[Federal Register Volume 61, Number 51 (Thursday, March 14, 1996)]
[Notices]
[Pages 10614-10615]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6091]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36945; File No. SR-GSCC-96-02]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Notice of Proposed Rule Change Modifying the Minimum 
Financial Criteria for Category One Interdealer Broker Netting 
Membership

March 7, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on February 13, 1996, the 
Government Securities Clearing Corporation (``GSCC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which items have 
been prepared primarily by GSCC. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    GSCC proposes to modify its rules to reflect a new minimum 
financial criteria for category one interdealer broker membership in 
GSCC's netting system.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, GSCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. GSCC has prepared summaries, set forth in sections A, B, 
and C below, of the most significant aspects of such statements.\2\

    \2\ The Commission has modified the text of the summaries 
prepared by GSCC.
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A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

    As a part of its continuous process of reviewing its membership 
criteria and overall risk management mechanism, GSCC seeks to enhance 
its minimum financial criteria for category one interdealer broker 
(``IDB'') membership in the netting system. Currently, GSCC has two 
categories of netting system membership for IDBs.
    Category one IDBs act exclusively as brokers and trade only with 
netting members and for a temporary period established by the GSCC 
Board with certain ``grandfathered'' non-member firms.\3\ Currently, 
the minimum financial requirement for category one IDBs is $4.2 million 
in excess net or liquid capital, as applicable.\4\

    \3\ Grandfathered non-members are non-members designated as such 
by the GSCC Board. GSCC publishes from time to time a list of such 
firms.
    \4\ If the applicant is registered with the Commission as a 
broker-dealer pursuant to Section 15 of the Act and is applying to 
become a category one IDB netting member, it must have net capital 
of at least $4.2 million. If the applicant is registered as a 
government securities broker pursuant to Section 15C of the Act and 
is applying to become a category one IDB netting member, it must 
have liquid capital of at least $4.2 million.
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    Category two IDBs have a minimum financial requirement of $25 
million in net worth and $10 million in excess net or liquid capital, 
as applicable.\5\ Unlike a category one IDB, a category two IDB is 
permitted to have up to ten percent of its business with non-netting 
members other than grandfathered non-members. This determination is 
based on the category two IDB's dollar volume of next-day and forward 
settling activity in eligible securities over the prior twenty business 
days.

    \5\ If the applicant is registered with the Commission as a 
broker-dealer pursuant to Section 15 of the Act and is applying to 
become a category two IDB netting member, it must have net worth of 
at least $25 million and excess net capital of at least $10 million. 
If the applicant is registered with the Commission as a government 
securities broker pursuant to Section 15C of the Act and is applying 
to become a category two IDB netting member, it must have net worth 
of at least $25 million and excess liquid capital of at least $10 
million.
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    GSCC's proposed rule change will modify the minimum financial 
requirement for category one IDBs to require $10 million in excess net 
or liquid capital, as applicable. GSCC believes that given the large 
dollar volume of activity that the IDBs have submitted and continue to 
submit to GSCC for netting and settlement and their principal nature 
vis-a-vis GSCC, it is appropriate to require that all IDBs have and 
maintain a minimum level of excess net or liquid capital of at least 
$10 million. Category one IDBs will

[[Page 10615]]
continue to not have a minimum net worth requirement.
    GSCC intends for this new capital requirement for category one IDBs 
\6\ to become effective with the implementation of the second stage of 
netting services for repurchase and reverse repurchase transactions 
involving government securities as the underlying instrument 
(``repos'').\7\ As of the filing of this proposed rule change, the 
Board of Directors of GSCC will no longer consider applications for 
category one IDB netting membership unless the IDB applicant has at 
least $10 million in excess net or liquid capital.\8\

    \6\ Presently, GSCC has only one category one IDB.
    \7\ For a complete description of GSCC's repo services to date, 
refer to Securities Exchange Act Release Nos. 35557 (March 31, 
1995), 60 FR 17598 [File No. SR-GSCC-94-10] (order approving a 
proposed rule change relating to implementing a comparison service 
for repos) and 36491 (November 17, 1995), 60 FR 61577 [File No. SR-
GSCC-95-02] (order approving a proposed rule change relating to 
netting services for non-same-day-settling aspects of next-day and 
term repos). GSCC anticipates the next stage of the repo services 
involving netting, settlement, and risk management of the open and 
close legs of brokered repo transactions will become effective later 
this year.
    \8\ GSCC Rule 3, Section 2 provides that the $4.2 million 
capital requirement is a minimum and that the GSCC Board of 
Directors may impose greater standards in view of the anticipated 
positions and obligations of the applicant, the anticipated risk 
associated with the volume and types of transactions the applicant 
proposes to process, and the overall financial condition of the 
applicant.
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    GSCC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act and the rules and regulations 
thereunder because it will enhance GSCC's minimum financial criteria 
for membership in the netting system and strengthen its overall risk 
management process.\9\

    \9\ 15 U.S.C. 78q-1 (1988).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    GSCC does not believe that the proposed rule change will have an 
impact or impose a burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    Comments on the proposed rule change have not yet been solicited or 
received. Members will be notified of the rule filing, and comments 
will be solicited by an important notice. GSCC will notify the 
Commission of any written comments received by GSCC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the self-regulatory organization consents, 
the Commission will:
    (A) By order approve such proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. Copies 
of the submission, all subsequent amendments, all written statements 
with respect to the proposed rule change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of GSCC. All submissions 
should refer to File No. SR-GSCC-96-02 and should be submitted by April 
4, 1996.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\

    \10\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-6091 Filed 3-13-96; 8:45 am]
BILLING CODE 8010-01-M