[Federal Register Volume 64, Number 79 (Monday, April 26, 1999)]
[Notices]
[Pages 20346-20347]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-10308]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41303; File No. SR-GSCC-99-01]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Granting Approval of Proposed Rule Change Regarding 
the Expansion of GSCC's GCF Repo Service

April 16, 1999.
    On January 27, 1999, the Government Securities Clearing Corporation 
(``GSCC'') filed with the Securities and Exchange Commission 
(``Commission''), and on February 11, 1999, amended \1\ the proposed 
rule change (File No. SR-GSCC-99-01) pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'').\2\ Notice of the 
proposed rule change was published in the Federal Register on February 
17, 1999.\3\ The Commission received one comment letter in response to 
the proposed rule change.\4\ For the reasons discussed below, the 
Commission is approving the proposed rule change.
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    \1\ The February 11, 1999, amendment represents a technical 
amendment to the proposed rule change and as such does not require 
republication of notice.
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ Securities Exchange Act Release No. 41022 (February 5, 
1999), 64 FR 7932.
    \4\ Letter from Scott C. Rankin, Assistant General Counsel, The 
Bond Market Association (March 10, 1999).
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I. Description

    The GCF Repo service allows GSCC members that are not interdealer 
brokers to trade general collateral repos involving U.S. Government 
securities throughout the day without requiring trade for trade 
settlement on a delivery versus payment (``DVP'') basis.\5\ This change 
expands GSCC's GCF Repo service to allow participating dealers to 
engage in GCF Repo trading with participating dealers that use 
different clearing banks.\6\
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    \5\ 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).
    \6\ Currently, there are two banks approved by GSCC to provide 
GCF Repo settlement services. In the future, other banks that GSCC 
in its sole discretion determines to have met its operational 
requirements may be approved to provide GCF Repo settlement 
services.
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    Currently, not all of GSCC's 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 GFC Repo clearing bank. That is, the net securities borrowed 
position will not match the net securities loaned position across 
dealers intrabank.
    GSCC has been 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'') the possibility of 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 between 
the GFC Repo 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 to help determine if establishing such a window is in 
the public interest.
    As a result, GSCC and its two clearing banks, The Bank of New York 
(``BONY'') and The Chase Manhattan Bank (``Chase''), have agreed to 
establish a mechanism to permit after-hours movements of cash and 
securities between the two clearing banks. Each clearing bank will 
establish a special clearance account in the name of GSCC to be used 
exclusively to effect this after-hour 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 dealers that clear through one of the 
two banks will be in an aggregate net funds borrower position and 
aggregate net short securities position. The dealers that clear through 
the other bank will be in an aggregate net funds lender position and 
aggregate net long 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 maintained 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 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 will 
credit them by book-entry movement to a GSCC account and then to the 
dealers that clear at that bank that are net long securities. 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 the NYUCC.
    As an example, assume that after all intrabank cash and securities 
movements, the dealers that clear through Chase are in an aggregate net 
funds borrow/short securities position and the dealers that clear 
through BONY are in an aggregate net funds lender/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

[[Page 20347]]

short securities position. Chase will then transmit to BONY a 
description of the securities in the BONY securities account (which 
will be the same securities as in the GSCC special clearance account at 
Chase). 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 Chase's receipt 
of the funds, Chase will release any liens it may have on the 
securities in the special GSCC clearance account, and GSCC will release 
any liens it may have on the securities in the BONY securities account 
(which accounts are comprised of the same securities). BONY will credit 
the securities in the BONY securities account to GSCC's regular GCF 
Repo clearance account at BONY and to the dealers that clear at BONY 
that are in a net long securities position.
    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.

II. Comment Letters

    The Commission received one comment letter.\7\ The Bond Market 
Association (``Association'') supports the approval of the proposed 
rule change because the Association believes the change would provide a 
wide array of market participants with an increased flexibility in 
satisfying their funding needs as well as the funding needs of their 
customers.
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    \7\ Supra note 4.
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III. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and to assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible. The 
Commission believes that the proposed rule change is consistent with 
these obligations. The proposed rule change should increase the number 
of transactions that can be cleared through the GCF Repo service and 
therefore should facilitate the prompt and accurate clearance and 
settlement of general collateral repo transactions by increasing the 
number of such transactions that are cleared and settled through the 
facilities of GSCC. In addition, the Commission believes the procedures 
and arrangements GSCC has established for the movements between GSCC's 
clearing banks of securities and funds related to GCF Repo transactions 
should help to assure the safeguarding of securities and funds which 
are in GSCC's custody or control or for which it is responsible.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular with Section 17A 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-99-01) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-10308 Filed 4-23-99; 8:45 am]
BILLING CODE 8010-01-M