[Federal Register Volume 67, Number 59 (Wednesday, March 27, 2002)]
[Notices]
[Pages 14753-14755]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7291]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45605; File No. SR-GSCC-2001-10]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Notice of Filing of a Proposed Rule Change Establishing a 
Loss Allocation Cap for Dealers Acting as Brokers on Substantially All 
of Their Repurchase Agreement Trades

March 20, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 16, 2001, the 
Government Securities Clearing Corporation (``GSCC'') filed with the 
Securities and Exchange Commission (``Commission'') a proposed rule 
change and an on August 31, 2001, 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 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

    The proposed rule change establishes an account-based loss 
allocation process for dealers that act as brokers in certain 
repurchase agreement transactions.

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 changes and 
discussed any comments it received on the proposed rule 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) and (C) below, of the most significant aspects of such 
statements.\2\
---------------------------------------------------------------------------

    \2\ The Commission has modified parts of these statements.
---------------------------------------------------------------------------

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

    GSCC is proposing to amend its current loss allocation rule 
concerning non-inter-dealer broker (``dealer'') members who act as 
brokers in certain of their repurchase agreement (repo) transactions. 
Under the proposed amended rule, repo transaction accounts of these 
dealers will be subject to the same $5 million per event absolute loss 
allocation cap currently applicable to inter-dealer brokers (``IDBs'') 
instead of an unlimited loss allocation liability. The proposed rule 
change is designed to afford appropriate relief for these dealers while 
not unfairly burdening other members.
(i) Current Loss Allocation Procedure
    If upon liquidating a defaulting member's positions GSCC incurs a 
loss due to the failure of the defaulting member to fulfill its 
obligations to GSCC, GSCC looks to the collateral deposited by that 
defaulting member to satisfy the loss. If the defaulting member's 
collateral is insufficient to cover the loss, the defaulting member's 
most ``recent'' trading partners will be looked to, on a pro rata 
basis, in order to satisfy the ``remaining loss.''
    Before the loss can be allocated to the defaulting member's most 
``recent'' trading partners, GSCC must first determine the proportion 
of the loss that arose in connection with member-brokered transactions 
and non-member brokered transactions and the proportion that arose in 
connection with direct transactions.
    To the extent the remaining loss is determined by GSCC to arise in 
connection with member brokered transactions, GSCC's rules provide that 
fifty percent of the loss will be allocated to netting members that are 
category 1

[[Page 14754]]

IDBs or category 2 IDBs pro rata based upon the dollar value of each 
such IDB netting member's trading activity with the defaulting member 
compared, netted, and novated on the day of default. The remaining 
fifty percent of the loss will be allocated to the dealer netting 
members pro rata based upon the dollar value of the trading activity 
through IDBs of each such dealer netting member's trading activity with 
the defaulting member compared, netted, and novated on the day of 
default. For purposes of an allocation of loss determined to arise in 
connection with member brokered transactions, an IDB netting member 
will not be subject to an allocation of loss for any single loss-
allocation event in an amount greater than $5 million. A dealer netting 
member will not be subject to an allocation of loss for any single 
loss-allocation event in an amount greater than the lesser of $5 
million or five percent of the overall loss amount allocated to dealer 
netting members. To the extent that this cap is applicable, any excess 
amounts not collected from individual netting members, whether an IDB 
or a dealer, will be reallocated to the netting membership in general, 
pro rata based on average daily clearing fund deposit requirement over 
the twelve-month period prior to the insolvency. However, even with the 
reallocation, an IDB netting member would not be subject to an 
aggregate loss allocation for any single loss allocation event in an 
amount greater than $5 million.
    To the extent a remaining loss is determined by GSCC to arise in 
connection with non-member brokered transactions, it will be allocated 
among the recent category 2 IDB netting members that were parties to 
such non-member brokered transactions pro rata based upon the dollar 
value of each such category 2 IDB netting member's trading activity 
with the defaulting member compared, netted, and novated on the day of 
default. For purposes of an allocation of loss determined to arise in 
connection with non-member brokered transactions, there is no loss-
allocation cap.
    To the extent a remaining loss is determined to arise in connection 
with direct transactions, it will be allocated among the recent 
counterparty netting members pro rata based on the dollar value of the 
trading activity of each such netting member's trading activity with 
the defaulting member compared, netted, and novated during the recent 
trading period. For purposes of an allocation of loss determined to 
arise in connection with direct transactions, there is no loss-
allocation cap.
    Under the current loss allocation procedure, dealer netting members 
acting as brokers on all or substantially all of their repo 
transactions do not enjoy the $5 million per event absolute loss 
allocation cap applicable to IDBs. Consequently, these dealers likely 
would be disproportionately assessed for allocation loss in the current 
environment.
(ii) Proposed Changes
    The proposed rule change addresses the manner in which the loss 
allocation procedure described in subsection (i) above applies to 
dealers that act as brokers in their repo transactions. Specifically, 
the proposed rule change would establish an account-based loss 
allocation process whereby the segregated repo accounts of these 
dealers would be treated in the same way as IDB accounts.
    In order to accomplish this, GSCC is proposing to add two new 
definitions to its rules, ``non-IDB repo broker'' and ``segregated repo 
account.'' A non-IDB repo broker, with respect to activity in its 
segregated repo account, is a dealer netting member that GSCC has 
determined operates in the same manner as a broker and participates in 
GSCC's repo netting service pursuant to the same requirements imposed 
under the rules on IDB netting members that participate in that 
service. These requirements include keeping their brokered repo 
activity (with two GSCC netting members on both sides of each trade) in 
a separate account, the segregated repo account.
    Since GSCC's loss allocation procedures with respect to remaining 
losses distinguish between brokered transactions and direct 
transactions and since it is with respect to non-IDB repo brokers' 
brokered transactions that GSCC is proposing to give relief, the 
proposed rule filing would amend: (i) The definition of ``brokered 
transaction'' to include transactions to which a non-IDB repo broker, 
with regard to activity in its segregated repo account, is a party; 
(ii) the loss allocation rule applicable to brokered transactions to 
include references to non-IDB repo brokers and the activity in their 
segregated repo accounts; and (iii) the loss allocation rule to provide 
non-IDB repo brokers with regard to activity in their segregated repo 
accounts with a cap on their total loss allocation obligation of $5 
million as is currently applied to IDB netting members.
    All of the other activity processed by non-IDB repo brokers outside 
of their segregated repo broker accounts would continue to be subject 
to the loss allocation rules applicable to dealer netting members.
    The proposed rule change is consistent with the requirements of the 
Act, as amended, and the rules and regulations thereunder because it 
provides for a more equitable loss allocation process among GSCC's 
members.

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

    GSCC does not believe that the proposed rule change will have any 
impact or impose any 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 change have not yet 
been solicited or received. 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 GSCC consents, the Commission will:
    (a) By order approve the 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 
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,

[[Page 14755]]

Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of GSCC. All submissions 
should refer to File No. SR-GSCC-2001-10 and should be submitted by 
April 17, 2002.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\3\
---------------------------------------------------------------------------

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

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-7291 Filed 3-26-02; 8:45 am]
BILLING CODE 8010-01-P