Federal Register / Vol. 62, No. 182 / Friday, September 19, 1997 / Notices 49281

3 Interdealer broker netting members already have

a $5 million cap per loss event on their liability for

loss allocation. 4 17 CFR 200.30–3(a)(12).

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

GSCC’s loss allocation process is

designed to provide members with

incentives to assess the creditworthiness

of their counterparties. Thus, to the

extent that GSCC, using its own capital,

does not absorb the loss that results

from a member default, it allocates the

loss among members pro rata based on

the extent of their recent activity with

the defaulting member. In order to

determine which members will be

subject to loss allocation, GSCC will

look at trading activity that entered

GSCC’s netting system during as many

days as is necessary to reach a level of

activity that is equal to or greater than

five times the dollar value of the

liquidated positions.

Over the years, a number of members

and prospective members have raised an

issue regarding the application of the

loss allocation process for losses arising

from blind brokered transactions. Their

concern is that members that are not

interdealer brokers neither have

knowledge nor have control over

whether they may be matched against

any other member. Thus, they have no

ability to limit the amount of trading

that they do on a blind basis against a

member on which they would otherwise

place trading limits for credit or other

reasons. The concern by a dealer firm

over the inability to exercise control

from a credit perspective over its trading

activity with particular counterparties

has been heightened with last year’s

introduction of blind brokering activity

involving repurchase agreement

transactions.

GSCC believes that while the

possibility of a loss allocation occurring

is de minimis the concern over bearing

a disproportionate amount of loss is a

legitimate one that needs to be

addressed. Among other methods, GSCC

considered simply mutualizing among

all netting members, either in an equal

or pro rata manner, any loss allocation

arising from blind brokered activity. The

disadvantage of this approach is that it

removes any incentive for a member to

assess the creditworthiness of one’s

counterparties. GSCC believes that the

loss allocation process should continue

to function in a manner that preserves

to some extent this incentive.

In order to balance these

considerations, GSCC is seeking

authority to cap at a preset level the

degree to which any netting member

that is not an interdealer broker is liable

for loss allocation arising from blind

brokered activity.3 The proposed cap

per loss event will be equal to the lesser

of $5 million or five percent of the total

loss amount arising from blind brokered

activity that is allocated to members that

are not interdealer brokers as a group.

To the extent that this cap is applicable,

any amounts not collected from

individual netting members will be

reallocated to the entire netting

membership pro rata based on each

member’s average daily clearing fund

deposit requirement over the twelve

month period prior to the insolvency.

GSCC believes that the $5 million cap

will provide to all members the same

level of protection that interdealer

broker members currently have for blind

brokered activity. GSCC also states that

because dealer members do not control

the degree to which they may be

matched by interdealer brokers against

other members, the number of trades

that they engage in with an insolvent

member is outside of their control. The

5% limit is intended to compensate for

this lack of control by ensuring that no

single member will be liable for an

amount of loss for blind brokered

activity that is significantly greater than

the amount of loss allocated to other

dealer members.

GSCC believes the proposed rule

change is consistent with the

requirements of section 17A of the Act

and the rules and regulations

thereunder because the rule proposal

will promote the prompt and accurate

clearance and settlement of securities

transactions and will assure the

safeguarding of securities and funds in

the custody or control of GSCC or for

which GSCC is responsible.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

GSCC does not believe that the

proposed rule change will have an

impact or impose a burden on

competition.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

No written comments have 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 GSCC 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.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549. 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

Room, 450 Fifth Street, NW.,

Washington, DC 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of GSCC. All submission should

refer to the file number SR–GSCC–97–

05 and should be submitted by October

10, 1997.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.4

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–24860 Filed 9–18–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39054; File No. SR–GSCC–

97–04]

Self-Regulatory Organizations;

Government Securities Clearing

Corporation; Notice of Filing of a

Proposed Rule Change Relating to the

Implementation of a Fine Schedule

September 11, 1997.

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

Securities Exchange Act of 1934
49282 Federal Register / Vol. 62, No. 182 / Friday, September 19, 1997 / Notices

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

2The Commission has modified the text of the

summaries prepared by GSCC.

3Recently, GSCC released a White Paper to its

members and other interested parties that discussed

various initiatives GSCC plans to implement in the

coming years. Among other things, GSCC outlined

future plans to enhance its risk management

process by conducting a second afternoon fundsonly settlement and by calculating and collecting

clearing fund margin more dynamically.

4A copy of GSCC’s fine schedule is attached as

Exhibit A to the proposed rule change, which is

available for inspection and copying at the

Commission’s Public Reference Room or through

GSCC.

5U.S.C. 78q–1(b)(3)(F).

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

May 21, 1997, the Government

Securities Clearing Corporation

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

Exchange Commission (‘‘Commission’’)

the proposed rule change (File No. SR–

GSCC–97–04) as described in Items I, II,

and II 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 persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The proposed rule change will

implement a fine schedule in order to

ensure compliance by members with

deadlines for payment of funds

settlement debts and satisfaction of

clearing fund deposit deficiency calls.

The fine schedule is attached as Exhibit

1 to this notice.

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 the 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 such statements.2

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

GSCC believes that the most critical

elements of its risk management process

are the timely collections of mark-tomarket and clearing fund margin

amounts. Therefore, it is essential for

GSCC to ensure the compliance by

netting members with GSCC’s deadlines

for payment of funds settlement debits

and satisfaction of clearing fund deposit

deficiency calls. Failures to meet these

deadlines result in increased exposure

as well as potentially higher costs to

GSCC and its members.

Currently, members must pay fundsonly settlement obligations via GSCC’s

designated depository institution in Fed

funds by 10:00 a.m. In addition,

members must satisfy clearing fund

deficiencies within two hours after

notification from GSCC. Typically,

GSCC telephones its members by 8:30

a.m. to notify members of a call for an

additional clearing fund deposit. The

telephone call is followed up by telefax.

The exact time that the telephone call is

made is recorded and becomes the

formal time that the call is made.

Therefore, the usual deadline for

satisfaction of a clearing fund deficiency

is around 10:30 a.m.3

In order to promote greater

compliance with GSCC’s funds debit

and deficiency call deadlines, the

proposed rule change will implement a

fine schedule.4 According to GSCC, the

fine schedule will enable it to assess

predetermined monetary penalties

against members who fail to meet their

financial responsibilities on a timely

basis. The severity of any fine will be a

function of the magnitude and recent

history of the subject member’s late

payments. In addition, the proposed

rule change will eliminate the current

limitation of $5,000 on the maximum

size of any single fine GSCC may

impose.

GSCC proposes to implement the fine

schedule as it relates to late payment of

a funds-only settlement obligation

concurrently with the establishment of

an ‘‘autodebit’’ arrangement, which will

be the subject of a future rule filing. The

autodebit arrangement involves an

agreement between GSCC and

participating banks that allows GSCC to

use the banks to effect timely cash

payments between it and participating

netting members in settlement of their

morning funds-only settlement

obligations with GSCC. GSCC believes

that this arrangement will being more

certainty and will increase the

timeliness of payment of funds-only

settlement obligations with GSCC.

Netting members that participate

appropriately in the autodebit process

will not be subject to fines for late

payment of funds settlement

obligations.

GSCC believes that the proposed rule

change is consistent with the

requirements of Section 17A(b)(3)(F) of

the Act 5 and the rules and regulations

thereunder because it will assure the

safeguarding of securities and funds

which are in the custody or control of

GSCC or for which it is responsible.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

GSCC does not believe that the

proposed rule change will have an

impact or impose a burden on

competition.

(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. Members will be

notified of the filing of the proposed

rule change and comments will be

solicited by an Important Notice. 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 GSCC 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.

Persons making submissions should file

six copies thereof with the Secretary,

Securities and Exchange Commission,

450 Fifth Street, NW., Washington, DC

20549. Copies of this submission, all

subsequent amendments, all written

statements with respect to the proposed

rule change that are filed with the

Commission, and all written

communications 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

Room, 450 Fifth Street, NW.,

Washington, DC 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of GSCC. All submissions should

refer to the file number SR–GSCC–97–

04 and should be submitted by October

10, 1997.
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