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.
Federal Register / Vol. 62, No. 182 / Friday, September 19, 1997 / Notices 49285

2The classification criteria is set forth in NASD

Rule 4613(a)(2) and the footnote to NASD Rule

4710(g). 3 17 CFR 200.30–3(a)(12).

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

NASD 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. The NASD has

prepared summaries, set forth in

Sections A, B, and C below, of the most

significant aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

The purpose of the rule change is to

effectuate Nasdaq’s periodic

reclassification of NNM securities into

appropriate tier sizes for purposes of

determining the maximum size order for

a particular security eligible for

execution through SOES. Nasdaq

periodically reviews the SOES tier size

applicable to each NNM security to

determine if the trading characteristics

of the issue have changed so as to

warrant a tier size adjustment. Such a

review was conducted using data as of

June 30, 1997, pursuant to the following

established criteria: 2

NNM securities with an average daily nonblock volume of 3,000 shares or more a day,

a bid price less than or equal to $100, and

three or more market makers are subject to

a minimum quotation size requirement of

1,000 shares and a maximum SOES order

size of 1,000 shares;

NNM securities with an average daily nonblock volume of 1,000 shares or more a day,

a bid price less than or equal to $150, and

two or more market makers are subject to a

minimum quotation size requirement of 500

shares and a maximum SOES order size of

500 shares; and

NNM securities with an average daily nonblock volume of less than 1,000 shares a day,

a bid price less than or equal to $250, and

less than two market makers are subject to a

minimum quotation size requirement of 200

shares and a maximum SOES order size of

200 shares.

Pursuant to the application of this

classification criteria, 537 NNM

securities will be reclassified effective

October 1, 1997. These 537 NNM

securities are set out in the NASD’s

Notice To Members 97–61 (September,

1997).

In ranking NNM securities pursuant

to the established classification criteria,

Nasdaq followed the changes dictated

by the criteria with three exceptions.

First, an issue was not moved more than

one tier size level. For example, if an

issue was previously categorized in the

1,000-share tier size, it would not be

permitted to move to the 200-share tier

even if the reclassification criteria

showed that such a move was

warranted. In adopting this policy,

Nasdaq was attempting to maintain

adequate public investor access to the

market for issues in which the tier size

level decreased and help ensure the

ongoing participation of market makers

in SOES for issues in which the tier size

level increased. Second, for securities

priced below $1 where the reranking

called for a reduction in tier size, the

tier size was not reduced. Third, for the

top 50 Nasdaq securities based on

market capitalization, the SOES tier

sizes were not reduced regardless of

whether the reranking called for a tiersize reduction.

The NASD believes that the proposed

rule change in consistent with section

15A(b)(6) of the Act. Section 15A(b)(6)

requires, among other things, that the

rules of the NASD governing the

operation of The Nasdaq Stock Market

be designed to foster cooperation and

coordination with persons engaged in

regulating, clearing, settling, processing

information with respect to, and

facilitating transactions in securities,

and to remove impediments to and

perfect the mechanism of a free and

open market. The NASD believes that

the reassignment of NNM securities

within SOES tier size levels will further

these ends by providing an efficient

mechanism for small, retail investors to

execute their orders on Nasdaq and by

providing investors with the assurance

that they can effect trades up to a certain

size at the best prices quoted on Nasdaq.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD believes that the proposed

rule change will not result in any

burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Comments were neither solicited nor

received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The proposed rule change has become

effective immediately pursuant to

section 19(b)(3)(A)(i) of the Act and

subparagraph (e) of Securities Exchange

Act Rule 19b–4 because the reranking of

NNM securities into appropriate SOES

tier sizes was done pursuant to the

NASD’s stated policy and practice with

respect to the administration and

enforcement of an existing NASD rule.

Further, in the SOES Tier Size Order,

the Commission requested that the

NASD provide this information as an

interpretation of an existing NASD rule

under section 19(b)(3)(A) of the Act.

At any time within 60 days of the

filing of a rule change pursuant to

section 19(b)(3)(A) of the Act, the

Commission may summarily abrogate

the rule change if it appears to the

Commission that such action is

necessary or appropriate in the public

interest, for the protection of investors,

or otherwise in furtherance of the

purposes of the Act.

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 at

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to File No.

SR–NASD–97–64 and should be

submitted by October 10, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.3

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–24863 Filed 9–18–97; 8:45 am]

BILLING CODE 8010–01–M