[Federal Register Volume 62, Number 24 (Wednesday, February 5, 1997)]
[Notices]
[Pages 5502-5503]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2780]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38215; File No. SR-GSCC-96-13]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Approving a Proposed Rule Change Relating to the 
Eligibility of Treasury Inflation Indexed Securities for Netting 
Services

January 29, 1997.
    On November 21, 1996, the Government Securities Clearing 
Corporation (``GSCC'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change (File No. SR-GSCC-
96-13) pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act'').\1\ Notice of the proposal was published in the Federal 
Register on December 20, 1996.\2\ No comment letters were received. For 
the reasons discussed

[[Page 5503]]

below, the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 38048 (December 13, 
1996) 61 FR 67371.
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I. Description

    The proposed rule change amends GSCC's rules to make the U.S. 
Department of the Treasury's Treasury Inflation Indexed Security 
(``TIIS'') eligible for clearance and settlement at GSCC.\3\ The first 
auction of TIIS by the Department of the Treasury will occur on January 
29, 1997, and such securities will be issued on February 6, 1997. TIIS 
is a book-entry security that is designed to protect investors from 
inflation by adjusting semiannually the principal amount of the 
investors' holdings while maintaining a fixed interest rate. The amount 
of the principal adjustment is computed by multiplying the stated value 
at issuance (i.e., par amount) by an index ratio. The applicable index 
will be the U.S. City Average All Items Consumer Price Index for All 
Urban Consumers (``CPI'') published by the Bureau of Labor Statistics 
of the U.S. Department of Labor. TIIS will be redeemed at maturity at 
the greater of its inflation adjusted principal or its par amount.
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    \3\ The Department of the Treasury has adopted amendments to its 
Uniform Offering Circular for the Sale and Issue of Marketable Book-
Entry Treasury Bills, Notes, and Bonds (31 CFR Part 356) to 
accommodate the issuance of TIIS. Department of the Treasury 
Circular, Public Debt Service No. 1-93 (December 30, 1996) 62 FR 846 
(January 6, 1997).
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    Although the interest rate is fixed, the coupon payments will be 
variable because the interest is paid on a varying amount of principal. 
Because this will be the first security with variable interest payments 
eligible for netting at GSCC, GSCC has enhanced its automated 
systems.\4\ Since December 16, 1996, GSCC has been conducting tests 
with GSCC members in order to ensure that participants are able to 
properly provide and receive data regarding transactions in these new 
securities.
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    \4\The following enhancements have been made to GSCC's automated 
system. GSCC has created a database of historical CPI indexes in 
order to determine accrued interest, which will be used in valuing 
positions for settlement purposes and for forward margin and 
clearing fund calculations. GSCC has modified the security database 
to permit it to designate TIIS as a variable rate security. GSCC has 
modified participant input and output formats to take into account 
different and additional data elements.
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    GSCC also worked with the Public Securities Association to 
determine a uniformly acceptable method for the industry to reflect the 
inflation index in the calculation of final money on TIIS transactions. 
Consistent with these discussions, participants will submit 
transactions using their contract price. GSCC will compare and will 
report transactions based on its Final Settlement Money formula. Final 
Settlement Money will equal the original par value multiplied by the 
CPI index ratio multiplied by the contract price plus the inflation 
adjusted accrued interest. Inflation adjusted accrued interest will 
equal the original par value multiplied by the CPI index ratio 
multiplied by the interest rate multiplied by the term.

II. Discussion

    Section 17A(b)(3)(F) \5\ of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions. The Commission 
believes GSCC's rule change meets these goals by establishing a 
clearance and settlement system for TIIS whereby GSCC can provide the 
benefits of centralized automated settlement to a broader segment of 
government securities transactions. In addition, the inclusion of TIIS 
trades in GSCC's netting system provides several benefits to 
participants such as guaranteed settlement, automated coupon tracking, 
and automated output. By automating and enhancing the settlement 
process, GSCC's proposal is consistent with the prompt and accurate 
clearance and settlement of securities.
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with requirements of the Act and in particular 
with the requirements of 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-96-13) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-2780 Filed 2-4-97; 8:45 am]
BILLING CODE 8010-01-M