[Federal Register Volume 66, Number 213 (Friday, November 2, 2001)]
[Notices]
[Pages 55723-55725]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-27557]



[[Page 55724]]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44995; File No. SR-GSCC-2001-06]


Self Regulatory Organizations; Government Securities Clearing 
Corporation; Notice of Filing and Immediate Effectiveness of a Proposed 
Rule Change Relating to the Placement of Highly Leveraged Members on 
Surveillance Status

October 26, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ notice is hereby given that on May 14, 2001, the 
Government Securities Clearing Corporation (``GSCC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by GSCC. The Commission is published this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

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

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

    GSCC proposes to add new definitions and procedures to its rules 
that relate to how GSCC will monitor its members' clearing fund status. 
In addition, GSCC proposes to add a rule that would permit GSCC to 
exchange information with other clearing organizations concerning a 
member that is on any surveillance status.

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 rules changes and 
discussed any comments it received on the proposed rules changes. 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, 
C below of the most significant aspects of such 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

    Rule 4, section 3 of GSCC's rules states that a member whose 
clearing fund deposit obligation represents a significant portion of 
its net worth or net capital will be placed on a ``class 1 (advisory 
list) surveillance status'' and thus be subjected to a more thorough 
monitoring of its financial condition and activities. Until recently, 
GSCC has not routinely monitored its members' use of leverage. Now, due 
to factors such as the increasingly high level of members' clearing 
fund deposit requirements and the growing number of executing firms\3\ 
for whose trades members are responsible, the amount of clearing fund 
deposit required of certain GSCC netting members can represent a 
significant proportion of their excess capital. Consequently, GSCC 
believes that it has become appropriate for risk management purposes to 
more closely monitor members' relative use of leverage.
---------------------------------------------------------------------------

    \3\ An executing firm is a non-GSCC member that contracts with a 
GSCC member to submit trades on its behalf to GSCC.
---------------------------------------------------------------------------

    Specifically, GSCC believes that it is important to compare the 
ratio of each member's clearing fund requirement to that member's level 
of excess regulatory capital \4\ and to advise its membership of 
specific actions that it plans to take pursuant to Rule 4 with respect 
to any member that has a ratio in excess of certain defined 
parameters.\5\
---------------------------------------------------------------------------

    \4\ In this context, the term ``excess regulatory capital'' is 
used to include excess net capital, excess liquid capital, or excess 
adjusted net capital, all of which are measures of an organization's 
net worth after adjusting for the liquidity of its balance sheet.
    \5\ Inter-dealer brokers (``IDBs'') and bank members are 
excluded from this analysis because IDBs, which have fixed clearing 
fund requirements and limited capital, are subject to different 
types of risk management considerations and because banks do not 
perform net capital computations.
---------------------------------------------------------------------------

    To accomplish this, GSCC's approach under this proposed rule change 
would be analogous to the early warning concept applied by the 
Commission with respect to its net capital rule.\6\ Examining 
authorities utilize parameters established within the net capital rule 
to provide an early warning of any broker-dealer that may be at risk of 
not having sufficient liquid capital to meet current obligations.\7\ 
Deposits to GSCC's clearing fund are included in broker-dealers' net 
capital balances since such deposits are allowable assets.\8\ Despite 
its liquidity, these amounts are deposited with and retained by GSCC to 
support GSCC-related trading and, therefore, are not available for 
other use. Therefore, GSCC believes that it is meaningful to measure 
the portion of a member's excess capital that is deposited to the 
clearing fund against its overall excess capital.
---------------------------------------------------------------------------

    \6\ 17 CFR 240.15c3-1. The net capital rule is designed to 
ensure the liquidity of broker-dealers by requiring that they 
maintain minimum levels of liquid assets to support the volume and 
risk of the business in which they are engaged.
    \7\ In order to derive net capital under the net capital rule, a 
firm's net worth is reduced to give effect to the elements of 
market, credit, or operational risk inherent in the business in 
which the firm is engaged. Net capital is the broker-dealer's net 
worth adjusted for illiquid (``nonallowable'') assets, certain 
operational capital charges, and potential adverse fluctuations in 
the value of securities inventory (known as ``haircuts''). The 
purpose of the net capital computation is to determine that the 
broker-dealer's net liquid assets (minimum capital base) are 
adequate in the event of sudden adverse business conditions. Excess 
net capital is the amount by which the member's net capital exceeds 
its minimum capital requirement.
    \8\ Letter from Richard L. Gregg, Commissioner of the Bureau of 
the Public Debt of the Department of the Treasury, to Jeffrey F. 
Ingber, General Counsel of the Government Securities Clearing 
Corporation (August 30, 1989) (permitting registered government 
securities brokers or dealers to treat clearing fund collateral as 
allowable assets for capital calculation purposes).
---------------------------------------------------------------------------

    If a significant portion of the excess net capital of a netting 
member is committed to GSCC's clearing fund, it may be more likely than 
other members to have difficulty in meeting obligations in general and 
may therefore deemed to pose a greater likelihood of default with 
respect to its obligations to GSCC in particular.
    To compensate for this potentially higher-than-ordinary risk of 
default, GSCC will place a member with a clearing fund requirement to 
excess net capital ratio of greater than .050 on Class 1 Surveillance 
Status.\9\ Rule 4 permits GSCC to more thoroughly monitor such a highly 
leveraged member's financial condition and activities and to require 
the member to make more frequent financial disclosures. GSCC will 
require a highly leveraged member to provide GSCC with a satisfactory 
explanation of its leverage and it may seek to obtain information with 
respect to such member's margin requirements at other clearing 
organizations to better enable GSCC to assess whether the member will 
be able to meet its obligations to GSCC.
---------------------------------------------------------------------------

    \9\ For purposes of this analysis, the separate clearing fund 
requirements of members with multiple accounts will be combined into 
a single aggregate number.
---------------------------------------------------------------------------

    GSCC believes that the proposed rules change is consistent with the 
requirements of section 17A of the Act \10\ and the rules and 
regulations thereunder because they serve to clarify rights that GSCC 
currently possesses with respect to highly leveraged participants.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    GSCC does not believe that the proposed rules change will impact or 
impose a burden on competition.

[[Page 55725]]

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 rules changes have not 
yet been solicited or received. Members will be notified of the rule 
change filing and an Important Notice will solicit comments. 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)(A) \11\ of the Act and Rule 19b-4(f)(1) \12\ thereunder 
because the proposed rule change constitutes a stated policy, practice, 
or interpretation with respect to the meaning, administration, or 
enforcement of an existing rule. At any time within sixty 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 Act.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(1).
---------------------------------------------------------------------------

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 Room in Washington, DC. Copies of such 
filing will also be available for inspection and copying at GSCC's 
principal office. All submissions should refer to File No. SR-GSCC-
2001-06 and should be submitted by November 23, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-27557 Filed 11-1-01; 8:45 am]
BILLING CODE 8010-01-M