[Federal Register Volume 67, Number 247 (Tuesday, December 24, 2002)]
[Notices]
[Pages 78531-78532]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-32314]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47015; File Nos. SR-GSCC-2002-09 and SR-MBSCC-2002-01]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation and MBS Clearing Corporation; Order Granting Approval of 
Proposed Rule Changes Relating to the Merger of MBS Clearing 
Corporation Into the Government Securities Clearing Corporation to Form 
the Fixed Income Clearing Corporation

December 17, 2002.

I. Introduction

    On October 7, 2002, the Government Securities Clearing Corporation 
(``GSCC'') and MBS Clearing Corporation (``MBSCC'') filed with the 
Securities and Exchange Commission (``Commission'') proposed rule 
changes SR-GSCC-2002-09 and SR-MBSCC-2002-01 pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ On 
October 31, 2002, and on November 5, 2002, GSCC and MBSCC amended the 
proposed rule changes. Notice of the proposals was published in the 
Federal Register on November 15, 2002.\2\ No comment letters were 
received. For the reasons discussed below, the Commission is granting 
approval of the proposed rule changes.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 46790 (November 7, 
2002), 67 FR 69277.
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II. Description

    GSCC and MBSCC became wholly-owned, indirect subsidiaries of The 
Depository Trust and Clearing Corporation (``DTCC'') as a result of 
merger and exchange offer transactions that took place in late 2001 
(``DTCC Integration'').\3\ GSCC and MBSCC provide clearing and certain 
ancillary services for government securities and mortgage-backed 
securities, respectively. The clearing and other services for these 
different types of fixed-income products have many common elements. The 
handling of such products by different clearing corporations hinders 
development of uniform standards for the fixed-income services 
industry. The combination of GSCC and MBSCC will lead to development of 
uniform standards for messaging, reporting, netting and settlement 
mechanisms, standardized settlement practices, and coordinated cash and 
mark-to-market flows for fixed-income products. Moreover, combining 
GSCC and MBSCC will help the clearing corporations achieve important 
membership and risk management goals, such as building a consolidated 
risk management platform, optimizing cross-margining among various 
fixed-income products, and establishing uniform membership standards. 
Furthermore, redundant facilities, services, and operational aspects 
will be eliminated as a result of the merger thereby reducing the costs 
of processing transactions in fixed-income products over time.\4\
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    \3\ Securities Exchange Act Release Nos. 44988 (October 25, 
2001), 66 FR 55222 [SR-MBSCC-2001-01] and 44989 (October 25, 2001), 
66 FR 55220 [SR-GSCC-2001-11].
    \4\ Operational aspects include such things as separate annual 
reports, regulatory reports, audits, financial statements, and 
regulatory examinations.
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    To effect the merger, MBSCC will be merged into GSCC under New York 
law. At the time of the merger, GSCC Acquisition Company LLC (``GSCC 
Parent''), the sole shareholder of GSCC, will pay MBSCC Holding 
Company, Inc. (``MBSCC Parent''), the sole shareholder of MBSCC, a 
nominal amount of money in consideration of MBSCC Parent canceling its 
shares of capital stock of MBSCC. After MBSCC Parent cancels its shares 
of capital stock of MBSCC, GSCC will be the surviving corporation of 
the merger and will be renamed FICC, and GSCC Parent will be the sole 
direct shareholder of FICC. The current Certificate of Incorporation 
and Bylaws of GSCC will be amended to be the Certificate of 
Incorporation and Bylaws of FICC. FICC will form the Government 
Securities Division as the vehicle for delivering the services now 
provided by GSCC to GSCC members. FICC will form the Mortgage-Backed 
Securities Division as the vehicle for delivering the services now 
provided by MBSCC to MBSCC participants, limited purpose participants, 
and EPN users of MBSCC.
    The members and participants receiving services from the Divisions 
will retain their shareholdings in DTCC and their rights to be 
shareholders in DTCC that they received during the DTCC Integration. 
The structure implemented during the DTCC Integration to assure fair 
representation for, among others, the members of GSCC and participants 
of MBSCC will also remain in place. After the DTCC shareholders that 
were members of GSCC begin receiving services from the Government 
Securities Division and after the DTCC shareholders that were 
participants of MBSCC begin receiving services from the Mortgage-Backed 
Securities Division, they will continue to elect persons to serve on 
the DTCC Board of Directors as they did prior to the creation of FICC. 
The individuals elected to serve on the DTCC Board will, in turn, be 
selected by DTCC to serve as directors of FICC just as those 
individuals previously were selected by DTCC to serve as directors of 
GSCC and MBSCC. On a periodic basis to be determined by DTCC pursuant 
to the DTCC shareholders agreement, DTCC common stock will be 
reallocated to the shareholders using the services of The Depository 
Trust Company (``DTC''), Emerging Markets Clearing Corporation 
(``EMCC''), National Securities Clearing Corporation (``NSCC''), and 
now the Divisions of FICC based upon their usage if those services. The 
members receiving services from the Government Securities Division and 
the participants receiving services from the Mortgage-Backed Securities 
Division will continue to have the right but not the obligation to 
purchase some or all of the DTCC common stock to which they are 
entitled.
    The charters of the two committees formed during the DTCC 
Integration, the DTCC/DTC/GSCC/MBSCC/NSCC Fixed Income Operations and 
Planning Committee of DTCC, which includes representatives of members 
of GSCC and participants of MBSCC, and the GSCC/MBSCC Membership and 
Risk Management Committee, which is comprised of the representatives of 
members of GSCC and participants of MBSCC, will be amended to refer to 
members receiving services from the Government Securities Division and 
participants receiving services from the Mortgage-Backed Securities 
Division.
    The DTCC/DTC/GSCC/MBSCC/NSCC Fixed Income Operations and Planning 
Committee will be renamed the DTCC/DTC/FICC/NSCC Fixed Income 
Operations and Planning Committee. It will continue to advise the DTCC 
Board and management with respect to the services provided by and the 
fixed-income products processed by DTC, EMCC, NSCC, and FICC. The GSCC/
MBSCC Membership and Risk Management Committee will be renamed the FICC 
Membership and Risk Management Committee. It will advise the Board of 
Directors of FICC with respect to membership, credit, and risk matters. 
Other functions may be assigned to the committees as they are today.

[[Page 78532]]

    After the merger, FICC will satisfy the fair representation 
requirement of Section 17A of the Act \5\ by (i) continuing to give the 
members receiving services from the Government Securities Division and 
the participants receiving services from the Mortgage-Backed Securities 
Division, the right to purchase shares of DTCC common stock on a basis 
that reflects their usage of the services of the Divisions, DTC, EMCC, 
and NSCC; (ii) continuing to allow members and participants receiving 
services from the Divisions to take part in the selection of 
individuals to be directors of DTCC (who will also be directors of 
FICC, DTC, EMCC, and NSCC) to ensure that all major constituencies in 
the securities industry will have a voice in the business and affairs 
of each of these companies; and (iii) utilizing the committee structure 
described above to ensure that the members and the participants 
receiving services from the Divisions will have a voice in the 
operations and affairs of the Divisions.
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    \5\ 15 U.S.C. 78q-1(b)(3)(C).
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    As a result of the merger, GSCC's Certificate of Incorporation and 
Bylaws will be amended to reflect the change of GSCC's name to FICC. 
The Rules of MBSCC will be adopted by FICC as the rules of the 
Mortgage-Backed Securities Division. The Rules of GSCC and MBSCC will 
be amended to reflect that (i) the Government Securities Division and 
the Mortgage-Backed Securities Division will be separate Divisions of 
FICC; (ii) neither Division of FICC will be liable for the obligations 
of the other Division; and (iii) the clearing fund and other assets of 
each Division will not be available to satisfy the obligations of the 
other Division.

III. Discussion

    Section 17A(b)(3)(A) of the Act requires that a clearing agency be 
organized and have the capacity to be able to facilitate the prompt and 
accurate clearance and settlement of securities transactions.\6\ The 
purpose of the proposed merger of MBSCC into GSCC to form FICC is to 
eliminate the inefficiencies and inconsistencies that result from 
operating two fixed-income clearing corporations as separate entities. 
Accordingly, the Commission finds that FICC will be organized and have 
the capacity to facilitate the prompt and accurate clearance and 
settlement of securities transactions first by ensuring the continued 
availability to GSCC members and MBSCC participants of safe and 
efficient clearing services which were previously provided by GSCC and 
MBSCC and second by providing a means whereby uniform standards and 
clearance and settlement practices for various types of fixed-income 
products can be developed and implemented.
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    \6\ 15 U.S.C. 78q-1(b)(3)(A).
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    In the DTCC Integration, the Commission found that GSCC and MBSCC 
satisfied the requirements of section 17A(b)(3)(C) of the Act.\7\ 
Section 17A(b)(3)(C) requires that a clearing agency's rules assure the 
fair representation of its shareholders (or members) and participants 
in the selection of its directors and administration of its affairs.\8\ 
The merger of MBSCC into GSCC to create FICC will not affect the 
structure established by the DTCC Integration to assure fair 
representation of those who were GSCC members and MBSCC participants 
and are now Government Securities Division members and Mortgage-Backed 
Securities Division participants. Accordingly, the Commission finds 
that the proposed rule changes are also consistent with section 
17A(b)(3)(C).
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    \7\ Supra note 3.
    \8\ 15 U.S.C. 78q-1(b)(3)(C).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule changes are consistent with the requirements of the Act 
and in particular with the requirements of Section 17A of the Act and 
the rules and regulations thereunder applicable.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule changes (File Nos. SR-GSCC-2002-09 and SR-MBSCC-
2002-01) be and hereby are approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-32314 Filed 12-23-02; 8:45 am]
BILLING CODE 8010-01-P