[Federal Register Volume 62, Number 229 (Friday, November 28, 1997)]
[Notices]
[Pages 63405-63406]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31153]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39340; File No. SR-GSCC-97-05]
Self-Regulatory Organizations; Government Securities Clearing
Corporation; Order Approving a Proposed Rule Change to Modify the Loss
Allocation Process
November 21, 1997.
On July 8, 1997, the Government Securities Clearing Corporation
(``GSCC'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change (File No. SR-GSCC-97-05)
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'').\1\ On July 23, 1997, GSCC filed with the Commission an
amendment to the proposed rule change. Notice of the proposal was
published in the Federal Register on September 19, 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. 39066 (September 12,
1997), 62 FR 49280.
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I. Description
Generally, if a GSCC member were to default, after liquidating the
defaulting member's positions and applying its collateral deposited
with GSCC, GSCC would allocate any loss that it did not absorb from its
own capital 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 would look at trading
authority that was entered into 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.
Pursuant to this proposed rule change, GSCC is limiting the amount
to which any netting member that is not an interdealer broker is liable
for loss allocation arising from blind brokered activity.\3\ The new
cap per loss event is 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 states that the $5 million cap is intended to provide to all
members the same level of protection that interdealer broker members
currently have for blind brokered activity. The 5% limit is intended to
ensure 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.
II. Discussion
Section 17A(b)(3)(F) \4\ of the Act provides that the rules of a
clearing agency must be designed to assure the safeguarding of
securities and funds in the custody or control of the clearing agency
or for which it is responsible, and Section 17A(b)(3)(D) \5\ of the Act
provides that the rules of a clearing agency must provide for equitable
allocation of charges among its participants. Prior to the rule change,
nonbroker members could be assessed for the entire loss resulting from
blind brokered transactions even though they did not have any control
or knowledge of their counterparty. Because in brokered transactions,
dealers cannot select their counterparty, these members may not be able
to limit their losses resulting from the counterparty's default. The
rule change limits the member's liability but still provides the member
with an incentive to minimize the risk of loss. Therefore, the
Commission believes that the rule
[[Page 63406]]
change is consistent with a clearing agency's obligation to provide for
equitable allocation of charges among its participants.
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\4\ 15 U.S.C. 78q-1(b)(3)(F).
\5\ 15 U.S.C. 78q-1(b)(3)(D).
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In addition, by spreading any losses resulting from a member
default among a wider segment of GSCC's members, the rule change should
decrease the likelihood that any one member will be disproportionately
affected. Thus, the proposal may make it easier for GSCC to collect
such funds should the need ever arise. Therefore, the Commission
believes that this rule will enhance GSCC's ability to safeguard
securities and funds.
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of Sections 17A(b)(3)(F)
and 17A(b)(3)(D) 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-97-05) 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. 97-31153 Filed 11-26-97; 8:45 am]
BILLING CODE 8010-01-M