[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