[Federal Register Volume 67, Number 116 (Monday, June 17, 2002)]
[Notices]
[Pages 41285-41287]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-15136]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46053; File No. SR-GSCC-00-12]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change Relating to 
Insolvency and Clearing Fund Requirements

June 10, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 5, 2000, 
Government Securities Clearing Corporation (``GSCC'') filed with the 
Securities and Exchange Commission (``Commission''), and on December 
14, 2000, 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 parties.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change would allow GSCC to amend its clearing 
fund and insolvency rules to better protect itself and its members from 
certain types of legal risk.

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 change and 
discussed any comments it received on the proposed rule change. 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 these 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by GSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    On January 30, 1996, the Securities and Exchange Commission 
(``Commission'') issued an order (``Commission's Order'') approving 
GSCC's proposed rule change permitting foreign entities to become 
members of GSCC's netting system.\3\ The rule change established 
application and continuing membership requirements for foreign 
entities, including the delivery to GSCC of an opinion of foreign 
counsel addressing the particular jurisdictional concerns raised by the 
admission of a foreign entity to netting system membership.\4\
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    \3\ Securities Exchange Act Release No. 36788 (January 30, 
1996), 61 FR 4500 (February 6, 1996).
    \4\ GSCC also requires each prospective foreign member to 
provide an insolvency law opinion discussing applicable U.S. Federal 
and state laws.
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    Having gained experience from reviewing the legal opinions 
regarding foreign law that were provided in connection with the 
applications of the foreign banks that GSCC has admitted to its netting 
system to date, GSCC has determined to clarify its insolvency rule, 
Rule 22, in the manner described in subsection (i) below so that the 
insolvency rule more appropriately references the types of insolvency 
proceedings to which a foreign member

[[Page 41286]]

might become subject. GSCC is also proposing to make conforming 
language changes to GSCC's rules dealing with applications for 
membership and continuing membership standards as they apply to foreign 
members.
    Some of the legal opinions referred to in the previous paragraph 
have indicated that GSCC would be exposed to ``legal risk'' as a result 
of the application of the particular jurisdiction's law to a foreign 
member's insolvency or bankruptcy. The legal risk can take the form of 
prohibiting or delaying GSCC from: accessing some or all of the 
clearing fund deposit of the member; performing its netting, close-out, 
or liquidation of transactions; or the setting off of obligations as 
set forth in its clearing fund rule (Rule 4), its ceasing to act rule 
(Rule 21), or its insolvency rule (Rule 22), or the taking of any other 
action contemplated by these rules. GSCC is proposing to amend its 
rules to better protect itself and its members from these types of 
legal risk in the circumstances where GSCC reasonably determines based 
upon factors such as outside legal advice or a discussion with a 
relevant regulator that such legal risk exists. The proposed rule 
changes are described more fully in subsection (ii) below.
    GSCC's experience in connection with the admission of U.S. branches 
of foreign banks has also indicated that certain issues that are 
described in these opinions could affect GSCC's rights in the event of 
the insolvency or bankruptcy of a domestic member. GSCC believes, given 
the importance of its being able to exercise its rights as set forth in 
its clearing fund rule, its ceasing to act rule, and its insolvency 
rule that the proposed rule changes discussed below in subsection (ii) 
should also apply to domestic members that present GSCC with legal 
risk. GSCC would reasonably determine that such legal risk exists based 
upon factors such as outside legal advice or a discussion with a 
relevant regulator.
    GSCC is also proposing to add language to GSCC's clearing fund rule 
clarifying GSCC's right to rehypothecate the cash deposits of its 
clearing fund.
    (i) Changes to Insolvency Rule
    GSCC's insolvency rule contains a section that lists the various 
types of events or proceedings which would permit GSCC to treat a 
member as insolvent. The rule was written utilizing terms common in 
United States insolvency or bankruptcy proceedings. GSCC is proposing 
to amend its insolvency rule to add language so that the rule more 
appropriately references the types of insolvency proceedings to which a 
foreign member might become subject. GSCC has broad discretion pursuant 
to its rules to impose additional terms and conditions on members that 
it deems to be necessary to protect itself and its members. GSCC's 
foreign membership agreements have already been expanded to incorporate 
the insolvency triggering events that GSCC now proposes to make part of 
its rules. The proposed changes will bring the rules into conformity 
with the foreign membership agreements and specifically give GSCC the 
right pursuant to its rules to declare a foreign member to be insolvent 
under the requisite circumstances.\5\
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    \5\ In addition, the proposed rule change makes conforming 
language changes to GSCC's Rule 2 (Members) and Rule 3 (Financial 
Responsibility and Operational Capability Standards) as they apply 
to foreign members.
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    (ii) Clearing Fund Requirements
    One of GSCC's most important risk management tools is its clearing 
fund, which is comprised of three components: (1) cash; (2) certain 
netting-eligible securities; and (3) eligible letters of credit. The 
purposes served by the clearing fund are to: (1) have on deposit from 
each netting member assets sufficient to satisfy any losses that may be 
incurred by GSCC as the result of the default by the member and the 
resultant close-out of that member's settlement positions; (2) maintain 
a total asset amount sufficient to satisfy potential losses to GSCC and 
its members resulting from the failure of more than one member (and the 
failure of such members' counterparties to pay their pro rata 
allocation of loss); and (3) ensure that GSCC has sufficient liquidity 
at all times to meet its payment and delivery obligations.
    A clearing fund deposit, to serve its intended purpose, should be 
immediately accessible to GSCC in the event of the member's bankruptcy 
or insolvency. However, the application of certain domestic or foreign 
laws could delay or prevent GSCC from accessing the portion of the 
member's clearing fund deposit that is in the form of cash and 
securities. The portion of the clearing fund deposit that is in the 
form of letters of credit (``LCs'') is generally not subject to the 
same risk because LCs are typically not considered to be part of the 
bankrupt/insolvent entity's estate.
    The rules with respect to the calculation of a member's clearing 
fund deposit do not currently address the legal risk detailed above. In 
order to better protect itself and its members, GSCC is seeking the 
authority to require a domestic or foreign member that in management's 
reasonable view (which may be based upon factors such as outside legal 
advice or discussion with a relevant regulator) presents heightened 
legal risk to GSCC to: (1) deposit additional collateral over what 
would normally be required under GSCC's clearing fund rule and/or (2) 
post some additional portion of its clearing fund deposit requirement 
in the form of an LC.\6\
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    \6\ GSCC's clearing fund rule requires that LCs constitute no 
more than 70 percent of a member's clearing fund deposit. GSCC is 
seeking the authority to ask for a higher percentage in the form of 
an LC if circumstances warrant.
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    (iii) Clarification of Rehypothecation Right with Respect to Cash 
Deposits
    GSCC's clearing fund rule contains a provision that permits GSCC to 
rehypothecate, transfer, or assign its clearing fund collateral in the 
event that GSCC needs to secure a loan or to satisfy an obligation 
incurred by it, in each case incident to its clearance and settlement 
business. GSCC desires to clarify the reference in the provision to the 
portions of the clearing fund that may be rehypothecated, transferred, 
or assigned by GSCC. The provision refers to the securities and the LCs 
that members pledge or deposit to the clearing fund as well as the 
``deposits or other instruments in which the cash deposits'' to the 
clearing fund may be invested. GSCC believes that this language could 
be read to not actually refer to the cash deposits themselves. GSCC 
believes that it is prudent to specifically add a reference to ``cash 
deposits'' to eliminate any doubt as to GSCC's ability to use the cash 
portion of the clearing fund in the manner set forth in the clearing 
fund rule.
    The proposed rule change is consistent with the requirements of 
Section 17A of the Act \7\ and the rules and regulations thereunder 
applicable to GSCC because it will help protect GSCC and its members in 
the event of the insolvency of a foreign member.
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    \7\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    GSCC does not believe that the proposed rule change will have an 
impact or impose a 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.

[[Page 41287]]

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 the self-regulatory organization consents, 
the Commission will:
    (A) by order approve such 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 
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 Section, 450 Fifth Street, NW, 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of GSCC. All submissions 
should refer to File No. SR-GSCC-00-12 and should be submitted by July 
8, 2002.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-15136 Filed 6-14-02; 8:45 am]
BILLING CODE 8010-01-P