[Federal Register Volume 62, Number 182 (Friday, September 19, 1997)]
[Notices]
[Pages 49280-49281]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24860]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39066; File No. SR-GSCC-97-05]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Notice of Filing of a Proposed Rule Change To Modify Rules 
Relating to the Loss Allocation Process

September 12, 1997.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 8, 1997, the 
Government Securities Clearing Corporation (``GSCC'') filed with the 
Securities and Exchange Commission (``Commission'') and on July 23, 
1997, amended the proposed rule change (File No. SR-GSCC-97-05) 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. 78s(b)(1).
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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 modify GSCC rules 
relating to its loss allocation process.

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 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 summaries 
submitted by GSCC.

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[[Page 49281]]

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    GSCC's loss allocation process is designed to provide members with 
incentives to assess the creditworthiness of their counterparties. 
Thus, to the extent that GSCC, using its own capital, does not absorb 
the loss that results from a member default, it allocates the loss 
among members pro rata based on the extent of their recent activity 
with the defaulting member. In order to determine which members will be 
subject to loss allocation, GSCC will look at trading activity that 
entered GSCC's netting system during as many days as is necessary to 
reach a level of activity that is equal to or greater than five times 
the dollar value of the liquidated positions.
    Over the years, a number of members and prospective members have 
raised an issue regarding the application of the loss allocation 
process for losses arising from blind brokered transactions. Their 
concern is that members that are not interdealer brokers neither have 
knowledge nor have control over whether they may be matched against any 
other member. Thus, they have no ability to limit the amount of trading 
that they do on a blind basis against a member on which they would 
otherwise place trading limits for credit or other reasons. The concern 
by a dealer firm over the inability to exercise control from a credit 
perspective over its trading activity with particular counterparties 
has been heightened with last year's introduction of blind brokering 
activity involving repurchase agreement transactions.
    GSCC believes that while the possibility of a loss allocation 
occurring is de minimis the concern over bearing a disproportionate 
amount of loss is a legitimate one that needs to be addressed. Among 
other methods, GSCC considered simply mutualizing among all netting 
members, either in an equal or pro rata manner, any loss allocation 
arising from blind brokered activity. The disadvantage of this approach 
is that it removes any incentive for a member to assess the 
creditworthiness of one's counterparties. GSCC believes that the loss 
allocation process should continue to function in a manner that 
preserves to some extent this incentive.
    In order to balance these considerations, GSCC is seeking authority 
to cap at a preset level the degree to which any netting member that is 
not an interdealer broker is liable for loss allocation arising from 
blind brokered activity.\3\ The proposed cap per loss event will be 
equal to the lesser of $5 million or five percent of the total loss 
amount arising from blind brokered activity that is allocated to 
members that are not interdealer brokers as a group. To the extent that 
this cap is applicable, any amounts not collected from individual 
netting members will be reallocated to the entire netting membership 
pro rata based on each member's average daily clearing fund deposit 
requirement over the twelve month period prior to the insolvency.
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    \3\ Interdealer broker netting members already have a $5 million 
cap per loss event on their liability for loss allocation.
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    GSCC believes that the $5 million cap will provide to all members 
the same level of protection that interdealer broker members currently 
have for blind brokered activity. GSCC also states that because dealer 
members do not control the degree to which they may be matched by 
interdealer brokers against other members, the number of trades that 
they engage in with an insolvent member is outside of their control. 
The 5% limit is intended to compensate for this lack of control by 
ensuring that no single member will be liable for an amount of loss for 
blind brokered activity that is significantly greater than the amount 
of loss allocated to other dealer members.
    GSCC believes the proposed rule change is consistent with the 
requirements of section 17A of the Act and the rules and regulations 
thereunder because the rule proposal will promote the prompt and 
accurate clearance and settlement of securities transactions and will 
assure the safeguarding of securities and funds in the custody or 
control of GSCC or for which GSCC is responsible.

(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

    No written comments have been solicited or received. 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 submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 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, NW., Washington, 
DC 20549. Copies of such filing will also be available for inspection 
and copying at the principal office of GSCC. All submission should 
refer to the file number SR-GSCC-97-05 and should be submitted by 
October 10, 1997.

    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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-24860 Filed 9-18-97; 8:45 am]
BILLING CODE 8010-01-M