[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