SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-39110; File No. SR-NSCC-97-07)
September 22, 1997
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of a Proposed Rule Change Relating to Changes
in Membership Standards
Pursuant to Section 19(b)(1) of the Securities Exchange Act
of 1934 ("Act")<1>, notice is hereby given that on August 5, 1997,
the National Securities Clearing Corporation ("NSCC") filed with
the Securities and Exchange Commission ("Commission") the
proposed rule change as 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 from interested
persons on the proposed rule change.
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The proposed rule change will amend NSCC's membership
standards to increase the minimum excess net capital requirements
imposed on members and applicants for membership.
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 such statements.<2>
(A) Self-Regulatory Organization's Statement of the
Purpose of, and Statutory Basis for, the Proposed Rule
Change
The purpose of the proposed rule change is to amend NSCC's
membership standards to increase the amount of net capital
required over the Commission's minimum net capital requirements
("excess net capital").<3> Currently, the excess net capital
requirement for all members is $50,000. The proposed amendments:
(i) will increase the excess net capital requirement for full
service members to $500,000 except for municipal securities
brokers' brokers<4> for which the excess net capital requirement
will be $100,000<5> and (ii) will increase the excess net capital
requirement for members that clear for other broker-dealers to
$1,000,000.
NSCC's current excess net capital requirements were
implemented in 1976 when NSCC was formed. The environment in
which NSCC members operate has changed significantly since that
time. In terms of the change in the value of money alone,
$50,000 in 1976 dollars is worth nearly $150,000 today. Trading
volumes and the average value of securities traded have increased
even more significantly. The Commission also has changed its
minimum net capital requirements for most NSCC members during
this time period from $25,000 (i.e., one-half of NSCC's current
excess net capital requirement) to $250,000 (i.e., one-half of
NSCC's proposed excess net capital requirement).<6>
As a result of the changing environment, it has been NSCC's
recent experience that when a member with less than $500,000 in
excess net capital has problems with even one transaction that
would not be considered large by today's standards, concerns
arise with respect to that member's ability to settle on a timely
basis and to post additional required collateral with NSCC.
Additionally, even though the size of the exposure due to the
failure of any one of these small firms is relatively small, NSCC
believes that the time and resources that it must spend
addressing problems related to small firms is disproportionate to
the magnitude of the potential loss and is unjustifiably
disruptive of NSCC's daily surveillance process.
NSCC also believes that the owners or principals of an NSCC
member should have a meaningful amount of their own assets at
stake to absorb losses before a member's excess net capital falls
below regulatory minimums and the member is required to cease
doing business. NSCC believes that this provides a strong
motivation for firms to implement appropriate risk management
controls on their own. In today's environment, NSCC does not
believe that $50,000 is a meaningful amount and believes that
$500,000 is a more appropriate amount.<7>
In addition, NSCC has recognized that members that clear for
other broker-dealers present special risks to the clearance and
settlement process. These firms become legally responsible for
the settlement of transactions of other firms and generally do
not have complete control over those transactions. Many of these
firms have surveillance procedures and other risk controls in
place and can cease clearing for a correspondent broker-dealer if
they perceive that a risk has developed. But the clearing
arrangements of these firms and marketplace rules generally
require that the clearing firm (i.e., the NSCC member) take on
settlement responsibility for most of the correspondent broker-
dealer's transactions before the clearing firm has had a chance
to review such transactions. This increases the possibility that
a clearing firm will be responsible for problematic or risky
transactions. In light of the higher risk presented by these
firms, NSCC believes that they should be subject to higher
minimum capital standards.
Currently, twenty-nine NSCC members do not meet the proposed
$500,000 standard for full service members. For this reason,
NSCC proposes that the new standard become effective on the later
of (a) one year from the date of publication in the Federal
Register of the notice of the filing of this rule change or (b)
the date of Commission approval of this rule change. NSCC
believes that this effective date will give those firms
sufficient time to obtain appropriate capital infusions or make
other clearing arrangements.
In addition, two NSCC members that clear for other broker-
dealers do not meet the $1,000,000 standard. Therefore, NSCC
proposes that this new standard become effective on the later of
(a) six months from the date of publication in the Federal
Register of the notice of the filing of this rule change or (b)
the date of Commission approval of this rule change. NSCC
believes that this effective date will give those firms
sufficient time to obtain appropriate capital infusions.
During the interim period, if any, between Commission
approval of this rule change and its effective date, NSCC will
not consider applicants that do not meet the new minimum capital
standards other than those firms applying for membership in
connection with the agreement between NSCC and the Stock Clearing
Corporation of Philadelphia ("SCCP") under which SCCP has agreed
to cease operations as a clearing corporation.
In view of the facts that (i) the costs of surveillance and
of collateral collection procedures in both time and resources
falls on NSCC and all of its members and that these costs are
disproportionately high relative to the size of the potential
loss for members with less than $500,000 in excess net capital,
(ii) the default or insolvency of any settling member potentially
imposes burdens and costs on NSCC and all of its members, and
(iii) the changes proposed by this filing are meant to reduce
these burdens and costs, NSCC believes that this filing is
consistent with Section 17A of the Act<8> and the rules and
regulations thereunder.
(B) Self-Regulatory Organization's Statement on Burden
on Competition
NSCC does not believe that the proposed rule change will
impose a burden on competition. In fact, NSCC believes that the
proposed rule change will rectify a burden on competition that
has slowly developed due to changing circumstances by having the
costs of risk management more equitably borne by all NSCC members
and by requiring all firms to have a meaningful amount of capital
at risk. NSCC believes the increased capital requirements better
reflect current marketplace realities.
(C) Self-Regulatory Organization's Statement on
Comments on the Proposed Rule Change Received from
Members, Participants or Others
No written comments relating to the proposed rule change
have 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 NSCC 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 Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing also will be
available for inspection and copying at the principal office of
NSCC. All submissions should refer to File No. SR-NSCC-97-07 and
should be submitted by [insert date 21 days from the date of
publication in the Federal Register].
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.<9>
Jonathan G. Katz
Secretary
_______________________________
1 15 U.S.C. 78s(b)(1).
2 The Commission has modified the text of the summaries
prepared by NSCC.
3 The minimum net capital requirements are set forth in
Rule 15c3-1(a) under the Act. 17 CFR 240.15c3-1(a).
4 "Municipal securities brokers' broker" is defined in
Rule 15c3-1(a)(8) under the Act. 17 CFR 240.15c3-
1(a)(8).
5 NSCC believes that this is consistent with the
Commission's approach of maintaining separate capital
rules for municipal securities brokers' brokers.
6 See 17 CFR 240.15c3-1(a)(2)(i).
7 Under the proposed rule change, NSCC will maintain its
current right to impose higher capital requirements on
members depending on the circumstances and type of
business that the member is in.
8 15 U.S.C. 78q-1.
9 17 CFR 200.30-3(a)(12).