[Federal Register Volume 66, Number 95 (Wednesday, May 16, 2001)]
[Notices]
[Pages 27190-27192]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-12251]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44282; File No. SR-GSCC-2001-01]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change Relating to the 
Redesign of Comparison Rules

May 8, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), notice is hereby given that on January 16, 2001, the 
Government Securities Clearing Corporation (``GSCC'') filed with the 
Securities and Exchange Commission (``Commission'') and on April 11, 
2001,\1\ 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.
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    \1\ Letter from Nikki M. Poulos, Vice President and Associate 
General Counsel, GSCC (April 10, 2001). Subsequent to filing GSCC-
2001-01, GSCC filed a rule proposal (SR-GSCC-2001-02) that became 
immediately effective under Section 19(b)(3). The letter states that 
GSCC-2001-02 amends rules previously listed by GSCC-2001-01 in 
Exhibit A and that both rule filings are consistent with each other. 
The amendment does not amend any language in GSCC-2001-01 as 
originally filed with the Commission and as presented herein.
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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 allow GSCC to redesign its 
comparison rules in order to implement real-time interactives 
services.\2\
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    \2\ A copy of the text of GSCC's proposed rule change and the 
attached exhibits are available at the Commission's Public Reference 
Section or through GSCC.
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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.

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

    In a white paper distributed to all members in early 1997, GSCC 
outlined its long-range plans to provide straight-through processing 
and a point-of-trade guarantee to its members primarily through the 
implementation of real-time interactive services. Last year, GSCC 
announced that it would implement its interactive services in three 
phases. Phase 1 will introduce interactive messaging to support real-
time comparison; phase 2 will introduce interactive messaging to 
support netting; and phase 3 will introduce support of same-day 
settlement of repo start legs.
    During the latter part of 2000, GSCC implemented the necessary 
technical changes to its automated system to implement the first phase 
of its interactive processing service (i.e., making available the 
interactive messaging facility to support real-time comparison). Up 
until this point, GSCC's processing experience has been essentially 
batch. Members now have the ready ability, from a technological 
perspective, to submit trade input on an automated basis to GSCC 
intraday as trades are executed. While GSCC will continue to support 
its existing batch input and output facilities initially, it plans to 
eventually stop supporting these older formats. Members will be 
encouraged to make the shift from batch to interactive processing as 
soon as it is feasible for them to do so. At some point in time, once a 
sufficient nucleus of members has begun processing interactively, GSCC 
will implement disincentives to discourage members from continuing to 
submit and receive data via the old batch formats.
    Concurrent with this development, GSCC has been redesigning its 
matching and comparison procedures to better meet the needs of its 
members during their transition from a batch on an interactive 
environment. This redesign is the subject of this rule filing. GSCC's 
central goal in this redesign is to provide straight-through processing 
by allowing for the easy identification and resolution of trades 
intraday to achieve 100 percent comparison. GSCC believes that 
interactive messaging and enhanced real-time trade matching processing 
are critical steps in helping to reduce risk by ensuring that more 
transactions are compared earlier in the day and then eventually also 
netted and guaranteed through GSCC so that intraday credit exposure to 
counterparties is minimized.
    In the current environment, most trades are compared within the 
GSCC system as a result of bilateral comparison with the exception 
being certain locked-in trades, such as members' Federal Reserve 
auction purchases. To facilitate real-time comparison while still 
providing members with the flexibility to transition from batch to 
interactive submission according to a timeframe suitable to their own 
needs and resources, GSCC is proposing to: (i) Amend its rules to 
provide for three types of trade comparison: (a) Bilateral comparison, 
(b), demand comparison, and (c) locked-in comparison and (ii) make 
certain other related rules changes as further discussed below.
Bilateral Comparison
    Bilateral comparison, which is the traditional method of 
comparison, will continue to require that the two trade counterparties 
(or if one or both of the counterparties are not GSCC members, the 
members acting on their behalf) submit trades to GSCC in which certain 
mandatory details either match or fall within predefined parameters to 
effect a match. Bilateral comparison will remain the primary comparison 
type for dealer-to-dealer trades and will be available in both real-
time and batch. Members may elect to submit interactively regardless

[[Page 27191]]

of whether their trade counterparties do so.
    A new feature of bilateral comparison will be the ability for 
members to ``DK'' any trades they ``do not know.'' The proposed rule 
change introduces the term ``DK Notice'' to GSCC's rules. If a member 
determines that a request for comparison is invalid or incorrect, it 
can send a DK notice to GSCC which will be forwarded to the original 
submitter. The receipt of the DK notice by GSCC will prevent the trade 
from comparing in GSCC's system. If a member that sent a DK notice 
determines that it did so erroneously, the member will be able to 
remove the DK and enable comparison to occur if it does so within the 
timeframes prescribed by GSCC for such purpose.
Demand Comparison
    Demand comparison is a new type of comparison that has been 
designed to provide members with flexibility and control over the 
comparison process for trades executed via intermediaries. Demand 
comparison strikes a balance between bilateral comparison, where the 
member is required to submit trade data in order for its trade to 
compare, and locked-in comparison (discussed in more detail below), 
where the trade has essentially been operationally compared before 
being submitted to GSCC.
    Demand trades will be submitted by approved intermediaries (e.g., 
brokers) which will be called ``demand trade sources.'' Demand trade 
sources must be able to communicate with GSCC interactively. In order 
for GSCC to accept trades from a demand trade source on a member's 
behalf, the member must provide GSCC with prior written authorization. 
The intermediary must also be approved and authorized by GSCC to be a 
demand trade source.
    GSCC will deem a demand trade compared upon receipt of the trade 
data from the demand trade source. However, if a member does not know a 
trade submitted on its behalf by a demand trade source, the member will 
be able to submit a DK notice to GSCC. The receipt of a DK notice by 
GSCC will cause the demand trade to no longer be eligible for 
comparison. If a member that sent a DK notice determines that it did so 
erroneously, the member will be able to remove the DK and enable 
comparison to occur if it does so within the timeframes prescribed by 
GSCC for such purpose.
    GSCC is making incidental rules changes to Rules 11, 16, 18, 21, 
22, and 39 to take into account the introduction of demand trades.
Locked-In Comparison
    Locked-In Comparison will be similar to that currently provided for 
in GSCC's rules. Locked-In Comparison presumes that a member would 
elect not to submit corresponding trade details to affect a match 
because the trade has been precompared by the trade source. An example 
of a trade appropriate for locked-in comparison would be one executed 
through a ``pure'' electronic trading system that is terminal-driven 
and that exercises no discretion over the trade.
    In order to participate, the locked-in trade source must be 
authorized by both the members on whose behalf it will be submitting 
trade data and by GSCC. With the exception of some current locked-in 
sources, such as the Federal Reserve banks, locked-in trade sources 
will be expected to communicate with GSCC.
    Locked-In trades will be deemed compared upon receipt by GSCC. The 
DK feature will also be available for locked-in trades. However, unlike 
in the case of demand trades, a DK of a locked-in trade will be treated 
by GSCC as a request for cancellation to the locked-in trade source. In 
order to actually cancel the trade on GSCC's system, the locked-in 
trade source will have to respond to the request by submitting a trade 
cancellation. The locked-in trade source can modify the trade in 
response to a DK notice in order to remove the trade's DK status.
Submission Methods
    In order to set forth the concept of a member submitting 
interactively versus submitting in one of the batch modes, GSCC is 
proposing to add three new definitions to its rules: ``interactive 
submission method,'' ``multiple batch submission method,'' and ``single 
batch submission method.'' The proposed rules changes make clear which 
submission type is required for each type of comparison.
    In addition, GSCC is proposing to add a definition of ``real time'' 
in its rules to be used to indicate when a particular process (e.g., 
the enhanced comparison processes set forth in Rule 10) will be 
performed by GSCC in real time as opposed to at the end of day.
Submission of Full-Sized Trades
    GSCC is also proposing to permit members to submit full-sized 
trades. Currently, non-GCF Repo trades are submitted in $50 million 
increments. Because members' internal systems tend to reflect the full 
size of each trade (as opposed to the pieces that they submit to GSCC), 
the submission of full-sized trades will permit members to better 
reconcile their trading activity. GSCC recognizes that not all members 
will be able to begin processing full-sized trades immediately. 
Therefore, GSCC will not require that members exercise this option.
Timing of Key Processes of GSCC
    GSCC's key processes are comparison, netting, novation, and 
guaranty of settlement. GSCC is proposing to change the timing of two 
of these processes (comparison and guaranty of settlement).
    With respect to the timing of comparison, GSCC's rules currently 
provide that it occurs when GSCC makes its comparison output available 
to members. The proposed rule filing provides that, while comparison 
will continue to occur upon issuance of the comparison message by GSCC 
with respect to trades submitted for bilateral comparison, it will be 
deemed to occur upon receipt of trade data from the authorized trade 
source with respect to trades submitted for demand comparison and 
locked-in comparison.
    With respect to the timing of netting, GSCC's rules currently 
provide that this occurs upon issuance of the report of or output on 
net settlement positions by GSCC. This will continue to be the case. 
Similarly, GSCC's rules currently provide that novation, the process by 
which GSCC becomes the substituted counterparty to trades submitted to 
it, occurs upon the issuance of the report of or output on net 
settlement positions by GSCC. This will also remain unchanged.
    With respect to the timing of GSCC's guaranty of settlement, GSCC's 
current rules provide that GSCC guarantees the settlement of a netting-
eligible trade upon issuance of the report/output that sets forth the 
member's net settlement position. The exception to this rule is GSCC's 
policy of guaranteeing blind brokered repos entered into in good faith 
upon trade execution.\3\
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    \3\ GSCC adopted its policy of guaranteeing blind brokered repos 
entered into in good faith upon trade execution in order to comfort 
dealers that have intraday credit exposure to brokers through whom 
they execute such transactions. The policy only applies to such 
transactions that are entered into in good faith, which means, for 
example, that GSCC would not honor it in the event that a dealer 
entered into a transaction knowing that the counterparty was 
insolvent.
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    The proposed rule changes will move the timing of GSCC's guaranty 
to the point of comparison. This means that a netting-eligible trade 
submitted for bilateral comparison will be guaranteed upon issuance of 
the comparison message by GSCC and that a netting-eligible trade 
submitted for demand or

[[Page 27192]]

locked-in comparison will be guaranteed upon receipt of trade data from 
the authorized trade source. if a trade is DKed (and with respect to a 
locked-in trade, canceled by the locked-in trade source), GSCC's 
guaranty will no longer be in effect with respect to that trade. As a 
transition measure that recognizes that members may need some time to 
switch to interactive processing, GSCC is proposing that it maintain 
its policy of guaranteeing blind brokered repo trades entered into in 
good faith upon trade execution through the year 2001.
General Responsibilities of Members
    GSCC's comparison rule contains a provision that requires members 
to review documents that they receive from GSCC.\4\ GSCC desires to 
expand the provision to cover any type of communication provided to 
members by GSCC and require members to inform GSCC promptly, but in no 
event later than ten calendar days after receipt of the communication, 
if there is any error, omission or other problem with respect to the 
communication.\5\ GSCC's netting rule contains a similar provision with 
respect to which GSCC has proposed to add the ten-day requirement.\6\ 
GSCC believes that the ten-day timeframe will provide members with a 
sufficient amount of time within which to detect problems in a 
communication from GSCC.
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    \4\ GSCC proposed revised Rule 5, Section 5 will state: ``Each 
Member shall promptly review each Report it receives from the 
Corporation pursuant to this Rule. Any errors, omissions, or similar 
problems noted by a Member with respect to a Report must be promptly 
reported to the Corporation, but such reporting to the Corporation 
shall be made no later than ten calendar days after the receipt of 
the Report.''
    \5\ In its rules, GSCC requires its members to review reports 
received from GSCC. In its Rule 1, ``Definitions,'' GSCC defines the 
term ``report'' as follows: ``The term Report means any document, 
record, or other output prepared by the Corporation and made 
available to a Member in any format (including, but not limited to, 
machine-readable and print-image formats) or medium (including, but 
not limited to, print copy, magnetic tape, video display terminal, 
and CPU-to-CPU interface formats) that provides information to such 
Member with regard to the services provided by, or the operations, 
of, the Corporation.''
    \6\ GSCC proposed revised Rule 11, Section 12 will state: ``The 
Netting member shall inform the Corporation after the occurrence of 
any event specified above; provided however, that the Netting Member 
shall inform the Corporation no later than ten calendar days after 
receiving a Report described in subsection (b) above.''
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Amendments to Schedules
    GSCC is proposing incidental changes to certain of its Schedules 
for clarification purposes and to bring them into conformity with the 
proposed rules changes discussed above. Specifically, GSCC is expanding 
the output time slot in its ``Schedule of Timeframes'' from ``midnight 
to 2 a.m.'' to ``8 to 2 a.m.'' This change reflects the fact that GSCC 
may be able to provide certain output earlier given the implementation 
of real-time trade matching and also the recent shift to the 8 p.m. 
trade submission deadline.
    GSCC is also proposing additional amendments to the Schedule of 
Timeframes in order to update it to reflect actual practice. 
Specifically, funds-only settlement payments are due to GSCC at 10 a.m. 
(currently at 9 a.m.) and funds-only settlement payments are due from 
GSCC at 11 a.m.). GSCC has proposed clarifying language to indicate 
that the 10:30 a.m. deadline for satisfaction of a clearing fund 
deficiency call is approximate because members have two hours after a 
call is made to fulfill their obligation.
    GSCC is also updating its ``Schedule of Required Match Data,'' 
``Schedule of Required Data Submission Items,'' and its ``Schedule of 
Required Data Submission Items for a Right of Substitution'' to make 
clear that the only locked-in trades to which those schedules do not 
apply are Treasury/Federal Reserve auction purchases and GCF repo 
transactions.
    GSCC is also amending its fee structure to set fees for demand 
trades which will be the same as those currently imposed on locked-in 
trades.
    The proposed rules changes are consistent with the requirements of 
the Act and rules and regulations thereunder because they will help to 
eliminate risk by promoting a higher rate of comparison and ensuring 
that more transactions are compared on a more timely basis, and then 
eventually netted and guaranteed through GSCC.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    GSCC does not believe that the proposed rules changes 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 changes 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 20549-0609. 
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-2001-01 and should be submitted by 
June 6, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-12251 Filed 5-15-01; 8:45 am]
BILLING CODE 8010-01-M