[Federal Register Volume 65, Number 88 (Friday, May 5, 2000)]
[Notices]
[Pages 26255-26256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11254]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42729; File No. SR-GSCC-99-05]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Granting Approval of a Proposed Rule Change Relating 
to the Formation of the European Securities Clearing Corporation

April 28, 2000.
    On November 16, 1999, the Government Securities Clearing 
Corporation (``GSCC'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change (File No. SR-GSCC-
99-05) 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 January 5, 2000.\2\ No comment letters were received. For 
the reasons discussed below, the Commission is granting approval of the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 42279, (December 28, 
1999), 65 FR 541.
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I. Description

    Under the rule change, GSCC seeks Commission approval to become an 
initial shareholder and to serve on the board of directors of the 
European Securities Clearing Corporation (``ESCC''). ESCC will be a new 
entity formed under the laws of the United Kingdom by GSCC, the 
Euroclear Clearance System Societe Cooperative (``Euroclear''), and the 
London Clearing House (``LCH''). ESCC will be owned equally by GSCC, 
Euroclear, and LCH.\3\
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    \3\ In 1998, GSCC's board of directors requested that GSCC 
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 Euroclear and its operator 
Morgan Guaranty Trust Company of New York, Brussels Branch. 
Specifically, GSCC and Euroclear had planned to use J.P. Morgan 
Benelux, S.A., an existing Morgan subsidiary, as the netting vehicle 
that would have been renamed the European Securities Clearing 
Corporation. In a separate development, LCH was also asked by its 
members to provide these same services in Europe. In response, in 
April 1999 LCH began offering its RepoClear service through which 
LCH provides netting services for European sovereign debt repo 
transactions. To achieve greater efficiency, GSCC, Euroclear, and 
LCH have agreed that it would be more efficient to provide the 
services for European sovereign debt purchases and repo transactions 
through a single netting vehicle, RepoClear.
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    ESCC's main role will be to oversee the scope and nature of the 
netting services being offered through LCH's RepoClear.\4\ It is 
intended that ESCC will be governed by its market participant users, 
which are expected to be major participants in the European fixed-
income marketplace. GSCC's involvement in ESCC will be a governance 
role that should help ensure, among other things, that RepoClear will 
draw upon GSCC's experience and knowledge and will have 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.
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    \4\ In accordance with the agreement between GSCC, Euroclear, 
and LCH, LCH will transfer control of RepoClear to ESCC. For a 
description of LCH's RepoClear, see note 3.
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    GSCC's role in ESCC will further help to ensure that the RepoClear 
service will use, to the extent appropriate, GSCC's mark-to-market and 
margining methodologies to provide comprehensive, uniform risk

[[Page 26256]]

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; \5\ (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; (iv) the RepoClear service will support global 
electronic trading systems which will allow for more efficient 
settlement of side-by-side cash and futures activities through 
coordinated mark-to-market and margining processes, standardized 
clearance and settlement practices, and optimized cross-margining of 
correlated positions.
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    \5\ The proposed cross-margining arrangement will be the subject 
of a separate rule filing by GSCC in the future. GSCC, Euroclear, 
and LCH intend to work toward implementing the cross-margining 
arrangement by early 2001.
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II. Discussion

    Section 17A(b)(3)(F) \6\ 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 and to foster 
cooperation and coordination with persons engaged in the clearance and 
settlement of securities transactions. For the reasons set forth below, 
the Commission believes that GSCC's proposed rule change is consistent 
with GSCC's obligations under the Act.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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    GSCC's participation in ESCC as a shareholder and a member of the 
board of directors should help to ensure that ESCC is able to provide 
both to United States organizations operating abroad, either directly 
or through their European affiliates, and to non-United States 
organizations a clearance and settlement system that provides for the 
prompt and accurate clearance and settlement of buys and sells and repo 
transactions involving European sovereign debt instruments. GSCC's 
participation in ESCC should also foster cooperation and coordination 
between itself, Euroclear, and LCH, all of which are major providers of 
clearance and settlement services.

III. 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-99-05) be and hereby is 
approved.
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    \7\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
Jonathan G. Katz,
Secretary.
[FR Doc. 00-11254 Filed 5-4-00; 8:45 am]
BILLING CODE 8010-01-M