[Federal Register Volume 63, Number 110 (Tuesday, June 9, 1998)]
[Notices]
[Pages 31539-31543]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15214]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40057; File No. SR-GSCC-98-02]
Self-Regulatory Organizations; Government Securities Clearing
Corporation; Notice of a Proposed Rule Change Regarding the
Implementation of the GCF Repo Service
June 2, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on April 10, 1998, the
Government Securities Clearing Corporation (``GSCC'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change 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 from interested persons on the proposed rule
change.
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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 proposed rule change will allow GSCC to implement a new service
called the ``GCF Repo service.'' The GCF Repo service will allow GSCC's
dealer members to trade general collateral repos involving Government
securities throughout the day without requiring intraday, trade-for-
trade settlement on a delivery-versus-payment (``DVP'') basis.\2\
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\2\ The complete text of the proposed rule change is attached as
Exhibit A to GSCC's filing, which is available for inspection and
copying at the Commission's public reference room and through GSCC.
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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 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.\3\
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\3\ The Commission has modified the text of the summaries
prepared by GSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The GCF Repo service has been developed as part of a collaborative
effort among GSCC, its clearing banks,\4\ industry representatives
service on GSCC's Repo Implementation Committee, and its associated GCF
Repo Working Group.
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\4\ Currently, GSCC's clearing banks are The Bank of New York
and The Chase Manhattan Bank. Under the proposed rule change, any
clearing bank that meets GSCC's operational requirements will be
able to provide GCF Repo settlement services to GSCC netting
members.
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(1) General
The GCF Repo service will enable netting members of GSCC that are
not interdealer brokers (``dealers'') to trade general collateral
repos, based on rate and term, with interdealer broker netting members
of GSCC (``brokers'') on a blind basis throughout each day. Brokers
will be required to submit GCF Repo trade data to GSCC within five
minutes of trade execution through a new terminal function. Brokers
will not be able to submit GCF Repo trades in batch. Upon receipt of
the trade data, GSCC immediately will report transaction details to
dealers through a terminal dynamic display facility, and the GCF Repos
will receive GSCC's settlement guarantee. Standardized, generic CUSIP
numbers established exclusively for the GCF Repo service will be used
to specify the acceptable type of underlying Fedwire book-entry
eligible collateral, which will include Treasuries, Agencies, and
mortgage-backed securities.\5\
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\5\ Because GCF Repo trades will be conducted on a blind-
brokered basis, the specific collateral will not be know at the time
of the trade. Brokers will submit all GCF Repo trades to GSCC using
generic general collateral CUSIPs that denote the underlying
security. GSCC expects that the initial types of generic CUSIPs that
will be used for GCF Repo activity will denote the following
categories of securities: all Treasury securities, Treasury
securities with a remaining maturity of ten years and under, all
Fedwire-eligible Agency securities, and all Fedwire-eligible
mortgage-backed securities. GSCC will continuously review with the
members of its Repo Implementation Committee and with appropriate
Bond Market Association committees the appropriateness of making
eligible other types of generic CUSIPs.
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Daily submission cutoff for GCF Repo trades will occur five minutes
after a predetermined trading deadline, which initially will be 3:30
p.m. GSCC will reject all trades submitted for same-day processing that
are received after the cutoff. Dealers initially will have until 3:45
p.m. to affirm or disaffirm trade data submitted against them by a
broker. If a dealer takes no action either to affirm or to disaffirm
trade data, the trade automatically will be deemed to be affirmed. GSCC
will then conduct an afternoon net exclusively for GCF Repo activity
and will establish a single net receive or deliver obligation for
dealer members in each generic CUSIP.
Each dealer with a net deliver obligation will allocate acceptable
securities (determined by the generic CUSIP) and will deliver those
securities on a DVP basis to a GSCC account within the dealer's
clearing bank using a modified triparty arrangement. GSCC will then
instruct the clearing bank to deliver those securities to dealers that
have net receive obligations. All GCF Repo activity will settle between
dealers
[[Page 31540]]
and GSCC within the dealers' clearing banks.
GSCC initially will implement the GCF Repo product offering within
each participating clearing bank separately. As a result, a
participating dealer will be able to trade GCF Repos only with other
dealers that use the same clearing bank. This will allow GSCC time to
monitor and review the GCF Repo process as it operates on a limited
basis, to detect processing inefficiencies before the service is made
more broadly available, and to determine how best to effect after-hours
interbank securities allocations.\6\
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\6\ GSCC currently is engaged in discussions with staff of the
Federal Reserve Bank of New York regarding the appropriateness of
GSCC's proposed means for accomplishing ``after-hours'' interbank
securities allocations. Assuming a satisfactory resolution of the
issues involved, which may require, among other things, the Board of
Governors of the Federal Reserve System to issue for public comment
GSCC's proposal for the opening of the securities Fedwire after its
normal close, GSCC expects to expand the GCF Repo product to allow a
participating dealer to engage in GCF Repo trading with dealers that
use different clearing banks.
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(2) Participant Eligibility
To be eligible for the GCF Repo service, brokers and dealers will
be required to meet the qualifications for repo netting membership as
defined in GSCC's rules. In addition, dealer members will be required
to designate the brokers that are authorized to submit GCF Repo trades
on their behalf. GSCC members that wish to become eligible to use the
GCF Repo service also will be required to test with GSCC and to
demonstrate that they are able to submit data to and to receive output
from GSCC in the communications links, formats, timeframes, and
deadlines established for the service.
(3) Securities Eligibility
Initially, the securities eligible for the GCF Repo service will be
U.S. Treasury securities (other than inflation-indexed securities or
STRIPs), Agency securities that are not mortgage-backed, and book-entry
mortgage-backed securities that are Fedwire-eligible. GSCC will
continuously review with the members of its Repo Implementation
Committee and appropriate Bond Market Association committees the
appropriateness of making eligible other types of securities.
(4) Broker Submission
All GCF Repos will be executed by dealers as money-fill
transactions through eligible GSCC brokers on a blind-brokered
basis.\7\ Brokers will be required to submit GCF Repo trades within
five minutes of trade execution. Each GCF Repo trade will have a single
dealer on the repo side that is matched to a single dealer on the
reverse side. To facilitate this prompt submission, GSCC will implement
a new terminal facility that will provide the following services:
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\7\ GSCC will consider expanding the GCF Repo service to allow
for direct dealer input of data on dealer-to-dealer trading at some
point in the future when real time processing capabilities have been
established between dealers and GSCC.
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(a) Large Trade Submission. Brokers will be able to submit GCF Repo
trades to GSCC having a principal values of up to $2 billion. The
current maximum transaction size is $50 million. Therefore, for a $2
billion trade, a broker will be able to make a single entry instead of
the eighty entries that would currently be required to satisfy both
sides of the trade. GCF Repos will have a $1 million minimum
transaction size and a $1 million multiple requirement.
(b) Single Screen Entry. Brokers will be able to submit data
simultaneously for both the repo and reverse sides of the trade using a
single screen.
(c) Data Entry Short-Cuts. The screen design will require brokers
only to enter critical fields. GSCC automatically will populate certain
fields, such as trade date and start date, with default values. Brokers
will not have to enter any information that differs from the default
values. The system also will automatically calculate the end money for
the repo based on start amount, term and rate.
In addition to these specific broker submission services, GSCC will
require that every broker participating in GCF Repo provide its
terminal on GSCC's premises, so that GSCC operations staff can monitor
whether the broker is satisfactorily fulfilling its GCF Repo trade
submission responsibilities.
(5) Trade Recording and Dealer Notification
GSCC will immediately record, as compared, all GCF Repos upon
receipt of trade data from the brokers. This type of ``locked-in''
trade recording, called broker-assisted processing, will replace the
traditional matched comparison process. As a result, both the repo and
reverse sides of the transaction will be processed solely based upon
broker input without requiring the submission and matching of
corresponding trade details from the dealer members.
By using input from a single, approved submission source (i.e.,
brokers) to process GCF Repos, the intrinsic limitations and processing
delays associated with two-sided comparison will be avoided. This is
especially important in order to effectively net each dealer's GCF Repo
activity on a real time basis, as opposed to the overnight process that
is currently performed for regular buy/sell and repo activity.
Upon receipt of trade data from the brokers, GSCC will immediately
provide dealers with GCF Repo transaction details by way of a dynamic,
real time, online display. The most recent trades will be displayed in
a window at the bottom of these screens while current position
information will be displayed at the top of the screen. Position
information will be available at both the individual CUSIP level and
the cumulative, overall level.
(6) Dealer Affirmation
Dealers will have an obligation to promptly review GCF Repo trades
and either affirm or disaffirm them. Affirming a trade will indicate
that the dealer recognizes the trade and agrees to its terms. If a
dealer disaffirms a trade, its GCF Repo position automatically will be
adjusted, and a notification will be sent to the broker for prompt
resolution. During the affirmation process, dealers will have the
ability to provide their reference number. Entry of a reference number
will result in the automatic affirmation of the trade.
Any trade that has not been affirmed or disaffirmed by the close of
business will be affirmed automatically by the system.\8\ Because
prompt review of transactions is critical in a same-day processing
environment, GSCC will assess penalties for late dealer affirmations.
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\8\ GSCC will send a message to participants fifteen minutes
prior to running the automated process that will affirm all pending
trades.
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(7) GCF Repo Netting and Position Reporting
GSCC will net all GCF Repo trades intraday for each dealer into a
single net settlement position for each generic general collateral
CUSIP submitted. This position will represent the aggregate net dollar
amount borrowed by the repo dealer or ``loaned'' by the reverse dealer.
Each day, GCF Repo netting will consist of adding all of the
carryover activity (i.e., previous term and previously submitted
forward-starting activity that is starting on the current day) for GCF
Repos together with the current day's activity. As a result, positions
associated with term repos will be renetted each day with the dealer's
current activity. GSCC will provide netting results to the clearing
banks and its netting dealer members. Clearing banks participating in
GCF Repo will be responsible for notifying
[[Page 31541]]
their members regarding the allocation of collateral and the transfer
of funds.
GSCC will carry every GCF Repo trade in its system and will be
responsible for maintaining a database of all financial data for the
repos that are traded. This will include tracking all relevant terms of
each transaction and insuring that the appropriate final settlement
amounts are paid at the conclusion of each repo.
Real time, online output will be provided to brokers, dealers, and
the clearing banks over GSCC terminals to provide all transaction and
position information necessary for the intraday processing of GCF Repo
activity. Brokers and dealers will have the ability to view real time
position information, both at the individual CUSIP and overall position
levels, on their terminals throughout the day. The bottom of each
position screen also will include a revolving dynamic display of the
five most recent transactions processed against that participant. Each
clearing bank will have the ability to monitor the positions of its
clearing members using its terminal and also will be able to monitor
projected interbank position and funds movements when that service is
made available.
(8) Securities Allocation
Each dealer that is a net lender of securities through GCF Repo
will be responsible for allocating the appropriate collateral (as
defined by the generic general collateral CUSIP) to its clearing banks
using whatever mechanism it mutually agrees upon with the bank. All
such collateral movements will be made on a DVP basis to and from a
GSCC account. Dealers will have to give priority to the allocation of
GCF Repo collateral so that reallocation to the ultimate customer may
occur promptly. To encourage timely collateral allocation, GSCC will
impose a penalty on collateral allocations that are made after 4:30
p.m. Allocations not made by 7:00 p.m. will be considered fails.
Dealers that receive securities as the result of reverse GCF Repos
will be required to reallocate them to a location that is available for
reversal before the opening of the securities wire on the next day.
Examples of these locations are overnight triparty repos, hold-in-
custody repos, and bank loans.
(9) Next-Day Return of Collateral
All GCF Repo positions will be reversed on the morning of the next
business day prior to the opening of the securities Fedwire. This next
day reversal will occur for all GCF transactions regardless of the term
of the transaction. The repos themselves will be fully collateralized
intraday by cash.
(10) Risk Management
GCF Repo transactions and resulting settlement obligations will be
subject to all of GSCC's existing risk management processes. GSCC will
be able to appropriately assess its members' overall, cumulative
exposure as a result of their combined DVP buy/sell and repo activity
and their GCF Repo activity.
(a) Interest Rate Mark-to-Market. GSCC employs a forward margin
process to protect GSCC and its members against market value
fluctuations in securities prices and repo interest rates for
guaranteed trades from their submission date through to their
settlement date. This process is required because in the event of a
participant default, GSCC, as transaction guarantor and counterparty,
must maintain funds sufficient to replace the defaulting member's
settlement obligations at their current market value. Therefore, each
day all outstanding trades are marked from contract value to market
value. For repos, this mark-to-market includes the cost of financing
from the later of the start date or the current date to the scheduled
end date. Forward margin debits and credits are settled each day
through GSCC's daily funds-only settlement process.
GSCC will perform a daily interest rate mark-to-market for all term
GCF Repo activity to bring transactions to their current replacement
value.\9\ The mark will result in the daily collection and pass-through
of accrued repo interest to date plus or minus the repo rate
differential.\10\ The GCF Repo interest rate mark will be incorporated
into GSCC's regular daily funds-only settlement process. Additionally,
there will be a separate marking process for forward-starting GCF Repos
that will be the same as the marking process currently employed for
marking forward-starting DVP repos.
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\9\ Because all GCF Repos will be processed using generic
CUSIPs, the underlying collateral will not be marked by GSCC.
However, clearing banks will be responsible for ensuring that
allocated collateral conforms to the terms of the contract and that
the collateral value is equal to 100% of the principal value of the
repo.
\10\ The rate differential will be equal to the difference
between the contractual repo rate for the term and the GSCC
replacement cost repo rate.
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(b) Clearing Fund. GSCC requires its netting members to maintain
deposits in the GSCC clearing fund account to provide adequate risk
protection and liquidity in the event of a participant failure. The
clearing fund guards against potential market exposure that could occur
between the current date and the liquidation date of an insolvent
participant's obligations. GSCC accomplishes this by calculating the
net effect of: (1) Estimated daily changes in the value of the
securities underlying each participant's transactions; (2) estimated
daily fluctuations in repo rates for the participant's repo activity;
and (3) each participant's estimated funds settlement exposure. All of
these estimates of exposure are based on an extensive analysis of
historical rate and price volatility and cover at least two standard
deviations of all historical movements. GCF Repo activity will be
included in all three clearing fund calculations.
(i) Securities Liquidation Component
The risk associated with security receive and deliver obligations
is based on price volatility. If a participant were to default, GSCC
would ensure that all of that participant's obligations settled. This
would expose GSCC to differences in current market value and
liquidation value. The securities liquidation component of the clearing
fund accounts for this exposure. In order to provide appropriate
protection for the market risk associated with the underlying
collateral, for GCF Repo activity GSCC will calculate the securities
liquidation component based upon a representative portfolio of
securities as designated by each generic general collateral CUSIP.
(ii) Repo Volatility Component
Where market exposure related to the underlying collateral is
provided for in the securities liquidation component of the clearing
fund, the risk pertaining to the interest amount is accounted for in
the repo volatility component. The repo volatility component estimates
the amount repo rates might change over the course of a repo.
Calculations for this component are based on analysis of historical
repo rate volatility.
(iii) Funds Adjustment (``FAD'') Component
The FAD portion of the clearing fund is based on each participant's
average funds-only settlement amount. The relevant variable in this
calculation is the size of the settlement amount. It does not matter
whether the funds are collected or paid. The FAD component is the
average of the absolute value of the twenty largest funds-only
settlement amounts over the most recent seventy-five business days.
(c) Intraday Risk Protections. GSCC plans to manage intraday risk
by maintaining the capability to run clearing fund calculations
multiple
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times throughout the day to assess the impact of significant changes in
position on clearing fund deposit requirements and by making margin
calls as necessary. Further, the calculation of net settlement
positions arising from GCF Repo activity will be dynamic which will
allow GSCC and clearing banks to perform real time position monitoring.
(d) Loss Allocation Procedure. GSCC has analyzed the
appropriateness of its current loss allocation procedure in light of
the unique aspects of the GCF Repo service. GSCC has concluded that its
current loss allocation procedure remains the most fair and equitable
means of allocating any loss that might arise from the insolvency of a
member that engaged in GCF Repo activity. Thus, GSCC's loss allocation
procedure will remain the same for GCF Repo activity.
(11) Trade Modification/Cancellation
The rules for GCF Repo trade modification are: (1) Any data input
field on an unaffirmed trade may be modified unilaterally by the broker
at any time during the processing day and (2) dealers may not modify
any data on GCF repos; rather they must cancel (or request cancellation
of) the trade. The modification of an unaffirmed trade will result in
the immediate replacement of the original trade and all affected
processing screens will be immediately updated accordingly.
The submission of a request for cancellation of an affirmed trade
will result in the generation of a trade cancellation request to the
original broker or dealer. Upon approval of the cancel request, the
approving dealer will automatically be replaced by the broker in the
transaction. The broker will carry the position and incur all
associated responsibilities unless and until the broker submits a
correcting entry (i.e., an entry where the broker enters a new single-
sided transaction with the correct dealer to eliminate the broker's
position).
The two basic rules for canceling GCF Repos are: (1) An unaffirmed
trade may be unilaterally canceled by either the broker or the dealer
at any time during the processing day and (2) a trade that has been
affirmed, either by a dealer or by the system as part of end-of-day
processing, will require bilateral cancellation. This means that a
broker may cancel a trade unilaterally at any time during the day if it
has not been affirmed by either the dealer or by the system. A
unilateral cancellation of a GCF Repo trade by the broker will result
in the cancellation of both sides of the trade. Trade cancellation by
the broker will result in the cash and collateral positions being
reversed by the amount of the canceled trade and taken out of account
balances.
A dealer may cancel a GCF Repo trade unilaterally at any time
during the day if it has not been affirmed either by the dealer or by
the system. Trade cancellation will result in the dealer's cash and
collateral position balances being adjusted by the amount of the
canceled trade, and the automatic replacement of the dealer by the
broker in the transaction. The broker will carry the position and incur
all associated responsibilities unless and until the broker submits a
correcting entry (i.e., an entry where the broker enters a new single-
sided transaction with the correct dealer to eliminate the broker's
position). Cancellation of a trade by the dealer results in the
cancellation of that dealer's side only. The other dealer's side of the
trade will remain intact.
Cancellation of trades that have been affirmed by the dealer or by
the system will be required to be bilateral (i.e., if the dealer
requests a cancellation, the broker must approve it and vice-versa). A
dealer or broker request for cancellation of an affirmed trade that is
not acted upon by the counterparty will require manual intervention by
GSCC operations to determine whether or not the trade should be
canceled.
(12) Output and Reports
GSCC will establish a separate reporting stream to produce a full
range of machine-readable output (``MRO'') and print image end-of-day
reports for the GCF Repo service, which will be substantially similar
to the output currently provided to participants in conjunction with
their regular cash and repo trading activity. In accommodating the GCF
Repo service, GSCC will attempt to limit the number and magnitude of
changes made to existing MRO formats in order to minimize the
development effort required by participating members.
(13) Benefits
GSCC believes that the GCF Repo service will bring numerous
benefits to the Government securities marketplace, including the
following:
(a) Increased Liquidity. The GCF Repo service should improve market
liquidity by adding an additional resource to current borrowing options
(i.e., bank loans and triparty repos). Liquidity should be further
enhanced by providing to the dealer community open access to a
multitude of funds providers and by allowing for the bulk movement of
collateral between dealers.
(b) Enhanced Ability to Trade General Collateral Repos. The GCF
Repo service should enhance the ability to trade general collateral
repos by removing the current constraints of collateral allocation and
notification imposed on every transaction. As a result, dealers will be
able to freely trade rate and term while having only one settlement on
a net basis at the end of the day.
(c) Additional Collateral Source. The GCF Repo service provides an
alternative vehicle for dealers to buy or sell collateral, finance
positions, or swap collateral.
(d) Risk Protection. Through netting and novation, GSCC will become
the legal contraparty to all GCF repos within minutes of execution and
thereby eliminate counterparty risk. In addition to GSCC's current risk
management procedures, dynamic risk assessment processes will be
implemented to address any intraday risk associated with the GCF Repo
service.
(e) Open Access. The GCF Repo service will be available to a broad
spectrum of industry participants. These will include brokers, dealers,
securities lenders, money borrowers, and any qualified clearing bank
that provides clearance services to GSCC members.
(14) Statutory Basis for the Proposed Rule Change
GSCC believes that the proposed rule change is consistent with the
requirements of the Section 17A of the Act \11\ and the rules and
regulations thereunder because they will allow GSCC to offer to all of
its netting members on an equal basis a service that will provide them
with enhanced ability to engage in general collateral trading activity
in a safe and efficient manner.
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\11\ 15 U.S.C. 78q-1.
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(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
Written comments relating to the proposed rule change have not yet
been solicited or received. GSCC will notify the Commission of any
written comments received by GSCC.
[[Page 31543]]
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 the self-regulatory organization 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, including whether the proposed rule
change is consistent with the Act. 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 Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing also will be available for
inspection and copying at the principal office of GSCC. All submissions
should refer to File No. SR-GSCC-98-02 and should be submitted by June
30, 1998.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-15214 Filed 6-8-98; 8:45 am]
BILLING CODE 8010-01-M