[Federal Register Volume 59, Number 47 (Thursday, March 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5481]


[[Page Unknown]]

[Federal Register: March 10, 1994]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33703; File No. SR-GSCC-94-01]

 

Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Notice of Filing and Amendment No. 1 to Proposed Rule 
Change Relating to the Comparison and Netting of Members' Treasury 
Auction Purchases

March 2, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on January 26, 1994, the 
Government Securities Clearing Corporation (``GSCC'') 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 by the self-regulatory organization. On February 18, 
1994, GSCC filed Amendment No. 1 to the proposed rule change.\2\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
---------------------------------------------------------------------------

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\Letter from Jeffrey F. Ingber, General Counsel, GSCC to Jack 
Drogin, Branch Chief, Commission (February 15, 1994).
---------------------------------------------------------------------------

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

    The proposed rule change would modify GSCC's rules to allow GSCC to 
accept and report data on proprietary purchases of Treasury securities 
made at auction by members of GSCC's Netting System; to net the 
purchases with when-issued trades of such members in the same 
securities; and to deliver purchased securities through GSCC's clearing 
mechanism.

III. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, GSCC 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. GSCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    (a) In 1990, GSCC submitted to the United States Department of the 
Treasury (``Treasury'') a preliminary proposal, with regard to Treasury 
security purchases made at auction by members of GSCC's Netting System 
(``netting members''), to: (1) Accept and report data on such purchases 
through GSCC's Comparison System; (2) net the purchases with when-
issued trades of such members in the same securities, through the 
Netting System; and (3) assume responsibility for the delivery of the 
purchased securities, with GSCC receiving the securities via its agent 
bank directly from the appropriate Federal Reserve Banks for re-
delivery through GSCC's clearing mechanism. Over the past several 
years, this proposal (known as the ``auction takedown'' proposal) has 
been refined as the result of discussion with and comment by GSCC Board 
members, Treasury and Federal Reserve Bank of New York (``FRBNY'') 
staff, representatives of Public Securities Association committees, 
GSCC's members, and others.
    Treasury, Federal Reserve Banks, and GSCC staff are working toward 
implementation of the proposal. While certain operational details 
regarding its implementation remain to be worked out, GSCC has targeted 
the Spring of 1994 as the time period for commencement of this service.
    With the approval of GSCC's Board, this rule filing is being made 
in order for GSCC to receive the necessary authorization to implement 
the auction takedown proposal in conjunction with the Treasury, the 
Board of Governors of the Federal Reserve System (``Federal Reserve 
Board''), and the Federal Reserve Banks. This rule filing also would 
authorize GSCC more generally to establish a mechanism for taking in 
data on members' activity in eligible securities from sources such as 
exchanges and other clearing corporations and treating such data, under 
its rules, as compared trades to the same extent as if the data had 
been compared through the matching by GSCC of data submitted by two 
members.
    GSCC believes that implementation of the auction takedown proposal 
would bolster the scope and effectiveness of GSCC's Netting System and 
the credit protections afforded by that system, would reduce the 
overall level of settlement exposure in the Government securities 
marketplace, and would provide other significant benefits, for the 
following reasons:

     The netting process performed by GSCC is incomplete so 
long as it does not encompass auction purchases, because there is no 
netting of such purchases with when-issued trades in the same 
securities in the secondary market. With the netting of auction 
purchases with secondary trades, the level of potential netting 
would be increased and, in the aggregate, there would be fewer 
required securities movements to be made.
     The settlement process for Treasury securities is made 
more efficient, because the re-delivery of original purchases to the 
next, and perhaps ultimate, buyer occurs in many cases virtually 
instantaneously after delivery by the Federal Reserve Banks (i.e., 
where the auction purchase has been resold to another member).
     The proposal would reduce the counterparty credit risk 
to the Treasury resulting from the auction process.
     The level of daylight overdraft exposure may be 
lessened as the result of re-deliveries taking place earlier in the 
day.
     Currently, the information that GSCC maintains on the 
net settlement positions of members is incomplete and therefore, 
potentially misleading for risk management purposes, because those 
positions do not take into account auction purchases. For example, a 
member that appears to GSCC to be in a net short position in a 
particular CUSIP may in fact be in a net long position because of 
the size of its auction purchases. If this proposed procedure is 
implemented, more complete information on the overall distribution 
process required to settle auction purchases, and the true net 
settlement positions of members during a when-issued period, would 
be available to GSCC, which would enable it to be better manage the 
risks and exposures presented to it by members' activity.

    The general elements of GSCC's auction takedown proposal and its 
plan to establish a facility for the receipt of trade data on a locked-
in basis are reviewed below.
1. The Auction Takedown Proposal
    a. Receipt of data by GSCC. In the afternoon or evening of the day 
of a Treasury auction, the Federal Reserve Banks would transmit to GSCC 
information, on a per-CUSIP basis, regarding which netting members 
received auction awards of eligible securities and the amount and value 
of those awards at each yield by submitter. The Federal Reserve Banks 
would receive in advance the necessary authorization from netting 
members to allow the dissemination of such auction award information to 
GSCC.
    b. Eligible securities. GSCC would accept and report data on 
Treasury auction purchases of netting members, and net such purchases, 
only if information on such purchases is provided to GSCC by a Federal 
Reserve Bank. If a Treasury auction bid is submitted by a netting 
member for its own account, information on an auction award arising 
from such bid would be provided to GSCC and the purchase would be 
included in GSCC's net. If a Treasury auction bid is submitted by a 
netting member with a customer's or client's name either on the tender 
form or on an attachment to the tender form that has been submitted to 
a Federal Reserve Bank (even is such customer or client is itself a 
netting member), information on an auction award arising from such bid 
would not be provided to GSCC, and the purchase would not be eligible 
for GSCC's net. Only auction purchases of CUSIPs with an issue date 
that is one or more business days after auction date would be eligible 
for netting and settlement through GSCC; thus securities that are 
auctioned and issued on the same date would not be eligible for GSCC's 
net.
    c. Reporting of auction purchase information. There would be no 
requirement that auction award data reported to GSCC by a Federal 
Reserve Bank be matched with data submitted by the purchasing member. 
Each eligible auction award would be treated as a ``locked-in trade'' 
and would be reported by GSCC to the purchasing member as a part of the 
daily comparison output. Upon the availability of GSCC's comparison 
output, the locked-in trade would be binding on the member pursuant to 
GSCC's rules, just as a trade that has been compared by GSCC through 
the matching of data received from two members. The comparison output 
provided to members would indicate, as appropriate, that a locked-in 
trade has been reported using data supplied to GSCC by a Federal 
Reserve Bank.
    Procedures would be established that would provide the Federal 
Reserve Banks with a unilateral capability to cancel incorrect data and 
to provide new, correct data, as necessary. All such corrections would 
be promptly reported by GSCC to its members. GSCC also would provide 
each member with the capability to generate a cancellation and 
correction request to the Federal Reserve Banks should it believe that 
an error has been made; however, a member-requested adjustment would be 
made by GSCC's system only if it is acted upon by a Federal Reserve 
Bank, which would provide the corrected data to GSCC.
    d. Netting. Reported auction awards, which would be treated GSCC's 
rules as compared trades, would go directly into the net. Pursuant to 
GSCC's procedures for netting such trades, these trades would be netted 
with members' compared secondary market trades in the same CUSIP to 
establish net settlement positions. Net settlement positions arising in 
whole or part from auction purchases would be established by GSCC and 
be binding on members based on the auction award data provided by the 
Federal Reserve Banks.
    GSCC would make available netting output reflecting such positions 
to the members. At that time, subject to a limited exception discussed 
below, GSCC would become obligated to accept delivery of each member's 
auction purchases and pay for such purchases, through its agent banks, 
as though GSCC had made the auction purchases. To allow GSCC to assume 
the risks associated with undertaking these obligations, GSCC would 
require from its members Clearing Fund margin and forward mark 
allocation payment amounts calculated based on their net settlement 
positions taking into account auction purchases.
    e. Change in the forward mark allocation payment formula. In 
connection with implementation of the auction takedown proposal, GSCC's 
formula for calculating the forward mark allocation (``FMA'') payment 
obligations of most of its members will be changed. Except for category 
1 inter-dealer broker netting members, who do not have an FMA payment 
obligation, all netting members will have their FMA payment obligation 
calculated based on the entire debit mark. The current method reduces 
the debit mark by a fraction based on the five largest debit mark 
amounts. Currently, only category 2 dealers have their FMA payment 
obligation calculated based on the entire debit mark.
    This is being done in order to enhance GSCC's risk management 
process. Absent this change, there might not be sufficient time in the 
morning of issue date for GSCC to collect--via the transaction 
adjustment payment (TAP) component of its funds-only settlement 
process--the mark-to-market payments necessary to protect itself and 
its members from market exposure on net settlement positions. Pre-
collection of mark-to-market exposure amounts via FMA payments is the 
best means of assuring that GSCC would have sufficient protection, 
especially given the potentially large auction positions that would be 
encompassed within GSCC's net.
    Based on its years of experience with the netting and guaranteeing 
of forward net settlement positions and the collection of FMA payments, 
GSCC believes that this change would not pose an undue burden on 
members. Currently, members typically pay at least 75 percent of each 
debit mark on a forward net settlement position (and closer to 100 
percent of the debit mark for off-the-run issues).
    As regards its members, GSCC would continue to assume 
responsibility for ensuring the settlement of the entire amount of each 
of the deliver and receive obligations, and related payment 
obligations, generated by the net. However, as is discussed below, as 
between it and the Treasury, under certain, limited circumstances, GSCC 
would not bear the risk of loss that arises from the potential failure 
of a member to pay for auction purchases.
    f. Delivery of auction purchases on issue date. Securities 
deliveries would be made by the Federal Reserve Banks to the clearing 
bank designated by GSCC for such purpose (currently, The Bank of New 
York for Treasury Notes and Chemical Bank for all other products). A 
netting member that makes a netting-eligible auction purchase would be 
required to provide the Federal Reserve Bank from which it makes such 
auction purchase with appropriate instructions providing that such 
auction purchase be delivered to the agent bank designated by GSCC to 
act on its behalf with regard to such auction purchase. GSCC would 
continue to ``pre-load'' its agent banks during the early morning with 
netted deliver and receive instructions such that the re-deliveries by 
those banks of auction purchases would occur automatically and 
virtually instantaneously after their receipt from the Federal Reserve 
Banks.
    Deliveries would be made from a Federal Reserve Bank to GSCC 
against payment by GSCC at the auction award price. GSCC's initial 
redelivery to a member of a net long position that includes an auction 
purchase would be made against payment by such member at the greater 
of: (a) the settlement (market) value for the position nor (b) the 
average auction price for such auction purchase.
    g. Revision to the funds-only settlement process. In order to take 
into account the delivery by GSCC of securities at a value different 
than the system value, a new concept--the settlement value--is being 
introduced and incorporated into GSCC's securities and funds-only 
settlement processes. This could be either the average auction price or 
the market value of securities, as designated by GSCC. The proposal 
also would authorize GSCC to require a member to settle net obligations 
at a price different from either the market value or average auction 
price if the member is subject to higher than normal surveillance 
status, and if, in the opinion of senior GSCC management, the potential 
for such member to fail to meet its settlement obligation to GSCC is 
higher than normal.\3\
---------------------------------------------------------------------------

    \3\See Letter from Jeffrey F. Ingber, General Counsel, GSCC to 
Jack Drogin, Branch Chief, Commission (February 15, 1994).
---------------------------------------------------------------------------

    Thus, following approval of the proposed rule change, members would 
be obligated to make and receive deliveries of securities to and from 
GSCC at the ``settlement value'' of the deliver or receive obligation. 
In the vast majority of situations, the settlement value of a receive 
or deliver obligation will be the same as the system value for such 
obligation. In those cases where an adjustment has been made by GSCC to 
the system value, such adjustment will be deemed to be the ``delivery 
differential adjustment amount'' and will be collected or paid as a new 
and separate component of the member's funds-only obligation. GSCC may 
establish varying delivery differential adjustment amounts for 
different deliver obligations and/or receive obligations of one or more 
members involving the same securities.
    h. Change in the handling of fails. At the time of the 
implementation of netting, in 1989, due solely to internal operational 
concerns on the part of certain of the initial netting participants, it 
was determined that GSCC would maintain deliver and receive obligations 
on fail net settlement positions on an independent basis until settled. 
In the course of designing the auction takedown process, GSCC has 
reconsidered its handling of fails and has determined it appropriate 
now to allow the netting of fail deliver obligations and fail receive 
obligations with any other receive obligations and deliver obligations.
    GSCC believes that the operational concerns that once prevented the 
netting of fail obligations are now gone. Moreover, allowing deliver 
and receive obligations on fail net settlement positions to be netted 
with any other receive or deliver obligations will enhance GSCC's 
netting process and further minimize the number of necessary movements 
of securities. Indeed, on occasion over the past several years, in 
response to a severe fail situation created by large short positions, 
GSCC has netted fail and non-fail positions in a specific CUSIP.
    i. Mandatory nature of the proposal. Each member would be obligated 
to have all of its eligible Treasury auction purchases automatically 
delivered to GSCC's bank and encompassed within GSCC's net. There 
might, however, be certain circumstances, such as a member experiencing 
systems problems or just starting up in netting, where, because of 
operational considerations, GSCC would not allow a member's auction 
purchases to go into the net.
    j. Priority of auction purchase deliveries. GSCC would provide a 
mechanism for ensuring timely delivery of needed auction purchases to a 
member that believes that, by virtue of its secondary market trading, 
it will have on issue date a net short or flat position, or a long 
position that is smaller than the amount of auction purchases that it 
requires, in a particular CUSIP. To accomplish this, each such member 
would be able to request (an ``auction delivery request''), on a CUSIP-
by-CUSIP basis, that GSCC deliver to it needed auction purchases (the 
``requested auction purchase amount'') immediately after GSCC has 
received the securities from the Federal Reserve Banks on issue 
date.\4\ Although an auction delivery request would be made prior to a 
member's having knowledge of its net settlement position on issue date, 
a member would be able to take advantage of this facility regardless of 
the nature (i.e., long, short, or flat) of its ultimate net settlement 
position. GSCC would monitor this process to ensure that members are 
requesting priority delivery only of securities for which immediate 
delivery is needed.
---------------------------------------------------------------------------

    \4\A member cannot receive priority delivery of an amount of 
securities greater than the amount of auction purchases made by the 
member.
---------------------------------------------------------------------------

    For a member that submits an auction delivery request, GSCC would 
effectively split such member's existing net settlement position (the 
``prior net settlement position'') into two net settlement positions--a 
new long position (the ``requested position''), equal to the level of 
the requested auction purchase amount that is filled and a new 
offsetting short position (the ``offsetting position''). Both the 
requested position and the offsetting position would be guaranteed by 
GSCC.
    Each auction delivery request would have to be made to GSCC no 
later than on the second business day immediately prior to issue date 
(i.e., if the issue date is a Wednesday, the request must be made by 
GSCC's data input cutoff time in the evening of the prior Monday). An 
exception to this requirement would be allowed for purchases at 
auctions that are held on the business day immediately prior to issue 
date; in such a case, the request must be made by no later than on the 
auction date. As noted above, purchases made at auctions that are held 
on the same day as the day of issue are not eligible for GSCC's net.
    The requested position would not be netted against the offsetting 
position or against any other existing net short position in the same 
CUSIP, nor would it be offset by the offsetting position or by any 
other existing net short position for purposes of calculation of the 
member's required Clearing Fund deposit. For purposes of calculation of 
a member's required Clearing Fund deposit, a priority delivery request 
would, prior to issue date, be treated as if it were a net long 
position if it is greater than the member's actual net long position. 
This would ensure that GSCC has sufficient margin protection prior to 
issue date.
    Once all priority delivery requests are satisfied, GSCC would 
ensure that every netting member with a net long position comprised in 
whole or part of auction purchases receives from GSCC auction purchases 
in an amount equal to the lesser of such member's net long position or 
the amount of its auction purchases. Thereafter, a portion of the 
auction distribution likely would remain to be delivered out by GSCC. 
This would be done by delivering auction purchases, on an equal basis 
in $50 million increments, to each member with a net long position that 
remains unfilled. These deliveries also would take place immediately 
after GSCC's receipt of the auction distribution.
    Once the auction distribution is exhausted, the allocation of 
securities received from members in a short position in satisfaction of 
still remaining long positions then would take place pursuant to GSCC's 
normal allocation process, which first looks to fill the ``receive'' 
needs of the members with the largest long positions.
    In sum, GSCC's allocation process would automatically satisfy--from 
the Federal Reserve Banks' auction deliveries to GSCC on the morning of 
issue date--a member's long position up to the amount of the member's 
auction purchases. Thus, unless a member's secondary market trading in 
a particular CUSIP results in its having a net settlement position that 
is short, flat, or less long than the amount of its auction purchases, 
GSCC's ``normal'' allocation procedure alone would ensure that timely 
delivery would be made to the member of the entire amount of auction 
purchases that it might need to take possession of in the morning of 
issue date.
    k. Links with Federal Reserve Banks. GSCC plans to implement the 
auction takedown proposal inclusive of the Treasury auction purchases 
of all netting members, including those that take delivery of auction 
purchases from Federal Reserve Banks other than the FRBNY. In this 
regard, GSCC will establish the necessary links for the transmission of 
data to GSCC on the auction purchases of members currently receiving 
securities from other Federal Reserve Banks.
    l. Risk considerations for GSCC arising from the potential failure 
of an auction purchaser. Because, as discussed above, GSCC guarantees 
its net settlement positions upon their establishment, it has 
considered the possibility that a member that has bid successfully on 
an auction issue may fail, on or prior to issue date, and, as a result, 
may not settle its net settlement positions that arise, in whole or 
part, from such auction purchases. In such an unlikely scenario, GSCC, 
in liquidating the member's positions, might incur a loss over and 
above the amount of collateral it holds from that dealer.\5\
---------------------------------------------------------------------------

    \5\As a risk control measure, each Netting Member must promptly 
inform GSCC of the termination of any autocharge agreement that it 
has provided to a Federal Reserve Bank.
---------------------------------------------------------------------------

    Under this proposal, GSCC would continue to guarantee fully the 
secondary market when-issued trades of its members, as it does today, 
as well as each member's receipt of its auction purchases. However, 
GSCC does not believe that it is appropriate to extend its full 
settlement guarantee to the Treasury for auction purchases. GSCC would 
not be in a position to appropriately allocate the loss to its other 
members, because the party that effectively ``traded'' with the 
defaulting member was the Treasury.\6\
---------------------------------------------------------------------------

    \6\GSCC's loss allocation procedure essentially provides that, 
if GSCC incurs a loss due to the default of a member and, after 
applying to the loss all of the Clearing Fund or other collateral of 
such defaulting member held by GSCC, a deficit remains, the 
remaining loss is allocated to the members that had trading activity 
with the defaulting member for settlement on or prior to the day of 
default, in proportion to the dollar value of such trading activity 
of each such member.
---------------------------------------------------------------------------

    Pursuant to its arrangement with the Treasury, GSCC would have the 
right not to take delivery from a Federal Reserve Bank on issue date of 
part or all of the auction purchases of a member under the following 
limited and defined circumstances: (1) A netting member has made 
auction purchases in a CUSIP, and remains in a long net settlement 
position in that CUSIP; (2) GSCC has reasonable cause to believe, bases 
on information it has received, that the member cannot or will not 
timely take delivery of and fully pay for auction purchase amounts due 
it from GSCC; (3) GSCC has determined from its analysis and prevailing 
market conditions that there is reasonable cause to believe that, if it 
were to liquidate the member's position, it would incur a loss that 
would not be covered by the margin deposited by the member with GSCC 
and/or by profits from the liquidation of other positions of the 
member; and (4) GSCC notifies that appropriate Federal Reserve Bank, in 
a mutually acceptable manner, of its exercise of this right by no later 
than 8:30 a.m. New York time on the relevant issue date. GSCC can only 
exercise this right to the extent that it is to have delivered to it 
from a Federal Reserve Bank securities that it cannot net against a 
short position. Payment for any securities refused by GSCC would remain 
the responsibility of the member to whom such securities were awarded, 
pursuant to the terms established by the Treasury.
    m. Loss allocation. The need for an allocation of residual loss 
arising from the liquidation of a failed member's auction purchases is 
a remote possibility, given that GSCC would have the right until 8:30 
a.m. on the morning of issue date to refuse delivery of any residual 
net long position up to the amount of the member's auction purchases. 
Should an allocation of residual loss incurred as the result of the 
liquidation of a failed member's auction purchases be necessary, it 
would be handled in the same manner as any other allocation of loss. As 
a failed member's actual counterparty, the Treasury, cannot be 
assessed, following GSCC's current procedure is the most equitable 
means of allocating the loss, because it effectively spreads the loss 
among all of the netting members that the failed member did business 
with on or prior to the day of default.
2. Facility for the Reporting and Netting of Locked-In Trade Data
    In addition to implementing the auction takedown proposal, the 
proposed rule change would establish a facility permitting GSCC to 
treat trade data received from certain other designated sources (e.g., 
exchanges or clearing corporations) as locked-in trades. The auction 
award data would be the first type of data to be accepted by GSCC on a 
locked-in basis.
    a. Reporting of locked-in trade data. GSCC would accept trade data 
from a locked-in trade source without matching it with data provided by 
a member. GSCC would report these locked-in trades to members as part 
of its daily comparison output. For purposes of GSCC's rules, locked-in 
trades would be considered as compared trades and would be as valid, 
binding, and enforceable as comparisons issued based on a match of 
corresponding data submitted to GSCC by two members.
    Each member that makes an eligible locked-in trade would be 
obligated to provide GSCC with authorization for GSCC to receive from 
the locked-in trade source data on the locked-in trade. GSCC would not 
accept data from a locked-in trade source with regard to a member 
unless GSCC previously has received this authorization.
    A locked-in trade source that has submitted trade data to GSCC may 
have such data deleted or corrected by providing appropriate 
instruction to GSCC. Moreover, if the locked-in trade source is not a 
party to a locked-in trade, the data on the locked-in trade may be 
deleted or corrected upon receipt by GSCC of matching instructions from 
each member that is a party to such locked-in trade.
    Data on locked-in trades would be reported by GSCC to members with 
an indication that such data has been received from a locked-in trade 
source. In its sole discretion, subject to the terms and conditions 
that it has agreed to with the locked-in trade source, GSCC may decline 
to accept from a locked-in trade source data on the locked-in trades of 
a particular member or members.
    b. Netting. In order to be in a position to ensure the integrity of 
its netting process, GSCC may, in its sole discretion, subject to the 
terms and conditions that it has agreed to with the locked-in trade 
source, exclude any locked-in trade from the Netting System.
    Each netting member that makes a locked-in trade that is eligible 
for netting and settlement by GSCC must provide GSCC with authorization 
for GSCC to receive from the locked-in trade source data on the locked-
in trade. Each netting member that makes a locked-in trade that is 
eligible for netting and settlement by GSCC must provide the locked-in 
trade source with sufficient authorization for the source to transmit 
to GSCC such data as GSCC deems necessary on the locked-in trade.

3. Other Revisions

    GSCC Rule 11, Section 2 provides that a trade is eligible for 
netting and settlement through the GSCC Netting System if the number of 
business days between the scheduled settlement date and the comparison 
date is fewer than fifteen. GSCC proposes to revise this language to 
allow GSCC to establish the maximum number of business days between 
comparison and settlement by a separately published schedule. When GSCC 
made forward-settling trades eligible for the Netting System in 1990, 
it was uncertain as to the length of time that it would be required to 
guarantee settlement of those trades. Given that the price volatility 
normally increases over time, and that GSCC was not taking a full debit 
mark on forward-settling positions, GSCC was concerned about unlimited 
risk exposure, and therefore placed a fifteen business day limit on 
forward-settling trades. GSCC no longer believes this limit is 
necessary or appropriate. GSCC has adjusted its Clearing Fund formula 
to incorporate all forward-settling activity, and is now switching to 
taking a full debit mark on all forward-setting position. Therefore, 
the increased price volatility associated with a position that remains 
open for a lengthy period of time is a less significant factor.
    GSCC also proposes to collect clearance difference amounts on an 
intra-day basis. In the auction takedown context, a money difference 
may arise as a result of the pairing-off with fail obligations because 
in certain circumstances GSCC will establish a settlement value for net 
long positions that is different from the system value of those 
positions (i.e., if the average auction price is higher than the system 
price, the settlement value will be set at the average auction price). 
If a net long position that has a settlement value equal to the average 
auction price of the underlying securities is paired off with a fail 
net short position in the same CUSIP (as can happen if the security 
being issued is a reissue), there will be a money difference reflecting 
an amount owed to GSCC by the member. This money difference should be 
settled on the same day if it is a significant amount. However, at the 
time the pair-off is done, it is too late to collect the difference via 
the morning funds-only settlement process. Thus, GSCC needs the 
ability, in order to minimize its exposure, in its discretion to 
require the affected member to pay such money difference amount to it 
on the same day.
    The proposed rule change also adds language expressly making clear 
that GSCC generally, in order to ensure the efficiency and integrity of 
its comparison and netting processes, has the discretion to establish 
minimum amounts, maximum amounts, and other parameters for the 
acceptance of data submitted to it.
    (b) The proposed rule change will broaden the scope of Government 
securities activity that will receive the benefits of GSCC's 
comparison, netting, and risk management processes and reduce overall 
risk in the settlement system for Government securities. Thus, GSCC 
believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act and the rules and regulations 
thereunder.

B. Self-Regulatory Organization's Statement on Burden on Competition

    GSCC does not believe that the proposed rule change will have an 
impact on, or impose a burden on, competition.

B. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Comments on the proposed rule change have previously been solicited 
and received. Members will be notified of the rule filing, and comments 
again will be solicited, by an Important Notice. GSCC will notify the 
Commission of any written comments received by GSCC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 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 90 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, DC 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 provisions of 5 
U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, Washington, DC 
20549. Copies of such filing will also be available for inspection and 
copying at the principal office of the above-mentioned self-regulatory 
organization. All submissions should refer to File No. SR-GSCC-94-1 and 
should be submitted by March 31, 1994.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-5481 Filed 3-9-94; 8:45 am]
BILLING CODE 8010-01-M