[Federal Register Volume 67, Number 123 (Wednesday, June 26, 2002)]
[Notices]
[Pages 43198-43199]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-16059]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46093; File No. SR-GSCC-2002-02]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Approving Proposed Rule Changes To Alter Trade Data 
Submission Requirements for Netting and Comparison-Only Members

June 20, 2002.

I. Introduction

    On February 11, 2002, the Government Securities Clearing 
Corporation (``GSCC'') filed with the Securities and Exchange 
Commission (``Commission'') proposed rule change SR-GSCC-2002-02 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ Notice of the proposal was published in the Federal 
Register on March 19, 2002.\2\ For the reasons discussed below, the 
Commission is approving the proposed rule changes.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 45548 (March 12, 2002), 
67 FR 12630.
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II. Description

    GSCC has proposed to amend its rules to alter trade data submission 
requirements for both Netting \3\ Members and Comparison-Only \4\ 
Members. Based on an analysis conducted by GSCC to discover the cause 
of lower-than-desired buy/sell comparison rates, GSCC has determined 
that changes to its trade submission requirements would boost GSCC's 
trade

[[Page 43199]]

comparison rates \5\ and thereby should decrease risks associated with 
uncompared trades not settling.
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    \3\ A Netting member is a Member of GSCC that is a member of 
both the Comparison System and the Netting System. The Comparison 
System performs trade comparison which consists of the reporting, 
validating, and in some cases, matching by GSCC of the long and 
short sides of a securities trade, including a repo transaction, to 
ensure that the details of such trade are in agreement between the 
parties. Trade detail comparison is the first step in the clearance 
and settlement process for securities transactions. The Netting 
System is a system for aggregating and matching offsetting 
obligations resulting from trades, including repo transactions, 
submitted by or on behalf of netting members.
    \4\ A Comparison-Only Member is a member of GSCC that is a 
member only of the Comparison System.
    \5\ Comparison rates are derived by dividing the total number of 
buy/sell trades compared by the total number of buy/sell trades 
submitted.
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    In the course of its analysis, GSCC discovered that while 
comparison rates for repo transactions approached 97 percent, 
comparison rates for buy/sell transactions were consistently lower at 
95 percent. GSCC determined that there were four main reasons for this 
trend. First, many trades submitted to GSCC are not submitted as 
originally executed between members. Many trades are either ``bunched'' 
or ``broken down'' resulting in some trades not being compared.\6\ 
While GSCC employs certain tolerances for required data fields in order 
to aid comparison, some bunched or broken down trade scenarios fall 
outside of GSCC's par summarization tolerances.\7\
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    \6\ For example, Firm A submits one trade for $30 million, and 
Firm B ``breaks down'' the trade into three $10 million pieces. 
Alternatively, Firm A and Firm B may execute five separate trades 
each worth $10 million. Firm A submits each trade separately while 
Firm B ``bunches'' the five trades into one $50 million piece. In 
both of these examples, the trades will not be compared.
    \7\ In the event of a mismatch of final money, GSCC has 
established trade tolerances which allow for differences in trade 
values (or par summarization) submitted by members on each side of 
one transaction. For a trade to be compared, par summarization must 
be on a 2:1 or 2:2 ratio. For example, where Firm A submits a trade 
in one piece of $50 million and Firm B submits two pieces of $25 
million each, this transaction would fall within the 2:1 par 
summarization tolerance. If Firm A were to submit two pieces of $25 
million each and Firm B submitted two pieces of $20 million and $30 
million, this would fall within GSCC's 2:2 par summarization 
tolerance. Assuming that the final money matches, both of these 
trades will be compared by GSCC.
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    The second reason for uncompared trades is when GSCC members fail 
to notify GSCC of their intent to submit trades for Executing Firms.\8\ 
GSCC keeps over 400 Executing Firms and their corresponding symbols on 
a master list which is available to all members. GSCC should be 
notified in advance of a member's intent to submit trade data on behalf 
of an Executing Firm so that the master list can be updated. However, 
member firms often fail to so notify GSCC, they submit trade data 
without the proper Executing Firm symbol, or they fail to submit 
Executing Firm data completely. These trades may show up in GSCC's 
systems as uncompared.
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    \8\ An Executing Firm is a firm that is not a member of GSCC 
whose trade data is submitted to GSCC by a GSCC member.
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    A third reason for uncompared trades is that GSCC does not 
currently require its members to submit to it all types of trade data. 
As a result, some firms do not submit to GSCC for comparison trades 
that are executed and settled on the same day (cash trades). The fourth 
reason for uncompared trades occurs because Comparison-Only Members, 
who do not settle their trades through GSCC, do not submit their trade 
data to GSCC on a consistent basis.
    The proposed rule changes would increase comparison rates by 
effectively eliminating the situations described above. Specific 
proposed rule changes would apply to both buy/sell and repo 
transactions as follows:
    (i) Each Comparison-Only Member would be required to submit data to 
GSCC on all buy/sell or repo trades executed by such member with any 
other Comparison-Only Member or Netting Member of GSCC.
    (ii) Each Netting Member would be required to submit data to GSCC 
on all buy/sell or repo trades executed by such member with any other 
Comparison-Only Member.\9\
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    \9\ GSCC Rule 11 already requires Netting Members to submit all 
trade data for transactions with other Netting Members.
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    (iii) Each GSCC member would be required to submit data to GSCC on 
all trades with other GSCC members executed and settled on the same 
day.
    (iv) Each GSCC member would be required to submit trade data 
exactly as executed up to a $50 million dollar cap. Trades for over $50 
million could be submitted in $50 million pieces with a ``tail'' for 
any remainder.\10\
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    \10\ GSCC does not accept trade data for transactions over $50 
million except for GCF Repo transactions.
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    (v) Each GSCC member would be required to inform GSCC of all 
Executing Firms on whose behalf they submit trade data for placement on 
GSCC's master list and to submit to GSCC all trades executed on behalf 
of an Executing Firm on GSCC's master list with the appropriate symbol. 
In addition, each GSCC member would be required to inform GSCC of those 
Executing Firms that should be deleted from the master list.
    In the event that a member does not comply with the new trade 
submission rules, GSCC has certain rights to enforce compliance. In 
addition to automatically placing a Netting Member or a Comparison-Only 
Member on surveillance status, GSCC would have the right to increase 
the required Clearing Fund deposit of a Netting Member pursuant to GSCC 
Rule 4, Section 3 and at GSCC's discretion notify the Netting Member or 
Comparison-Only Member's appropriate regulatory authority of its non-
compliance with GSCC's rules. GSCC expects to submit a rule filing at a 
later date giving GSCC the authority to assess fees to members who do 
not comply with the trade data submission requirements outlined in 
these rules.

III. Discussion

    Section 17A(b)(3)(F) 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.\11\ The Commission 
finds that GSCC's proposed rule change is consistent with this Section 
because by boosting GSCC's trade comparison rates it will promote the 
prompt and accurate clearance and settlement of securities 
transactions.
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the 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-2002-02) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-16059 Filed 6-25-02; 8:45 am]
BILLING CODE 8010-01-P