Document ID: SEC-2006-1566-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Securities Clearing Corp.
Posted Date: 2006-12-06T05:00Z

[Federal Register: December 6, 2006 (Volume 71, Number 234)]
[Notices]               
[Page 70820-70822]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06de06-114]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54822; File No. SR-NSCC-2006-11]

 
Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Amend its 
Rules and Procedures Wth Respect to Clearing Fund Collateral

November 28, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 3, 2006, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change described in Items I, II, and 
III below, which items have been prepared primarily by NSCC. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested parties.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change seeks to modify NSCC's Rules with respect 
to Clearing Fund collateral in order to improve liquidity and to 
minimize risk for NSCC and its members. NSCC has also made certain 
technical corrections to the text of Rule 4 to conform the rule to 
actual practice.\3\
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    \3\ For example, the reference in Rule 4, Section 1 to the 
``market value'' of Qualifying Bonds has been corrected to 
accurately reference the ``collateral value'' of Eligible Clearing 
Fund Securities.
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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, NSCC 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. NSCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.\4\
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    \4\ The Commission has modified the text of the summaries 
prepared by NSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Under NSCC's Rules,\5\ members are required to make deposits to the 
Clearing Fund. The amount of each member's required deposit (``Required 
Deposit'') is fixed by NSCC in accordance with one or more formulas. A 
member's Required Deposit may be satisfied with a cash deposit, and a 
portion of a member's Required Deposit may be evidenced by an open 
account indebtedness secured by Qualifying Bonds and/or one or more 
irrevocable letters of credit issued under certain guidelines 
established within NSCC's Rules.\6\ NSCC haircuts the value that 
Qualifying Bonds receive when used to

[[Page 70821]]

meet a member's Clearing Fund requirement and will not allow a letter 
of credit to be used if by doing so more than twenty percent of NSCC's 
total Clearing Fund would consist of letters of credit issued by that 
approved letter of credit issuing bank. Each member is entitled to any 
Clearing Fund interest earned or paid on Qualifying Bonds and cash 
deposits.
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    \5\ Rule 4 (Clearing Fund), Procedure XV (Clearing Fund Formula 
and Other Matters), and Annex 1 (Version 2 of Procedure XV--Limited 
Applicability).
    \6\ Mutual Fund/Insurance Service Members are not permitted to 
use Qualifying Bonds or irrevocable letters of credit to satisfy 
their Required Deposits.
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    NSCC proposes to modify its Rules to: (1) Expand the types of 
instruments which NSCC may accept as Qualifying Bonds (``Eligible 
Clearing Fund Securities'') securing a member's open account Clearing 
Fund indebtedness and establish concentration requirements with regard 
to their use; (2) create a correlating range of haircuts to be applied 
to these expanded types of Eligible Clearing Fund Securities; and (3) 
eliminate letters of credit as a generally acceptable form of 
collateral securing the member's open account Clearing Fund 
indebtedness.
1. Revised Clearing Fund Components
    (a) Cash. The current Clearing Fund minimum cash deposit 
requirement will remain unchanged: each member must contribute a 
minimum of $10,000 with the first forty percent but no less than 
$10,000 of a member's Required Deposit being in cash.\7\
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    \7\ See supra note 6.
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    (b) Securities. NSCC proposes to replace the term Qualifying Bonds 
\8\ with a new set of definitions for Eligible Clearing Fund 
Securities. These securities will be unmatured bonds which are either 
an Eligible Clearing Fund Agency Security, Eligible Clearing Fund 
Mortgage-Backed Security, or Eligible Clearing Fund Treasury Security. 
An Eligible Clearing Fund Agency Security will be defined as a direct 
obligation of those U.S. agencies or government sponsored enterprises 
as NSCC may designate from time to time that satisfies such criteria 
set forth in notices issued by NSCC from time to time. An Eligible 
Clearing Fund Mortgage-Backed Security will be defined as a mortgage-
backed pass through obligation issued by those U.S. agencies or 
government sponsored enterprises as NSCC may designate from time to 
time that satisfies such criteria set forth in notices issued by NSCC 
from time to time. An Eligible Clearing Fund Treasury Security will be 
defined as a direct obligation of the U.S. Government that satisfies 
the criteria set forth in notices issued by NSCC from time to time.
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    \8\ ``Qualifying Bonds'' is defined in Rule 4 as unmatured bonds 
that are either direct obligations of, or obligations guaranteed as 
to principal and interest by, the United States or its agencies.
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    Initial eligibility criteria for each type of Eligible Clearing 
Fund Security will be announced to members in an Important Notice prior 
to the effective date of these proposed rule changes. Any future 
changes to the eligibility criteria will also be announced to members 
in Important Notices in advance of such changes becoming effective.
    (c) Security Concentration Provisions. NSCC also proposes to 
establish security concentration provisions for Clearing Fund deposits. 
As is currently required, each member must contribute a minimum of 
$10,000 with the first forty percent but no less than $10,000 of a 
member's Required Deposit being in cash.\9\ The remainder of a member's 
deposit may be secured by the pledge of Eligible Clearing Fund 
Securities in any combination of Eligible Clearing Fund Treasury 
Securities, Eligible Clearing Fund Agency Securities, and/or Eligible 
Clearing Fund Mortgage-Backed Securities, subject to the following two 
limitations. First, any deposits of Eligible Clearing Fund Agency 
Securities or Eligible Clearing Fund Mortgage-Backed Securities in 
excess of twenty-five percent of the member's Required Deposit will be 
subject to an additional haircut equal to twice the percentage noted in 
the haircut schedule. Second, no more than twenty percent of a member's 
Required Deposit secured by pledged Eligible Clearing Fund Agency 
Securities may be of a single issuer.\10\
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    \9\ See supra note 6.
    \10\ No member may post as collateral Eligible Clearing Fund 
Agency Securities for which it is the issuer. However, a member may 
pledge Eligible Clearing Fund Mortgage-Backed Securities for which 
it is the issuer subject to a premium haircut. That haircut shall be 
fourteen percent as an initial matter, and if the member also 
exceeds the twenty-five percent concentration limit, the haircut 
shall be twenty-one percent.
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    (d) Letters of Credit and Other Adequate Assurances. Because 
letters of credit will no longer be accepted by NSCC as a form of 
Clearing Fund collateral,\11\ the current requirements within NSCC's 
Rules that pertain to Letter of Credit Issuers will be modified to 
reflect this. For those members who currently have letters of credit 
posted as collateral (other than members, if any, that have been 
required to post letters of credit for legal risk), effective April 1, 
2007, (which date corresponds with the regular expiration date of 
letters of credit) members will be required to replace that portion of 
their Clearing Fund deposit with either cash or Eligible Clearing Fund 
Securities.
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    \11\ NSCC has found that in practice letters of credit are not 
as liquid as cash and securities, and therefore potentially pose 
more risk to NSCC and its members when accepted by NSCC as Clearing 
Fund collateral. NSCC will, however, reserve the right to require 
letters of credit from members in those instances where a particular 
member has been found, by NSCC in its discretion, to present legal 
risk.
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    (e) Implementation Timeframes. The foregoing rule changes will 
become effective thirty days after an Important Notice is issued to 
members informing them that NSCC's systems are ready to accommodate 
such changes with the corresponding changes to NSCC's rules being made 
at that time.
    NSCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \12\ and the rules and 
regulations thereunder because it will enable NSCC to diversify 
Clearing Fund collateral in order to improve liquidity and to minimize 
risk for NSCC and its members. As such, NSCC believes it will better 
enable NSCC to safeguard securities and funds in its possession or 
control or for which it is responsible.
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    \12\ 15 U.S.C. 78q--1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change will have any 
impact or impose any burden on competition.

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

    Written comments relating to the proposed rule change have not yet 
been solicited or received. NSCC will notify the Commission of any 
written comments received by NSCC.

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

    Within thirty-five 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 ninety 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 self-regulatory organization 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

[[Page 70822]]

arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
) or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NSCC-2006-11 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

    All submissions should refer to File Number SR-NSCC-2006-11. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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 Section, 100 F Street, 
NE., Washington, DC 20549. Copies of such filings also will be 
available for inspection and copying at the principal office of NSCC 
and on NSCC's Web site at http://www.nscc.com/legal/2006/2006-11.pdf. 

All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-NSCC-2006-11 
and should be submitted on or before December 27, 2006.
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    \13\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\13\
Nancy M. Morris,
Secretary.
[FR Doc. E6-20623 Filed 12-5-06; 8:45 am]

BILLING CODE 8011-01-P