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Self-Regulatory Organizations; National Securities Clearing Corporation; Order Granting Approval of a Proposed Rule Change Relating To Clearing Fund Requirements and Letters of Credit Collateralization

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Start Preamble November 27, 2002.

I. Introduction

On July 16, 2002, the National Securities Clearing Corporation filed with the Securities and Exchange Commission (“Commission”) and on July 25, 2002, and November 25, 2002, amended a proposed rule change File No. SR-NSCC-2002-05 pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”).[1] Notice of the proposal was published in the Start Printed Page 72715 Federal Register on August 27, 2002.[2] No comment letters were received. For the reasons discussed below, the Commission is granting approval of the proposed rule change.

II. Description

Under NSCC's current rules, each member, except for a Mutual Fund/Insurance Services Member, is required to maintain a minimum contribution to the clearing fund of $10,000. The first $10,000 of a member's contribution must be in cash, and if all or a part of the member's contribution is collateralized with letters of credit, the greater of $50,000 or ten percent of the member's contribution up to a maximum of $1,000,000 is required to be in cash.

To assure NSCC of more cash to meet any liquidity needs, NSCC is modifying rule 4 (Clearing Fund) and procedure XV (Clearing Fund Formula and Other Matters) of its rules and procedures to require that, except with respect to a Mutual Fund/Insurance Services Member: (1) The first 40%, but no less than $10,000, of a member's required deposit to the clearing fund must be in cash and (2) with respect to the remaining amount, no more than 25% of the required deposit may be collateralized with a letter of credit. Mutual Fund/Insurance Services Members' clearing fund requirements will remain unchanged.

Based on NSCC's current calculations, increasing the percentage of cash that must be deposited to the clearing fund will impact approximately 48 member firms. Reducing the permitted use of letters of credit will affect 21 of the approximately 33 member firms that post letters of credit. NSCC will implement these clearing fund changes no earlier than 30 days after the Commission approves the proposed rule change.

III. Discussion

Section 17A(b)(3)(F) of the Act 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.[3] By increasing the minimum percentage of cash that NSCC members must deposit to meet their required deposits to the clearing fund and by lowering the maximum percentage of their required clearing fund deposit that may be collateralized with letters of credit, the rule change will result in NSCC maintaining a higher percentage of cash in its clearing fund which will make the clearing fund more liquid. This will result in NSCC being in a better position to address any situation in which the clearing fund is called into play. As a consequence, NSCC will be better able to provide for the safeguarding of funds and securities under its custody or control or for which it is responsible.

IV. Conclusion

On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act and in particular with the requirements of section 17A(b)(3)(F) of the Act and the rules and regulations thereunder.

It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (File No. SR-NSCC-2002-05) be and hereby is approved.

Start Signature

For the Commission by the Division of Market Regulation, pursuant to delegated authority.[4]

Jill M. Peterson,

Assistant Secretary.

End Signature End Preamble


2.  Securities Exchange Act Release No. 46389, (August 21, 2002), 67 FR 55053 (August 27, 2002).

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3.  15 U.S.C. 78q-1(b)(3)(F).

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[FR Doc. 02-30888 Filed 12-5-02; 8:45 am]