[Federal Register Volume 61, Number 183 (Thursday, September 19, 1996)]
[Notices]
[Pages 49367-49368]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24058]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37678; File No. SR-GSCC-96-9]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Notice of Filing of a Proposal Rule Change Relating to the 
Establishment of a Mechanism for Returning Certain Excess Clearing Fund 
Collateral to Members on a Daily Basis

September 13, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ notice is hereby given that on August 11, 1996, the 
Government Securities Clearing Corporation (``GSCC'') filed with the 
Securities Exchange Commission (``Commission'') the proposed rule 
change (File No. SR-GSCC-96-9) 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.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    GSCC is filing a proposed rule change that establishes a mechanism 
for returning certain excess clearing fund collateral to members on a 
daily basis rather than on the current monthly basis.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In filing with the Commission, GSCC included statements concerning 
the purpose of and basis for the proposed rule change and discussed any 
comments that 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\
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    \2\ The Commission has modified the text of the statements GSCC 
submitted.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    GSCC proposes to amend its rules to establish a mechanism for 
returning certain excess clearing fund collateral to members on a daily 
basis rather than on the current monthly basis. GSCC's clearing fund is 
designed to protect GSCC from the exposure presented by fluctuations in 
the value of a defaulting member's net settlement position from the 
most recent marking-to-market until liquidation of that position. The 
daily mark-to-market mechanism, which is applicable to forward net 
settlement positions, is designed to bring net settlement positions 
from contract value to current market value.
    The clearing fund collateral pool in fact serves a number of 
purposes. It allows GSCC to have on deposit from each netting member 
assets sufficient to satisfy any losses that may otherwise be incurred 
by GSCC and ultimately its members as the result of the member's 
default and the resultant close out of that member's net settlement 
position. It permits GSCC to maintain a total asset

[[Page 49368]]

amount sufficient to satisfy potential losses to it and its members 
resulting from the default of more than one member or the failure of a 
defaulting member's counterparties to pay their pro rata allocation of 
loss. It also allows GSCC to ensure that it has sufficient liquidity at 
all times to meet its payment and delivery obligations. Thus, the 
maintenance of an appropriate overall level of clearing fund collateral 
is vital to GSCC's risk-management mechanism.
    As GSCC cannot know with any certainty what liquidation exposure it 
might incur or what its overall liquidity requirements might be, the 
calculation of clearing fund deposit requirements involves an estimate 
of such exposure that is based on historical price volatility and on 
member's historical activity. In fact, on any particular business day, 
a member's trading activity and the general market price volatility 
related to the member's activity may be significantly higher than 
normal. Given this uncertainty and the importance of the purposes 
served by the clearing fund, members are encouraged to maintain excess 
clearing fund collateral. GSCC takes significant comfort from the 
cushion represented by member's excess clearing fund collateral.
    Member's clearing fun deposit requirements are calculated daily 
based on the level of members' historical and current day's net 
activity. However, the maintenance of an appropriate level of overall 
clearing fund collateral is not designed to be a daily collection and 
return process. In part, this is due to the administrative burden and 
cost that this would entail. The process for collection of clearing 
fund deposit involves not just cash but also securities and letters of 
credit making it more complex than GSCC's daily morning funds-only 
collection process. More significantly, the disfavor of daily 
collection and return of clearing fund collateral recognizes the above 
stated desirability of maintaining a cushion of excess clearing fund 
collateral.
    Because of these concerns, GSCC's rules currently provide for the 
return of excess clearing fund collateral to members only once a 
calendar month on the second business day of each month. This 
methodology applies regardless of the level of a member's excess 
clearing fund collateral. Upon review of this process, it is GSCC's 
view that the importance of maintaining a level of excess collateral 
adequate to protect GSCC and its members and of avoiding a cumbersome 
clearing fund deposit collection process should be balanced against the 
cost and drain on liquidity posed to members that build up an unusually 
large amount of excess clearing fund collateral over the course of a 
month. GSCC therefore proposes as a means of balancing these interests 
that members may request the return of excess collateral on any 
business day under the following circumstances: (1) The amount of the 
member's excess clearing fund collateral is at least $5 million; (2) 
the member is not on class 2 or class 3 surveillance status; and (3) 
the collateral will be returned only to the extent that GSCC retains a 
cushion of excess collateral of no less than the greater of (a) 110 
percent of the member's clearing fund deposit requirement (i.e., GSCC 
must retain 110% of the member's clearing fund deposit requirement) or 
(b) $1 million more than the amount of collateral needed to cover the 
member's current clearing fund deposit requirement.
    GSCC believes the proposed rule changes are consistent with the 
requirements of Section 17A of the Act and the rules and regulations 
thereunder because it promotes efficiencies in the prompt and accurate 
clearance and settlement of securities transactions.\3\ Members will 
experience less liquidity pressure from not having to maintain large 
amounts of excess clearing fund collateral with GSCC and will be better 
able to manage their cash management needs. However, at the same time 
GSCC will maintain sufficient excess clearing fund collateral to 
protect itself and its members in an instance of member default.
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    \3\ 15 U.S.C. Sec. 78q-1 (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    GSCC perceives no impact on competition by reason of the proposed 
rule change.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received from Members, Participants or Others

    GSCC has not solicited or received comment on the proposed rule 
change.

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 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 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. Sec. 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 filing will also be available 
for inspection and copying at the principal office of GSCC. All 
submissions should refer to the file number (SR-GSCC-96-9) and should 
be submitted by October 10, 1996.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12) (1996).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-24058 Filed 9-18-96; 8:45 am]
BILLING CODE 8010-01-M