Federal Register / Vol. 61, No. 130 / Friday, July 5, 1996 / Notices 35289

30 17 CFR 200.30–3(a)(12).

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

2Letter from J. Keith Kessel, Compliance Officer,

SCCP, to Peter R. Geraghty, Senior Counsel,

Commission (May 8, 1996). The amendment also

requested permanent approval of SCCP’s CNS

guarantee procedures.

3The proposals, along with a similar proposal

submitted by the Midwest Clearing Corporation

(‘‘MCC’’), were originally approved on a temporary

basis in 1989. For a complete discussion of these

proposals, refer to Securities Exchange Act Release

Nos. 27192 (August 29, 1989), 54 FR 37010

(approving File Nos. SR–NSCC–87–04, SR–MCC–

87–03, and SR–SCCP–87–03 until December 31,

1990). In addition, the Commission has temporarily

extended the respective proposals on six previous

occasions in Securities Exchange Act Release Nos.

28728 (December 31, 1990), 56 FR 717 (approving

File Nos. SR–NSCC–90–25, SR–MCC–90–08, and

SR–SCCP–90–03 until June 30, 1991); 29388 (June

28, 1992), 56 FR 30951 (approving File Nos. SR–

NSCC–91–06, SR–MCC–91–03, and SR–SCCP–91–

03 through June 30, 1992); 30879 (July 1, 1992), 57

FR 30279 (approving File Nos. SR–NSCC–92–04,

SR–MCC–92–07, and SR–SCCP–92–02 through June

30, 1993); 32547 (June 29, 1993), 58 FR 36491

(approving File Nos. SR–NSCC–93–04, SR–MCC–

93–02, and SR–SCCP–93–02 through June 30,

1994); and 33996 (June 27, 1994), 59 FR 33996

(approving File Nos. SR–NSCC–94–09, SR–MCC–

94–06, and SR–SCCP–94–02 through June 30,

1995); and 35916 (June 28, 1995), 60 FR 35575 (July

10, 1995) (approving File Nos. SR–NSCC–95–04,

SR–MCC–95–02, and SR–SCCP–95–03). On January

5, 1996, MCC withdrew from the securities

clearance business. Securities Exchange Act Release

No. 36684 (January 5, 1996), 61 FR 1195 (order

approving File No. SR–MCC–95–04).

that a market maker’s quotation is

updated after an exposure limit is

exhausted. Uninterrupted use of this

function will maintain continuous

quotations in Nasdaq as market makers

exhausting their exposure limits in

SOES will not be subject to a ‘‘closed

quote’’ condition or an unexcused

withdrawal from the market.

Finally, the NASD believes that the

proposed rule change is consistent with

significant national market system

objectives contained in Section

11A(a)(1)(C) of the Act. This provision

states it is in the public interest and

appropriate for the protection of

investors and the maintenance of fair

and orderly markets to assure, among

other things: (i) Economically efficient

execution of securities transactions; (ii)

fair competition among brokers and

dealers; and (iii) the practicality of

brokers executing investor orders in the

best market. Specifically, the SOES

Minimum Exposure Limit Rule and the

SOES Automated Quotation Update

Feature advance each of these objectives

by preserving the operational

efficiencies of SOES for the processing

of small investors’ orders, by

maintaining current levels of market

maker participation through reduced

financial exposure from unpreferenced

orders, and by reducing price volatility

and the widening of market makers’

spreads in response to the practices of

order entry firms active in SOES.

In addition, for the same reasons

provided by the SEC when it approved

the Interim SOES Rules that are cited

above in the text accompanying

footnotes 6 through 13, the NASD

believes that the proposed rule change

is consistent with Sections 15A(b)(6),

15A(b)(9), 15A(b)(11) and 11A(a)(1)(C)

of the Act.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD believes that the proposed

rule change will not result in any

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

Comments were neither solicited nor

received.

III. Date of effectiveness of the Proposed

Rule Change and Timing for

Commission Action

Within 35 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

90 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 the NASD 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, N.W.,

Washington, D.C. 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. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to File

Number SR–NASD–96–22 and should

be submitted by July 26, 1996.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.30

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–17144 Filed 7–3–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37381; File Nos. SR–

NSCC–96–09; SR–SCCP–96–02]

Self-Regulatory Organizations;

National Securities Clearing

Corporation; Stock Clearing

Corporation of Philadelphia; Notice of

Filing and Order Granting Permanent

Approval on an Accelerated Basis of

Proposed Rule Changes Relating to

the Guarantee of Trades in Continuous

Net Settlement Systems

June 28, 1996.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that the

National Securities Clearing Corporation

(‘‘NSCC’’) and Stock Clearing

Corporation of Philadelphia (‘‘SCCP’’)

(collectively referred to as ‘‘Clearing

Corporations’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’) on April 3, 1996, and

May 8, 1996, respectively, the proposed

rule changes as described in Items I and

II below, which items have been

prepared primarily by the Clearing

Corporations. On May 8, 1996, SCCP

filed an amendment to the proposed

rule change to remove from

consideration certain proposed

amendments to its clearing fund

calculations.2 The proposals seek

permanent approval of rule changes

relating to the guarantee of trades in the

Clearing Corporations’ continuous net

settlement (‘‘CNS’’) systems. The

Commission is publishing this notice

and order to solicit comments on the

proposed rule changes from interested

persons and to grant accelerated

permanent approval of the proposed

rule changes.

I. Self-Regulatory Organizations’

Statement of the Terms of Substance of

the Proposed Rule Changes

The proposals seek permanent

approval of proposed rule changes to

which the Commission has granted

temporary approval.3 The proposals

authorize the Clearing Corporations to

guarantee at an earlier time the

settlement of participant trades in their

CNS systems. In addition, NSCC’s
35290 Federal Register / Vol. 61, No. 130 / Friday, July 5, 1996 / Notices

4 In its original filing with the Commission, SCCP

proposed revisions to its program governing the

guarantee of CNS trades and its clearing fund

calculations. Supra note 2. Because the Commission

has recently granted temporary approval to the

proposed revisions to SCCP’s clearing fund

calculations in connection with a different filing in

a separate order, SCCP, as noted above, amended

its proposal to eliminate the proposed amendments

to its clearing fund calculations. For a complete

description of SCCP’s formula, refer to Securities

Exchange Act Release No. 36875 (February 22,

1996), 61 FR 7846 [SR–SCCP–95–06] (order

approving proposed rule change).

5The Commission has modified the language in

these sections.

6Until the Clearing Corporations guarantee

settlement of a trade, each side to the trade bears

the risk of the contraside defaulting if the Clearing

Corporations cease to act for a defaulting member.

Once the Clearing Corporations guarantee

settlement, the original contractual obligations

between the two parties are discharged and

replaced by contracts between the Clearing

Corporations and each of the original parties.

7NSCC’s revised CNS clearing fund formula

includes the following components (a) 2% of the

member’s projected total long CNS positions plus

(b) the net of each day’s difference between the

contract price of pending, compared CNS trades,

exclusive of trades reported by The Options

Clearing Corporation (‘‘OCC’’) which are the result

of options exercises and assignments, and the

current market price for all guaranteed pending

CNS trades, exclusive of trades reported by OCC

which are the result of options exercises and

assignments which have not yet reached settlement

plus (c) .25% of the net of all guaranteed pending

CNS trades and open CNS positions. The specific

changes being made to NSCC’s clearing fund

formulas and other procedures are set forth in

Exhibit A to NSCC’s proposed rule change. A copy

of the proposal with Exhibit A is available through

the Commission’s Public Reference Room or

through NSCC.

8For a more detailed discussion of the proposal,

refer to Securities Exchange Act Release Nos.

34261, 32547, 30879, 29388, 28728, and 27192 and

the accompanying rule filings, supra note 4.

9 15 U.S.C. 78q–1 (1988).

10 15 U.S.C. 78q–1(b)(3)(F) (1988).

11Supra notes 7 and 8.

12 15 U.S.C. 78q–1(b)(3)(F) (1988).

13 In addition, the Commission was concerned

that daily clearing fund calculations based on markto-market average exposure for a rolling twenty-day

period would not reflect actual mark-to-the-market

exposure as well as, for example, daily collection

of marks-to-the-market.

proposal seeks approval of its revised

clearing fund calculations designed to

protect against any increased risk

caused by such earlier guarantees.4

II. Self-Regulatory Organizations’

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Changes

In their filings with the Commission,

the Clearing Corporations included

statements concerning the purpose of

and basis for the proposed rule changes

and discussed any comments they

received on the proposed rule changes.

The text of these statements may be

examined at the places specified in Item

IV below. The Clearing Corporations

have prepared summaries, set forth in

sections (A), (B), and (C) below, of the

most significant aspects of such

statements.5

(A) Self-Regulatory Organizations’

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Changes

The proposed rule changes seek

permanent approval of the Clearing

Corporations’ procedures whereby they

guarantee the settlement of all pending

CNS trades as of midnight on the day

after the trade date for locked-in or

automatically compared trades and as of

midnight on the day trades are reported

to members as compared for all other

trades.6 NSCC’s proposal also seeks

approval of revisions to the CNS portion

of its clearing fund formula.7 This

revision is designed to protect against

increased risk associated with earlier

guarantees.8

The Clearing Corporations believe

that the proposed rule changes are

consistent with the Act and particularly

with Section 17A of the Act because the

proposed changes will help the Clearing

Corporations to assure the safeguarding

of securities and funds which are in

their custody or control or for which

they are responsible.9

(B) Self-Regulatory Organizations’

Statement on Burden on Competition

The Clearing Corporations believe

that the proposed rule change will not

impose a burden on competition.

(C) Self-Regulatory Organizations’

Statement on Comments on the

Proposed Rule Changes Received from

Members, Participants or Others

The Clearing Corporations have

neither solicited nor received any

comments on the proposed rule

changes.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Section 17A(b)(3)(F) of the Act 10

requires that the rules of a clearing

agency be designed 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 and be designed to remove

impediments to and perfect the national

system for the clearance and settlement

of securities transactions. The

Commission believes that the Clearing

Corporations’ procedures for earlier

guarantees and NSCC’s revised formula

for calculating CNS clearing fund

contributions are consistent with the

Clearing Corporations’ obligations under

Section 17A(b)(3)(F) because the

proposals should help the Clearing

Corporations increase certainty as to

settlement of securities transactions by

reducing the time that clearing members

are exposed to the risk of counterparty

default. The Commission further

believes that the proposals achieve that

goal without compromising the

safeguarding of securities and funds in

the Clearing Corporations’ custody or

control or for which they are

responsible.

The Commission also believes that

NSCC’s revised CNS formula,11 as well

as its additional existing safeguards

such as monitoring member financial

condition, reviewing member settlement

activity in relation to prior activity,

monitoring securities settled in its

system for volatility, and the ability to

collect additional fund deposits, should

reduce the risk that a member

purchasing securities will be unable to

pay for the securities upon delivery and

protects NSCC if the market price of

compared trades moves away from their

contract price before settlement. Thus,

the Commission believes the NSCC

proposal is also consistent with Section

17A(b)(3)(F) 12 of the Act because it

should help NSCC reduce its risk of loss

and thereby should enhance its ability

to safeguard securities and funds under

its control.

Because the Commission was

concerned about the ability of the

proposed CNS clearing fund formulas to

guard against increased risk posed by an

earlier CNS guarantee,13 the

Commission originally approved the

proposed rule changes on a temporary

basis in order that the procedures and

formulas could be carefully monitored

before they were approved permanently.

The Commission is now permanently

approving the Clearing Corporations’

earlier guarantee procedures and

NSCC’s revised CNS formula because

during the temporary approval period,

the Commission has not received any

reports of problems caused by NSCC’s

CNS clearing fund formula or the earlier

CNS guarantees.

The Clearing Corporations have

requested that the Commission find

good cause for approving the proposed

rule changes prior to the thirtieth day

after the date of publication of notice of

filing. The Commission finds good

cause for so approving the proposed

rule changes because the Commission

has noticed the proposals on seven

separate occasions without receiving

any comment letters and does not

expect to receive any with regard to the

current proposals. Furthermore,

accelerated approval will allow the

Clearing Corporations to continue to
Federal Register / Vol. 61, No. 130 / Friday, July 5, 1996 / Notices 35291

14 17 CFR 200.30–3(a)(12) (1995).

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

2Securities Exchange Act Release No. 36781

(January 26, 1996), 61 FR 3958 [File Nos. SR–SCCP–

96–01 and SR–Philadep–96–01] (order granting

accelerated approval on a temporary basis of

proposed rule changes to provide for the

application of Article 8 of the New York UCC).

utilize the procedures without any

disruption when the current temporary

approval expires on June 28, 1996.

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, N.W.,

Washington, D.C. 20549. Copies of the

submissions, all subsequent

amendments, all written statements

with respect to the proposed rule

changes that are filed with the

Commission, and all written

communications relating to the

proposed rule changes 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. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filings will also be available for

inspection and copying at the principal

offices of NSCC and SCCP. All

submissions should refer to file

numbers SR–NSCC–96–09 and SR–

SCCP–96–02 and should be submitted

by July 26, 1996.

It is therefore ordered, pursuant to

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

proposed rule changes, as amended

(File Nos. SR–NSCC–96–09 and SR–

SCCP–96–02), be, and hereby are,

permanently approved on an

accelerated basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.14

Jonathan G. Katz,

Secretary.

[FR Doc. 96–17146 Filed 7–3–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37382; File Nos. SR–

Philadep–96–08 and SR–SCCP–96–04]

Self-Regulatory Organizations;

Philadelphia Depository Trust

Company and Stock Clearing

Corporation of Philadelphia; Notice of

Filing and Order Granting Accelerated

Approval on a Temporary Basis of

Proposed Rule Changes Requesting

Permanent Approval of the Adoption of

Article 8 of the New York Uniform

Commercial Code To Govern Certain

Transactions

June 28, 1996.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

May 30, 1996, the Philadelphia

Depository Trust Company (‘‘Philadep’’)

and the Stock Clearing Corporation of

Philadelphia (‘‘SCCP’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) the proposed rule

changes (File Nos. SR–Philadep–96–08

and SR–SCCP–96–04) as described in

Items I and II below, which Items have

been prepared primarily by Philadep

and SCCP. The Commission is

publishing this notice to solicit

comments from interested persons and

to grant accelerated approval of the

proposed rule changes on a temporary

basis through December 31, 1996.

I. Self-Regulatory Organizations’

Statement of the Terms of Substance of

the Proposed Rule Changes

Philadep requests permanent

approval of the adoption of Rule 32 and

the amendment of Rule 1 of its rules,

and SCCP requests permanent approval

of the adoption of Rule 41 and the

amendment of Rule 1 of its rules

governing the choice of law to be

elected in certain transactions effecting

Philadep, SCCP, their participants, and

pledged. On January 26, 1996, the

Commission temporarily approved

through June 30, 1996, Philadep’s and

SCCP’s proposed rule changes adopting

Article 8 of the New York Uniform

Commercial Code (‘‘UCC’’) as their

choice of law governing certain

transactions.2

II. Self-Regulatory Organizations’

Statements of the Purpose of, and

Statutory Basis for, the Proposed Rule

Changes

In their filings with the Commission,

Philadep and SCCP included statements

concerning the purpose of and the basis

for the proposed rule changes and

discussed any comments received on

the proposed rule changes. The text of

these statements may be examined at

the places specified in Item IV below.

Philadep and SCCP have prepared

summaries, as set forth in sections A, B,

and C below, of the most significant

aspects of these statements.

A. Self-Regulatory Organization’s

Statements of the Purpose of, and the

Statutory Basis for, the Proposed Rule

Changes

Philadep and SCCP propose to

permanently adopt Rules 32 and Rule

41, respectively, and to permanently

amend Rule 1 of their rules to codify

their decision to elect certain New York

commercial code provisions to govern

certain transactions for the purpose of

providing a uniform, consistent, and

predictable body of law. Specifically,

Rule 32 and Rule 41 will assure that the

rights and obligations of Philadep and

SCCP, their participants, and their

pledgees with respect to transfers and

pledges of securities, to the extent

Article 8 of the UCC applies thereto,

will be governed by and construed in

accordance with Article 8 of the UCC of

New York in effect from time to time.

The definition of ‘‘security’’ under Rule

1 of both Philadep’s and SCCP’s rules

was amended to cite to New York UCC

Article 8 as opposed to Pennsylvania

UCC Article 8.

Philadep and SCCP note that

uncertainty exists whether New York

law or Pennsylvania law may apply to

any particular transfers and whether

some transfers within Philadep’s or

SCCP’s systems may be governed by

Pennsylvania’s UCC Article 8 while

other transaction within such systems

may be governed by New York’s UCC

Article 8. With so many of the

transactions for which Philadep and

SCCP provide depository, clearance,

and settlement services potentially

being affected (e.g., those transactions

effected through interface with brokerdealers, banks, and other institutions

which are participants in The

Depository Trust Company (‘‘DTC’’) and

National Securities Clearing Corporation

(‘‘NSCC’’) systems), it is problematic

that different rules of law under Article

8 of the UCC may govern the rights and

obligations of parties to such transfers.

Philadep and SCCP, therefore, have

chosen to elect the application of New

York’s UCC Article 8 rather than

Pennsylvania’s UCC Article 8. The

choice of New York law also assures

that DTC, NSCC, and their respective

participants and pledgees will find

harmonious commercial code