[Federal Register Volume 61, Number 125 (Thursday, June 27, 1996)]
[Notices]
[Page 33564]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16450]


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

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37343; File No. SR-GSCC-96-02]


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

June 20, 1996.
    On February 13, 1996, the Government Securities Clearing 
Corporation (``GSCC'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change (File No. SR-GSCC-
96-02) pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act'').\1\ Notice of the proposal was published in the Federal 
Register on March 14, 1996.\2\ GSCC amended the filing on May 16, 
1996.\3\ No comment letters were received regarding the proposed rule 
change. For the reasons discussed below, the Commission is approving 
the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ Securities Exchange Act Release No. 36945 (March 7, 1996), 
61 FR 10614.
    \3\ GSCC amended the filing to request that the proposed rule 
change become effective upon approval by the Commission and not with 
the implementation of the second stage of netting services for 
repurchase and reverse repurchase transactions involving government 
securities as the underlying instrument (``repos'') as originally 
requested. Letter from Jeffrey F. Ingber, General Counsel and 
Secretary, GSCC, to Jerry W. Carpenter, Assistant Director, Division 
of Market Regulation, Commission (May 16, 1996).
---------------------------------------------------------------------------

I. Description

    GSCC is modifying its rules to reflect a new minimum financial 
criteria for category one interdealer broker (``IDB'') membership in 
GSCC's netting system. Such financial criteria will be based on levels 
of (1) excess net capital if the member is a broker-dealer registered 
with the Commission pursuant to Section 15 of the Act \4\ or (2) excess 
liquid capital if the member is a government securities broker 
registered pursuant to Section 15C of the Act.\5\ Excess net capital is 
defined in GSCC's rules as the difference between the net capital of a 
broker or dealer and the minimum net capital such broker or dealer must 
have to comply with the requirements of Rule 15c3-1(a) under the 
Act.\6\ Excess liquid capital is defined in GSCC's rules as the 
difference between the liquid capital of a government securities broker 
or dealer and the minimum liquid capital that such broker or dealer 
must have to comply with the requirements of 17 CFR 402.2 (a), (b), and 
(c).
---------------------------------------------------------------------------

    \4\ 15 U.S.C. Sec. 78o (1988).
    \5\ 15 U.S.C. Sec. 78o-5 (1988).
    \6\ 17 CFR 15c3-1(a) (1975).
---------------------------------------------------------------------------

    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 with certain ``grandfathered'' nonmember firms.\7\ 
Currently, the minimum financial requirement for category one IDBs is 
$4.2 million in excess net or liquid capital, as applicable. 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.\8\
---------------------------------------------------------------------------

    \7\ GSCC maintains a list of grandfathered entities which are 
non-netting system members that historically have done business with 
GSCC's interdealer broker 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.
    \8\ 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, nonmember firms. 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.
---------------------------------------------------------------------------

    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. Category one IDBs will continue not 
to have a minimum net worth requirement.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the Act, and specifically with Sections 17A(b)(4)(B) \9\ and 
17A(b)(3)(F).\10\ Section 17A(b)(4)(B) provides that a registered 
clearing agency may deny participation to or condition the 
participation of any person if such person does not meet such standards 
of financial responsibility as are prescribed by the rules of the 
clearing agency. Section 17A(b)(3)(F) requires 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. 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 as a condition to participation that all 
IDBs have and maintain a minimum level of excess net or liquid capital 
of at least $10 million. The Commission believes that modifying the 
minimum financial criteria for category one IDBs should strengthen 
GSCC's overall risk management process and enhance its membership 
standards. The Commission believes that the increased capital 
requirement for category one IDBs should provide for greater financial 
responsibility, operational capacity, experience, and competence. The 
Commission also believes that by enhancing its risk management process 
the increase will facilitate GSCC in fulfilling its statutory 
obligations under Section 17A of the Act with respect to the 
safekeeping of securities or funds in its custody or control or for 
which it is responsible.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78q-1(b)(4)(B) (1988).
    \10\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with Section 17A of the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-GSCC-96-02) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12) (1995).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-16450 Filed 6-26-96; 8:45 am]
BILLING CODE 8010-01-M