[Federal Register Volume 65, Number 226 (Wednesday, November 22, 2000)]
[Notices]
[Pages 70370-70371]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-29887]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43566; File No. SR-GSCC-00-01]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Granting Approval of a Proposed Rule Change Relating 
to Financing Necessary for the Provision of Securities Settlement 
Services

November 15, 2000.
    On March 7, 2000, the Government Securities Clearing Corporation 
(``GSCC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-GSCC-00-01) 
pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ Notice of the proposal was published in the Federal 
Register on July 11, 2000.\2\ No comment letters were received. For the 
reasons discussed below, the Commission is granting approval of the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 42997, (June 30, 2000), 
65 FR 42739.
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I. Description

    According to GSCC, it occasionally is required to obtain financing 
in connection with its securities settlement process. For example, a 
member with a net short position may deliver securities so near the 
close of the securities Fedwire that GSCC is unable to redeliver the 
securities to member(s) with the net long position(s). Currently, 
GSCC's rules provide for GSCC to obtain financing under these 
circumstances in the form of loans because the rules expressly permit 
GSCC to grant security interests in the securities in question.\3\ The 
costs or expenses that GSCC incurs in obtaining such financing are 
generally allocated pro rata among all netting members based upon usage 
of GSCC's services.\4\
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    \3\ GSCC Rule 12, section 8.
    \4\ GSCC's rules also provide that if the GSCC Board determines 
in its sole discretion that a netting member has on a frequent basis 
and without good cause caused GSCC to incur such financing costs, 
the member can become obligated to pay for or to reimburse GSCC for 
the entire amount of the financing costs.
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    Another situation where GSCC might need to obtain financing is when 
a GCF inter-dealer broker \5\ has a GCF net settlement position as the 
result of a data submission error. As a result, GSCC is required to 
finance the settlement of the other-side of the transaction. Again, 
GSCC's rules currently contemplate that GSCC will obtain the requisite 
cash or securities through loans or securities borrowing/lending 
transactions. The rule change gives GSCC the option to obtain the 
requisite financing in the situations such as the ones described above 
by entering into repurchase transactions with GSCC netting members and 
clearing agent bank members.\6\
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    \5\ GCF inter-dealer broker netting member that GSCC has: (1) 
determined to be eligible to participate in GSCC's netting system 
services for repo transactions pursuant to GSCC Rule 18 and (2) 
designated as eligible to submit to GSCC data on GCF repo 
transactions on a locked-in basis.
    \6\ GSCC already has the authority to enter into repurchase 
agreements in connection with clearing fund deposits and proprietary 
funds.
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    The rule change also addresses the situation where an inter-dealer 
broker netting member obtains financing of a net settlement position. 
For example, an inter-dealer broker may have a net settlement position 
as the result of an uncompared trade. Under the proposed rule change, 
if the inter-dealer broker-netting member obtains financing of a net 
settlement position, it must obtain such financing by entering into 
overnight repurchase transactions only with GSCC netting members or 
clearing agent bank members. GSCC may reimburse the inter-dealer broker 
for the costs of such financing if the net settlement position was 
incurred through no fault of the inter-dealer broker.\7\
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    \7\ GSCC may also reimburse certain dealer netting members in a 
similar situation. This additional possibility for reimbursement 
would apply to a division or other separate operating unit within a 
dealer netting member that GSCC has determined: (a) operates in the 
same manner as a broker and (b) has agreed to and does participate 
in the repo netting service pursuant to the same requirements 
imposed under GSCC's rules on inter-dealer broker netting members 
that participate in that service.
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II. Discussion

    Section 17A(b)(3)(F) \8\ of the Act requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody or control of

[[Page 70371]]

the clearing agency or for which it is responsible. For the reasons set 
forth below, the Commission believes that GSCC's proposed rule change 
is consistent with GSCC's obligations under the Act.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    By allowing GSCC to enter into repurchase transactions with its 
highly creditworthy netting members and clearing agent bank members, 
GSCC should be able to obtain more favorable financing terms that 
should result in lower financing costs being allocated to members. As 
repurchase transactions are safe, widely accepted financing mechanisms, 
there should be no reduction in GSCC's ability to safeguard securities 
and funds which are in the custody or control of GSCC or for which it 
is responsible.
    Accordingly, the Commission finds that the ability to enter into 
repurchase transactions with GSCC netting members and/or clearing agent 
bank members satisfies GSCC's obligations to assure the safeguarding of 
securities and funds which are in the custody or control of GSCC or for 
which it is responsible.

III. 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 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-00-01) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority. \9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-29887 Filed 11-21-00; 8:45 am]
BILLING CODE 8010-01-M