[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]
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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.
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\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).
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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).
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\4\ 15 U.S.C. Sec. 78o (1988).
\5\ 15 U.S.C. Sec. 78o-5 (1988).
\6\ 17 CFR 15c3-1(a) (1975).
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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\
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\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.
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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. 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.
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\9\ 15 U.S.C. 78q-1(b)(4)(B) (1988).
\10\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
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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\
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\11\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-16450 Filed 6-26-96; 8:45 am]
BILLING CODE 8010-01-M