[Federal Register Volume 61, Number 178 (Thursday, September 12, 1996)] [Notices] [Pages 48191-48192] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 96-23344] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-37656; File No. SR-GSCC-96-06] Self-Regulatory Organizations; Government Securities Clearing Corporation; Order Approving a Proposed Rule Change Permitting All Netting Members To Receive Credit Forward Mark Adjustment Payments September 6, 1996. On June 15, 1996, the Government Securities Clearing Corporation (``GSCC'') filed with the Securities and Exchange Commission (``Commission'') a proposed rule change (File No. SR-GSCC-96-06) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ to allow all netting members to receive credit forward mark adjustment payments. Notice of the [[Page 48192]] proposal was published in the Federal Register on July 29, 1996.\2\ One comment letter was received.\3\ For the reasons discussed below, the Commission is approving the proposed rule change. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1) (1988). \2\ Securities Exchange Act Release No. 37461 (July 19, 1996), 61 FR 39492. \3\ Letter from Santo C. Maggio, President, Refco Securities, Inc., to Jonathan Katz, Secretary, Commission (July 12, 1996). --------------------------------------------------------------------------- I. Description The rule change amends 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.\4\ Currently, 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 eligible category one dealer and bank netting members that are in a positive forward mark position with regard to such CUSIP. Each member's forward mark adjustment 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. --------------------------------------------------------------------------- \4\ 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. Because GSCC novates and guarantees forward settling trades prior to the settlement of such trades, GSCC incurs multi-day settlement exposure on such trades. To mitigate this risk, GSCC collects from each netting member on a daily basis an amount equivalent to the difference between the contract value of the netting member's positions and GSCC's system value based on current market values (``collateral mark''). GSCC also collects a financing mark based on the rate for all forward repurchase and reverse repurchase transactions (``repos'') which is equal to the product of the market value of the repo, GSCC's system repo rate, and the repo term. A member's forward mark adjustment payment is the sum of all collateral marks and all financing marks. --------------------------------------------------------------------------- Section 1 of GSCC Rule 13 previously provided that only category one 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 repurchase transactions (``repo'').\5\ Under the rule change, all netting members are eligible to receive credit forward mark adjustment payments, and the sixty day waiting period has been eliminated. --------------------------------------------------------------------------- \5\ GSCC believed that limiting credit pass throughs in connection with the implementation of the netting service for repos was a prudent measure to ensure that the revised forward mark adjustment process did not pose undue risk to GSCC. 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 all netting members are now eligible to receive credit forward mark adjustment payments, special provisions apply to category two dealer netting members and category two futures commission merchant (``FCM'') netting members. 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 \6\ in part because of the more modest minimum net worth requirements for these types of netting members.\7\ --------------------------------------------------------------------------- \6\ Category two dealer and FCM netting members 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. \7\ 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. --------------------------------------------------------------------------- Accordingly, the rule change provides that each category two dealer netting member and category two FCM netting member now have an option as to whether it wishes to (i) receive credit forward mark adjustment payments 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. II. Comment Letters One comment letter was received with regard to the proposed rule change from Refco Securities, Inc. (``Refco'').\8\ In its letter supporting the proposed rule change, Refco stated that it is an active participant in the government securities market and wants to participate in the repo netting process in the same manner as other dealers but as a category two dealer netting member it is unable to do so because it is not eligible to receive credit forward mark adjustment payments. --------------------------------------------------------------------------- \8\ Supra note 3. --------------------------------------------------------------------------- III. Discussion Section 17A(b)(3)(F) \9\ of the Act requires that 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. The Commission believes that the proposed rule change is consistent with GSCC's obligations under Section 17A of the Act. --------------------------------------------------------------------------- \9\ 15 U.S.C. 78q-1(b)(3)(F) (1988). --------------------------------------------------------------------------- The rule change should permit GSCC to deliver credit forward mark adjustment payments to all netting members while still assuring the safeguarding of securities and funds within its custody or control. GSCC has gained some experience with the new forward mark adjustment process since the implementation of the process in November 1995 and is now better able to assess its liquidity needs. Furthermore, GSCC will only permit category two dealer and FCM netting members to receive credit forward mark adjustment payments if such netting members maintain additional clearing fund margin. If any such netting member elects to receive credit forward mark adjustment payments, the increase in the netting member's margin factors should help ensure that GSCC has sufficient collateral if such netting member defaults on its settlement obligations. III. Conclusion On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act and in particular Section 17A of the Act and the rules and regulations thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (File No. SR-GSCC-96-06) be and hereby is approved. For the Commission by the Division of Market Regulation, pursuant to delegated authority.\10\ --------------------------------------------------------------------------- \10\17 CFR 200.30-3(a)(12) (1996). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 96-23344 Filed 9-11-96; 8:45 am] BILLING CODE 8010-01-M