[Federal Register Volume 62, Number 95 (Friday, May 16, 1997)]
[Notices]
[Page 27088]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12825]



[[Page 27088]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38592; File No. SR-GSCC-96-14]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Approving a Proposed Rule Change to Eliminate 
Grandfather Privileges

May 9, 1997.
    On December 19, 1996, the Government Securities Clearing 
Corporation (``GSCC'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change (File No. SR-GSCC-
96-14) 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 February 25, 1997.\2\ No comment letters were received. For 
the reasons discussed 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. 38302 (February 18, 
1997), 62 FR 8475.
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I. Description

    Effective June 30, 1997, the proposed rule change eliminates the 
list of grandfather non-members. GSCC established the grandfather list 
in May 1993, when GSCC created category 1 IDBs and category 2 
interdealer broker netting members (``IDB'') and placed limitations on 
their trading activity with firms that were not members of GSCC's 
netting system.\3\ GSCC restricted category 1 IDBs to trading only with 
GSCC netting members and limited to ten percent the trading activity of 
category 2 IDBs with nonmember firms.
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    \3\ Securities Exchange Act Release No. 32722 (August 5, 1993), 
58 FR 42993 (order approving establishment of new membership 
categories).
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    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\ Accordingly, category 1 IDBs would continue to 
trade with the grandfather nonmembers and trades between category 2 
IDBs and grandfathered firms did not count toward category 2 IDBs' ten 
percent limit.
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    \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)
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    Currently, all grandfather nonmembers are eligible for GSCC 
membership or could have their trades submitted to GSCC's netting 
system through an affiliated netting member. The proposed rule change 
eliminates the grandfather list. As a result, category 2 IDBs, which do 
virtually all of the brokered transactions with the current 
grandfathered nonmembers, 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.

II. Discussion

    Section 17A(b)(3)(F) \5\ 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 GSCC's 
proposed rule change is consistent with GSCC's obligations under the 
Act because eliminating the grandfather list ends the additional 
exposure to GSCC that the trading by the IDBs with grandfather 
nonmembers creates.
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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    Specifically, these trades expose GSCC to greater risks than trades 
between an IDB and a netting member because trades with a grandfather 
nonmember are not eligible for netting by GSCC. As a result, when an 
IDB has offsetting trades with a netting member and with a grandfather 
nonmember, only the trade with the netting member will be netted 
thereby leaving the IDB instead of a grandfathered firm with a 
position. The traditional role of IDBs is to net out of every 
transaction. GSCC's system reflects this role. (For example, IDBs have 
lower net capital requirements.) As a result, an IDB with a position 
presents a greater risk to GSCC. By reducing the risks to GSCC, the 
proposed rule change enables GSCC to better assure the safeguarding of 
securities and funds which are in its custody or control.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the 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-96-14) 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. 97-12825 Filed 5-15-97; 8:45 am]
BILLING CODE 8010-01-M