[Federal Register Volume 66, Number 163 (Wednesday, August 22, 2001)]
[Notices]
[Pages 44193-44194]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21164]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44714; File No. SR-GSCC-00-08]


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

August 16, 2001.

    On July 31, 2000, the Government Securities Clearing Corporation 
(``GSCC'') filed with the Securities and Exchange Commission (``M'' a 
proposed rule change (File No. SR-GSCC-00-08) 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 January 11, 
2001.\2\ No comment letters were received. For the reasons discussed 
below, the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 43793 (Jan. 3, 2001), 66 
FR 2465 (Jan. 11, 2001).
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I. Description

    GSCC has established two membership categories, ``category 1'' and 
``category 2,'' for dealers and futures commission merchants (``FCMs'') 
that want to participate in GSCC's netting system. GSCC established 
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\ (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

[[Page 44194]]

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 against 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. It the member has a net debt, 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 that 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 
for category 2 members 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 category 2 members while 
expanding the range of netting members in a prudent manner.

II. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder and particularly with the requirements of Section 
17A(b)(3)(F) \8\ of the Act. 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 finds that GSCC's rule change meets these 
requirements because it should result in additional broker-dealers and 
banks becoming GSCC netting members, which will promote the prompt and 
accurate clearance and settlement of securities transactions. In 
addition, by maintaining the more stringent margin factor requirements 
for category 2 members, GSCC should collect sufficient margin from duly 
approved category 2 members to allow GSCC to assure the safeguarding of 
securities and funds even while permitting certain offsets for category 
2 members.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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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 with the requirements of 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-00-08) 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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Jonathan G. Katz,
Secretary.
[FR Doc. 01-21164 Filed 8-21-01; 8:45 am]
BILLING CODE 8010-01-M