Federal Register / Vol. 62, No. 182 / Friday, September 19, 1997 / Notices 49283

6 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2Securities Exchange Act Release No. 38871 (July

24, 1997), 62 FR 40877.

3Forward-starting repo transactions are repo

transactions that have start legs settling one or more

business days in the future.

4Each business day, all eligible repo transactions

are netted with regular cash activity and Treasury

auction purchases in the same CUSIP to establish

a single net position in the security for each netting

member participating in the repo netting process.

For netting purposes, the settlements associated

with repo close legs and reverse start legs are

treated as long positions. The settlements associated

with repo start legs and reverse close legs are

treated as short positions. The difference between

a participant’s total short activity and its total long

activity within a CUSIP is the participant’s net

position in the CUSIP.

5The notification must be made by submitting an

‘‘intent to substitute’’ notification that provides

specific collateral details to GSCC using an on-line

function (i.e., a screen input facility) provided by

GSCC. If one of the members that has submitted the

data on the repo is a broker, GSCC will accept the

‘‘intent to substitute’’ notification solely from that

broker without the need for a matching notification

from the dealer counterparty. If neither of the

members that submitted the data on the repo are

brokers, GSCC will accept the ‘‘intent to substitute’’

notification from the member in the short or

delivering position without the need for a matching

notification from the dealer counterparty. However,

GSCC will attempt to verify manually with the

other member the accuracy of the details of the

notification from the member with the short

position.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.6

Margaret H. McFarland,

Deputy Secretary.

Exhibit 1—GSCC Fine Schedule

LATE PAYMENT OF FUNDS SETTLEMENT DEBIT/LATE SATISFACTION OF

CLEARING FUND DEFICIENCY CALL

Amount

First

occasion

Second

occasion

Third

occasion

Any

lateness

more

than

1

hour

or

fourth

occasion

$1 to $100M (1) $100 $200 $500

Greater than

$100M to

$1MM ....... (1) 300 600 1,000

Greater than

$100MM to

$2MM ....... (1) 600 1,200 2,000

Greater than

$2MM ....... $250 1,000 2,000 3,000

Notes

(1) A warning letter is sent to senior

officials of the offender describing the nature

of the violation and the consequences of

successive violations.

(2) Each instance of late payment of a

funds settlement debit or late satisfaction of

a Clearing fund deficiency call is deemed to

be a separate occasion. Such instances are

combined, regardless of type, to determine

the number of occasions.

(3) The number of occasions is determined

over a moving 30 calendar-day period

beginning with date of the first occasion.

(4) A specific determination will be made

by the Membership & Standards Committee

of the Board of Directors when the number

of occasions exceeds four, or when the

number of occasions of lateness of more than

an hour exceeds two.

(5) The Membership & Standards

Committee reserves the discretion to waive or

reduce scheduled fines when a particular

occasion is not deemed to be the fault of the

affected member.

[FR Doc. 97–24862 Filed 9–18–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39060; File No. SR–GSCC–

97–03]

Self-Regulatory Organizations;

Government Securities Clearing

Corporation; Order Approving a

Proposed Rule Change Relating to

Eligibility of Forward-Starting Repos

for Netting and Guaranteed Settlement

Prior to Their Scheduled Start Date

September 11, 1997.

On May 8, 1997, the Government

Securities Clearing Corporation

(‘‘GSCC’’) filed with the Securities and

Exchange Commission (‘‘Commission’’)

and on June 13, 1997, amended a

proposed rule change (File No. SR–

GSCC–97–03) 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 July 30, 1997.2 No comment letters

were received. For the reasons

discussed below, the Commission is

approving the proposed rule change.

I. Description

The proposed rule change amends

several of GSCC’s rules to make

transactions in forward-starting

repurchase agreements (‘‘repos’’)

eligible for netting and guaranteed

settlement before they reach their

scheduled start date.3 Previously,

forward-starting repos were not eligible

for netting and guaranteed settlement

until they reach their scheduled

settlement date.

Since November 1995, GSCC has

provided netting services for repo

transactions.4 After GSCC nets repo

transactions, it interposes itself between

the submitting participants for

transaction settlement purposes as it

does for cash transactions. In doing so,

GSCC guarantees settlement of all repos

that enter its netting system. GSCC’s

guarantee for netted repos includes

guaranteeing the return of repo

collateral to repo participants, the return

of principal (i.e., repo start amount) to

reverse participants, and the payment of

repo interest to the full term of the repo

to reverse participants.

Forward-starting repos generally are

either: (1) ‘‘specific collateral’’ repos for

which the underlying CUSIP is known

from the date of execution of the repo,

or (2) ‘‘general collateral’’ repos for

which the specific security and par

amount that will be transferred from the

repo participant to the reverse

participant on the start date are not

known at the time of execution. Repo

participants submitting to GSCC data on

general collateral repo transactions will

use one of the seventeen generic CUSIP

numbers established by the CUSIP

service bureau for identifying collateral.

These CUSIP numbers identify the type

of Government security (e.g., bill, bond,

or note) and indicate the remaining

length to maturity for the issue. In

addition, the par amount of the

underlying collateral is no longer an

item that must be included when the

repo is submitted to GSCC. This will

allow GSCC to match submitted trades

in general collateral forward-starting

repos upon their submission to GSCC

without inclusion of the par amount.

The parties to a general collateral

forward-starting repo have the

obligation to inform GSCC when the

specific CUSIPs and associated par

values that will be used for settlement

purposes are determined. The

notification must be made to GSCC no

later than by the close of business on the

business day prior to the date on which

the repo is scheduled to start.5

Until a forward-starting repo actually

starts, the forward margin and clearing

fund requirements applied to it will

differ from those applied to all other

repos. With regard to forward margin,

because a forward-starting repo that has

not yet started presents only interest

rate exposure and not exposure to

movements in the value of the

underlying collateral, only an interest
49284 Federal Register / Vol. 62, No. 182 / Friday, September 19, 1997 / Notices

6As a part of the morning funds-only settlement

process, GSCC collects and passes through on a

daily basis forward margin based on its ongoing

exposure on each forward net settlement position.

For repos, the market value is subtracted from the

repo’s contract value (i.e., the amount of money that

was exchanged for the collateral), and a debit or

credit is established depending upon the result of

the calculation and whether or not the participant

is on the reverse or repo side of the transaction. The

forward margin calculation for repos differs from

that for cash market trades in that there is an

additional financing mark component. The

financing mark component reflects the fact that, if

GSCC replaced the reverse side of the repo by

buying securities and putting them out on repo, a

financing cost would be incurred. The financing

mark is debited to the reverse side and credited to

the repo side.

7For repos for which the underlying collateral

has already been exchanged, each day GSCC

guarantees to the reverse repo party the interest

payment on the principal amount. However, until

the repo begins, GSCC only guarantees the

difference between the agreed upon repo rate and

the rate the party could receive in the open market. 8 15 U.S.C. 78q–1(b)(3)(F).

9 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

rate mark-to-market will be applied.6

This interest rate mark component will

be calculated by multiplying the

principal value of the repo first by a

factor equal to the absolute difference

between the system and contract repo

rates and then by a fraction where the

numerator is the number of calendar

days from the scheduled start date of the

repo until the scheduled close date for

the repo and the denominator is 360.

The interest rate mark differs from the

financing mark applied to repos that

have already started in that, because the

exposure presented to GSCC is a pure

rate risk exposure, it can be a debit to

either the short side or the long side.7

The clearing fund requirement for a

forward-starting repo during its forwardstarting period will be based solely on

the interest rate mark.

In addition to the changes relating to

forward-starting repos, the proposal

clarifies that a right of substitution

continues after GSCC novates the trade.

Section 4 to Rule 18 specifies the

method of substituting collateral.

Should a repo participant want to

implement a substitution, either it or its

broker must submit an ‘‘intent to

substitute’’ notification to GSCC using

GSCC’s on-line collateral substitution

function. For money fill substitutions,

the par amount and/or CUSIP may

change, and for par fill substitutions, the

principal, CSUIP, and/or end money

may change. GSCC does not review the

appropriateness of the substitute

collateral. All movements associated

with the substitution will be made

through GSCC.

Regardless of the type of substitution,

GSCC will maintain accrued interest

information throughout the life of the

repo across multiple collateral

substitutions as required. GSCC also

will reverse any previous mark-tomarket and clearing fund monies

calculated for the collateral being

replace. These amounts will be

recalculated using the security

information for the replacement

collateral.

Finally, the proposal makes eligible

for GSCC’s netting system repos with

underlying collateral that matures on or

prior to the scheduled close date by

eliminating from the list of requirements

for netting-eligibility the requirement

that the maturity date of the underlying

securities be on or later than the

scheduled settlement date of the close

leg. Section 6 of Rule 18 requires that if

a repo participant has transferred

securities as underlying collateral that

mature prior to the settlement date of

the close leg, that participant must

substitute equivalent securities with a

later maturity date prior to the business

day before the maturity date.

II. Discussion

Section 17A(b)(3)(F) requires that the

rules of the clearing agency be designed

to promote the prompt and accurate

clearance and settlement of securities

transactions and to ensure the

safeguarding of securities and funds

which are in the custody and control of

the clearing agency or for which it is

responsible.8 The Commission believes

that proposal will enhance GSCC’s

ability to clear and to settle forwardstarting repos. GSCC will be better able

to evaluate participants’ true positions

by including more of participants’

pending positions in the margin and

clearing fund calculations. By collecting

funds based on a more accurate

reflection of a participant’s actual risk,

the proposal assists GSCC in

safeguarding securities and funds. By

guaranteeing forward-starting repos

earlier in the process, the proposal

increases the likelihood that these

trades will eventually settle.

Furthermore, by making forwardstarting repos eligible for netting and

guaranteed settlement, the proposal

should increases the number of repos

that will be cleared and settled through

GSCC and should increase the utility of

GSCC’s clearance system. By enhancing

the settlement process, GSCC’s proposal

is consistent with the prompt and

accurate clearance and settlement of

securities.

III. Conclusion

On the basis of the foregoing, the

Commission finds that the proposal is

consistent with requirements of the Act

and in particular with the requirements

of 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–97–03) be and hereby is

approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.9

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–24866 Filed 9–18–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39063; File No. SR–NASD–

97–64]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

National Association of Securities

Dealers, Inc. Relating to Small Order

Execution System Tier Size

Classifications

September 12, 1997.

Pursuant to section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

September 4, 1997, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’) filed with

the Securities and Exchange

Commission (‘‘Commission’’ or ‘‘SEC’’)

the proposed rule change as described

in Items I, II, and III below, which Items

have been prepared by NASD. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The NASD is submitting this filing to

effectuate The Nasdaq Stock Market,

Inc.’s (‘‘Nasdaq’’) periodic

reclassification of Nasdaq National

Market (‘‘NNM’’) securities into

appropriate tier sizes for purposes of

determining the maximum size order for

a particular security eligible for

execution through Nasdaq’s Small Order

Execution System (‘‘SOES’’).

Specifically, under the proposal, 537

NNM securities will be reclassified into

a different SOES tier size effective

October 1, 1997. Since the NASD’s

proposal is an interpretation of existing

NASD rules, there are no language

changes.