[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