[Federal Register Volume 62, Number 37 (Tuesday, February 25, 1997)] [Notices] [Pages 8475-8477] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 97-4607] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-38302; File No. SR-GSCC-96-14] Self-Regulatory Organizations; Government Securities Clearing Corporation; Notice of Filing of Proposed Rule Change To Eliminate Grandfather Privileges February 18, 1997. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 [[Page 8476]] (``Act''),\1\ notice is hereby given that on December 19, 1996, the Government Securities Clearing Corporation (``GSCC'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change (File No SR-GSCC-96-14) 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). --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The purpose of the proposed rule change is to eliminate the ability of GSCC's interdealer broker netting members (``IDB'') to trade with certain nonmembers identified on GSCC's grandfather list. 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 prepare 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 Organizations's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In May 1993, GSCC established limitations on the trading activity of IDBs with firms that are not a members of GSCC's netting system.\3\ GSCC restricted category 1 IDBs to trading only with GSCC netting members and limited the trading activity of category 2 IDBs with nonmember firms to ten percent. At that time, GSCC decided to allow IDBS to continue to trade with certain nonmember firms (``grandfather nonmembers'') that historically have had access to the IDB's screens and that GSCC has identified on its grandfather list.\4\ GSCC believed that it was unfair to penalize IDBs for continuing to trade with firms that GSCC was not yet successful in bringing into its netting system membership. Accordingly, category 1 IDBs can continue to trade with the grandfathered nonmember dealers and trading between category 2 IDBs and grandfathered firms does not count toward category 2 IDBs' ten percent limit. --------------------------------------------------------------------------- \3\ Securities Exchange Act Release No. 32722 (August 5, 1993), 58 FR 42993 (order approving establishment of new membership categories). \4\ The grandfather list includes the following firms: Aubrey G. Lanston & Co., Inc. The Nikko Securities Co., Ltd. (Tokyo) Nikko Europe PLC (London) Nomura International Inc. (Tokyo) Nomura Securities Co., Ltd. (Tokyo) Nomura International PLC (London) Daiwa Europe Ltd. (London) --------------------------------------------------------------------------- Since 1993, GSCC has made numerous attempts to encourage each of the grandfathered firms either to join GSCC's netting system or to have their eligible trades submitted to the net by an affiliated netting member.\5\ GSCC also has established a category of netting system membership for foreign entities. Thus, all entities on the grandfather list are now eligible for direct netting membership in GSCC. --------------------------------------------------------------------------- \5\ The number of grandfathered firms has decreased from twelve to seven. --------------------------------------------------------------------------- GSCC believes that trades between an IDB and a grandfathered firm expose GSCC to greater risks than trades between an IDB and a netting member because trades with a grandfathered firm are not eligible for netting by GSCC. As a result, when an IDB has offsetting trades with a netting member and a grandfathered firm, only the trade with the netting member will be netted thereby leaving the IDB instead of a grandfathered firm with a position.\6\ --------------------------------------------------------------------------- \6\ While the number of trades between IDBs and grandfathered firms is a relatively small percentage of the IDB's trades, they are significant in absolute terms. --------------------------------------------------------------------------- Therefore, GSCC is proposing to eliminate the grandfather list, effective June 30, 1997. GSCC believes that the effective date provides grandfathered firms with sufficient time to join GSCC's netting system or to adjust to nongrandfathered status. Once the grandfather list has been eliminated, category 2 IDBs, which do virtually all of the brokered transactions with the current grandfathered firms, will have to trade with the formerly grandfathered firms that do not join GSCC's netting system under the category 2 IDB's authority to engage in ten percent of its trading activity with nonmember firms. Category 1 IDBs will be prohibited from doing any netting eligible activity with a formerly grandfathered firm that does not join GSCC's netting system. GSCC believes that the proposed rule change is consistent with the requirements of Section 17A of the Act \7\ and the rules and regulations thereunder because it would end the exposure to GSCC that the trading by the IDBs with grandfathered firms creates. --------------------------------------------------------------------------- \7\ 15 U.S.C. 78q-1. --------------------------------------------------------------------------- (B) Self-Regulatory Organization's Statement on Burden on Competition GSCC does not believe that the proposed rule change will have an impact 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. Members will be notified of the rule change filing and comments will be solicited by an Important Notice. 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 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. 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 [[Page 8477]] refer to the file number SR-GSCC-96-14 and should be submitted by March 18, 1997. For the Commission by the Division of Market Regulation, pursuant to delegated authority.\8\ --------------------------------------------------------------------------- \8\ 17 CFR 200.30-3(a)(12) --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 97-4607 Filed 2-24-97; 8:45 am] BILLING CODE 8010-01-M