[Federal Register Volume 60, Number 66 (Thursday, April 6, 1995)]
[Notices]
[Pages 17598-17600]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8493]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35557; File No. SR-GSCC-94-10]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Approving Proposed Rule Change Relating to 
Implementing a Comparison Service for Repurchase and Reverse Repurchase 
Transactions Involving Government Securities as the Underlying 
Instrument

March 31, 1995.
    On December 30, 1994, the Government Securities Clearing 
Corporation (``GSCC'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change (File No. SR-GSCC-
94-10) pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act'').\1\ Notice of the proposal was published in the Federal 
Register on February 2, 1995.\2\ No comment letters were received 
regarding the proposed rule change. For the reasons discussed below, 
the Commission is approving the proposed rule change.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\Securities Exchange Act Release No. 35288 (January 27, 1995), 
60 FR 6580.
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I. Description

    GSCC is amending its rules to provide comparison services for 
repurchase and reverse repurchase transactions involving government 
securities as the underlying instrument (``repos''). GSCC ultimately 
intends to provide comparison, netting, and risk management services 
for the opening (``on'') and closing (``off'') legs of all overnight 
repos (also referred to as next-day repos), term repos (also referred 
to as forward settling repos), and open repos, including the same-day 
settling aspects of those repos.\3\

    \3\GSCC also intends to include such services as the tracking of 
rate changes and open repo interest, the provision to the funds 
borrower of coupon protection, the provision to all parties of a 
comprehensive audit trail for their repo activity, and the 
monitoring and facilitation of collateral substitutions.
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    GSCC will offer its repo services in three phases. The first phase 
will involve the provision of comparison and netting services. The 
pending proposal would authorize GSCC to implement the initial stage of 
the first phase, which is the provision of comparison services for 
overnight and term repos whether or not the on leg occurs before, on, 
or after the submission date.\4\ GSCC will accept and compare data on 
all of the components of a repo transaction, including information on 
the on and off legs of a repo, with members providing such data via a 
single input. The second implementation phase of GSCC's planned repo 
services will focus on the provision of comparison, netting, and risk 
management services for open repos. The last phase of GSCC's planned 
implementation of repo services will focus on providing intraday 
netting and risk management services for the same-day settling aspects 
of repo transactions, including settlement of same-day settling start 
legs and close-outs of open repos.

    \4\GSCC will file proposed rule changes for the authority to 
implement both the next stage of the first phase of repro services, 
which is the provision of netting and risk management services for 
the non-same-day settling aspects of next-day and forward settling 
repo transactions, and future phases of repo services.
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    The Phase 1 comparison process for repos is substantially similar 
to the comparison process offered by GSCC today. Each party to a repo 
will submit its transaction data to GSCC.\5\ As is the case now for 
non-repo transactions, comparison of a repo trade will occur 
immediately upon the receipt by GSCC from two members of matching data. 
If all mandatory data fields that are required to match do in fact 
match, GSCC will generate a comparison.\6\

    \5\The proposed rule change establishes a new schedule of 
required data submission items applicable to all trades. In addition 
to the items on the schedule of required match data, a member must 
submit the broker reference number, contra submitting member's 
executing firm, executing firm, external reference number, price 
(rate), pricing method, and trade date. These fields are not 
matched.
    \6\The following items must match for a trade to compare: (1) 
Contra member identifying information, (2) CUSIP number, (3) 
member's identifying number, (4) par amount (quantity), (5) 
settlement amount, (6) settlement date, and (7) transaction type 
(i.e., buy, sell, repo, or reverse). In addition, these required 
match data items must match only for repo transactions: (1) start 
amount (i.e., the contract value for the start leg of the repo 
transaction) and (2) start date (i.e., the settlement date for the 
start leg of a repo transaction).
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    If the data on a repo remains uncompared at end-of-day, the 
submitter of the repo data will receive a report of an uncompared 
trade, and the participant being submitted against will receive an 
advisory. If a repo transaction has not yet been compared, it may be 
unilaterally canceled, and the submitter will receive notification of 
the cancellation. To cancel a repo that has [[Page 17599]] been 
compared, bilateral agreement is required. GSCC will delete trade data 
on repo transactions that remain uncompared from GSCC's comparison 
system the later of (1) the processing cycle after the second business 
day after the repo start date or (2) the processing cycle after the 
second business day after the date of submission of such data.
    GSCC comparison output will continue to be available on an on-line 
basis. To be eligible for comparison, both submitting members must be 
deemed eligible for repo comparison processing by GSCC. GSCC will make 
such a determination based on the demonstration by a member of its 
ability to submit designated input to and receive designated output 
from GSCC.
    The implementation of Phase 1 comparison services for repos 
requires certain modifications to GSCC's comparison processes. The 
``transaction type'' data field will be expanded to include two 
additional transaction types: ``repo'' (designating the side of the 
repo transaction that is borrowing funds and lending securities) and 
``revr'' (designating the side of the repo transaction that is lending 
funds and borrowing securities). Repos and reverse repos will compare 
only with each other and not with buy and sell activity. Two optional 
data fields have been added to bolster the comparison process for 
repos, the give-up broker field and the secondary reference number 
field. Dealer members may use the give-up broker field to identify the 
broker, if any, used to conduct the repo. GSCC will provide members 
with a standardized list of brokers for this purpose. The secondary 
reference number field may be used by dealers to provide additional 
identification information on the repos.
    Two new mandatory match items for repo transactions will be 
introduced: start date and start amount. The repo start date will 
indicate the settlement date for the start leg of the repo. The repo 
start amount will contain the contract value for the start leg of the 
repo. Initially, a $1 per repo transaction tolerance for start amount 
will be established.
    The repo rate will be a required submission field but will not be 
matched. If a participating member does not submit the settlement 
amount, GSCC will calculate it using the start amount, repo rate, and 
the number of days from start date to settlement date. Initially, a $1 
per $1 million tolerance will be established for settlement amount. 
When the settlement amounts differ, but the difference falls within the 
tolerance, GSCC will generate the comparison based upon the amount 
submitted by the broker (for brokered trades) or upon the amount 
submitted by the deliverer of the repo close leg.
    GSCC currently permits transactions that do not match in a few 
selected fields to compare in a process referred to as ``phased 
comparison.'' This program allows those transactions that do not match 
during real-time comparison to be compared at the end of the day based 
upon assumptions regarding which party submitted the correct data. 
Phased comparison of par summarization, settlement amount, and trade 
date will not apply to repo transactions.\7\ Par summarization is the 
comparison of a trade based on a match of either the total of the par 
amounts on two or more buy sides equaling the par amounts on one or 
more sell sides or the total of the par amounts on two or more sell 
sides equaling the par amounts on one or more buy sides. The phased 
comparison tolerance of $40 per $1 million for unmatched settlement 
amounts on buy/sell trades will not apply to repo transactions. This 
tolerance is used by GSCC in its phased comparison process to account 
for commission differences.\8\

    \7\Phased comparison of trade date does not apply to repos 
because trade date is not a mandatory input field for repo 
comparison.
    \8\However, as noted above, a $1 per $1 million tolerance will 
be applied to settlement amounts during real-time comparison.
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    Phased comparison of the executing firm field and the contra party 
field will apply to repo transactions. Under phased comparison of the 
executing firm field, GSCC will compare trades having unmatched 
executing firm data based upon a match between the participant numbers 
of the two submitting members. Under phased comparison of the contra 
party field, GSCC may compare a trade if all details match except the 
contra party field, and the contra party affiliate submits the matching 
detail.

II. Discussion

    The Commission believes that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder and particularly with the requirements of Section 
17A(b)(3)(F).\9\ Section 17A(b)(3)(F) requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and 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. The 
initiation of comparison services for overnight and term repos will 
begin the process whereby GSCC will provide the benefits of 
centralized, automated comparison to a broader segment of government 
securities transactions.

    \9\15 U.S.C. 78q-1(b)(3)(F) (1988).
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    Encompassing repos in CSCC's automated comparison process will 
provide industry participants with many benefits, including: (1) 
Elimination of the need for physical confirmations, (2) timely 
comparison of repo trade data, (3) enhanced ability for identification 
and correction of errors, (4) easier recordkeeping, (5) easier access 
to audit trail information, and (6) on-line inquiry capabilities. The 
proposal thus enhances the prompt and accurate clearance of repo 
transactions.
    The proposed rule change also will implement a recommendation of 
the Joint Report on the Government Securities Market.\10\ The Joint 
Report indicated that the market for repurchase and reverse repurchase 
agreements could benefit from automated comparison. Moreover, the Joint 
Report noted that automated comparison could enable regulators to 
obtain data on repos as necessary for surveillance purposes at little 
or no cost to market participants.\11\

    \10\See, Joint Report on the Government Securities Market 
(January 1992) (``Joint Report''), prepared by the Department of the 
Treasury, the Securities and Exchange Commission and the Board of 
Governors of the Federal Reserve System.
    \11\Id. at 31. Activity in the government securities repo market 
is sizable. Centralized repo processing may give regulators a truer 
picture not only of the government securities market but also of 
each market participant's total risk profile, enabling GSCC, other 
clearing agencies, and regulators to refine their risk reduction 
policies.
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    GSCC noted in its filing that it has two physically-remote data 
processing sites with redundant hardware configuration. Further GSCC 
has run a pilot program whereby it collected live data to assess the 
impact of repo processing on its existing systems. The Commission 
believes that GSCC's automated facilities are sufficient to implement 
the comparison services for repos that are approved in this order, and 
the addition of these services will not diminish GSCC's ability to 
provide its current services for non-repo transactions in a safe, 
efficient, and timely manner.

III. 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 Section 17A(b)(3)(F) of the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-GSCC-94-10) be, and hereby 
is approved.

    [[Page 17600]] For the Commission by the Division of Market 
Regulation, pursuant to delegated authority.\12\

    \12\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-8493 Filed 4-5-95; 8:45 am]
BILLING CODE 8010-01-M