[Federal Register Volume 59, Number 108 (Tuesday, June 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13735]


[[Page Unknown]]

[Federal Register: June 7, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34134; File No. SR-GSCC 94-2]

 

Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Approving a Proposed Rule Change Relating to the 
Comparison and Netting of Non-Member Trades

May 31, 1994.
    On March 28, 1994, pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ the Government Securities Clearing 
Corporation (``GSCC'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change that will allow GSCC 
to continue to offer comparison and netting services for trades which 
have been submitted to GSCC by netting members on behalf of non-member 
executing firms. On April 25, 1994, the Commission published notice of 
the proposed rule change in the Federal Register to solicit comment 
from interested persons.\2\ No comments were received. This order 
permanently approves the proposal.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\Securities Exchange Act Release No. 33887 (April 8, 1994), 59 
FR 19743.
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I. Description

    On December 13, 1991, the Commission approved, on a temporary basis 
through December 31, 1992, a rule change authorizing GSCC to implement 
a non-member, ``executing firm'' information feature as an enhancement 
to its comparison service.\3\ On December 23, 1992, the Commission 
extended its temporary approval of the executing firm feature until 
June 30, 1994.\4\ The proposed rule change allows GSCC netting members 
to submit trading activity of non-members to GSCC. The proposal 
effectively expands the scope of trades eligible for GSCC's comparison 
and netting systems by allowing GSCC to identify, compare, and net 
trades where one or both sides to the transaction are non-members that 
have entered into clearing or correspondent arrangements with a GSCC 
member. The proposal will not result in GSCC's interacting directly 
with non-members.
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    \3\Securities Exchange Act Release No. 30078 (December 13, 
1991), 56 FR 66110.
    \4\Securities Exchange Act Release No. 31651 (December 23, 
1992), 57 FR 62586.
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    Prior to its first submission on behalf of a non-member 
(``executing firm''), the GSCC member (``submitting member'') must 
provide notice to GSCC of each executing firm on whose behalf the 
submitting member intends to act. The submitting member must indicate 
whether the executing firm's trades are to be compared and netted, or 
compared only. The submitting member's obligations to GSCC with respect 
to the non-member trade are the same as if the submitting member had 
executed the trade. Therefore, if the submitting member permits non-
member trades to be included in GSCC's netting system, such member's 
margin and clearing fund deposits will be calculated based on its 
trades and non-member trades submitted to the netting system. The 
submitting member also will be required to complete delivery, receipt, 
and payment on netted trades of executing firms.
    A submitting member would submit trades to GSCC on behalf of an 
executing firm that it clears for by indicating to the comparison 
system: (1) The name of the executing party associated with the member; 
and (2) the name of the executing party associated with the contra-
party member. In general, for a comparison to be generated by GSCC, 
there must be an exact match of all required match data,\5\ except for 
the contract value for which GSCC may set a tolerance on a systemwide 
basis. In order to minimize the number of uncompared trades that this 
system could initiate, GSCC in some instances may permit comparison 
even if certain fields do not match. If the identity of the executing 
firm does not match, GSCC may still compare a trade based on a match of 
submitting members. If the submitting party for the contra-party 
executing firm is incorrectly identified, GSCC may compare the trade if 
it has received notice from a GSCC member that it wishes to be deemed 
the appropriate submitting party for such executing firm. If data on a 
trade submitted against a member does not compare, but would compare if 
matched against data submitted by an affiliate of such member, GSCC may 
compare the transaction as if the member had submitted the trade 
against the affiliate.\6\ If a trade is submitted without identifying 
an executing party, GSCC will compare the trade as if there is no 
executing party for that side of the trade. GSCC would, if requested, 
translate a member's internal contra-participant identifiers to a valid 
GSCC member identifying number.\7\
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    \5\The required items that must match are participant/contra-
participant, par value, CUSIP number, buy versus sell indication, 
trade date, settlement date, final money or yield and commission, 
and executing firm/contra-executing firm.
    \6\Prior to this comparison, GSCC must have received notice from 
the two parties stating that they are affiliates and that each 
wishes to be presumed to be the correct contra-party to a side of a 
trade submitted with the other as contra-party.
    \7\This would assist GSCC members that, for operational reasons, 
have more than one contra-trading account set up for a given member.
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II. Discussion

    Section 17A(b)(3)(F) of the Act provides that the rules of a 
clearing agency must promote the prompt and accurate clearance and 
settlement of securities transactions and remove impediments to perfect 
the mechanism of a national system for the prompt and accurate 
clearance and settlement of securities transactions. By accepting non-
member trades into GSCC's comparison system, a greater number of trades 
are included in the national clearance and settlement system. These 
trades are given the benefit of a centralized clearance and settlement 
system.
    In the initial approval order,\8\ the Commission stated that GSCC 
should encourage its members to be more accurate in the data they 
submit in order to reduce, and eventually eliminate, the need for GSCC 
to substitute or supplement data on behalf of members. The Commission 
also stated that GSCC should track the identity of the submitting 
member and the executing firm in order to identify by type of match 
each trade involving a non-member. The Commission stated that the 
tracking should provide a basis for GSCC to test the accuracy of member 
input. Finally, the Commission requested that GSCC provide on a 
quarterly basis during the temporary approval period data concerning 
GSCC's comparison rates.
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    \8\Securities Exchange Act Release No. 30078 (December 13, 
1991), 56 FR 66110.
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    GSCC reports that since January of this year, the rate of 
successfully compared trades executed by non-member firms was 63%.\9\ 
This figure is down slightly from the 69% figure reported to the 
Commission for the third quarter of 1992.\10\ In order to increase the 
comparison rate, GSCC issues a report each month to members indicating 
the comparison rate for member trades and for non-member trades.\11\ 
GSCC will counsel firms that have low comparison rates for non-member 
trades.
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    \9\During this same period, forty trades for non-members have 
been submitted each day on average. Telephone conversation between 
Jeffrey Ingber, General Counsel, GSCC and Christine Sibille, 
Attorney, Commission (April 8, 1994).
    \10\See Securities Exchange Act Release No. 31651 (December 23, 
1992), 57 FR 62586.
    \11\Telephone conversation between Jeffrey Ingber, General 
Counsel, GSCC and Christine Sibille, Attorney, Commission (April 11, 
1994).
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    Currently, twelve firms act as submitting members for a total of 
271 non-member executing firms. This is a substantial increase from 
December 1992, when four firms acted as submitting members, for a total 
of fifty-eight non-members. GSCC should continue to attract more firms 
that provide a correspondent clearing service.
    The Commission believes that GSCC should be able to deem a trade as 
compared when both sides of the trade do not agree as to the executing 
firm information.\12\ GSCC structured the proposal in this manner to 
facilitate the successful comparison of trades because not all GSCC 
members' internal systems are equipped to accommodate additional 
information fields. The Commission believes that as participation in 
the executing firm program grows, the exceptions to the requirements 
for a matched trade will help bolster the percentage of successfully 
compared trades.
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    \12\Other clearing agencies have programs which allow trades to 
compare even though certain items do not precisely match. Securities 
Exchange Act Release Nos. 31352 (October 23, 1992), 57 FR 49728 
(MBSCC's Comparison and Clearing System); and 32747 (August 13, 
1993), 58 FR 44530 (NSCC's Fixed Income Transaction System).
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    GSCC has had more than two years experience in administering the 
program. To date, GSCC has not experienced any operational or other 
problems with regard to the executing firm feature. While the 
Commission believes that GSCC should continue to work to improve the 
comparison rate, the Commission also believes that GSCC has 
demonstrated sufficient expertise to warrant permanent approval of this 
rule filing.

III. Conclusion

    For the reasons stated above, the Commission finds that the 
proposed rule change is consistent with Section 17A of the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-GSCC-94-02) be, and hereby is, 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-13735 Filed 6-6-94; 8:45 am]
BILLING CODE 8010-01-M