[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