[Federal Register Volume 66, Number 8 (Thursday, January 11, 2001)]
[Notices]
[Pages 2465-2466]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-897]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43793; File No. SR-GSCC-00-08]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change Relating to 
Permitting Clearing Fund Offsets for Category 2 Dealer Netting Members 
and Futures Commission Merchants

January 3, 2001.
    Pursuant to section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act''), notice is hereby given that on July 31, 2000, 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 by GSCC. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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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 would enable GSCC to provide offsets in 
the clearing fund calculation for Category 2 Dealer Netting Members and 
Category 2 Futures Commission Merchants (``FCMs'') (collectively, 
``category 2 members'') that meet all of GSCC's requirements for 
participating in its netting system.

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 rules change and 
discussed any comments it received on the proposed rules 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.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by GSCC.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    GSCC has established two membership categories (``category 1'' and 
``category 2'') for dealers and FCMs that want to participate in GSCC's 
netting system. GSCC established a ``Category 2'' membership for 
dealers and FCMs that meet all of GSCC's requirements for participating 
in the netting system but have less net worth than GSCC's category 1 
members. The minimum net worth requirement for category 1 members is 
$50 million, and the minimum net worth requirement for category 2 
members is $25 million.\3\
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    \3\ Both categories have identical requirements for minimum 
excess net or liquid capital of $10 million.
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    While category 2 members have a lower net worth threshold than 
category 1 members, category 2 members currently have a more stringent 
clearing fund requirement under GSCC Rule 4, section 2(d). 
Specifically, the clearing fund requirement for category 2 members is 
calculated (i) without the benefit of any of the offsets across 
opposite net settlement positions \4\ that are permitted for category 1 
members and (ii) with margin factors set at the 99 percent-of-movements 
confidence level \5\ (while margin factors for a category 1 member are 
set at the 95 percent confidence level). In addition, if a category 2 
member elects to receive credit forward margin amounts \6\ in its daily 
funds-only settlements, its margin factors are set at levels that are 
based on the greater of: (i) the category 2 margin factors or (ii) 
margin factors adjusted to reflect GSCC's historical two-day price 
volatility data covering 95 percent of all movements.\7\
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    \4\ This means that GSCC does not allow category 2 members to 
offset long positions versus short positions.
    \5\ This means that the category 2 margin factors are based on 
GSCC's historical daily price volatility data covering 99 percent of 
all movements.
    \6\ A credit forward margin amount refers to GSCC's daily 
process of computing a member's collateral by marking to market the 
member's transactions that will settle in the future. The result 
will produce a net credit or a net debit. If the member has a net 
credit, it can elect to have GSCC pay it the value of the net 
credit. If the member has a net debit, it must pay GSCC.
    \7\ A category 2 member that elects to receive credit forward 
margin amounts will have higher margin factors than a category 2 
member that does not make that election.
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    GSCC currently has no active category 2 members. GSCC believes that 
certain entities that meet the eligibility requirements for category 2 
membership and who recognize the many benefits of GSCC's netting system 
have not applied for membership because they consider the liquidity 
burden associated with the current clearing fund calculation to be too 
onerous. In order to broaden the availability of GSCC's netting 
services, GSCC proposes to allow for offsets in the clearing fund 
calculation for category 2 members. The current prohibition of offsets 
for category 2 members was implemented years ago as a conservative 
measure designed to avoid any risk arising from the creation of the 
category 2 level. Now, after many years of experience in conducting 
risk assessments, netting, and calculating margin, GSCC believes that 
prohibiting offsets is overly conservative and punitive. In addition, 
expanding the roster of GSCC netting members should also enhance the 
netting benefits for the existing members that currently trade with 
potential category 2 members.
    Recognizing that category 2 members have smaller net worth bases 
and may therefore be deemed to pose a greater risk of default than 
category 1 members, the margin factors applied to category 2 members 
will continue to be set at the 99 percent confidence level (versus 95 
percent for category 1 members). Furthermore, category 2 members will 
still be required to make an election regarding the receipt of forward 
margin. By permitting certain offsets for category 2 members and at the 
same time maintaining the more stringent margin factor requirements, 
GSCC will collect sufficient margin from duly approved category 2 
members while expanding the range of netting members in a prudent 
manner.
    GSCC believes that the proposed rule change is consistent with 
section 17A(b)(3)(F) \8\ of the Act and the rules and regulations 
thereunder because it will (i) permit new entities to join GSCC and 
realize the benefits of participating in its netting system and (ii) 
enhance the netting benefits of existing members that currently trade 
with the potential members.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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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 From Members, Participants or Others

    Written comments relating to the proposed rule change have not yet 
been solicited or received.\9\ GSCC will notify the Commission of any 
written comments received by GSCC.
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    \9\ Members will be notified of the rule change filing, and 
comments will be solicited by an Important Notice.
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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

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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 20549-0609. 
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 Room in Washington, DC. Copies of such 
filing will also be available for inspection and copying at GSCC's 
principal office. All submissions should refer to File No. SR-GSCC-00-
08 and should be submitted by February 1, 2001.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-897 Filed 1-10-01; 8:45 am]
BILLING CODE 8010-01-M