
[Federal Register: September 14, 2010 (Volume 75, Number 177)]
[Notices]               
[Page 55836]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14se10-117]                         

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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

