[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