[Federal Register Volume 61, Number 146 (Monday, July 29, 1996)]
[Notices]
[Pages 39492-39493]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19120]


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

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37461; File No. SR-GSCC-96-06]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Permit Netting 
Members To Receive Credit Forward Mark Adjustment Payments

July 19, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 15, 1996, the 
Government Securities Clearing Corporation (``GSCC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change (File No. SR-GSCC-96-06) as 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1) (1988).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change will amend GSCC's rules to permit GSCC 
netting members to receive credit forward mark adjustment payments from 
GSCC pursuant to GSCC's funds-only settlement process.

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 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.\2\
---------------------------------------------------------------------------

    \2\ The Commission has modified the text of the summaries 
prepared by GSCC.
---------------------------------------------------------------------------

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to amend GSCC Rule 13 to 
permit all netting members to receive credit forward mark adjustment 
payments from GSCC pursuant to GSCC's funds-only settlement process. 
The forward mark adjustment is a daily mark-to-market process for all 
net settlement positions designed to account for GSCC's ongoing 
exposure on each forward net settlement position. As the novation of 
forward settling trades occurs prior to the settlement of such trades, 
GSCC incurs multiday settlement exposure on such trades. To mitigate 
this risk, GSCC collects on a daily basis an amount equivalent to the 
difference between the contract value of netting members' positions and 
GSCC's system value based on current market value (``collateral 
mark''). GSCC also collects a financing mark based on the rate for all 
forward repurchase and reverse repurchase transactions (``repos'').\3\ 
A member's forward mark adjustment payment is the sum of all collateral 
marks and all financing marks.
---------------------------------------------------------------------------

    \3\ The financing mark is equal to the product of the market 
value of the repo, GSCC's system repo rate, and the repo term.
---------------------------------------------------------------------------

    GSCC collects forward mark adjustment payments from those netting 
members with a negative forward mark adjustment on a particular 
business day with regard to a particular CUSIP and remits forward mark 
adjustment payments to category 1 dealer and bank netting members that 
are in a positive forward mark position with regard to such CUSIP. A 
member's required payment is recalculated each day with any debit or 
credit from the previous day reversed, and a new forward mark 
adjustment payment obligation is established. Only cash can be used to 
fund forward mark adjustment payments because GSCC passes through 
credit forward mark adjustment payments.
    GSCC's rules currently provide that only category 1 dealer netting 
members and bank netting members that have been members for at least 
sixty calendar days are entitled to receive credit forward mark 
adjustment payments. This limitation was put into effect in connection 
with the implementation of GSCC's netting service for repos.\4\ GSCC

[[Page 39493]]

believed that limiting credit pass throughs in this manner was a 
prudent measure to ensure that the revised forward mark adjustment 
process did not pose undue risk to GSCC. However, with the benefit of 
some experience with the new forward mark adjustment process, GSCC now 
believes it is appropriate to pass through credit forward mark 
adjustment payments to all netting members provided that GSCC maintains 
sufficient clearing fund margin protection. In addition, GSCC believes 
that the sixty day waiting period set forth in Section 1 of GSCC Rule 
13 is no longer necessary.
---------------------------------------------------------------------------

    \4\ For a complete description of GSCC's repo netting system, 
refer to Securities Exchange Act Release No. 36491 (November 17, 
1995), 60 FR 49649 [File No. SR-GSCC-95-02] (order approving 
proposed rule change implementing GSCC's netting services for non-
same-day-settling aspects of next-day and term repo transactions).
---------------------------------------------------------------------------

    Although GSCC proposes to extend to all netting members the right 
to receive credit forward mark adjustments, GSCC believes it is prudent 
to obtain additional margin protection from category two dealer netting 
members and category two futures commission merchant (``FCM'') netting 
members in return for acquiring such right. Under GSCC's current rules, 
category two dealer netting members and category two FCM netting 
members are required to provide GSCC with additional clearing fund 
margin protection.\5\ This is due in part to the more modest minimum 
net worth requirements for such types of netting members.\6\ Therefore, 
GSCC proposes that each category two dealer netting member and category 
two FCM netting member be given an option as to whether it wishes to 
either (i) receive a full credit forward mark adjustment payment and 
have the haircut applicable to its clearing fund deposit raised from 
the current levels to levels that are based on historical two day 
volatility designed to cover ninety-five percent of price movements, as 
determined by using the greater of the price movements from the last 
quarter or the last year or (ii) not receive credit forward mark 
adjustment payments and retain its current clearing fund margin level. 
If such netting member elects to receive forward mark adjustments, the 
increase in the member's margin factors should help ensure that even in 
a situation involving a delay in the liquidation of such member's 
positions GSCC's exposure will be limited.
---------------------------------------------------------------------------

    \5\ Category two dealer and FCM netting members now have 
applicable margin factors as set by GSCC's Board of Directors which 
can be no lower than ninety-nine percent of historical one day price 
volatility. All other GSCC members have applicable margin factors as 
set by GSCC's Board of Directors which can be no lower than ninety-
five percent of historical one day price volatility.
    \6\ For example, category two dealer netting members and FCM 
netting members must maintain a net worth of $25 million, but 
category one banks and category one dealers and FCMs must maintain a 
minimum net worth of $100 million and $50 million, respectively.
---------------------------------------------------------------------------

    GSCC believes that the proposed rule change is consistent with 
Section 17A of the Act and the rules and regulations thereunder because 
it will facilitate the prompt and accurate clearance and settlement of 
securities transactions.\7\
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78q-1 (1988).
---------------------------------------------------------------------------

(B) Self-Regulatory Organization's Statement on Burden on Competition

    GSCC does not believe that the rule filing will have an impact on 
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

    Written comments relating to the proposed rule change have not yet 
been solicited or received. GSCC members will be notified of the filing 
of the proposed rule change. 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 (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 GSCC 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, N.W., Washington, D.C. 20549. 
Copies of the submissions, 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 Room, 450 Fifth Street, N.W., Washington, 
D.C. 20549. Copies of such filings will also be available for 
inspection and copying at the principal office of GSCC. All submissions 
should refer to the file number SR-GSCC-96-06 and should be submitted 
by August 19, 1996.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12) (1995).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19120 Filed 7-26-96; 8:45 am]
BILLING CODE 8010-01-M