[Federal Register Volume 60, Number 230 (Thursday, November 30, 1995)]
[Notices]
[Pages 61577-61581]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29258]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36491; File No. SR-GSCC-95-02]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Approving a Proposed Rule Change Relating to Netting 
Services for the Non-Same-Day-Settling Aspects of Next-Day and Term 
Repurchase and Reverse Repurchase Transactions

November 17, 1995.
    On August 1, 1995, the Government Securities Clearing Corporation 
(``GSCC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-GSCC-95-02) 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ On August 29, 1995, and September 19, 1995, GSCC amended 
the filing.\2\ Notice of the proposal was published in the Federal 
Register on September 26, 1995.\3\ One comment letter was received 
regarding the proposed rule change.\4\ For the reasons discussed below, 
the Commission is approving the proposed rule change.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ Letters from Jeffrey F. Ingber, General Counsel and 
Secretary, GSCC, to Christine Sibille, Division of Market 
Regulation, Commission (August 24, 1995, and September 14, 1995).
    \3\ Securities Exchange Act Release No. 36252 (September 19, 
1995), 60 FR 49649.
    \4\ Letter from Barry E. Silverman, President, Delta Government 
Options Corp., to Jonathan G. Katz, Secretary, Commission (October 
20, 1995).
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I. Description

    On May 12, 1995, GSCC implemented its comparison service for next-
day (also referred to as ``overnight'') and term repurchase and reverse 
repurchase transactions involving government securities as the 
underlying instrument (``repos'').\5\ As of October 10, 1995, forty-
five members are participating in this service. This rule filing allows 
GSCC to implement the next stage of its repo services, which is 
providing netting and risk management services for the non-same-day-
settling aspects of next-day and term repo transactions.\6\

    \5\ For a complete description of GSCC's repo comparison 
service, refer to Securities Exchange Act Release No. 35557 (March 
31, 1995), 60 FR 17598 [File No. SR-GSCC-94-10] (order approving 
proposed rule change relating to implementing a comparison service 
for repos).
    \6\ GSCC plans to offer its repo services in three phases. Phase 
I involves providing comparison and netting services for next-day 
and term repo transactions; Phase II will focus on providing 
comparison, netting, and risk management services for open repos; 
and Phase III will focus on providing intraday netting and risk 
management services for same-day settling aspects of repo 
transactions. Future phases will add the following repo services 
(not necessarily in this order): (1) tracking and facilitation of 
collateral substitutions, (2) enhanced comparison services for 
forward-settling repos, and (3) interest rate protection for 
forward-settling repos.
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    The repo netting process began in test mode on October 12, 1995, 
and continues on a daily basis. The test process is conducted using 
data submitted during the previous day's production cycle. GSCC 
anticipates fully implementing repo netting in mid-November 1995 after 
the November refunding of government securities. In order to 
accommodate the repo netting process, the proposed rule change 
substantially modifies GSCC's procedures and methodologies as described 
below.

(1) Eligibility for Netting

    GSCC netting members, other than interdealer broker netting 
members, may participate in the repo netting system upon being 
designated by GSCC's Membership and Standards Committee as eligible for 
such services.\7\ The 

[[Page 61578]]
Committee will base its determination of eligibility on: (1) 
Satisfactory participation in GSCC's repo comparison service, (2) 
demonstration by the member of its ability to meet its obligations with 
regards to the netting and settlement of repos, and (3) execution by 
the member of documents provided by GSCC to ensure that the netting and 
settlement of the member's repos will be done in conformity with GSCC's 
rules.

    \7\ Interdealer broker netting members will not be eligible for 
GSCC's repo netting service during this first phase because 
brokering in the repo market currently is done on a ``give up'' 
basis with interdealer brokers giving up the name of each 
counterparty to the other counterparty and the no longer having any 
involvement in the transaction.
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    A start leg or a close leg of a repo is eligible for netting and 
settlement through the netting system if: (1) The repo is compared 
through GSCC, (2) (i) for the start leg, the number of calendar days 
between the business day on which the repo is submitted to GSCC and the 
scheduled settlement date for the close leg associated with the 
settling start leg must not be greater than the maximum number of 
calendar days set by GSCC, which initially is 195 calendar days and 
(ii) for the close leg, the number of calendar days between the 
business day on which the repo is submitted to GSCC and the scheduled 
settlement date for the close leg must not be greater than the maximum 
number of calendar days set by GSCC, (3) netting of the start or close 
leg must occur on or before its scheduled settlement date (i.e., the 
leg cannot be a same-day settling leg), (4) data on each side of the 
repo must be submitted to GSCC by members designated as eligible to 
participate in the repo netting process, (5) the underlying securities 
must be eligible for netting,\8\ and (6) the maturity date of the 
underlying securities must be on or later than the scheduled settlement 
date of the leg.

    \8\ Pursuant to GSCC's rules, an eligible security is a security 
issued or guaranteed by the U.S., a U.S. government agency or 
instrumentality, or a U.S. government-sponsored corporation (except 
a mortgage-backed security) that GSCC has listed on its eligible 
securities master file.
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    A forward-settling start leg \9\ is not netted with other trades 
and is not guaranteed until the scheduled settlement date for that 
start leg. A forward-settling close leg is not netted with other trades 
and is not guaranteed until the scheduled settlement date for the 
associated start leg.

    \9\ A forward-settling transaction is submitted one or more 
business days prior to its scheduled settlement date.
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(2) Netting Process

    Each night a participating repo netting member's eligible repo 
transactions will be netted with its regular buy/sell cash activity and 
Treasury auction purchases in the same CUSIP to establish a single net 
position in each security. For netting purposes, the settlements 
associated with repo start legs and reverse repo close legs will be 
treated as short positions. The settlements associated with repo close 
legs and reverse repo start legs will be treated as long positions. The 
difference between a member's total short activity and its total long 
activity within a CUSIP is its net position in the CUSIP.
    GSCC will provide each participant with a daily netting system 
output that will breakdown its net positions by reporting for each 
security: (1) The net cash position, (2) the net repo position, and (3) 
the total net position.\10\ Each participant's forward-settling net 
position for each of its securities is recalculated on a daily basis. 
Forward-settling net positions automatically convert into deliver or 
receive obligations on their scheduled settlement dates.

    \10\ The daily netting system output separately lists forward-
settling start legs and close legs until such transactions are 
eligible for netting (i.e., the settlement date of the start leg).
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(3) Settlement

    Each processing day, GSCC conducts two settlement processes. These 
are a securities settlement and a funds-only settlement.\11\ For 
securities settlement, each netting member is obliged to deliver to or 
to receive from GSCC its net deliver or receive obligation in each 
CUSIP that is generated as a result of the netting process. Securities 
settlement for repo legs will not differ from securities settlement for 
regular cash activity. For funds-only settlement, GSCC will add amounts 
pertaining to repos to amounts pertaining to regular cash activity and 
Treasury auction purchases and will report such amounts within the 
existing categories (e.g., forward margin or fail mark 
obligations).\12\

    \11\ At 2:00 a.m., GSCC issues to each participant its netting 
output reports which establish the participant's deliver, receive, 
and payment obligations for the day. By 10:00 a.m., a participant 
must satisfy its funds only settlement obligations, and GSCC will 
pay funds credits owed to participants by 11:00 a.m. A participant 
may satisfy its securities deliver obligations at any time during 
the day.
    \12\ The daily net funds-only settlement amount for each netting 
member will be adjusted to reflect certain changes to GSCC's 
margining processes as discussed below in Section (7).
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(4) Coupon Protection

    When the start leg of a repo is initiated, securities are moved 
from the account of the funds borrower (i.e., the long side for the 
close leg) to the account of the funds lender (i.e., the short side for 
the close leg) until the settlement date of the close leg. However, 
because the funds lender is not entitled to any coupon payments which 
are made by the issuer directly to the funds lender's clearing bank 
while the securities are in its possession, the coupon payments will be 
passed through from the funds lender (short side) to the funds borrower 
(long side) when the coupon date is after the repo start date and on or 
before the repo close date. GSCC's current procedures for paying coupon 
on all fail obligations will not change and will apply to fail 
obligations arising from repos as well.\13\

    \13\ Under these procedures, on the coupon payment date GSCC 
will collect the coupon payment from a member with a fail net short 
position and pass the coupon payment to the member with the fail net 
long position.
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(5) Collateral Substitution

    In this initial phase of repo netting, GSCC will not perform 
collateral substitutions on an automated basis. However, participants 
may make collateral substitutions by designating new underlying 
collateral for a repo transaction through use of the ``cancel and 
correct'' feature of GSCC's comparison system. GSCC's operations staff 
manually will process the collateral substitution as it does now for 
clearing fund securities margin.

(6) Guarantee of Settlement

    As in cash transactions, GSCC novates the repo transaction at the 
time the start or close leg is netted. At that time, GSCC assumes 
contraparty responsibility and guarantees settlement of the repo. 
GSCC's guarantee includes the return of the underlying collateral to 
the funds borrower and both the return of principal (repo start amount) 
and the payment of interest to the term of the repo transaction to the 
funds lender. As discussed above, forward-settling repo start legs and 
close legs are not netted or guaranteed until the scheduled settlement 
date of the start leg.

(7) Forward Margin

    Because GSCC guarantees the settlement of all transactions once 
they are compared and netted, each day GSCC will mark-to-market each 
participant's forward-settling net positions and will recalculate each 
participant's forward margin obligation. Participating members will 
then be assessed forward margin accordingly in their daily funds 
settlement.\14\

    \14\ Because forward-settling start legs are not guaranteed 
until the scheduled settlement date, such transactions are not 
margined.
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    Margin for cash trades will continue to be calculated by marking 
each transaction to the market using the following formula:

Market value=GSCC Price x Par Amount+Accrued Coupon Interest 

[[Page 61579]]
Calculated to Scheduled Settlement Date

    The resulting value is then subtracted from the contract value to 
calculate the appropriate margin amount.
    To take into account differences between the repo market and the 
when-issued cash market, including the fact that the liquidation 
process for repos involves a cost-of-carry element, forward margin 
calculations for repos will differ from those of cash market trades. To 
margin a forward-settling repo close leg, GSCC begins by calculating 
market value, using the following formula:

Market Value=GSCC Price x Par Amount+Accrued Coupon Interest Calculated 
to Current Date

    The market value calculated is subtracted from the repo's contract 
value\15\ to establish a debit or credit collateral mark.

    \15\ The contract value of the repo is the dollar value at which 
the close leg is to be settled.
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    Next, the repo financing mark for the transaction is calculated. If 
a member in a net short position (reverse side) fails, GSCC will 
replace the position by buying securities and putting them out on repo 
in the market and thus will incur a financing cost. Conversely, if a 
member in a net long position (repo side) fails, GSCC will replace the 
position by selling securities obtained by doing a reverse repo in the 
market and thus will create interest income potential. To account for 
its possible financing costs and interest income potential, GSCC 
computes the financing mark and includes it in the clearing margin 
calculation. The formula used to calculate the financing mark is:

Financing Mark=Market Value of Repo x GSCC Repo Rate x Number of Days 
to Scheduled Settlement Date360

    GSCC tailors its repo rate to each individual repo transaction. To 
establish the repo rate, GSCC first determines if the collateral 
underlying the repo is general or specific.\16\ For general collateral 
repos, GSCC uses the remaining term of the repo to determine the 
appropriate market repo rate. For specific collateral repos, GSCC uses 
both the CUSIP and the remaining term of the repo to determine the 
specific repo rate. GSCC uses multiple market sources to obtain repo 
rates which are monitored on a daily basis. After calculating, GSCC 
debits from the reverse (short) side the financing mark and credits the 
financing mark to the repo (long) side.

    \16\ General collateral repos refer to repo transactions that do 
not specify the underlying collateral by a CUSIP number while 
specific collateral repos indicate by CUSIP number what the 
underlying security must be.
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    The total forward margin for repos is calculated using the 
following formula:

Total Forward Margin=Collateral Mark+Financing Mark

    The debit and credit margins calculated for the individual 
transactions comprising the participant's net settlement position are 
then added together. A participant's total forward margin is the 
mathematical sum of the individual debit and credit margins calculated 
across all securities and across all settlement dates.
    Any credit margin amounts resulting from both cash and repo trades 
remaining after being used to fully offset debit margin amounts across 
CUSIPs will be paid out to participants in funds settlements. There are 
the following exceptions to this pay-through policy: (1) only bank and 
category one dealer netting members that have been active in the 
netting system for at least sixty days may collect credit forward 
margin amounts, (2) if a member has been awarded Treasury securities at 
auction, GSCC's obligation to pay to such member a credit forward 
margin payment will be limited by the amount of debit forward margin 
payment(s) that under GSCC's rules the Federal Reserve Banks are not 
obligated to pay to GSCC, and (3) GSCC may suspend a member's right to 
collect credit forward margin if the member is placed on surveillance.
    Because credit margins now will be paid to participants, only cash 
may be used as margin. Members will no longer be able to post 
collateral in advance in lieu of their cash forward margin obligations. 
GSCC will pay interest on all margin amounts collected and will charge 
interest on all margin amounts paid on a daily basis using the 
effective Fed Funds rate.

(8) Clearing Fund

    GSCC's method of calculating a member's clearing fund contribution 
now is based on the net settlement positions of all of the cash and 
repo activities of the participant. The funds settlement risk component 
and the securities settlement risk component of the clearing fund 
calculation has been changed to take into account the average of a 
member's most active ten days over the most recent seventy-five 
business days instead of the average of the most recent twenty business 
days.\17\

    \17\ This change has been made to both the general rules on 
clearing fund deposits and the specific rules for Category 2 dealer 
netting members and Category 2 futures commission merchants.
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    The clearing fund formula also has been modified to anticipate any 
exposure resulting from the clearance of the present day's settlement 
transactions. Specifically, a member's outstanding net settlement 
position for clearing fund purposes is calculated alternately by 
disregarding an by including the amount of securities underlying the 
positions that are scheduled to settle that day. The portion of the 
clearing fund formula that reflects securities settlement exposure is 
calculated by taking the average offset margin amount \18\ or, if 
greater, the greatest of the following three calculations; (1) fifty 
percent of that day's gross margin amount, (2) one hundred percent of 
that day's offset margin amount calculated by excluding positions that 
are schedule to settle that day or (3) one hundred percent of that 
day's offset margin amount including positions that are scheduled to 
settle that day.\19\

    \18\ The offset margin amount is the gross margin (the dollar 
value of a member's net settlement positions multiplied by the 
appropriate margin factors) as reduced by offsetting short and long 
positions based on maturity date and par amount. The average offset 
margin, which is part of the securities settlement risk component 
discussed above, takes the average of offset margins from the ten 
most active days over the previous seventy-five business days.
    \19\ Prior to this filing, securities settlement exposure was 
calculated as the greater of the average offset margin amount or 50% 
of the gross margin amount.
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    The calculation of the securities settlement exposure for a 
Category 2 dealer netting member or a Category 2 futures commission 
merchant netting member also is revised to require such member to 
deposit the greatest (1) such member's average gross margin amount 
based on the average of the ten most active days over the most recent 
seventy-five business days, (2) such member's gross margin amount 
calculated by including positions settle that day, or (3) such member's 
gross margin amount calculated by excluding positions settling that 
day.
    The proposed rule change adds a new component, the repovolatility 
factor, to the clearing fund formula. Repo volatility factors are a set 
of percentages which are applied to the net settlement repo positions 
to cover the securities' settlement exposure posed by such repo 
activity.\20\ Initially, the repo volatility factor for general 
collateral repos will be set at fifty basis points. The repo volatility 
factor for specific repos that 

[[Page 61580]]
are expected to convert to general collateral repos on a certain date 
will be the same as the factor for general collateral repos. The repo 
volatility factor for all other specific repos will be the spread 
between the system rate for the repo and the system rate for general 
collateral repos with a minimum factor of fifty basis points.

    \20\ These percentages are derived based on GSCC's research, 
which has been conducted with the assistance of tits members, on 
historical repo rate volatility including repo market participants' 
analytics and raw data itself. GSCC is building and will maintain 
its own date base on the historical daily volatility of repo rates.
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    Each member is required to add to its clearing fund requirement the 
greater of (1) the product of the repo volatility factors and the 
market value of the member's repo transactions reduced by offsetting 
short and long positions based on maturity date and par amount \21\ 
(``offset repo volatility amount'') or (2) the average of a member's 
ten highest offset repo volatility amounts over the most recent seventy 
five business days. Participants may submit requests for the return of 
excess collateral on a monthly basis instead of on a quarterly basis.

    \21\ A twenty-five percent disallowance will be imposed an all 
offsets.
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(9) Obligation To Submit Trades

    GSCC Rule 11, Section 3, which requires a netting member to submit 
all eligible trades to GSCC for comparison and netting, is not 
applicable to a netting member's repo transactions. Rule 18, Section 4 
requires a repo netting member to submit for comparison and netting all 
repo trades eligible for netting to either GSCC, to another Commission 
registered clearing agency, or a clearing agency exempted by the 
Commission from Clearing agency registration.

II. Comments

    The Commission received one comment letter opposing the 
proposal.\22\ This commenter argues that: (1) GSCC's system does not 
novate trades, and therefore, its members may not offset repo trades on 
their books in reliance on Interpretation 41 of the Financial 
Accounting Standards Board (``FASB''); \23\ (2) GSCC's repo volatility 
factor provides inadequate protection in a volatile market; \24\ (3) 
GSCC does not have a third party credit line to pay for customer 
defaults; and (4) GSCC has not imposed trading limits on its members. 
In its response to the commenter, GSCC states that the commenter's 
arguments are based on misrepresentations and misstatements regarding 
GSCC and its processes.\25\

    \22\ Supra note 4.
    \23\ The commenter asserts that nothing in GSCC's rules or 
procedures prevents it from assigning a guaranteed obligation to a 
system participant having an equal obligation and stepping out as a 
counterparty.
    \24\ Specifically, the commenter asserts that GSCC's repo 
volatility factor is based upon two standard deviations from the 
mean rate over the historical period instead of the three standard 
deviations used by the commenter.
    \25\ In its letter, GSCC addressed each of the commenter's 
points. (1) Regarding novation of trades, GSCC asserts that its 
rules clearly set forth the novation process whereby GSCC stands in 
the middle of all net settlement positions as a counterparty to each 
member for settlement purposes, and with regard to repos, as 
counterparty it ensures the return of the underlying collateral to 
the funds borrower and both the return of principal and the payment 
of interest to the term of the repo to the funds lender. (2) 
Regarding the protection given by GSCC's repo volatility factor in a 
volatile market, GSCC asserts that it does not plan to use a two 
standard deviation measure for the repo volatility component of its 
clearing fund calculation as asserted by the commenter and states 
that the factor will reflect the interest rate exposure incurred by 
GSCC in guaranteeing payment to the funds lender in a repo 
transaction. (3) Regarding third-party credit support, GSCC asserts 
that it uses a dynamic margining process whereby margin is 
recalculated and collected daily and increases or decreases daily 
based on the level of members' net activity. GSCC states that the 
dynamic nature of the margining process provides a high level of 
assurance that GSCC's overall settlement process for the Government 
securities industry never fails. (4) Regarding system limits and 
risk assessment, GSCC asserts that it has a comprehensive and highly 
automated management reporting system that allows it to assess the 
risks presented by members' activities and changing market 
conditions. GSCC asserts that the clearing fund and forward margin 
requirements imposed on members act as limits on system-wide 
exposure because a member can only increase its trading activity to 
the extent that it can meet its daily margin obligations. Letter 
from Jeffrey F. Ingber, General Counsel and Secretary, GSCC, to 
Jerry W. Carpenter, Assistant Director, Division of Market 
Regulation, Commission (October 27, 1995).
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III. Discussion

    The Commission finds 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).\26\ 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 
Commission believes GSCC's rule change meets these goals because the 
implementation of a netting system for repos continues the process 
whereby GSCC provides the benefits of centralized automated settlement 
to a broader segment of government securities transactions and because 
the netting system is being implemented with safeguards adequately 
designed to limit the risks to GSCC and its participants associated 
with the netting of repo transactions.

    \26\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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    In addition to centralizing and automating the settlement process, 
repo netting provides several benefits to participants. Among others, 
these include: (1) guaranteed settlement, (2) reduction in FedWire 
transfer activity through the netting of a member's repo transactions 
with its cash transactions and auction purchases, (3) automated coupon 
tracking, and (4) automated output.
    The proposed rule change also is consistent with the 
recommendations of the Joint Report on the Government Securities 
Market.\27\ The Joint Report recommended, among other things, that GSCC 
include more trades in its netting system. The Joint Report noted that 
the benefits of netting are greater as more trades are included in the 
net and that as more trades are included in GSCC's net a larger 
percentage of market trades become guaranteed trades.

    \27\ Joint Report on the Government Securities Market (January 
1992) at 31 (``Joint Report''), prepared by the Department of the 
Treasury, the Securities and Exchange Commission, and the Board of 
Governors of the Federal Reserve System.
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    The Commission also believes that GSCC has put in place adequate 
safeguards to limit the settlement risk associated with repo 
transactions. For example, GSCC does not novate or guarantee the start 
leg of a repo until the scheduled settlement date. In addition, GSCC's 
guarantee is limited to repos that are schedule to settle within 195 
days of submission to GSCC. The Commission believes that these measures 
provide additional risk protection. As GSCC becomes more experienced in 
the netting of repos, it may decide that it can eliminate or modify 
these limitations consistent with its responsibility to safeguard 
securities and funds.\28\

    \28\ Should GSCC decide that it can modify or eliminate the 
limitations in a manner consistent with its statutory safeguarding 
obligations, it will file for Commission approval a proposed rule 
change.
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    The Commission further believes that GSCC's forward margin and 
clearing fund calculations provide adequate risk management. GSCC's 
margining system takes into account changes in the price of the 
underlying collateral and the risk that GSCC may need to replace the 
underlying collateral if a participant defaults. The clearing fund 
calculation is based on both a member's funds settlement amount and 
securities settlement amount. With respect to repos, GSCC also will 
collect clearing fund contributions based on changes in the financing 
rate which will reflect possible changes in repo rates. The Commission 
believes that the margin and clearing fund contributions appropriately 
take into account the risks posed to GSCC by the settlement of repos.
    The Commission also notes that GSCC's rules require that netting 

[[Page 61581]]
    members submit a repo transaction to either GSCC or another registered 
or exempted clearing agency. The Commission believes that such a 
requirement is consistent with the Act's goal of establishing a 
national system for the clearance and settlement of securities by 
including more trades within the system.\29\

    \29\ 15 U.S.C. 78q-1(a)(2)(A) (1988).
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    Currently, GSCC will not accept same-day settling repo legs or open 
repos. The Commission understands that GSCC needs to study further the 
risk involved with such repos and to modify its systems in order to 
process these trades in a safe and efficient manner. The Commission 
believes that the current limitations on eligible transactions are 
appropriate.
    The one adverse commenter argued that GSCC's system does not comply 
with FASB's Interpretation No. 41 because GSCC does not novate the 
trades.\30\ The Commission believes that the commenter mischaracterizes 
GSCC's netting process. Pursuant to Section 6 of GSCC's Rule 11, all 
obligations between netting members are terminated at the time a report 
of such positions and obligations are made available to members and are 
replaced by obligations to deliver to and/or to receive from GSCC 
securities and payments.

    \30\ The commenter noted that although Price Waterhouse LLP 
issued an opinion stating that GSCC members would be allowed to 
offset for financial statement purposes positions in repos, this 
opinion is based on GSCC's description of the novation process by 
which GSCC becomes the counterparty. Letter from Barry E. Silverman, 
supra note 4, referring to a letter from Price Waterhouse LLP to 
GSCC (May 30, 1995).
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    The adverse commenter also argues that GSCC's repo volatility 
factor should take into account a three standard deviation move instead 
of a two standard deviation move.
    Contrary to the commenter's statement, GSCC does not rely upon a 
two standard deviation movement. Instead, the current minimum repo 
volatility factor of fifty basis points exceeds the largest one day 
movement (forty-one basis points) in all general collateral repos.\31\

    \31\ In contrast, a two standard deviation movement is equal to 
ten basis points.
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    The commenter also argues that GSCC does not have sufficient 
liquidity through a third party credit line and does not limit the 
positions of members. In its release announcing standards for the 
registration of clearing agencies, the Commission stated that a 
clearing agency should establish an appropriate level of clearing fund 
contributions based on the risks to which it is subject.\32\ The 
purpose of the clearing fund is to enable a clearing agency to meet its 
obligations to its participants. The Commission believes that by 
revising its clearing fund formula to take into account repo activity, 
GSCC will have sufficient liquidity to provide for the safeguarding of 
securities and funds. Further, GSCC's clearing fund is based upon each 
member's level of trading activity.\33\ Thus, GSCC will collect 
payments from members in proportion to their trading activity.

    \32\ Securities Exchange Act Release No. 16900 (June 17, 1980), 
45 FR 41920.
    \33\ While the commenter suggests that in its repo clearing 
system it establishes trading limits for all participants, such 
limits only prohibit additional trading activity that is not 
margined (i.e., the commenter requires that a participant submit 
additional margin in order to submit additional trades).
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    Nonetheless, the Commission believes it is appropriate for GSCC to 
review its liquidity needs and resources after it has experience 
operating the repo netting system. Accordingly, GSCC has agreed to 
conduct a study of its liquidity resources within a year after 
implementing this service, and to provide a copy of such study to the 
Commission.

IV. 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-95-02) be, and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\34\

    \34\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29258 Filed 11-29-95; 8:45 am]
BILLING CODE 8010-01-M