[Federal Register Volume 65, Number 233 (Monday, December 4, 2000)]
[Notices]
[Pages 75750-75751]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-30771]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43626; File No. SR-GSCC-00-05]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change Relating to 
Enhancements to the Government Collateral Finance Repo Service and 
Clarifying Certain Risk Management Practices of the Service

November 27, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 5, 2000, the 
Government Securities Clearing Corporation (``GSCC'') filed with the 
Securities and Exchange Commission (``Commission'') and on July 13, 
2000, amended the proposed rule change as described in Items I, II, and 
III 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 parties.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The proposed rule change will allow GCF Repo securities lenders to 
satisfy their collateral allocation requirements with ``comparable 
securities,'' benchmark U.S. Treasury securities, or cash. Similarly, 
the proposed rule change will allow GCF Repo securities borrowers, 
under certain conditions, to return ``comparable securities,'' 
benchmark U.S. Treasury securities, or cash. The proposed rule change 
also would allow GSCC to alter its risk management procedures 
associated with the GCF Repo service to conform to the mortgage-backed 
securities (``MBS'') market practice.

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 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. GSCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by GSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    GSCC introduced its GCF Repo Service in November 1998.\3\ The GCF 
Repo Service allows GSCC's non-inter-dealer broker netting members 
(``dealers'') to trade general collateral repos involving U.S. 
Government securities throughout the day without requiring trade for 
trade settlement on a delivery versus payment basis.
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    \3\ In 1998, the Commission approved a rule change that allowed 
GSCC to implement the GCF Repo Service on an intrabank basis. 
Securities Exchange Act Release No. 40623 (October 30, 1998), 63 FR 
59831, (November 5, 1998) [File No. SR-GSCC-98-02]. In 1999, the 
Commission approved a rule change that allowed GSCC to implement the 
second, interbank phase of the GCF Repo Service. That enhancement 
has enabled participating dealers to engage in GCF Repo trading with 
participating dealers that use a different clearing bank. Securities 
Exchange Act Release No. 41303 (April 16, 1999), 64 FR 20346 (April 
26, 1999) [File No. SR-GSCC-99-01].
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    GSCC has been activating the generic CUSIP numbers representing the 
securities that are eligible for GCF Repo processing in stages. U.S. 
Treasury securities with a maturity of ten years or less and U.S. 
Treasury securities with a maturity of thirty years or less were the 
first products to be made eligible for GCF Repo processing. At the 
beginning of this year, GSCC also began accepting non-mortgage-backed 
agency securities for GCF Repo processing and more recently began 
accepting mortgage-backed securities (``MBS'') for GCF Repo 
processing.\4\
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    \4\ On March 20, 2000, GSCC activated the generic CUSIP number 
representing Federal Home Loan Mortgage Corporation and Federal 
National Mortgage Association fixed-rate MBS.
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    Having gained the experience of operating the GCF Repo Service for 
more than one year, GSCC is now seeking to enhance the service in 
certain ways in order to make it more responsive to its members' needs 
and to clarify certain risk management practices, each in a manner 
consistent with market practice.
(i) Authority To Deliver Comparable or U.S. Treasury Securities
    The first change proposed by GSCC applies to the collateral 
allocation

[[Page 75751]]

obligations of securities lenders \5\ in GCF Repo transactions. Under 
the proposed rule change, securities lenders will be permitted to 
satisfy their collateral allocation requirements in connection with 
their GCF Repo activity with (1) ``comparable securities'' (i.e., those 
that fall within the same generic CUSIP number), (2) benchmark U.S. 
Treasury securities (i.e., bills, notes, or bonds), or (3) cash. Market 
participants consider comparable securities to be acceptable 
substitutes because securities that fall within the same generic CUSIP 
number tend to have the same level of liquidity. U.S. Treasury 
securities are also acceptable substitute securities because of their 
high level of liquidity.
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    \5\ As provided in GSCC's Rule 46, the use of borrowing and 
lending terminology in this proposed rule change filing and in 
GSCC's rules and agreements shall not be deemed to affect the intent 
of members as to their characterization of their transactions in 
agreements entered into by the members with each other or with third 
parties with respect to such transactions.
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    The second change proposed by GSCC applies where the securities 
borrower, due to reasons beyond its control and despite exercising best 
efforts, is not able to obtain in a timely manner the securities that 
were delivered on the day before by the securities lender. Under the 
proposed rule change, the securities borrower will have the right to 
return (1) ``comparable securities,'' (2) benchmark U.S. Treasury 
securities, or (3) cash. The securities borrower will be responsible 
for making the securities lender whole (through GSCC) for any actual 
damages directly suffered by the securities lender as a result of not 
receiving back the same securities that were originally lent.
(ii) Insolvency Situation Involving Mortgage-Backed Securities
    The third change proposed by GSCC relates to clarification of its 
risk management procedures associated with the GCF Repo Service to 
reflect the nature of MBS and MBS market practice. In the event of a 
securities borrower's insolvency, it may be impractical or even 
impossible for GSCC to obtain the identical types of MBS that were 
originally lent. Moreover, MBS market practice is such that in such a 
situation, securities lenders in repurchases transactions involving MBS 
would not expect to receive the same securities back.
    The proposed rule change will amend Rule 22, Section 4 of GSCC's 
rules by giving GSCC the authority in an insolvency situation, where 
MBS were the underlying collateral, to deliver back to a securities 
lender ``comparable securities'' or benchmark U.S. Treasury 
securities.\6\ Alternatively, the proposed rule change will permit GSCC 
to give a securities lender the right to close out the transaction by 
buying ``comparable securities'' or U.S. Treasury securities in return 
for a cash payment by GSCC equal to the value of the securities it 
bought. However, if GSCC determines that the price paid by the 
securities lender is unreasonably high, GSCC will be entitled to pay 
the securities lender a reasonable price as determined by an 
independent third party pricing source for the ``comparable 
securities'' or U.S. Treasury securities.
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    \6\ Rule 3 of MBS Clearing Corporation (``MBSCC'') reflects MBS 
market practice of delivering comparable securities in an insolvency 
situation.
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    GSCC believes that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to GSCC and in particular with Section 17A(b)(3)(F) of the 
Act because it will enhance the GCF Repo Service by making it more 
responsive to the needs of GSCC's members and by clarifying certain of 
GSCC's risk management practices, each in a manner consistent with 
market practice.

(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. 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 the self-regulatory organization 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, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies of thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
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 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 Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of GSCC.
    All submissions should refer to File No. SR-GSCC-00-05 and should 
be submitted by December 26, 2000.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-30771 Filed 12-1-00; 8:45 am]
BILLING CODE 8010-01-M