[Federal Register Volume 75, Number 177 (Tuesday, September 14, 2010)]
[Notices]
[Page 55836]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-22801]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62849; File No. SR-NSCC-2010-07]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change To Amend Addendum C
of its Rules and Procedures To Implement Risk Enhancements To its Stock
Borrow Program
September 3, 2010.
I. Introduction
On July 1, 2010, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2010-07 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\
The proposed rule change was published for comment in the Federal
Register on July 29, 2010.\2\ No comment letters were received on the
proposal. This order approves the proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 62567 (July 14, 2010),
75 FR 44828 (July 29, 2010) (SR-NSCC-2010-07).
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II. Description
NSCC is amending its Rules to implement risk enhancements whereby
municipal and corporate bonds will be ineligible for lending through
NSCC's Stock Borrow Program (``SBP'') and Members will be prevented
from lending through the SBP securities that were issued by that Member
or any of its affiliates.
1. SBP Background
In the course of daily operations, for various reasons, NSCC's
Continuous Net Settlement (``CNS'') system often requires a number of
shares for a particular security that exceeds the number of shares
available to NSCC through Member deliveries. To improve the efficiency
of the clearing system in such situations, NSCC's has implemented
automated stock borrow procedures to meet these needs for shares of a
particular CNS security.
Members wishing to participate in the SBP notify NSCC each day of
the securities they have on deposit at The Depository Trust Company
(``DTC'') that are available to be borrowed by NSCC. After NSCC's
nighttime processing of regular deliveries, NSCC borrows from its
Members the securities that have been identified as available for the
SBP and that are needed to fulfill deliveries. The daytime and
nighttime SBP are separate processes. Members can choose to participate
only in the nighttime SBP, only in the daytime SBP, or in both.
Similarly, securities needed for unfulfilled delivery obligations
during the daytime processing are borrowed from Members that have made
securities available. NSCC place the borrowed securities in a special
CNS subaccount, and the lending Member is advanced the full market
value of the borrowed securities until they are returned. As securities
become available, borrowed securities are returned through normal long
allocations against the special subaccount.
2. Proposed Amendment to Addendum C of the NSCC's Rules
After reviewing the SBP, NSCC determined that it faced increased
risk when it borrows municipal or corporate bonds and when it borrows
securities issued by the lending Member or any of its affiliates.
First, if NSCC is unable to close out in a timely manner long positions
in corporate or municipal bonds that were created by loans of such
securities from a Member that becomes insolvent, then NSCC may possess
high concentrations of corporate or municipal bonds that it cannot
deliver to the insolvent Member. Consequently, NSCC bears an increased
risk of loss because it would be forced to liquidate those corporate or
municipal bond positions in thinly traded markets. Second, NSCC incurs
credit exposure in instances where it borrows securities from a Member
that is also the issuer of the securities or is an affiliate of the
issuer. In the event that such a Member becomes insolvent, then NSCC
incurs the additional risk that the securities loaned through the SBP
issued by the Member or its affiliate and will likely decline in value.
In both situations, NSCC believes that the risks posed by these SBP
practices outweigh the benefits to NSCC and its Members. Accordingly,
NSCC is amending its Rules so that municipal and corporate bonds will
be ineligible for lending through the SBP and so that Members will be
unable to lend securities through the SBP that are issued by the Member
or any of its affiliates. Members will be advised of the implementation
date for these changes through the issuance of NSCC Important Notices.
III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act \3\ and the rules and regulations
thereunder applicable to NSCC. In particular, the Commission believes
that the changes NSCC is making to the SBP to establish appropriate
safeguards and enhanced efficiency to mitigate risks to NSCC from the
SBP are consistent with NSCC's obligations under Section
17A(b)(3)(F).\4\ That section requires, among other things, that the
rules of a clearing agency are 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.
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\3\ 15 U.S.C. 78q-1.
\4\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act \5\ and the
rules and regulations thereunder.
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\5\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\6\ that the proposed rule change (File No. SR-NSCC-2010-07) be,
and hereby is, approved.\7\
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\6\ 15 U.S.C. 78s(b)(2).
\7\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-22801 Filed 9-13-10; 8:45 am]
BILLING CODE 8010-01-P