2552-2554]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1272]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36740; File No. SR-MCC-95-05]


Self-Regulatory Organizations; Midwest Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Relating to a Contingency Plan for Participants in 
Connection With Midwest Clearing Corporation's Decision to Withdraw 
From the Securities Clearing Business

January 19, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 26, 1995, the 
Midwest Clearing Corporation (``MCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I and II below, which items have been prepared 
primarily by MCC. On January 11, 1996, MCC filed an amendment to the 
proposed rule change to clarify certain provisions in the proposal.\2\ 
The Commission is publishing this notice and order to solicit comments 
from interested persons and to grant accelerated approval of the 
proposed rule change.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Letter from David T. Rusoff, Foley & Lardner, to Peter 
Geraghty, Division of Market Regulation, Commission (January 11, 
1996).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    MCC proposes to add an Article XI, Sponsored Accounts, to its rules 
to limit the types of persons and entities that are eligible to be 
participants at MCC and to provide for a contingency, to be implemented 
solely at MCC's discretion, in the event that certain MCC participants 
have not made arrangements with alternate service providers by January 
19, 1996.\3\

    \3\ MCC's filing refers to January 15, 1996, as the date by 
which MCC participants must have made arrangements with alternate 
service providers. This date was postponed to January 19, 1996. 
Telephone conversation between J. Craig Long, Foley & Lardner, 
[counsel to MCC], and Jerry Carpenter, Assistant Director, Peter 
Geraghty, Senior Counsel, and Cheryl Tumlin, Staff Attorney, 
Division of Market Regulation, Commission (January 18, 1996).
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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, MCC 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. MCC has prepared summaries, set forth in section (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\4\

    \4\ The Commission has modified the text of the summaries 
prepared by MCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    On January 5, 1996, the Commission approved a proposed rule change 
filed by MCC relating to its withdrawal from the securities clearance 
and settlement business in conjunction with an agreement with the 
National Securities Clearing Corporation (``NSCC'').\5\ Under the 
agreement with NSCC, MCC and its parent, the Chicago Stock Exchange 
(``CHX''), will provide certain floor members and member organizations 
of the CHX with access to the services offered by NSCC through 
sponsored accounts with NSCC. This filing implements that portion of 
the transaction and provides a contingency plan, to be implemented 
solely at MCC's discretion, for current participants of MCC that are 
unable to find alternative clearance and settlement services by January 
19, 1996.

    \5\ For a description of the agreement, refer to Securities 
Exchange Act Release No. 36684 (January 5, 1996), [File No. SR-MCC-
95-04] (order approving proposed rule change).
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    Pursuant to its agreement with NSCC, MCC will become a member of 
NSCC and may sponsor Temporary Sponsored Participants (``TSP'') and 
Sponsored Participants (``SP'') at NSCC. MCC will maintain subaccounts 
at NSCC for each TSP and SP. The purpose of the TSP membership category 
is to provide existing participants of MCC temporary 

[[Page 2553]]
clearing arrangements if they are unable to find appropriate 
alternative clearing arrangements by the January 19, 1996 deadline.\6\ 
The purpose of the SP category is to provide a mechanism for 
specialists, market makers, and floor brokers of the CHX who are not 
members of any registered clearing agency other than MCC to have access 
to the services of a registered clearing agency. The only services that 
MCC will provide to TSPs and SPs is access to the facilities of a 
Qualified Clearing Agency (``QCA'').\7\

    \6\ By an Important Notice dated November 17, 1996, MCC informed 
its participants that it intended to cease providing clearing 
services on January 15, 1996, and that participants should make 
arrangements for alternate clearing services by that date. The date 
was postponed to January 19, 1996. Note 3, supra.
    \7\ As set forth in proposed Article XI, Rule 5, the term 
Qualified Clearing Agency refers to a registered clearing agency 
which has entered into an agreement with CHX and MCC pursuant to 
which it will, among other things, act as a securities clearing 
agency for SPs and TSPs and provide such services to CHX, CHX 
members, and MCC as CHX, MCC, and the QCA shall from time to time 
agree.
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    MCC and CHX will guarantee the obligations of TSPs and SPs to NSCC 
to the extent provided in an agreement between CHX and NSCC. Only 
entities that are participants of MCC as of January 19, 1996 will be 
eligible to be TSPs. Only entities that are members or member 
organizations of CHX, that are registered as specialists, market 
makers, or floor brokers, and that meet the other eligibility standards 
of financial responsibility, operational capacity, experience, and 
competence will be eligible to be SPs.\8\ If implemented, the TSP 
category will terminate on or before March 31, 1996, at which time MCC 
will definitively cease to act for all TSPs.

    \8\ Proposed Article XI, Rule 2(a) sets forth the requirements 
for eligibility as a sponsored participant.
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    Under the proposed arrangement for SPs, CHX will transmit compared 
trade information to NSCC so that NSCC can determine each SP's net 
settlement obligation. NSCC than will transmit SPs' settlement 
obligations to MCC. Based on NSCC's final settlement figures, MCC will 
use funds received from an SP or will initiate payments against an SP's 
bank account to satisfy an SP's payment obligation. In this regard, 
each SP is required to maintain funds that are sufficient for purposes 
of settlement and that are accessible to MCC. If an SP has a credit 
balance, NSCC will forward the credit to MCC, and MCC will make 
available to such SP the amount of the credit balance.\9\

    \9\ Proposed Article XI, Rule 7 governs the settlement of 
sponsored accounts and temporary sponsored accounts.
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    Each SP that maintains a sponsored account will be permitted to 
utilize the sponsored account only for the clearance of transactions in 
issues traded on the CHX trading floor which are effected by the SP in 
its capacity as a specialist, market maker, or floor broker, as the 
case may be. SPs will be required to contribute to a sponsored account 
fund as provided in proposed Article XI, Rule 11. Each SP's required 
contribution will consist of the greater of its minimum contribution or 
its alternative contribution. The minimum contribution for an SP will 
be $15,000. The alternative contribution will be 110% of the SP's 
required contribution to the participant's fund of any registered 
clearing agency that has entered into appropriate agreements with MCC 
as a QCA. As of the date of this filing, only NSCC has entered into 
such an agreement. MCC also may require an SP to deposit a supplemental 
contribution not based on an SP's usage of MCC's services. All 
contributions to the sponsored account fund must be in cash. All 
sponsored account fund contributions not forwarded to a QCA by MCC may 
be invested by MCC. The sponsored account fund may be used to cover 
losses in a manner similar to that provided for in the current MCC 
participants fund rules.
    While SPs will not be obligated to comply with all of MCC's rules, 
SP's will be obligated to comply with the MCC rules designated in 
Article XI as being applicable to SPs. Among other things, Article XI 
provides that SPs must comply with MCC's rules relating to losses, 
indemnification, and ceasing to act.\10\ SPs also must comply with the 
rules of any QCA.\11\

    \10\ Proposed Article XI, Rule 2(a).
    \11\ Proposed Article XI, Rule 2(b).
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    In the event that MCC ceases to act for an SP, proposed Article XI, 
Rule 10 provides that MCC may buy-in a security position of the SP.\12\ 
This will be the case even if the QCA does not issue a buy-in notice to 
MCC for the SP's account.

    \12\ MCC also may buy-in a position of an SP if the SP has 
voluntarily ceased to be a participant in MCC but has not closed out 
all of its positions or if MCC determines that such action is 
necessary and proper in order to protect MCC or its participants or 
to satisfy its obligations to safeguard securities and funds and to 
assure the prompt and accurate clearance and settlement of 
securities transactions. Proposed Article XI, Rule 10.
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    Under the proposed arrangement for TSPs, NSCC will determine each 
TSP's net settlement obligation. Upon notice to and with authorization 
from MCC, a TSP may elect to have NSCC transmit its settlement 
obligations directly to it instead of to MCC. If the TSP so elects, 
NSCC will transmit the settlement figures directly to the TSP, and the 
TSP will effect money settlement directly with NSCC. The TSP must 
comply with NSCC's rules regarding cutoff times and the use of 
settlement banks. If the TSP has a credit balance, NSCC will forward 
the credit directly to the TSP's bank account. If the TSP elects to 
have NSCC transmit its final settlement figures to MCC, MCC will use 
the funds it receives from the TSP or will initiate payments against 
the TSP's bank account to satisfy the TSP's payment obligation. If a 
TSP has a credit balance under this arrangement, NSCC will forward the 
credit to MCC, and MCC will make available to the TSP the amount of the 
credit balance.
    Each TSP will be permitted to utilize the temporary sponsored 
account only for the clearance of issues eligible for clearance and 
settlement at NSCC. In addition, each TSP will be required to 
contribute to the sponsored account fund in a manner and amount that is 
similar to SPs.
    Because TSPs are existing participants, they will be required to 
comply with all existing MCC rules for activity occurring prior to 
becoming a TSP, and they will be required to comply with the MCC rules 
designated in Article XI as being applicable to TSPs. Under proposed 
Rule 10, in the event that MCC ceases to act for a TSP, MCC may buy-in 
a security position of the TSP. Such a buy-in may occur even if NSCC 
does not issue a buy-in notice to MCC for the TSP's account.
    MCC believes the proposed rule change is consistent with Section 
17A of the Act in that it is designed to promote the accurate clearance 
and settlement of securities transactions and to assure the 
safeguarding of securities and funds which are in MCC's control or for 
which MCC is responsible.

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

    MCC does not believe that the proposed rule change will impose a 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    Written comments on the proposal have not been solicited or 
received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Section 17A(b)(3)(F) \13\ of the Act requires the rules of a 
clearing agency be 

[[Page 2554]]
designed to promote the prompt and accurate clearance and settlement of 
securities transactions and to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible. The Commission believes the proposal is 
consistent with MCC's obligations under Section 17A of the Act because 
it should help ensure that MCC participants will have access to safe 
and efficient securities clearing services and should protect against 
disruption in their businesses upon MCC's withdrawal from the 
securities clearing business. Furthermore, MCC's coordination with NSCC 
in establishing clearing services for TSPs and SPs through sponsored 
accounts and temporary sponsored accounts and the requirement of a 
sponsored account fund to cover possible losses by MCC incident to the 
operation of the sponsored and temporary sponsored accounts should help 
MCC safeguard the securities and funds which are in its custody or 
control or for which it is responsible.

    \13\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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    MCC has requested that the Commission find good cause for approving 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of the filing. The Commission finds good cause 
for so approving the proposed rule change because the proposal is 
critical to MCC's orderly withdrawal from the securities clearing 
business by its announced deadline of January 19, 1996. Furthermore, 
the Commission received only one comment letter \14\ during the comment 
period of MCC's proposal to withdraw from the clearing business.\15\ 
Thus the Commission does not believe it will receive negative comment 
letters on this proposal.

    \14\ Letter from Leland W. Hutchinson, Jr., Freeborn & Peters, 
[counsel for Scattered Corporation and Laura Bryant, members of CHX] 
to Richard R. Lindsey, Director, Division of Market Regulation, 
Commission (December 15, 1995).
    \15\ See, Securities Exchange Act Release No. 36684 (January 5, 
1996), [File No. SR-MCC-95-04] (order approving MCC's proposal to 
withdraw from the securities clearing business).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submission 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submissions, 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 Room, 450 Fifth Street, NW., 
Washington, DC. Copies of such filing also will be available for 
inspection and copying at the principal office of MCC. All submissions 
should refer to the file number SR-MCC-95-05 and should be submitted by 
February 16, 1996.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-MCC-95-05) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\16\

    \16\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
FR Doc. 96-1272 Filed 1-25-96; 8:45 am]
BILLING CODE 8010-01-M