[Federal Register Volume 65, Number 3 (Wednesday, January 5, 2000)]
[Notices]
[Pages 541-542]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-112]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42279; File No. SR-GSCC-99-05]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change Relating to the 
Formation of and Involvement in the European Securities Clearing 
Corporation

December 28, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 16, 1999, the 
Government Securities Clearing Corporation (``GSCC'') filed with the 
Securities and Exchange Commission (``Commission'') 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 seeks the Commission's approval for GSCC 
to become an initial shareholder and serve on the Board of Directors of 
the European Securities Clearing Corporation (``ESCC'').

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

    In 1998, GSCC was requested by its board of directors, which is 
composed of representatives of many organizations active in the 
government debt securities cash and repo markets both in the United 
States and in Europe, to explore the possibility of providing in Europe 
the types of comparison, netting, and risk management services that 
GSCC provides in the United States. GSCC originally planned to provide 
these services through a joint venture with the Euroclear Clearance 
System Societe Cooperative (``Euroclear'') \3\ and its operator, Morgan 
Guaranty Trust Company of New York, Brussels Branch (``Morgan'').\4\ 
Specifically, GSCC and Euroclear had planned to use J.P. Morgan 
Benelux, S.A. (``Benelux''), an existing Morgan subsidiary, as the 
netting vehicle. Benelux would have been renamed the European 
Securities Clearing Corporation.\5\ The London Clearing House (``LCH'') 
was also asked by its members to provide these same services in 
Europe.\6\ In response, LCH began offering its RepoClear service in 
August 1999 through which LCH provides netting services for European 
sovereign debt repo transactions.
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    \3\ Euroclear was created in 1968 to provide clearance and 
settlement for internationally traded securities. It provides 
related services such as custody, securities lending, and money 
transfer. Euroclear has extensive experience in European securities 
settlement.
    \4\ Morgan and Euroclear recently announced that they have 
signed a letter of intent to create a new, market-owned European 
bank to succeed Morgan as operator and banker of Euroclear. The 
transition from Morgan to the new bank operator is expected to occur 
within approximately twenty months.
    \5\ It was intended that GSCC would acquire a minority ownership 
interest in Benelux.
    \6\ LCH was created in 1888 to clear certain commodities 
transactions. It currently provides clearing and netting services 
for a wide array of financial products, including futures, equities, 
swaps, and repos. LCH is a ``recognized clearing house'' under the 
United Kingdom's Financial Services Act of 1986.
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    GSCC, Euroclear, and LCH (collectively, the ``parties'' and, each 
individually, a ``party'') have determined that it would be more 
efficient to provide the services for European sovereign debt buy-sell 
and repo transactions through a single netting vehicle, which will be 
LCH through its RepoClear service.\7\ This plan allows for a logical 
consolidation of the efforts of the three parties and maximizes the 
synergies to be achieved by them. Each of the parties brings its unique 
knowledge and experience to the effort. GSCC has extensive netting and 
risk management expertise as the leading provider of these services for 
the buy-sell and repo markets in the United States. Euroclear has over 
thirty years experience providing settlement, custody, and collateral 
management services in Europe. As mentioned above, LCH provides 
clearing and netting services for a wide array of financial products, 
including repos. The parties also share a large common membership 
(mostly through affiliated entities).
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    \7\ It should be noted that there is at least one other 
competing netting vehicle in Europe, ClearNet, which is owned by the 
ParisBourse. LCH to ESCC. ESCC will be owned equally by the three 
parties. It is intended that ESCC be governed by its market 
participant users, who are expected to be major participants in the 
European fixed-income marketplace.
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    The parties will form a new entity, ESCC, which is proposed to be a 
United Kingdom company and whose purpose will be oversee the scope and 
nature of the netting services offered by LCH. Thus, there will be a 
transition of control of LCH's RepoClear service from LCH to ESCC. ESCC 
will be owned equally by the three parties. It is intended that ESCC be 
governed by its market participant users, who are expected to be major 
participants in the European fixed-income marketplace.
    GSCC's involvement in ESCC at the outset will be a governance role 
that should help ensure, among other things, that LCH/RepoClear will 
draw upon GSCC's experience and knowledge and

[[Page 542]]

carry United States-style features, such as single-ticket data input, 
settlement of contracts at current market value, the facilitation of 
substitutions, and the admission of inter-dealer brokers. These 
features have proven very successful of the U.S. Government debt market 
in the United States.
    GSCC's management role in ESCC will further ensure that the 
RepoClear service will use, to the extent appropriate, GSCC's mark-to-
market and margining methodologies to provide comprehensive, uniform 
risk management processes. GSCC intends to help ensure that: (i) 
Processing efficiencies will be attained through the utilization of 
standardized SWIFT message formats for input and output; (ii) 
participants' margin requirements will be reduced through cross-
margining both their European Government securities activity and their 
combined United States and European activity; \8\ (iii) participants' 
balance sheets will be reduced and they will experience increased 
capital utilization through a maximization of the offsets available 
from repo and reverse repo activity; and (iv) the RepoClear service 
will support global electronic trading systems, allowing for more 
efficient settlement of cash and futures activities engaged in side-by-
side through coordinated mark-to-market and margining processes and 
standardized clearance and settlement practices and through optimized 
cross-margining of correlated positions.
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    \8\ The proposed cross-margining arrangement will be the subject 
of a separate rule filing in the future. The parties intend to work 
towards implementing the cross-margining arrangement by early 2001.
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    GSCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \9\ and the rules and 
regulations thereunder applicable to GSCC because it should help to 
ensure that United States organizations operating abroad either 
directly or through their European affiliates obtain the significant 
netting, risk management, and other services and associated benefits 
that GSCC provides in the United States.
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    \9\ 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 any 
impact or impose any burden on completion.

(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 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, N.W., Washington, D.C. 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, N.W., 
Washington, D.C. 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-99-05 and should be 
submitted by January 26, 2000.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-112 Filed 1-4-00; 8:45 am]
BILLING CODE 8010-01-M