[Federal Register Volume 64, Number 31 (Wednesday, February 17, 1999)]
[Notices]
[Pages 7932-7934]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3771]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41022; File No. SR-GSCC-99-01]
Self-Regulatory Organizations; Government Securities Clearing
Corporation; Notice of Filing of a Proposed Rule Change Regarding the
Expansion of GSCC's GCF Repo Service
February 5, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), \1\ notice is hereby given that on January 27, 1999, 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 expand GSCC's GCF Repo service to
allow participating dealers to engage in GCF Repo trading with
participating dealers that use different clearing banks.\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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[[Page 7933]]
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 allows GSCC members that are not interdealer
brokers (``dealers'') to trade general collateral repos involving U.S.
Government securities throughout the day without requiring trade for
trade settlement on a delivery versus payment basis (``DVP'').\4\ GSCC
believes that the GCF Repo service will bring benefits to the
Government securities marketplace, including increased liquidity,
enhanced ability to trade general collateral repos (which are an
alternative collateral source for dealers), risk protection, and access
to a broad spectrum of industry participants.
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\4\ For a detailed description of the GFC Repo Service, refer to
Securities Exchange Act Release No. 40623 (October 30, 1998) 63 FR
59831 (November 5, 1998) [File No. SR-GSCC-98-02] (order approving
proposed rule).
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GSCC believes that these benefits cannot be fully realized without
an after-hours interbank securities allocation.\5\ The need for an
after-hours allocation arises because not all of the GSCC dealer
members clear at the same bank. As a result of free and unrestricted
trading among all GSCC members, on any particular business day net
securities and cash positions with respect to GFC Repo transactions
will most likely not balance within each clearing bank. That is, the
net securities borrowed position will not match the net securities
loaned position across dealers intrabank (although these positions will
balance across the clearing banks).
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\5\ GSCC is discussing with the staff of the Federal Reserve
Bank of New York (``FRBNY'') and the Board of Governors of the
Federal Reserve System (``Board of Governors'') reopening the
securities Fedwire for a brief period of time after the normal 3:30
p.m. close to accomplish after-hours DVP movement of securities and
cash between the clearing banks. However, GSCC understands that an
after-hours DVP window cannot be established until FRBNY completes
its Year 2000 systems changes and the Board of Governors issues a
proposal for public comment and determines that establishing such a
window is in the public interest.
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GSCC's proposed solution is to introduce the GCF Repo service in
phases. On November 23, 1998, GSCC implemented the GCF Repo service
within each participating clearing bank separately. As a result, a
participating dealer can trade GCF Repos only with other participating
dealers that use the same clearing bank. This first phase allows GSCC
and its members to monitor the GCF Repo process in operation on a
limited basis and to detect processing inefficiencies before the
service is made more widely available. However, GSCC believes that this
first phase results in a fragmented marketplace that has limited
liquidity, both of which run contrary to the goals of the GCF Repo
project.
Therefore, GSCC now seeks to expand the GCF Repo service to allow a
participating dealer to engage in GCF Repo trading with dealers that
use different clearing banks. GSCC has enlisted the assistance of its
two clearing banks, The Bank of New York (``BONY'') and The Chase
Manhattan Bank (``Chase''), to establish an alternate mechanism to
permit an after-hours movement of cash and securities between the
clearing banks.
Each clearing bank will establish a special clearance account in
the name of GSCC to be used exclusively to effect this after-hours
movement of securities. At the end of each business day, GSCC will
establish the net GCF Repo settlement position and collateral
allocation obligation or entitlement for each participating dealer with
respect to each generic CUSIP number, and each clearing bank will make
all possible internal cash and securities GCF Repo deliveries between
GSCC and the dealers that clear at that bank. At this stage, the
clearance customers of one of the two banks--assume that it is Chase--
will be in an aggregate net funds borrower position (or aggregate net
short securities position), and the customers of the other bank--assume
that it is BONY--will be in aggregate net funds lender position (or
aggregate net long securities position). GSCC will then instruct Chase
to allocate to the special GSCC clearance account at Chase securities
in an amount equal to the net short securities position.
GSCC will establish on its own books and records two ``securities
accounts'' as defined in Article 8 of the New York Uniform Commercial
Code (``NYUCC''), one in the name of Chase and one in the name of BONY.
The Chase securities account will be comprised of the securities in
GSCC's special clearance account maintenance by BONY, and the BONY
securities account will be comprised of the securities in GSCC's
special clearance account maintained by Chase. GSCC will appoint Chase
as its agent to maintain GSCC's books and records with respect to the
BONY securities account, and GSCC will appoint BONY as its agent to
maintain GSCC's books and records with respect to the Chase securities
account.
The BONY and Chase securities accounts will enable the bank that is
in the net long securities position to receive securities after the
close of the securities Fedwire. Once the bank has received the
securities, it can credit them by book-entry to a GSCC account and then
to the dealers that clear at that bank that are net long securities in
connection with GCF repo trades. The establishment of the securities
accounts by GSCC also will give each clearing bank a ``securities
entitlement'' under Article 8 of the NYUCC and the comfort of relying
on GSCC as its ``securities intermediary'' as defined in Article 8 of
NYUCC.
In the example described above, Chase will transmit to BONY a
description of the securities in the BONY securities account. Based on
this transmission, BONY will transfer funds equal to the aggregate net
funds borrowed position to a demand deposit account in the name of GSCC
that is maintained by Chase. Upon receipt of the funds by Chase, Chase
will release any liens it may have on the special GSCC clearance
account, and GSCC will release any liens it may have on the BONY
securities account (both these accounts being comprised on the same
securities). BONY will credit the securities in the BONY securities
account to GSCC's regular GCF Repo clearance account at BONY, and BONY
will further credit these securities to dealers participating in the
GCF Repo service that clear at BONY and that are in a net long
securities position. Thus, GSCC, Chase, and BONY will have accomplished
an after-hours movement of securities between clearing banks that will
enable dealers that clear at both banks to trade GCF Repo with each
other.
All securities and funds movements occurring on a particular
business day between the participating clearing banks will be reversed
the next business day within a timeframe established by GSCC and the
clearing banks. This timeframe will correspond to the timeframe already
established by GSCC's Rule 20 for the reversal of GCF Repo transactions
between GSCC and its participating netting members.
[[Page 7934]]
GSCC believes the proposed rule change is consistent with the
requirements of Section 17A of the Act \6\ and the rules and
regulations thereunder because it will broaden access to GSCC's
existing GCF Repo service for members and increase market liquidity.
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\6\ 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 any
impact or impose any 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. Members will be notified of the rule change
filing, and comments will be solicited by an Important Notice. 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 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-99-01 and should be submitted by March
10, 1999.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-3771 Filed 2-16-99; 8:45 am]
BILLING CODE 8010-01-M