[Federal Register Volume 61, Number 25 (Tuesday, February 6, 1996)]
[Notices]
[Pages 4500-4502]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2406]



-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36788; International Series Release No. 924 File No. 
SR-GSCC-95-05]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Approving a Proposed Rule Change Permitting Entities 
Established or Organized in a Foreign Country To Become Members of 
GSCC's Netting System

January 30, 1996.
    On October 6, 1995, the Government Securities Clearing Corporation 
(``GSCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change (File No. SR-GSCC-95-05) 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ On October 30, 1995, GSCC filed an amendment to the 
proposed rule change.\2\ Notice of the proposal was published in the 
Federal Register on December 11, 1995.\3\ No comment letters were 
received. For the reasons discussed below, the Commission is granting 
approval of the proposed rule change.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ Letter from Jeffrey F. Ingber, General Counsel and 
Secretary, GSCC, to Jerry W. Carpenter, Assistant Director, Division 
of Market Regulation, Commission (October 26, 1995).
    \3\ Securities Exchange Act Release No. 36544 (December 1, 
1995), 60 FR 63555.
---------------------------------------------------------------------------

I. Description

    Currently, under GSCC's rules an entity that is organized or 
established under the laws of a country other than the United States 
(``foreign entity'') is eligible to apply to become a member of GSCC's 
comparison system if it has demonstrated to GSCC that its business and 
capabilities are such that it could reasonably expect material benefit 
from direct access to GSCC's services. Prior to this rule change, a 
foreign entity was not eligible for any of GSCC's eleven enumerated 
categories of netting system membership.\4\ The proposed rule change 
permits foreign entities that are regulated in a manner comparable to 
domestic entities eligible for GSCC membership to become members of 
GSCC's netting system. The rule change also establishes application and 
continuing membership requirements for foreign entities for both the 
comparison and netting systems.

    \4\ Foreign entities have been among the more significant 
participants in the government securities marketplace and trade 
actively with many current netting members. GSCC has maintained a 
list of ``grandfathered'' entities which are non-netting system 
members that historically have done business with GSCC's interdealer 
netting members. Business done by the interdealer broker netting 
members with grandfathered entities is treated by GSCC as business 
done with an actual netting member. Six of the seven firms on GSCC's 
list of grandfathered entities (Daiwa Europe Ltd.; Nikko Europe PLC; 
The Nikko Securities Co., Ltd. Tokyo; Nomura International PLC, 
London; Nomura International Inc., Tokyo; and Nomura Securities Co., 
Ltd. (Tokyo) are foreign entities.
---------------------------------------------------------------------------

1. Legal Considerations

    To address the particular jurisdictional concerns raised by the 
admission of foreign entities to netting system membership, GSCC will 
require foreign netting system applicants to enter into a special 
netting member agreement (``Agreement'') and to submit an opinion of 
foreign counsel (``Opinion''). The Agreement requires the foreign 
netting system applicant to adhere to GSCC's rules and provides that 
the Agreement shall be governed by and construed in accordance with the 
laws of the State of New York. The Opinion must provide that the 
execution by the foreign entity of the 

[[Page 4501]]
Agreement, the foreign entity's performance under the Agreement, and 
the exercise by GSCC of its rights and remedies under the Agreement 
will not conflict with or be impeded by the laws or regulations of the 
foreign entity's home country and will be respected by the foreign 
entity's primary foreign regulator. In addition, the Opinion must state 
that the Agreement's provision for governance by and construction in 
accordance with the laws of the State of New York will be recognized 
and given effect by the courts of the foreign entity's home country.
    Under the Agreement, the foreign entity: (i) Irrevocably waives all 
immunity from attachment of its assets in the U.S., (ii) irrevocably 
submits to the jurisdiction of a court in the U.S. with respect to any 
action or proceeding brought against it relating in any way to the 
Agreement, (iii) irrevocably waives any objection to the laying of 
venue in a court in the U.S., (iv) expressly states that any judgment 
obtained against it by GSCC may be enforced in the courts of any 
jurisdiction where it or any of its property may be found and 
irrevocably submits to the jurisdiction of each such court, and (v) 
agrees that payment of any judgment obtained by GSCC shall be in U.S. 
dollars.
    The Opinion must state that: (i) The waiver by the foreign entity 
of all immunity from attachment of its assets in the U.S. is valid and 
will be recognized and given effect by the courts of the foreign 
entity's home country, (ii) the foreign entity has the power to 
irrevocably submit to the jurisdiction of a court in the U.S. and to 
waive all objections to venue, (iii) any judgment obtained against the 
foreign entity by GSCC may be enforced in the courts of any 
jurisdiction where the foreign entity or any of its property may be 
found and its submission to the jurisdiction of each such court is 
valid and will be recognized and given effect by the courts of the 
foreign entity's home country, (iv) GSCC can institute in the foreign 
entity's home country an action for breach of the Agreement without 
first having to obtain a judgment against the entity in the U.S., and 
(v) GSCC can institute in the U.S. an action for breach of the 
Agreement without first having to obtain a judgment against the entity 
in the entity's home country.
    Under the Agreement, the foreign member must provide GSCC with 
information on its financial condition and/or trading activity that 
GSCC deems pertinent and agrees that any such information may be 
provided by GSCC to the Commission. The Opinion must state that the 
foreign entity has the power to provide GSCC with information on its 
financial condition and/or trading activity that GSCC deems pertinent 
and that neither the foreign entity's compliance with such a request 
nor the sharing by GSCC of such information with the Commission will 
conflict with or be impeded by the laws or regulations of the foreign 
entity's home country and will be respected by the foreign entity's 
primary foreign regulator.
    In addition to the Agreement and the Opinion, any foreign netting 
system applicant must submit a designation specifying an appropriate 
person or persons located in the State of New York as its agent to 
receive service of process or other legal summons.
    While there is no special agreement applicable to a foreign entity 
that applies for membership in GSCC's comparison system, such entity 
must provide to GSCC an opinion of foreign counsel. That opinion must 
state that the execution by the foreign entity of the comparison-only 
member agreement (``Comparison Agreement'') with GSCC, its performance 
under that agreement, and the exercise by GSCC of its rights and 
remedies under that agreement will not conflict with or be impeded by 
the laws or regulations of the foreign entity's home country and will 
be respected by the foreign entity's primary foreign regulator. The 
opinion also must state that the language in the Comparison Agreement 
providing that the agreement shall be governed by and construed in 
accordance with the laws of the State of New York will be recognized 
and given effect by the courts of the foreign entity's home country.

2. Minimum Financial Standards and Clearing Fund Requirements

    The proposed rule change also provides that the minimum financial 
standards and clearing fund requirements for a foreign netting system 
applicant will be the requirements applicable to the domestic netting 
system membership category that GSCC in its sole discretion determines 
is most comparable in type to the foreign applicant. In making this 
determination, GSCC will take into account, among other things, whether 
the entity's trading activity is done primarily for itself or for 
others. If a foreign netting system member falls out of compliance with 
its minimum financial requirements, the consequences of such 
noncompliance will be based on the subsection of GSCC Rule 3, Section 5 
that is applicable to the netting system membership category upon which 
a foreign entity's minimum financial standards are based.

3. Home Country Standards

    In order to be eligible for netting system membership, a foreign 
entity must be in compliance with the financial reporting and 
responsibility standards of its home country. A foreign entity applying 
for netting system membership also must be regulated in its home 
country in ways and pursuant to provisions comparable to those imposed 
on domestic GSCC netting members.

4. Information Sharing/Regulatory and Financial Reporting

    To insure appropriate information sharing, the home country 
regulator of a foreign entity applying for netting system membership 
must have entered into a memorandum of understanding with the 
Commission regarding the sharing or exchange of information. In its 
application for membership, either comparison-only or netting system, a 
foreign entity must agree to provide GSCC with all material regulatory 
filings made with its primary home country regulator over the prior 
year, audited financial statements for the prior three years, and any 
other financial information GSCC deems to be necessary in order to 
protect GSCC and its members. After acceptance to comparison-only or 
netting system membership, a foreign member must provide GSCC with all 
material regulatory filings made with its primary home country 
regulator promptly following its filing with such regulator, all 
audited financial statements, and any other financial information GSCC 
deems to be necessary in order to protect GSCC and its members.
    GSCC ordinarily will accept for financial monitoring purposes 
audited financial statements prepared in accordance with the home 
country's generally accepted accounting principles. If GSCC believes 
that those statements are not satisfactory, it will assess whether the 
foreign entity can provide information equivalent to that information 
provided by financial statements prepared in accordance with U.S. 
generally accepted accounting principles. All required financial and 
other reports must be submitted to GSCC in English. All required 
financial reports must be submitted to GSCC in dollar equivalents 
indicating the conversion rate and date used.
    As noted above, pursuant to the Agreement a foreign netting system 
member must agree to provide GSCC with information on its financial 
condition and/or trading activity 

[[Page 4502]]
deemed pertinent by GSCC and must acknowledge that GSCC may share this 
information with the Commission. In addition, GSCC will expect a 
foreign entity to prepare and provide to GSCC information to the form 
of unaudited financials sufficient for GSCC to monitor and assess the 
entity's financial condition on no less than a quarterly basis.

5. Physical Presence

    With respect to a foreign netting member's physical presence in the 
U.S., GSCC will require every foreign entity to maintain an office in 
the U.S. either directly or through a suitable agent that (i) has 
available individuals fluent in English who are knowledgeable about the 
entity's business and can assist GSCC representatives as necessary and 
(ii) ensures that the foreign member can meet its data submission and 
settlement obligations to GSCC.

II. Discussion

    Section 17A(b)(3)(F) \5\ of the Act requires that the rules of a 
clearing agency be designed to facilitate the prompt and accurate 
clearance and settlement of securities transactions. The Commission 
believes GSCC's proposed rule change is consistent with the 
requirements of section 17A(b)(3)(F) because by permitting foreign 
entities, which are significant participants in the government 
securities marketplace and which actively trade with many current 
netting members, to become members of GSCC's netting system, the 
proposal will enable GSCC to extend the benefits of its netting and 
risk management processes to a broader segment of government securities 
market participants and will enable GSCC to extend those benefits to 
current members in their trades with foreign entity counterparties. 
Thus, a greater percentage of transactions in government securities 
should be settled through the national clearance and settlement system, 
which should help facilitate prompt and accurate clearance and 
settlement of government securities transactions.

    \5\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
---------------------------------------------------------------------------

    Section 17A(b)(3)(f) also requires that the rules of a clearing 
agency be designed 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 that GSCC's rules adequately 
take into account the unique risks raised by the admission of foreign 
entities. Specifically, by requiring a foreign netting member to 
execute the Agreement and submit an Opinion, GSCC's proposal should 
help ensure that a foreign netting member can adhere to GSCC's rules 
and that jurisdictional issues will not impede the exercise of GSCC's 
rights and remedies, including, among other things, GSCC's ability to 
serve process on a foreign netting member, against a foreign netting 
member.
    The proposed rule change also takes into account GSCC's need to 
obtain information about the foreign member in order to adequately 
assess risk and to ensure compliance with GSCC's rules. The Agreement 
and Opinion facilitate GSCC's ability to obtain from foreign members 
financial and/or trading activity information which GSCC deems 
pertinent. Foreign applicants to and members of either the comparison-
only or netting systems must provide GSCC with all material regulatory 
filings submitted to their home country regulator and with audited 
financial statements. The requirement that a foreign netting 
applicant's home country regulator must have entered into a memorandum 
of understanding with the Commission regarding exchange of information 
should help to ensure that the Commission has the ability to obtain 
appropriate information on foreign netting members. To further reduce 
potential risk arising from the absence of domestic regulatory 
oversight of foreign applicants, the proposed rule change requires that 
a foreign entity must be in compliance with the financial and reporting 
standards of its home country and that it must be regulated in its home 
country in a manner that is comparable to the regulation of domestic 
netting members.
    To further guard against the potential risks posed by foreign 
netting members, the proposed rule change requires that every foreign 
netting member maintain an office in the U.S. that will ensure that the 
foreign member can meet its data submission and settlement obligations 
to GSCC. Such an office must have employees who are fluent in English 
and knowledgeable about the entity's business. Thus, GSCC will have an 
appropriate contact person readily available in event of an emergency 
situation.
    The Commission believes that the foregoing conditions should help 
GSCC ensure that foreign netting members are subject to appropriate 
legal, financial, and information sharing requirements, that they are 
regulated in a manner comparable to other GSCC members, and that they 
maintain a physical presence in the United States. As a result, the 
proposed rule change should help GSCC to assure the safeguarding of 
securities and funds which are in its custody or control or for which 
it is responsible with the expansion of its services to foreign netting 
members.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 17A of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-GSCC-95-05) be and hereby is 
approved.
    For the Commission by the Division of Market Regulation, pursuant 
to delegated authority.\6\

    \6\ 17 CFR 200.30-3(a)(12) (1994).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-2406 Filed 2-5-96; 8:45 am]
BILLING CODE 8010-01-M