[Federal Register Volume 61, Number 103 (Tuesday, May 28, 1996)]
[Notices]
[Pages 26550-26552]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13251]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37230; File No. SR-GSCC-96-04]
Self-Regulatory Organizations; Government Securities Clearing
Corporation; Notice of Proposed Rule Change Relating to Interdealer
Broker Netting Members Participating in the Netting and Settlement
Services for Repurchase and Reverse Repurchase Transactions Involving
Government Securities
May 20, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on May 10, 1996, the
Government Securities Clearing Corporation (``GSCC'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change and on May 13, 1996, amended the filing,\2\ which is 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.
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\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ Letter from Jeffrey F. Ingber, General Counsel, GSCC, to
Christine Sibille, Division of Market Regulation, Commission (May
13, 1996).
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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 allow interdealer broker
(``IDB'') netting members to become eligible for GSCC's netting service
for repurchase and reverse repurchase transactions involving government
securities as the underlying instrument (``repos'').\3\
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\3\ The text of the proposed revised rules is attached as
Exhibit A to File No. SR-GSCC-96-04 which is available for review in
the Commission's Public Reference Room.
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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
[[Page 26551]]
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.\4\
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\4\ 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
GSCC's long-range plans for repo services entail the full and
complete automation of all aspects of start and close leg processing,
including the intraday settlement of repo start legs. These services
have been and will continue to be introduced in phases.
In a previous rule filing, GSCC sought and received authority to
implement the first phase of repo netting services, which was the
provision of netting and risk management services for the non-same-day
settling aspects of next-day and forward-settling repo transactions.\5\
During the first phase, GSCC did not make IDB netting members eligible
for GSCC's repo netting services because brokering in the repo market
currently is done on a give-up basis (i.e., the brokers give up the
names of each counterparty to the other and drop out of the
transaction). GSCC anticipated addressing the various issues related to
IDB members' participation in GSCC's repo netting system in its next
repo rule filing relating to a netting and settlement service for same-
day-settling start legs. However, because the settlement of same-day-
settling start legs involves significant technological issues, GSCC
realizes it will not be able to implement such a service until the last
quarter of this year at the earliest. Therefore, GSCC is making this
rule filing in order to allow its IDB netting members to participate in
its current repo netting services.
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\5\ Securities Exchange Act Release No. 36491 (November 17,
1995), 60 FR 61577 (order approving proposed rule change relating to
the netting and risk management services for the non-same-day-
settling aspects of next-day and forward-settling repo
transactions).
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Pursuant to this rule change, IDB netting members and non-IDB
netting members (i.e., dealers) will submit data on brokered repos to
GSCC in the same manner as they do for cash transaction. GSCC will
compare, net, and settle repo start legs which are submitted prior to
the start date (i.e., non-same-day-settling start legs) and repo close
legs pursuant to GSCC's existing procedures for the netting and
settlement of repos. GSCC Rule 18, Special Provisions for Repo
Transactions, will also apply to brokered repos.\6\ The parties to
brokered repos will assume the responsibility for the intraday
settlement of same-day-settling start legs outside of GSCC.
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\6\ Rule 18 limits eligibility to participate in the repo
netting process, establishes the timing for novation of a repo
transaction, and sets forth a netting member's obligation to submit
repo transactions to GSCC, another registered clearing agency, or a
clearing agency that has been exempted from registration as a
clearing agency.
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Under this proposal, only IDBs that have and agree to maintain a
level of excess net capital or excess liquid capital, as applicable, of
at least $10 million will be eligible to submit data on repo
transactions to GSCC.\7\ To further minimize risk, GSCC will only
accept from IDBs that participate in this repo netting process data on
repo transactions that have been executed between two dealers that have
been designated as eligible to participate in GSCC's repo netting
services.\8\ As a result, the IDBs' position will always net out.
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\7\ File No. SR-GSCC-96-02, currently pending with the
Commission, will require all IDBs, regardless of whether they
participate in the repo netting service, to have and to maintain a
minimum level of excess liquid/net capital of at least $10 million.
GSCC stated in that filing that it is the intention of the Board of
Directors of GSCC no longer to consider applications for Category 1
IDB netting membership unless the IDB applicant meets the new
financial criteria. It is the Board's further intention that if File
No. SR-GSCC-96-02 has not yet been approved prior to the approval of
this filing, GSCC nonetheless will not permit a Category 1 IDB with
less than $10 million in excess liquid/net capital to participate in
the repo netting service. For a complete description of the
modifications to the minimum financial criteria for Category 1 IDB
netting members, refer to Securities Exchange Act Release No. 36945
(March 7, 1996), 61 FR 10614 (notice of proposed rule change
modifying the minimum financial criteria for Category 1 interdealer
broker netting membership).
\8\ GSCC proposes to amend the definitions for Category 1 and
Category 2 IDBs to account for repo transactions with non-GSCC
members. Specifically, Category 1 IDBs will not be limited to acting
exclusively as brokers on behalf of GSCC netting members and/or
grandfathered nonmembers with respect to repo transactions.
Similarly, Category 2 IDBs will not be limited to acting exclusively
as brokers or conducting at least ninety percent of their business
with GSCC netting members and/or grandfathered nonmembers with
respect to repo transactions. Similarly, IDB netting members will
not need to report data on repos pursuant to Section 3 of Rule 15
and the continuance standards of Rule 3, Section 5 (g) and (i) will
not take into account repo transactions.
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GSCC will impose operational requirements on IDB repo netting
members to minimize errors or problems, to help ensure a low level of
uncompared trades, and to achieve the highest possible netting factor
for IDBs. These operation requirements are: (1) Upon being informed by
either GSCC or another netting member of an error in or problem with
the data on an eligible repo transaction that it has submitted to GSCC,
an IDB netting member must act promptly and in good faith to correct
the error; (2) each IDB repo netting member will be assigned a second
GSCC participant number, and all repos must be processed using that
number;\9\ and (3) each IDB repo netting member will be required to
establish a separate account with a separate Fedwire address at a
clearing bank that will be used exclusively for the intraday settlement
outside of GSCC of same-day-settling start legs. (I.e., the dealer
member on the repo side of the start leg will deliver securities to
this separate Fedwire account, and the IDB will redeliver the
securities to the contraparty from this account.) GSCC intends to
require each IDB repo netting member to authorize its clearing bank to
allow GSCC to review this clearing account. This review will be
performed solely in order to facilitate the correction of errors and
problems. GSCC will not have or assume any responsibility for the
settlement of a same-day settling start leg.
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\9\ The second account will make it easier for GSCC to monitor
an IDB's repo activity.
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As set forth below, the benefits of allowing IDBs to participate in
the existing repo netting process are numerous.
1. Immediate Implementation
GSCC and its netting members, including IDBs, already have the
systems in place to submit data to and receive output from GSCC for
repo transactions. Thus, IDBs will only need to make minor changes to
their regular cash input and output specifications to accommodate repos
and then to test with GSCC.
2. Enhanced Risk Protection
In the same manner as it does now for netting-eligible repo legs,
GSCC will become the legal counterparty to all eligible netted close
legs and start legs submitted prior to the settlement date through
novation and will guarantee their settlement.
3. More Efficient Settlement
By encompassing more transactions into the net, the total number of
daily settlements for participants will be reduced. This will make the
settlement process more efficient, will lower clearance costs, and will
reduce participants' exposure to daylight overdraft costs.
4. Anonymity
Through repo blind brokering, IDBs will no longer give up the name
of the dealer counterparties. In this way, the dealer counterparties
will only know the IDB and will not see through to the other side of
the repo. This is the manner in which secondary market
[[Page 26552]]
activity currently is conducted for cash activity and is the means of
trading preferred by GSCC's members because of its efficiencies.
5. East of Transition to Fully Automated Services
GSCC and its participants will gain experience in processing blind-
broker repos during this first implementation stage. This experience
will aid GSCC in developing and fine-tuning the fully automated blind
brokering service that will provide for the settlement of same-day-
settling repo start legs directly through GSCC. In the future, when
fully automated services are available, IDBs will make the processing
switch to submitting locked-in trade data, and GSCC anticipates a
smooth transition to the new service.
GSCC believes the proposed rule change is consistent with the
requirements of Section 17A of the Act and the rules and regulations
thereunder. In particular, the proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act \10\ because it is designed to assure
the safeguarding of securities and funds that are in the custody or
control of GSCC or for which it is responsible, and it will reduce the
risk exposure to its solvent participants from the default of common
participants. Further, the proposed rule change will foster cooperation
and coordination with entities engaged in the clearance and settlement
of securities transactions.
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\1\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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B. Self-Regulatory Organization's Statement on Burden on Competition
GSCC does not believe that the proposed rule 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 (1) 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 submission
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-96-04 and should be submitted by June
18, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-13251 Filed 5-24-96; 8:45 am]
BILLING CODE 8010-01-M