[Federal Register Volume 61, Number 136 (Monday, July 15, 1996)]
[Notices]
[Pages 36945-36947]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17929]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37413; File Nos. SR-MBSCC-96-02, SR-GSCC-96-03, and SR-
ISCC-96-04]


Self-Regulatory Organizations; MBS Clearing Corporation, 
Government Securities Clearing Corporation, and International 
Securities Clearing Corporation; Notice of Filings of Proposed Rule 
Changes Seeking Authority To Enter Into Limited Cross-Guarantee 
Agreements

July 9, 1996.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 11, 1996, May 10, 
1996, and May 16, 1996, the MBS Clearing Corporation (``MBSCC''), the 
Government Securities Clearing Corporation (``GSCC''), and the 
International Securities Clearing Corporation (``ISCC'') (collectively 
referred to as ``the clearing corporations''), respectively, filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule changes (File Nos. SR-MBSCC-96-02, SR-GSCC-96-03, and SR-ISCC-96-
04) as described in Items I, II, and III below, which items have been 
prepared primarily by MBSCC, GSCC, and ISCC, respectively. On May 13, 
1996, GSCC filed an amendment to the proposed rule change to a change 
the specific rule numbers used in the proposed rule change.\2\ On July 
2, 1996 and July 3, 1996, ISCC and GSCC, respectively, filed amendments 
to their proposed rule changes to make certain technical 
corrections.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule changes from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Letter from Karen Walraven, Vice President and Associate 
Counsel, GSCC, to Jerry Carpenter, Assistant Director, Division of 
Market Regulation (``Division''), Commission (May 13, 1996).
    \3\ Letter from Julie Beyers, ISCC, to Peter Geraghty, Special 
Counsel, Division, Commission (July 1, 1996), and letter from Karen 
Walraven, Vice President and Associate Counsel, GSCC, to Peter 
Geraghty, Special Counsel, Division, Commission (July 2, 1996).
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I. Self-Regulatory Organizations' Statements of the Terms of Substance 
of the Proposed Rule Changes

    The purpose of the proposed rule change is to modify the clearing 
corporations' rules to enable them to enter into limited cross-
guarantee agreements with other clearing agencies.

II. Self-Regulatory Organizations' Statements of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    In their filings with the Commission, MBSCC, GSCC, and ISCC 
included statements concerning the purpose of and basis for the 
proposed rule changes and discussed any comments that they received on 
the proposed rule changes. The text of these statements may be examined 
at the places specified in Item IV below. MBSCC, GSCC, and ISCC have 
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 
submitted by MBSCC, GSCC, and ISCC.
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(A) Self-Regulatory Organizations' Statements of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    The purpose of the proposed rule changes is to modify the rules of 
the clearing corporations to enable them to enter into limited cross-
guarantee agreements with other clearing agencies. Generally, limited 
cross-guarantee agreements contain a guarantee from one clearing agency 
to another clearing agency that can be invoked in the event of a 
default of a common member. The guarantee provides that resources of a 
defaulting common member remaining after the defaulting common member's 
obligations to the guaranteeing clearing agency have been satisfied 
will be used to satisfy the obligations of the defaulting common member 
that remain unsatisfied at the other clearing agency. The guarantee is 
limited to the amount of a defaulting common member's resources 
remaining at the guaranteeing clearing agency.\5\
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    \5\ In the case of GSCC, the principal resources likely to exist 
are funds-only settlement payments and clearing fund deposits.
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    Generally, limited cross-guarantee agreements should be beneficial 
to the clearing corporations because amounts available under limited 
cross-guarantee agreements may be applied to unpaid obligations of the 
defaulting participant. With regard to GSCC, these amounts may reduce 
possible pro rata allocations against original counterparties of the 
defaulting participant. Similarly, these

[[Page 36946]]

amounts available to ISCC may reduce the possibility of pro rata 
charges against its clearing fund. Furthermore, even though MBSCC does 
not mutualize risk, these amounts may reduce allocations against and 
losses of the original contrasides of a defaulting participant.
    The benefits accruing to the clearing corporations from a limited 
cross-guarantee agreement are illustrated by the following example:

    Dealer A, a common participant of Clearing Agency X and Clearing 
Agency Y, declares bankruptcy. Upon insolvency, Dealer A owes 
Clearing Agency Y $10 million and Clearing Agency X owes A $7 
million. In the absence of an inter-clearing agency limited cross-
guarantee agreement, Clearing Agency X would be obligated to pay $7 
million to Dealer A's bankruptcy estate and Clearing Agency Y would 
have a claim for $10 million against Dealer A's bankruptcy estate as 
a general creditor with no assurance as to the extent of recovery. 
However, an effective cross-guarantee arrangement would obligate 
Clearing Agency X to pay Clearing Agency Y an amount equal to Dealer 
A's $7 million receivable from Clearing Agency X thereby reducing 
Clearing Agency Y's net exposure from $10 million to $3 million. 
This approach would enable Clearing Agency Y to secure earlier 
payment and would allow Clearing Agency X to fulfill its obligations 
without making an actual payment to Dealer A's bankruptcy estate.

    The benefits specifically accruing to MBSCC from a limited cross-
guarantee agreement are illustrated by the following example:

    A sells to B who sells to C. A also sells to X who sells to Y; 
and A also sells to Q. B and X net out, leaving obligations of A 
owing to C, Y, and Q. A becomes insolvent. Under MBSCC's rules, if 
A's participants fund contribution is not adequate to cover the 
aggregate of C's and Y's losses, then B, X, and Q, as original 
contra-sides, would be responsible for covering such losses. 
However, before allocating C's and Y's aggregate loss to B, X, and 
Q, MBSCC may obtain resources under a limited cross-guarantee 
agreement to reduce, if not eliminate, the amount of such 
allocations. If those resources are sufficient to satisfy C's and 
Y's losses, any remaining funds would also be available for the 
satisfaction of O's losses.

    The limited cross-guarantee agreements are designed to preserve 
substantial flexibility to the counterparty clearing corporation. The 
agreements will provide a list of all the limited cross-guarantee 
agreements to which the clearing agencies are a party, including the 
counterparties to those agreements. The agreements will set forth the 
clearing agency's priority structure with respect to the order in which 
it will make guarantee payments to its counterparty clearing agencies 
(if more than one exist) in the event of a defaulting common 
participant. GSCC intends to prioritize its counterparty clearing 
agencies in the following manner: (1) Pro rata to those counterparty 
clearing agencies with a transactional nexus to GSCC; (2) the National 
Securities Clearing Corporation; and (3) pro rata to all other 
counterparty clearing agencies.\6\
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    \6\ At this time, MBSCC and ISCC have not determined the 
priority structures of their limited cross-guarantee agreements.
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    An additional source of flexibility in a limited cross-guarantee 
agreement is the length of time within which a demand for payment must 
be made. This period is negotiated and agreed to by the counterparty 
clearing agencies. GSCC believes that an appropriate time period for 
this purpose is six months.\7\ During this six month period, the 
limited cross-guarantee agreement would permit recalculations of each 
clearing agency's available resources and losses. A six month period 
would allow for changed circumstances at one or several clearing 
corporations.
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    \7\ At this time, MBSCC and ISCC have not determined a specific 
recovery period for their limited cross-guarantee agreements.
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    The Commission has stated its support of the use of limited cross-
guarantee agreements and other similar arrangements among clearing 
agencies as a method of reducing clearing agencies' risk of loss due to 
a common member's default and has encouraged clearing agencies to 
explore such agreements or arrangements.\8\
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    \8\ Securities Exchange Act Release Nos. 36431 (October 27, 
1995), 60 FR 55749 [File No. SR-GSCC-95-03] and 36597 (December 15, 
1995), 60 FR 66570 [File No. SR-MBSCC-95-05] (orders approving 
proposed rule changes authorizing the release of clearing data 
relating to participants).
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    Accordingly, GSCC's proposed rule change modifies GSCC's rules to 
enable GSCC to enter into one or more limited cross-guarantee 
agreements. Proposed Rule 41 governing limited cross-guarantee 
agreements provides that a participant is obligated to GSCC for any 
guarantee payment that GSCC is required to make to a clearing agency 
pursuant to the terms of any limited cross-guarantee agreement. GSCC's 
Rule 41 and the proposed modifications to Section 8 of Rule 4 provide 
that amounts received by GSCC under any limited cross-guarantee 
agreement will be applied to the common participant's unpaid 
obligations to GSCC and will reduce assessments against original 
counterparties of the defaulting participant. The proposed rule change 
also modifies Rule 1 of GSCC's rules to add definitions of the terms 
``common member,'' ``cross-guarantee obligation,'' ``cross-guarantee 
party,'' ``defaulting common member,'' ``defaulting member,'' and 
``limited cross-guarantee agreement.'' GSCC is proposing to amend 
Section 6 of Rule 4 to clarify that liabilities of GSCC include limited 
cross-guarantee payments made to a counterparty clearing agency 
pursuant to a limited cross-guarantee agreement.\9\
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    \9\ The definitions of the terms described above as well as the 
specific changes to GSCC's rules and procedures are attached as 
Exhibit A to GSCC's proposed rule change which is available through 
GSCC or through the Commission's public reference room.
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    MBSCC's proposed rule change will add new Rule 4 to Article III of 
MBSCC's rules. The new rule will enable MBSCC to enter into one or more 
limited cross-guarantee agreements. The new rule provides that a former 
participant \10\ is obligated to MBSCC for any guarantee payment MBSCC 
is required to make to a clearing agency pursuant to the terms of any 
limited cross-guarantee agreement. The new rule also provides that 
amounts received by MBSCC under any limited cross-guarantee agreement 
will be applied to unpaid obligations of the former participant to 
MBSCC and to reduce assessments against and losses of original contra-
side participants. A technical modification will be made to the current 
Rule 4 of Article III to renumber such rule as Rule 5. MBSCC's proposed 
rule change also modifies Rule 1 of Article I of MBSCC's rules to add 
definitions of the terms ``limited cross-guarantee agreement,'' 
``cross-guarantee obligation,'' and ``cross-guarantee party.'' MBSCC's 
proposed rule change also modifies Chapter VI of MBSCC's procedures 
relating to application of the participants fund to reflect that 
amounts received by MBSCC under any limited cross-guarantee agreement 
will be applied to unpaid obligations of a former participant of MBSCC 
and to reduce assessments against and losses of original contra-side 
participants.\11\
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    \10\ Under Section 10 of Rule 3 of Article III of MBSCC's rules, 
the term ``former participant'' is defined as a participant for whom 
MBSCC has ceased to act pursuant to Sections 1 and 2 of Rule 3 of 
Article III.
    \11\ The definitions of the terms described above as well as the 
specific changes to MBSCC's rules and procedures are attached as 
Exhibit A to MBSCC's proposed rule change which is available through 
MBSCC or through the Commission's public reference room.
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    ISCC's proposed rule change will add new Rule 13 to ISCC's rules. 
The new rule provides that an ISCC member is obligated to ISCC for any 
guarantee payment ISCC is required to make to a clearing agency 
pursuant to the terms of any limited cross-guarantee agreement. ISCC's 
proposed rule change also modifies ISCC's rules to indicate that 
amounts available to satisfy aggregate

[[Page 36947]]

losses will include amounts available under limited cross-guarantee 
agreements. ISCC's proposal also modifies Rule 1 of the ISCC's rules to 
add definitions of the terms ``limited cross-guaranty agreement,'' 
``cross-guaranty obligation,'' and ``cross-guaranty party.'' \12\
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    \12\ The definitions of the terms described above as well as the 
specific changes to ISCC's rules and procedures are attached as 
Exhibit A to ISCC's proposed rule change which is available through 
ISCC or through the Commission's public reference room.
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    MBSCC, GSCC, and ISCC believe the proposed rule changes are 
consistent with Section 17A of the Act and the rules and regulations 
thereunder because the proposals should help to safeguard securities 
and funds in their custody or control or for which they are responsible 
and should foster cooperation and coordination with persons engaged in 
the clearance and settlement of securities transactions.

(B) Self-Regulatory Organizations' Statements on Burden on Competition

    MBSCC, GSCC, and ISCC do not believe that the proposed rule changes 
will impact or impose a burden on competition.

(C) Self-Regulatory Organizations' Statements on Comments on the 
Proposed Rule Changes Received From Members, Participants, or Others

    No written comments relating to the proposed rule changes have been 
solicited or received. MBSCC, GSCC, and ISCC will notify the Commission 
of any written comments they receive.

III. Date of Effectiveness of the Proposed Rule Changes 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 MBSCC, GSCC, and ISCC consents, the 
Commission will:
    (a) By order approve such proposed rule changes or
    (b) Institute proceedings to determine whether the proposed rule 
changes 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, N.W., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule changes that are filed 
with the Commission, and all written communications relating to the 
proposed rule changes 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 Room, 450 Fifth Street, 
N.W., Washington, D.C. 20549. Copies of the respective filings will 
also be available for inspection and copying at the respective 
principal offices of MBSCC, GSCC, and ISCC. All submissions should 
refer to file number SR-MBSCC-96-02, SR-GSCC-96-03, and SR-ISCC-96-04 
and should be submitted by August 5, 1996.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-17929 Filed 7-12-96; 8:45 am]
BILLING CODE 8010-01-M