Document ID: SEC-2005-0092-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Securities Clearing Corp.
Posted Date: 2005-10-11T04:00Z

[Federal Register: October 11, 2005 (Volume 70, Number 195)]
[Notices]               
[Page 59112-59114]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11oc05-82]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52552; File No. SR-NSCC-2005-13]

 
Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Modify and 
Consolidate Clearing Fund Rules

October 3, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 20, 2005, the 
National Securities Clearing Corporation (``NSCC'') filed with the 
Securities and

[[Page 59113]]

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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NSCC is seeking to modify Procedure XV (Clearing Fund Formula and 
Other Matters) and make related technical changes.

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.\2\
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    \2\ 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

1. Clearing Fund Formula Enhancements
    NSCC's clearing fund formula consists of a number of components 
designed to calculate the exposure to NSCC of participants' unsettled 
portfolios. For CNS and Balance Order transactions, the components 
include a mark-to-market calculation and a volatility calculation.\3\
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    \3\ 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, thus excluding 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 proposing to 
enhance the mark-to-market calculation by including trades that have 
reached Settlement Date and net CNS fail positions to more accurately 
cover the mark-to-market exposure of 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.
    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 proposing to enhance its volatility formula and replace the 
2% haircut for corporate and municipal bonds with a fixed income 
volatility calculation. NSCC would 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,\4\ 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 Procedure XV: Version 1 
(non-risk-based) and Version 2 (risk-based). Version 2 is currently 
located in Appendix 1.
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    \4\ 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 
proposes to restructure its Addendums, Procedures, and Rules.
    As Version 1 of Procedure XV now has limited applicability, NSCC is 
proposing to re-designate this as proposed Version 2 of Procedure XV 
and move it to Appendix 1. NSCC would retain only those provisions 
thereof (and of Version 1 of Addendum B \5\) that remain applicable. 
Because the current 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+3 and CNS fail 
positions. The current provisions of Appendix 1 (Version 2 of Procedure 
XV and Version 2 of Addendum B) would be moved into the body of the 
rules in place of current Version 1 of Procedure XV and current Version 
1 of Addendum B where they would appear in numerical order.
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    \5\ 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 current Version 1 of Addendum B 
are added as a note to the current Version 1 of Procedure XV that 
would be moved to Appendix 1 and would be renamed Version 2. The 
rest of Version 1 of Addendum B would be deleted. All participants 
remain subject to the provisions of the current Version 2 of 
Addendum B, which NSCC is proposing to move to the body of its rules 
from Appendix 1 and rename 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 (qualifying 
bonds would still be valued at their collateral value). Finally, 
certain technical corrections are proposed to Rule 4 and the clearing 
fund formula to provide consistent terminology and delete obsolete 
references.
    NSCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \6\ and the rules and 
regulations thereunder applicable to NSCC because it will permit NSCC 
to 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, as a result, more quickly adjust and collect additional 
clearing fund requirements than the current formula. As a result NSCC 
should be better protected from the possibility of a participant's 
default because the clearing fund deposits it collects should more 
accurately reflect NSCC's exposure.
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    \6\ 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

    NSCC has not solicited or received any written comments on this 
proposal. NSCC will notify the Commission of any written comments it 
receives.

[[Page 59114]]

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 
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-2005-13 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NSCC-2005-13. 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 filing 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. 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-2005-13 and 
should be submitted on or before November 1, 2005.
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    \7\ CFR 200.30-3(a)(12).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
Jonathan G. Katz,
Secretary.
[FR Doc. E5-5564 Filed 10-7-05; 8:45 am]

BILLING CODE 8010-01-P