[Federal Register Volume 66, Number 198 (Friday, October 12, 2001)]
[Notices]
[Pages 52166-52167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-25703]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44849; File No. SR-GSCC-00-10]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Approving Proposed Rule Change Relating to the 
Submission of Repo Collateral Substitutions

September 25, 2001.
    On September 11, 2000, the Government Securities Clearing 
Corporation (``GSCC'') filed with the Securities and Exchange 
Commission (``Commission'') pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ a proposed rule change 
(File No. GSCC-00-10) and on November 20, 2000, and August 28, 2001, 
amended the proposed rule change.\2\ Notice of the proposal was 
published in the Federal Register on January 11, 2001.\3\ 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\ Because the second amendment merely modified the language in 
GSCC's rule to better reflect what was discussed and comment 
requested on in the notice, notice of the amendment and comment is 
not required.
    \3\ Securities Exchange Act Release No. 43794 (January 3, 2001), 
66 FR 2466.
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I. Description

    The rule change enables GSCC to reduce the risk to itself and its 
members caused by the repurchase (``repo'') collateral substitution 
process. Due to a variety of reasons, this process has recently 
stressed GSCC's and its inter-dealer broker members' operational 
infrastructures, and has caused undue fail-financing expenses for other 
members. GSCC's new rules relating to repo collateral substitutions 
processes and the fees associated with such substitutions will prohibit 
certain practices and will impose an additional

[[Page 52167]]

risk management measure on the repo substitution process.
    First, GSCC will amend Rule 18 (``Special Provisions for Repo 
Transactions''), its Schedule of Timeframes, and its Fee Schedule to 
initially impose: (i) a deadline of noon (12:00 p.m. for the submission 
of repo collateral substitution notifications after which time the 
dealer member that initiated the substitution will be subject to a late 
fee of $500 per substitution notification and (ii) an absolute deadline 
of 12:30 p.m. for the submission of repo collateral substitution 
notifications after which time GSCC will reject the substitution 
notification.\4\ GSCC will extend these submission deadlines by one 
hour on those days that The Bond Market Association announces in 
advance will be extraordinary volume days. All required information 
must be included in the substitution notification in order for it to be 
deemed to be received by the deadlines. Substitution notifications or 
amendments will no longer be accepted verbally but instead will only be 
accepted through the use of GSCC's designated messaging utility that is 
available to all repo-netting participants.
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    \4\ The 12 p.m. deadline is one hour after which time the broker 
should have received all of the requisite substitution information 
under The Bond Market Association guidelines. In the future, GSCC 
may change these deadlines depending on market practice. Prior to 
making any such change, GSCC will make an appropriate filing under 
Section 19 of the Act and Rule 19(b)(4) thereunder and notify its 
members in advance.
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    Second, GSCC will revise Rule 12 (``Securities Settlement'') to 
make clear that the use of reversal codes in certain situations is 
improper and that members may not use a reversal code for a securities 
delivery obligation to GSCC unless the member has obtained GSCC's prior 
consent. The rule change also provides that if GSCC is required to 
obtain overnight financing with respect to securities delivered in 
violation of this new rule, the entire amount of the financing cost 
will be borne by the offender.\5\
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    \5\ A GSCC member may continue to use a reversal code under 
circumstances where it wishes to indicate to GSCC (where GSCC is the 
initiating party of a securities delivery to the member) that it 
``does not know'' (``DK'') the transaction. For example, if GSCC 
sends a securities delivery to a member in error, it is appropriate 
for the member to DK such delivery.
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    Third, for risk management reasons, GSCC will amend Rule 18 to add 
a requirement that all collateral substitutions with regard to repos 
that are on GSCC's books pending settlement must be made through GSCC.
    Fourth, GSCC will amend Section 4 of Rule 18 to permit a repo 
broker to submit a repo collateral substitution. As part of this 
change, GSCC will add the definition of repo broker to its definitions 
under Rule 1. A repo broker will be defined as an inter-dealer broker 
or a division or other separate operating unit within a dealer netting 
member that operates in the same manner as a broker and that 
participates in GSCC's repo netting service pursuant to the same 
requirements imposed under Rule 15 governing special provisions for 
certain netting members and Rule 19 governing special provisions for 
brokered repo transactions.

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) \6\ of the Act, which 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 the clearing agency or 
for which it is responsible. The commission finds that GSCC's rule 
change meets these conditions because it implements procedures designed 
to prohibit practices that pose risk and operational difficulties to 
GSCC.
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    \6\ 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 
proposal 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-00-10) be, and hereby 
is, approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-25703 Filed 10-11-01; 8:45 am]
BILLING CODE 8010-01-M