[Federal Register Volume 60, Number 70 (Wednesday, April 12, 1995)]
[Notices]
[Pages 18648-18649]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8924]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35561; File No. SR-GSCC 94-8]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Approving a Proposed Rule Change Relating to 
Mandatory Participation in the Yield-to-Price Conversion Process

April 3, 1995.
    On November 8, 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 require 
GSCC netting members to participate in GSCC's yield-to-price conversion 
process. On February 2, 1995, 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 approves 
the proposal.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Securities Exchange Act Release No. 35285 (January 27, 
1995), 60 FR 6579.
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I. Description

    On October 16, 1992, GSCC implemented its yield-to-price conversion 
feature, which allows yield trades to be netted and notated on the 
night the trade is entered and eliminates the need for double 
submission of when-issued trades.\3\ At that time, in order not to 
impose undue operational or systems burdens on certain firms, 
[[Page 18649]] participation in the conversion process was not made 
mandatory.

    \3\ On September 24, 1991, the Commission approved a proposed 
rule change on a temporary basis that provided authority for GSCC to 
implement the yield-to-price conversion service. Securities Exchange 
Act Release No. 29732 (September 24, 1991), 56 FR 49937. The 
Commission permanently approved GSCC's conversion service on 
February 4, 1993. Securities Exchange Act Release No. 31820 
(February 4, 1993), 58 FR 8072.
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    The conversion service permits GSCC to compare, convert, and net, 
prior to the U.S. Treasury auction, trades between members in Treasury 
note and bond issues that have been executed on the basis of the 
current market yield. GSCC members submit to GSCC trade data for yield 
trades with the price field blank. GSCC compares the trade on the basis 
of the yield. At the time of conversion, GSCC calculates the assumed 
coupon rate based on the par weighted average yield of trades compared 
by GSCC in each CUSIP adjusted down to the nearest \1/8\%. GSCC then 
uses the assumed coupon rate to convert yield trades to priced trades 
based on the U.S. Treasury standard conversion formula.
    Each day until the coupon rate is set and publicly available, GSCC 
recalculates the assumed coupon rate for the issue, converts new yield 
trades to priced trades, and adjusts the prices of previously 
converted, compared, and netted yield trades. During the pre-auction 
period, GSCC calucates the clearing fund contribution and the forward 
mark allocation for participating and nonparticipating members. On the 
day of the auction, final price data is submitted to GSCC. At that 
time, the trades are compared and netted on a final price basis.
    GSC believes that participation in the yield-to-price conversion 
process is important for a netting member and for the settlement 
process in general because otherwise a netting member's when-issued 
trades do not have GSCC's guarantee of settlement until auction date. 
Because of this, since October 1992, GSCC has not admitted an entity 
into netting system membership unless the applicant has agreed to 
participate in the yield-to-price process at the time of commencement 
of participation in the netting system. Currently, only one netting 
member still is not participating in the conversion process, and it is 
anticipated that it will commence participation in the yield-to-price 
process by the end of this year.
    As a result, participation in the yield-to-price conversion process 
by netting members will now be mandatory. However, there may be 
temporary situations, for example when an entity commences its 
participation in the netting system, in which there are operational or 
other considerations that render participation in the yield-to-price 
conversion process difficult for a member. In such circumstances, GSCC 
will retain the ability to temporarily exempt such member from the 
requirement to participate in the yield-to-price conversion process. 
For GSCC's protection, however, GSCC will calculate such member's 
clearing fund deposit and forward mark allocation payment obligations 
as if it were participating in the yield-to-price conversion process.

II. Discussion

    Section 17A(b)(3)(F) of the Act\4\ provides that the rules of a 
clearing agency must promote the prompt and accurate clearance and 
settlement of securities transactions and to assure the safeguarding of 
securities and funds in GSCC's custody or under GSCC's control. In the 
first order temporarily approving GSCC's yield-to-price conversion 
service, the Commission found that such service was consistent with 
Section 17A(b)(3)(F) in that it extended the benefits of GSCC's 
centralized automated netting system to netting members that execute 
yield trades. The Commission further stated that the service reduces 
netting members' exposure to the risk arising from contraparty default 
prior to the settlement of the transaction by allowing GSCC to 
interpose itself between the parties to a trade and guarantee 
performance of each netting member's obligation sooner.

    \4\15 U.S.C. 78q-1(b)(3)(F) (1988).
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    In the order permanently approving GSCC's yield-to-price conversion 
service, the Commission noted its potential concern about the interplay 
between voluntary submission of compared trades for GSCC netting and 
the potential financial exposure to GSCC and its members resulting from 
the exclusion of those trades from GSCC's netting operation. The 
Commission further encouraged GSCC to reconsider the appropriateness 
for netting members to withhold from the netting operation yield trades 
that were compared. GSCC delayed making the netting of such trades 
mandatory because some GSCC members needed to make further operational 
changes to accommodate mandatory netting of trades compared through the 
yield-to-price conversion system. Currently, only one member is not 
participating in the conversion process, and GSCC anticipates that such 
member will commence participation in the yield-to-price process by the 
end of this year.
    Accordingly, the Commission believes that it is appropriate to make 
participation in the yield-to-price conversion process mandatory. By 
including more trades in GSCC's netting system, the proposal furthers 
Section 17A's goals of prompt and accurate clearance of securities 
transactions. Inclusion of more member trades within GSCC's guarantee 
and margin requirements is consistent with Section 17A's goals of 
assurance of the safeguarding of securities and funds in GSCC's custody 
or under GSCC's control. Thus, the Commission believes that the 
proposed rule change is consistent with Section 17A(b)(3)(F).

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-94-08) 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. 95-8924 Filed 4-11-95; 8:45 am]
BILLING CODE 8010-01-M