[Federal Register Volume 62, Number 95 (Friday, May 16, 1997)]
[Notices]
[Pages 27088-27089]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12883]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38603; File No. SR-GSCC-96-12]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Approving a Proposed Rule Change Relating to 
Interdealer Broker Repurchase Agreement Transactions

May 9, 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-
96-12) pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act'').\1\ On December 3, 1996, GSCC filed with the Commission 
an amendment to the proposed rule change. Notice of the proposal was 
published in the Federal Register on February 20, 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. 38287 (February 13, 
1997), 62 FR 8068.
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I. Description

    Generally, interdealer brokered (``IDB'') submit data to GSCC on 
corresponding repo transactions entered into with two non-IDB 
counterparties with the intent of maintaining a flat position (i.e., 
the IDB's deliver obligations are equal to its receive obligations). 
Thus, the IDB does not have margin or clearing fund consequences from 
the trades at GSCC. However, when one non-IDB counterparty fails to 
submit in a timely or accurate fashion data related to the transaction, 
the IDB's trade with the non-submitting counterparty will not compare 
and will not enter GSCC's

[[Page 27089]]

netting system. If the corresponding repo submission compares and 
enters the net, the IDB will have a net settlement position and may 
incur clearing fund and funds-only settlement assessments.\3\
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    \3\ The funds-only settlement assessment is designed to 
collateralize a member's net cash payment obligations to GSCC.
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    The proposed rule change amends Rule 19, which sets forth special 
provisions for brokers repo transactions, by adding Section 3. Section 
3 reaffirms the obligation of a non-IDB netting member to submit in a 
timely and accurate manner to GSCC or to another registered or exempted 
clearing agency data on all of its brokered repo transactions.\4\ 
Section 3 also provides that if a non-IDB member fails without good 
cause to submit data on a brokered repo transaction in a timely or 
accurate manner, GSCC may treat the transaction as compared based on 
the data submission received from the counterparty IDB for purposes of 
assessing clearing fund deposits and funds-only settlement payments. 
Prior to GSCC's assessing clearing fund and funds-only settlement 
consequence to a non-IDB netting member that has failed to submit such 
trade data in a timely and accurate manner, GSCC would attempt to 
contact (e.g., by telephone) as promptly as possible such non-IDB 
netting member in order to confirm the accuracy of the data submitted 
by its IDB netting member counterparty. If the lack of comparison arose 
because of operational or other problems on the part of the IDB party 
and the non-IDB netting member therefore does not know the trade, GSCC 
would not assess margin consequences against the non-IDB netting 
member.
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    \4\ GSCC rules currently require that repo netting members 
submit in a timely manner data on all eligible repo transactions 
either to GSCC or to another registered clearing agency or a 
clearing agency that has been exempted from registration as a 
clearing agency by the Commission. Currently, only one other 
registered clearing agency, Delta Clearing Corp., clears and settles 
repo transactions in government securities. Typically, dealers enter 
into a brokered transaction with the understanding that such trade 
will be cleared and settled through a specified clearing agency. 
Therefore, if the counterparties to a repo transaction have selected 
GSCC as the clearing agency to be used, failure to submit the 
relevant data may be a violation of GSCC's rules.
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II. Discussion

    Section 17A(b)(3)(F) \5\ of the Act provides that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and to assure the 
safeguarding of securities and funds in the custody or control of the 
clearing agency or for which it is responsible. Without this amendment, 
a non-IDB that has failed to submit trade data as required by GSCC 
rules would not be required to pay the related clearing fund and funds-
only settlement obligations. Instead, these obligations would fall upon 
the IDB. Because of their traditional role, IDBs tend to have fewer 
financial resources to pay these obligations. The amendment is an 
effort to place the financial obligations associated with a trade on 
the proper party. By collecting funds from the party that represents 
the real settlement risk (i.e., the non-IDB party), the proposal helps 
to safeguard the securities and funds in the custody or control of 
GSCC.
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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    In addition, without this proposal, non-IDBs do not have an 
incentive to submit data in a timely fashion because failure to submit 
data results in clearing fund and funds-only settlement obligations not 
being assessed to them. By ensuring that the non-IDBs will be required 
to collateralize their risks whether or not they submit data, the 
amendment removes any incentive to fail to fulfill data submission 
obligations. Thus, the proposal promotes the prompt and accurate 
clearance and settlement of securities transactions.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of Section 17A(b)(3)(F) 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-96-12) be, and hereby is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegate 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. 97-12883 Filed 5-15-97; 8:45 am]
BILLING CODE 8010-01-M