[Federal Register Volume 62, Number 182 (Friday, September 19, 1997)]
[Notices]
[Pages 49283-49284]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24866]


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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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 38871 (July 24, 1997), 
62 FR 40877.
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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.
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    \3\ Forward-starting repo transactions are repo transactions 
that have start legs settling one or more business days in the 
future.
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    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.
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    \4\ Each 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.
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    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\
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    \5\ The 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.
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    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

[[Page 49284]]

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 forward-starting 
period will be based solely on the interest rate mark.
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    \6\ As 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.
    \7\ For 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.
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    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-to-market 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 forward-
starting 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.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    Furthermore, by making forward-starting 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\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-24866 Filed 9-18-97; 8:45 am]
BILLING CODE 8010-01-M