[Federal Register Volume 68, Number 143 (Friday, July 25, 2003)]
[Notices]
[Pages 44130-44131]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-18991]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48200; File No. SR-GSCC-2002-11]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Approving Proposed Rule Change To Reduce the 
Permitted Use of Letters of Credit to Twenty-Five Percent of a Member's 
Required Clearing Fund Deposit

July 21, 2003.

I. Introduction

    On October 10, 2002, the Government Securities Clearing Corporation 
(``GSCC'') \1\ filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-GSCC-2002-11 pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\2\ 
Notice of the proposal was published in the Federal Register on June 
17, 2003.\3\ For the reasons discussed below, the Commission is 
approving the proposed rule change.
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    \1\ On January 1, 2003, MBS Clearing Corporation (``MBSCC'') was 
merged into GSCC under New York law, and GSCC was renamed the Fixed 
Income Clearing Corporation (``FICC''). The functions previously 
performed by GSCC are now performed by the Government Securities 
Division (``GSD'') of FICC, and the functions previously performed 
by MBSCC are now performed by the Mortgage-Backed Securities 
Division (``MBSD'') of FICC. The GSD succeeded to the GSCC proposed 
rule change upon the merger of MBSCC and GSCC. To avoid confusion 
and maintain consistency with the Notice, in this Order we will 
continue to refer to GSCC as such. Securities Exchange Act Release 
No. 47015 (December 17, 2002), 67 FR 78531 [File Nos. SR-GSCC-2002-
09 and SR-MBSCC-2002-01].
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ Securities Exchange Act Release No. 48016 (June 11, 2003), 
68 FR 35925.
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II. Description

    The purpose of the proposed rule change is to reduce the permitted 
use of letters of credit (``LCs'') to twenty-five percent of a member's 
required clearing fund deposit. One of GSCC's most important risk 
management tools is its maintenance of clearing fund collateral. GSCC's 
clearing fund is comprised of cash, certain netting-eligible 
securities, and eligible LCs. The purposes served by the clearing fund 
are (1) to 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 and (2) to ensure that GSCC has sufficient 
liquidity at all times to meet its payment and delivery obligations.
    Currently, GSCC's rules permit up to 70 percent of a member's 
required clearing fund deposit to be in the form of LCs. Although GSCC 
believes that it will always receive funds from the presentment of an 
LC for payment, GSCC has recognized that in a period of market crisis 
there is the potential that GSCC might not receive the funds on a 
timely basis. To ensure that GSCC can always meet its liquidity needs 
on a timely basis in the unlikely event of a member default and in 
times of market crisis, GSCC is reducing the permitted use of LCs to 25 
percent of a member's required clearing fund deposit. Thus, the minimum 
level of cash and securities required to be maintained on deposit will 
increase from 30 percent to 75 percent of a member's required clearing 
fund deposit.\4\
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    \4\ The new LC limitation will not affect the requirement that 
certain non-US GSCC members post additional collateral in the form 
of LCs to protect GSCC against legal risk presented by the 
insolvency laws in those members' home countries. These members will 
not be required to increase the amount of their deposit that is in 
the form of cash and securities from 30 percent to 75 percent of 
their required clearing fund deposit.

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[[Page 44131]]

III. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible.\5\ The Commission finds that GSCC's 
proposed rule change is consistent with this requirement because it 
will protect GSCC and its members by ensuring that GSCC has adequate 
liquidity resources in the event of member insolvency or during times 
of market crisis.
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    \5\ 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-2002-11) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-18991 Filed 7-24-03; 8:45 am]
BILLING CODE 8010-01-P