[Federal Register Volume 66, Number 88 (Monday, May 7, 2001)]
[Notices]
[Pages 23058-23059]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-11338]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44226; File No. SR-GSCC-2001-02]


Self-Regulatory Organizations; The Government Securities Clearing 
Corporation; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to the Inclusion of Netting-Eligible Federal Home 
Loan Mortgage Corporation Securities in Auction Takedown Service

April 26, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on February 5, 2001, the 
Government Securities Clearing Corporation (``GSCC'') filed with the 
Securities and Exchange Commission (``Commission'') and on March 12, 
2001, amended 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 on the 
proposed rule change from interested parties.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The proposed rule change would allow GSCC to expand its auction 
takedown service to include netting-eligible Federal Home Loan Mortgage 
Corporation (``Freedie Mac'') securities.

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 these 
statements.\2\
---------------------------------------------------------------------------

    \2\ The Commission has modified the text of the summaries 
prepared by GSCC.
---------------------------------------------------------------------------

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    GSCC introduced its auction takedown service in 1994.\3\ The 
service enables GSCC to accept data on a locked-in basis with respect 
to proprietary purchases of Treasury notes, bills, and bonds made at 
auction by members of GSCC's netting system; to net the purchases with 
when-issued trades of such members in these securities; and to deliver 
the purchased securities through GSCC's settlement mechanism. In its 
approval of GSCC's rule filing, the Commission noted, ``By including 
auction securities in GSCC's netting system, the level of potential 
netting is increased and the number of required movements of securities 
are reduced. Netting of auction securities also may have the effect of 
increasing a member's liquidity. Previously, a GSCC member with a short 
position would have its required margin payments calculated based on 
its short position, even if it had an offsetting long position in 
auction purchases. Once the positions are netted, the member's margin 
payments will be calculated based on the position after taking into 
account the auction purchases, perhaps creating a lower margin payment. 
the additional liquidity may assist in the prompt and accurate 
clearance and settlement of securities transactions. In this manner, 
the proposal removes impediments to the national system for the prompt 
and accurate clearance and settlement of securities transactions, and 
fosters cooperation and coordination with persons engaged in clearance 
and settlement of securities transactions.'' \4\ The auction takedown 
service also reduces the counterparty risk to the Department of the 
Treasury and makes the information that GSCC maintains on the net 
settlement position of its members more complete for risk management 
purposes.
---------------------------------------------------------------------------

    \3\ Securities Exchange Act Release No. 33984 (May 2, 1994), 59 
FR 24491 (order authorizing GSCC to include in its comparison and 
netting services U.S. Treasury securities purchases at auction).
    \4\ Id.
---------------------------------------------------------------------------

    GSCC has recently been approached by Freddie Mac to extend GSCC's 
comparison and netting services to include netting-eligible Freddie Mac 
securities purchased at auction commencing in February 2001. Agency 
securities are steadily constituting an increasing portion of GSCC's 
processing activity.\5\ Including Freddie Mac

[[Page 23059]]

securities in GSCC's auction takedown service would provide GSCC and 
its members that trade these securities with all the benefits described 
above.
---------------------------------------------------------------------------

    \5\ In 2000, GSCC processed 88 percent more agency security 
transactions than in 1999, and, in 2000, the par value of agency 
security transactions increased 131 percent over the par value of 
these transactions in 1999.
---------------------------------------------------------------------------

    In order to meet the February deadline, it is necessary for GSCC to 
apply its current auction takedown procedures without any material 
alteration to the Freddie Mac auctions. Only minor changes to GSCC's 
rules are necessary. Such changes include the following:
    The Department of the Treasury utilizes the Federal Reserve Banks, 
its fiscal agents, to furnish details of its auction awards to GSCC. 
GSCC therefore designated both the Treasury Department and the Federal 
Reserve Banks as locked-in trade sources when it instituted the auction 
takedown service. GSCC will now add Freddie Mac as a locked-in trade 
source. The Commission has already given GSCC permission to designate 
locked-in trade sources on an as-needed basis. It should be noted that 
Freddie Mac will furnish details of its auction awards directly to GSCC 
without the involvement of its fiscal agent, the Federal Reserve Bank 
of New York.
    Various definitions will be expanded to include Freddie Mac and its 
securities in the rules referencing the auction takedown service.
    Freddie Mac has indicated that, unlike the Department of the 
Treasury, it desires that awards made to non-netting members also be 
handled by GSCC to the extent possible. GSCC thus will make changes to 
its existing rules, which already allow for secondary market trades 
executed by non-members to be submitted by members for the net, to 
specify that it will process auction purchases made by its netting 
members for their customers as well as for their proprietary accounts. 
The netting members will remain liable to GSCC as principals with 
respect to all auction purchase awarded to them whether the purchase is 
for their own accounts or for customers.
    Unlike the Treasury Department, Freddie Mac does not require the 
clearing banks to effectively guarantee payment in advance for any 
newly issued securities. thus, there will be no need for the execution 
of autocharge agreements by the clearing banks.
    Freddie Mac retains the right to cancel auctions. GSCC has made it 
clear in its rules what has always been implicit for an issuer of 
auction awards that GSCC will have no obligation with respect to any 
when-issued trades if securities are not ultimately issued by Freddie 
Mac. GSCC has also added the right to delete or modify trade data with 
respect to when-issued trades if any event occurs that gives rise to 
the obligation to substitute securities under guidelines published by 
The Bond Market Association.
    The Department of the Treasury is not a member of GSCC and is 
therefore not required to make any clearing fund deposits or funds 
settlement payments to GSCC. Since Freddie Mac is a GSCC netting member 
and would otherwise be responsible for these deposits and payments, 
GSCC has exempted Freddie Mac from these requirements but only in 
connection with its auction deliveries.
    The proposed rule change is consistent with the requirements of 
Section 17A of the Act and the rules and regulations thereunder because 
it will enhance GSCC's auction takedown service by making it more 
responsive to the needs of GSCC's members.

(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 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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3) of the Act and Rule 19b-4(f)(4) thereunder, because the 
proposed rule is effecting a change in an existing service that does 
not adversely affect the safeguarding of securities or funds in the 
custody or control of the clearing agency and does not significantly 
affect the respective rights or obligations of the clearing agency or 
person using the service. At any time within 60 days of the filing of 
such proposed rule change, the Commission may summarily abrogate such 
rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the 
Securities Exchange Act of 1934.

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 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-2001-02 and should be submitted by May 
29, 2001.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-11338 Filed 5-4-01; 8:45 am]
BILLING CODE 8010-01-M