[Federal Register Volume 59, Number 217 (Thursday, November 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27811]


[[Page Unknown]]

[Federal Register: November 10, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34935; File No. SR-GSCC-94-04]

 

Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Approving Proposed Rule Change Establishing New 
Categories of Netting System Membership for Futures Commission 
Merchants

November 3, 1994.
    On July 5, 1994, the Government Securities Clearing Corporation 
(``GSCC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-GSCC-94-04) 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ The proposed rule change establishes new categories of 
netting system membership for futures commission merchants (``FCMs''). 
The Commission published notice of the proposed rule change in the 
Federal Register on August 23, 1994.\2\ No comments were received. For 
the reasons discussed below, the Commission is approving the proposed 
rule change.
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    \1\15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\Securities Exchange Act Release No. 34529 (August 12, 1994) 
59 FR 43365.
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I. Description

Background

    GSCC was established primarily to provide the government securities 
marketplace with risk protections and a means of ensuring orderly 
settlement of member trading activity in U.S. Treasury securities. 
Initially, membership criteria were specified for large dealers, 
interdealer brokers, and clearing banks that might benefit from GSCC's 
services. Following expressions of interest in netting system 
membership by several FCMs, GSCC is establishing a Category 1 and a 
Category 2 FCM netting system membership class.
    An FCM is generally an entity that solicits orders, accepts orders, 
and/or accepts funds for the purchase or sale of exchange traded 
futures or options on futures. In effect, an FCM is the equivalent in 
the futures industry of a securities broker.\3\ The determination of 
whether an applicant is considered a Category 1 FCM or a Category 2 FCM 
will be based on the determination by GSCC as to which minimum 
financial admission criteria such FCM satisfies.\4\
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    \3\Under GSCC's rules, the term FCM is defined as having the 
meaning set forth in Section 2(a)(1)(A) of the Commodity Exchange 
Act (``CEA'') except that no entity will be considered an FCM for 
purposes of GSCC's rules unless it is registered as such with the 
Commodity Futures Trading Commission (``CFTC''). Section 2(a)(1)(A) 
of the CEA defines an FCM to include individuals, associations, 
partnerships, corporations, and trusts engaged in soliciting or in 
accepting orders for the purchase or sale of any commodity for 
future delivery on or subject to the rules of any contract market 
and that, in or in connection with such solicitation or acceptance 
of orders, accepts any money, securities, or property (or extends 
credit in lieu thereof) to margin, guarantee, or secure any trades 
or contracts that result or may result therefrom. GSCC Rule 1, 
``Definitions.''
    \4\In addition, because many participants are both broker-
dealers and FCMs, GSCC is amending its rules to expressly provide 
that if an applicant qualifies for more than one category of netting 
system membership, GSCC will determine in its sole discretion the 
proper category of netting system membership for which the FCM will 
be considered. This determination will be made at the time of 
admission as a netting system member.
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Proposed Minimum Financial Standards

    The term ``net capital'' as used in GSCC's rules and the 
Commission's uniform net capital rule is the approximate accounting 
equivalent of the term ``adjusted net capital'' as that term is used in 
the CFTC financial requirement rule.\5\ In addition, the term ``net 
worth'' as used in GSCC's rules is comparable to the concept of ``net 
capital'' in the CFTC's financial requirement rule.\6\
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    \5\Under GSCC's rules, the term ``net capital'' is defined as 
the amount equal to the net capital of a broker or dealer as defined 
in Commission Rule 15c3-1(c)(2) or any successor rule or regulation 
thereto. GSCC Rule 1, ``Definitions.''
    \6\Under GSCC's rules, for purposes of Category 1 and Category 2 
FCMs, the term ``net worth'' is defined as the amount equal to the 
excess of the assets of the FCM over the liabilities of the FCM 
computed in accordance with generally accepted accounting 
principles, including liabilities that are subordinated to the 
claims of creditors pursuant to a satisfactory subordination 
agreement as defined in 17 CFR 1.17(h) for an FCM that is not a 
registered broker-dealer. GSCC Rule 1, ``Definitions.''
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    Given these similarities, GSCC established categories of FCM 
netting membership with minimum financial standards and margin 
requirements that are equivalent to those for Category 1 and Category 2 
dealer netting members. Specifically, if an applicant is applying to 
become a Category 1 FCM, it must have, as of the end of the calendar 
month prior to the effective date of its membership, $50 million in net 
worth and $10 million in excess adjusted net capital\7\ and must meet 
the same clearing fund requirements as a Category 1 dealer netting 
member. If an applicant is applying to become a Category 2 FCM, it must 
have, as of the end of the calendar month prior to the effective date 
of its membership, $25 million in net worth and $10 million in excess 
adjusted net capital and must meet the same clearing fund requirements 
as a Category 2 dealer netting member.\8\ The minimum financial 
admission criteria are continuing membership standards, and a member 
must promptly inform GSCC any time it is not in compliance with any of 
the financial standards.
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    \7\Under GSCC's rules, for purposes of Category 1 and Category 2 
FCMs, the term ``excess adjusted net capital'' is defined as the 
amount equal to the difference between the adjusted net capital of 
an FCM and the minimum adjusted net capital that such FCM must have 
to comply with the requirements of 17 CFR 1.17 (a)(1) or (a)(2) or 
any successor regulations. GSCC Rule 1, ``Definitions.''
    \8\If an applicant satisfies the minimum financial standards 
required to become a Category 1 FCM, they will be subject to lower 
margin requirements than those imposed on a Category 2 FCM.
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    GSCC's rules require dealers to submit to GSCC certain financial 
reports that the dealers are required to file with their regulatory 
authorities. Because the CFTC requires all FCMs as of the close of 
business each month only to make and to keep a record of their 
computation of adjusted net capital and does not require FCMs to file 
such computations with their regulatory authorities, GSCC specifically 
will require every FCM netting member to submit to GSCC each month a 
copy of the computation of adjusted net capital required by the CFTC. 
GSCC also will require FCMs to submit to GSCC a copy of the CFTC's 
regulatory financial report at the time that the form is filed with the 
CFTC each quarter.

II. Discussion

    The Commission believes that GSCC's proposed rule change is 
consistent with Section 17A of the Act\9\ and in particular with 
Section 17A(b)(3)(F) of the Act.\10\ Section 17A(b)(3)(F) requires, 
among other things, that the rules of a clearing agency be designed to 
assure the safeguarding of securities and funds within its possession 
or control or for which it is responsible and to remove impediments to 
and perfect the mechanism of a national system for the prompt and 
accurate clearance and settlement of securities transactions. The 
Commission believes that GSCC's proposal to establish new categories of 
netting system membership for FCMs is consistent with these 
obligations.
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    \9\15 U.S.C. Sec. 78q-1 (1988).
    \10\15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
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    In their trading of futures on government securities, FCMs may be 
required to deliver or to accept delivery of Treasury securities but 
under certain circumstances may not be required to register as broker-
dealers.\11\ By permitting FCMs to become GSCC members, the proposed 
rule change allows GSCC to extend the services and benefits it offers 
as a registered clearing agency to a greater number of market 
participants and thereby should promote the establishment of a national 
system for the prompt clearance and settlement of securities 
transactions.
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    \11\In connection with the proposed rule change, GSCC will 
require each FCM who is not registered with the Commission as a 
broker-dealer or government securities broker-dealer and who applies 
to become a Category 1 or Category 2 FCM netting system member to 
send a representation to the Commission that the FCM is in 
compliance with Commission Rules 3a43-1 and 3a44-1 (17 CFR 240.3a43-
1 and 240.3a44-1 [1994]) and will remain in compliance with 
Commission Rules 3a43-1 and 3a44-1. Telephone conversation between 
Jeff Ingber, General Counsel, GSCC, and Jerry Carpenter, Assistant 
Director, Division of Market Regulation, Commission, and Ari 
Burstein, Attorney, Division of Market Regulation, Commission 
(November 2, 1994).
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    The minimum financial requirements implemented by GSCC for Category 
1 and Category 2 FCMs mirror those for Category 1 and Category 2 dealer 
netting members. The Commission believes that given the similarities 
between the concepts of net capital and net worth in GSCC, CFTC, and 
Commission rules, there is a basis for establishing categories of FCM 
netting membership with net capital, net worth, clearing fund, and 
margin requirements that are equivalent to those for Category 1 and 
Category 2 dealer netting members. The Commission therefore believes 
that the financial and reporting requirements established by GSCC for 
Category 1 and Category 2 FCMs along with GSCC's regular risk 
management procedures should allow GSCC to provide membership to FCMs 
consistent with GSCC's safeguarding obligations.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the Act, particularly with 
Section 17A of the Act, and with the rules and regulations thereunder.
    It is therefore ordered, Pursuant to section 19(b)(2) of the 
Act,\12\ that the proposed rule change (File No. SR-GSCC-94-04) be, and 
hereby is, approved.
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    \12\15 U.S.C. 78s(b)(2) (1988).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-27811 Filed 11-9-94; 8:45 am]
BILLING CODE 8010-01-M