[Federal Register Volume 66, Number 206 (Wednesday, October 24, 2001)]
[Notices]
[Pages 53816-53819]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-26727]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44946; File No. SR-GSCC-2001-01]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Granting Approval of a Proposed Rule Change Relating 
to the Redesign of Comparison Rules

October 17, 2001.
    On January 16, 2001, the Government Securities Clearing Corporation 
(``GSCC'') filed with the Securities and Exchange Commission 
(``Commission'') and on April 11 and August 17, 2001,\1\ amended the 
proposed rule change (File No. SR-GSCC-2001-01) pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\2\ Notice of 
the proposal was published in the Federal Register on May 16, 2001.\3\ 
No comment letters were received. For the reasons discussed below, the

[[Page 53817]]

Commission is granting approval for the proposed rule change.
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    \1\ The August 17, 2001, amendment withdrew a portion of the 
proposed rule change which was reflected by GSCC in a subsequent 
proposed rule change. Securities Exchange Act Release No. 44907 
(October 4, 2001), 66 FR 51988 (October 11, 2001) [File No. SR-GSCC-
2001-09]. As such, republication of notice was not required.
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ Securities Exchange Act Release No. 44282 (May 8, 2001), 66 
FR 27190.
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I. Description

    The purpose of the filing is to redesign GSCC's comparison rules in 
order to implement real-time interactive services. 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 years, 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.\4\
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    \4\ GSCC will file with the Commission pursuant to Section 19 of 
the Act proposed rule changes with respect to any fees intended as 
disincentives to discourage members from using batch formats.
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    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 batch to an interactive 
environment. This redesign is the subject of this proposed rule change. 
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 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, with the exception being certain 
locked-in trades, most trades such as members' Federal Reserve auction 
purchases are compared within the GSCC system as a result of bilateral 
comparison. 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 GSC 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 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 on 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 executive 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) that 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 no discretion over trade details is exercised once the trade 
is submitted.
    In order to participate, the locked-in trade source must be 
authorized by both the members of 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 interactively 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 
the case of demand trades, a DK of a locked-in trade will be treated by 
GSCC as a

[[Page 53818]]

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.

Submission Methods

    In order to set forth the concept of a member submitting 
interactively versus submitting in one of the batch modes, GSCC is 
adding 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 adding 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 end of day.

Submission of Full-Sized Trades

    GSCC is permitting 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 changing the timing of the comparison 
and guaranty of settlement processes.
    With respect to the timing of comparison, GSCC's rules currently 
provide that it occurs when GSCC makes its comparison output available 
to members. GSCC is amending its rules to state that, while comparison 
will continue to occur upon issuance of the comparison message by GSCC 
with respect to trades submitted for bilateral comparison, comparison 
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 netting 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.\5\ 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 
a netting-eligible trade submitted for demand or 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 
cancelled 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.
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    \5\ The exception to this rule is GSCC's policy of guaranteeing 
blind brokered repos entered into in good faith upon trade 
execution. GSCC adopted this policy 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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General Responsibilities of Members

    GSCC's comparison rule contains a provision that requires members 
to review documents that they receive from GSCC. GSCC desires to expand 
the provision to cover any type of communication provided to members by 
GSCC and to require members to inform GSCC promptly, but in no event 
later than ten calendar days upon receipt of the communication, if 
there is any error, omission, or other problem with respect to the 
communication. GSCC's netting rule contains a similar provision with 
respect to which GSCC is adding the ten-day requirement. GSCC believes 
that the ten-day time frame will provide members with a sufficient 
amount of time within which to detect problems in a communication from 
GSCC.

Amendments to Schedules

    GSCC is making 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 2:00 a.m.'' to ``8:00 p.m. to 2:00 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 8:00 p.m. trade submission deadline.
    GSCC is also adding language to make clear 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.

II. Discussion

    Section 17A(b)(3)(F) \6\ 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 GSCC. The rule change, which allows GSCC to implement 
interactive messaging to support real-time comparison, will enable GSCC 
to reduce risk by enabling firms to know earlier of any trades which do 
not compare and to have more time to resolve the problems. This should 
reduce the number of failed trades at GSCC. The rule change also 
provides for more efficient procedures in the comparison process 
thereby facilitating prompt and accurate clearance and settlement of 
securities at GSCC. Therefore, the Commission finds that the rule 
change is consistent with Section 17A and the rules and regulations 
thereunder.
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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 
proposed rule change is consistent with the

[[Page 53819]]

requirements of the Act and in particular 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-2001-01) 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. 01-26727 Filed 10-23-01; 8:45 am]
BILLING CODE 8010-01-M