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[Federal Register Volume 63, Number 110 (Tuesday, June 9, 1998)]
[Notices]
[Pages 31539-31543]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15214]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40057; File No. SR-GSCC-98-02]

Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Notice of a Proposed Rule Change Regarding the 
Implementation of the GCF Repo Service

June 2, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 10, 1998, the 
Government Securities Clearing Corporation (``GSCC'') filed with the 
Securities and Exchange Commission (``Commission'') 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 from interested persons on the proposed rule 
change.
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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 GSCC to implement a new service 
called the ``GCF Repo service.'' The GCF Repo service will allow GSCC's 
dealer members to trade general collateral repos involving Government 
securities throughout the day without requiring intraday, trade-for-
trade settlement on a delivery-versus-payment (``DVP'') basis.\2\
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    \2\ The complete text of the proposed rule change is attached as 
Exhibit A to GSCC's filing, which is available for inspection and 
copying at the Commission's public reference room and through GSCC.
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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 such 
statements.\3\
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    \3\ 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

    The GCF Repo service has been developed as part of a collaborative 
effort among GSCC, its clearing banks,\4\ industry representatives 
service on GSCC's Repo Implementation Committee, and its associated GCF 
Repo Working Group.
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    \4\ Currently, GSCC's clearing banks are The Bank of New York 
and The Chase Manhattan Bank. Under the proposed rule change, any 
clearing bank that meets GSCC's operational requirements will be 
able to provide GCF Repo settlement services to GSCC netting 
members.
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(1) General
    The GCF Repo service will enable netting members of GSCC that are 
not interdealer brokers (``dealers'') to trade general collateral 
repos, based on rate and term, with interdealer broker netting members 
of GSCC (``brokers'') on a blind basis throughout each day. Brokers 
will be required to submit GCF Repo trade data to GSCC within five 
minutes of trade execution through a new terminal function. Brokers 
will not be able to submit GCF Repo trades in batch. Upon receipt of 
the trade data, GSCC immediately will report transaction details to 
dealers through a terminal dynamic display facility, and the GCF Repos 
will receive GSCC's settlement guarantee. Standardized, generic CUSIP 
numbers established exclusively for the GCF Repo service will be used 
to specify the acceptable type of underlying Fedwire book-entry 
eligible collateral, which will include Treasuries, Agencies, and 
mortgage-backed securities.\5\
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    \5\ Because GCF Repo trades will be conducted on a blind-
brokered basis, the specific collateral will not be know at the time 
of the trade. Brokers will submit all GCF Repo trades to GSCC using 
generic general collateral CUSIPs that denote the underlying 
security. GSCC expects that the initial types of generic CUSIPs that 
will be used for GCF Repo activity will denote the following 
categories of securities: all Treasury securities, Treasury 
securities with a remaining maturity of ten years and under, all 
Fedwire-eligible Agency securities, and all Fedwire-eligible 
mortgage-backed securities. GSCC will continuously review with the 
members of its Repo Implementation Committee and with appropriate 
Bond Market Association committees the appropriateness of making 
eligible other types of generic CUSIPs.
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    Daily submission cutoff for GCF Repo trades will occur five minutes 
after a predetermined trading deadline, which initially will be 3:30 
p.m. GSCC will reject all trades submitted for same-day processing that 
are received after the cutoff. Dealers initially will have until 3:45 
p.m. to affirm or disaffirm trade data submitted against them by a 
broker. If a dealer takes no action either to affirm or to disaffirm 
trade data, the trade automatically will be deemed to be affirmed. GSCC 
will then conduct an afternoon net exclusively for GCF Repo activity 
and will establish a single net receive or deliver obligation for 
dealer members in each generic CUSIP.
    Each dealer with a net deliver obligation will allocate acceptable 
securities (determined by the generic CUSIP) and will deliver those 
securities on a DVP basis to a GSCC account within the dealer's 
clearing bank using a modified triparty arrangement. GSCC will then 
instruct the clearing bank to deliver those securities to dealers that 
have net receive obligations. All GCF Repo activity will settle between 
dealers

[[Page 31540]]

and GSCC within the dealers' clearing banks.
    GSCC initially will implement the GCF Repo product offering within 
each participating clearing bank separately. As a result, a 
participating dealer will be able to trade GCF Repos only with other 
dealers that use the same clearing bank. This will allow GSCC time to 
monitor and review the GCF Repo process as it operates on a limited 
basis, to detect processing inefficiencies before the service is made 
more broadly available, and to determine how best to effect after-hours 
interbank securities allocations.\6\
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    \6\ GSCC currently is engaged in discussions with staff of the 
Federal Reserve Bank of New York regarding the appropriateness of 
GSCC's proposed means for accomplishing ``after-hours'' interbank 
securities allocations. Assuming a satisfactory resolution of the 
issues involved, which may require, among other things, the Board of 
Governors of the Federal Reserve System to issue for public comment 
GSCC's proposal for the opening of the securities Fedwire after its 
normal close, GSCC expects to expand the GCF Repo product to allow a 
participating dealer to engage in GCF Repo trading with dealers that 
use different clearing banks.
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(2) Participant Eligibility
    To be eligible for the GCF Repo service, brokers and dealers will 
be required to meet the qualifications for repo netting membership as 
defined in GSCC's rules. In addition, dealer members will be required 
to designate the brokers that are authorized to submit GCF Repo trades 
on their behalf. GSCC members that wish to become eligible to use the 
GCF Repo service also will be required to test with GSCC and to 
demonstrate that they are able to submit data to and to receive output 
from GSCC in the communications links, formats, timeframes, and 
deadlines established for the service.
(3) Securities Eligibility
    Initially, the securities eligible for the GCF Repo service will be 
U.S. Treasury securities (other than inflation-indexed securities or 
STRIPs), Agency securities that are not mortgage-backed, and book-entry 
mortgage-backed securities that are Fedwire-eligible. GSCC will 
continuously review with the members of its Repo Implementation 
Committee and appropriate Bond Market Association committees the 
appropriateness of making eligible other types of securities.
(4) Broker Submission
    All GCF Repos will be executed by dealers as money-fill 
transactions through eligible GSCC brokers on a blind-brokered 
basis.\7\ Brokers will be required to submit GCF Repo trades within 
five minutes of trade execution. Each GCF Repo trade will have a single 
dealer on the repo side that is matched to a single dealer on the 
reverse side. To facilitate this prompt submission, GSCC will implement 
a new terminal facility that will provide the following services:
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    \7\ GSCC will consider expanding the GCF Repo service to allow 
for direct dealer input of data on dealer-to-dealer trading at some 
point in the future when real time processing capabilities have been 
established between dealers and GSCC.
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    (a) Large Trade Submission. Brokers will be able to submit GCF Repo 
trades to GSCC having a principal values of up to $2 billion. The 
current maximum transaction size is $50 million. Therefore, for a $2 
billion trade, a broker will be able to make a single entry instead of 
the eighty entries that would currently be required to satisfy both 
sides of the trade. GCF Repos will have a $1 million minimum 
transaction size and a $1 million multiple requirement.
    (b) Single Screen Entry. Brokers will be able to submit data 
simultaneously for both the repo and reverse sides of the trade using a 
single screen.
    (c) Data Entry Short-Cuts. The screen design will require brokers 
only to enter critical fields. GSCC automatically will populate certain 
fields, such as trade date and start date, with default values. Brokers 
will not have to enter any information that differs from the default 
values. The system also will automatically calculate the end money for 
the repo based on start amount, term and rate.
    In addition to these specific broker submission services, GSCC will 
require that every broker participating in GCF Repo provide its 
terminal on GSCC's premises, so that GSCC operations staff can monitor 
whether the broker is satisfactorily fulfilling its GCF Repo trade 
submission responsibilities.
(5) Trade Recording and Dealer Notification
    GSCC will immediately record, as compared, all GCF Repos upon 
receipt of trade data from the brokers. This type of ``locked-in'' 
trade recording, called broker-assisted processing, will replace the 
traditional matched comparison process. As a result, both the repo and 
reverse sides of the transaction will be processed solely based upon 
broker input without requiring the submission and matching of 
corresponding trade details from the dealer members.
    By using input from a single, approved submission source (i.e., 
brokers) to process GCF Repos, the intrinsic limitations and processing 
delays associated with two-sided comparison will be avoided. This is 
especially important in order to effectively net each dealer's GCF Repo 
activity on a real time basis, as opposed to the overnight process that 
is currently performed for regular buy/sell and repo activity.
    Upon receipt of trade data from the brokers, GSCC will immediately 
provide dealers with GCF Repo transaction details by way of a dynamic, 
real time, online display. The most recent trades will be displayed in 
a window at the bottom of these screens while current position 
information will be displayed at the top of the screen. Position 
information will be available at both the individual CUSIP level and 
the cumulative, overall level.
(6) Dealer Affirmation
    Dealers will have an obligation to promptly review GCF Repo trades 
and either affirm or disaffirm them. Affirming a trade will indicate 
that the dealer recognizes the trade and agrees to its terms. If a 
dealer disaffirms a trade, its GCF Repo position automatically will be 
adjusted, and a notification will be sent to the broker for prompt 
resolution. During the affirmation process, dealers will have the 
ability to provide their reference number. Entry of a reference number 
will result in the automatic affirmation of the trade.
    Any trade that has not been affirmed or disaffirmed by the close of 
business will be affirmed automatically by the system.\8\ Because 
prompt review of transactions is critical in a same-day processing 
environment, GSCC will assess penalties for late dealer affirmations.
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    \8\ GSCC will send a message to participants fifteen minutes 
prior to running the automated process that will affirm all pending 
trades.
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(7) GCF Repo Netting and Position Reporting
    GSCC will net all GCF Repo trades intraday for each dealer into a 
single net settlement position for each generic general collateral 
CUSIP submitted. This position will represent the aggregate net dollar 
amount borrowed by the repo dealer or ``loaned'' by the reverse dealer.
    Each day, GCF Repo netting will consist of adding all of the 
carryover activity (i.e., previous term and previously submitted 
forward-starting activity that is starting on the current day) for GCF 
Repos together with the current day's activity. As a result, positions 
associated with term repos will be renetted each day with the dealer's 
current activity. GSCC will provide netting results to the clearing 
banks and its netting dealer members. Clearing banks participating in 
GCF Repo will be responsible for notifying

[[Page 31541]]

their members regarding the allocation of collateral and the transfer 
of funds.
    GSCC will carry every GCF Repo trade in its system and will be 
responsible for maintaining a database of all financial data for the 
repos that are traded. This will include tracking all relevant terms of 
each transaction and insuring that the appropriate final settlement 
amounts are paid at the conclusion of each repo.
    Real time, online output will be provided to brokers, dealers, and 
the clearing banks over GSCC terminals to provide all transaction and 
position information necessary for the intraday processing of GCF Repo 
activity. Brokers and dealers will have the ability to view real time 
position information, both at the individual CUSIP and overall position 
levels, on their terminals throughout the day. The bottom of each 
position screen also will include a revolving dynamic display of the 
five most recent transactions processed against that participant. Each 
clearing bank will have the ability to monitor the positions of its 
clearing members using its terminal and also will be able to monitor 
projected interbank position and funds movements when that service is 
made available.
(8) Securities Allocation
    Each dealer that is a net lender of securities through GCF Repo 
will be responsible for allocating the appropriate collateral (as 
defined by the generic general collateral CUSIP) to its clearing banks 
using whatever mechanism it mutually agrees upon with the bank. All 
such collateral movements will be made on a DVP basis to and from a 
GSCC account. Dealers will have to give priority to the allocation of 
GCF Repo collateral so that reallocation to the ultimate customer may 
occur promptly. To encourage timely collateral allocation, GSCC will 
impose a penalty on collateral allocations that are made after 4:30 
p.m. Allocations not made by 7:00 p.m. will be considered fails.
    Dealers that receive securities as the result of reverse GCF Repos 
will be required to reallocate them to a location that is available for 
reversal before the opening of the securities wire on the next day. 
Examples of these locations are overnight triparty repos, hold-in-
custody repos, and bank loans.
(9) Next-Day Return of Collateral
    All GCF Repo positions will be reversed on the morning of the next 
business day prior to the opening of the securities Fedwire. This next 
day reversal will occur for all GCF transactions regardless of the term 
of the transaction. The repos themselves will be fully collateralized 
intraday by cash.
(10) Risk Management
    GCF Repo transactions and resulting settlement obligations will be 
subject to all of GSCC's existing risk management processes. GSCC will 
be able to appropriately assess its members' overall, cumulative 
exposure as a result of their combined DVP buy/sell and repo activity 
and their GCF Repo activity.
    (a) Interest Rate Mark-to-Market. GSCC employs a forward margin 
process to protect GSCC and its members against market value 
fluctuations in securities prices and repo interest rates for 
guaranteed trades from their submission date through to their 
settlement date. This process is required because in the event of a 
participant default, GSCC, as transaction guarantor and counterparty, 
must maintain funds sufficient to replace the defaulting member's 
settlement obligations at their current market value. Therefore, each 
day all outstanding trades are marked from contract value to market 
value. For repos, this mark-to-market includes the cost of financing 
from the later of the start date or the current date to the scheduled 
end date. Forward margin debits and credits are settled each day 
through GSCC's daily funds-only settlement process.
    GSCC will perform a daily interest rate mark-to-market for all term 
GCF Repo activity to bring transactions to their current replacement 
value.\9\ The mark will result in the daily collection and pass-through 
of accrued repo interest to date plus or minus the repo rate 
differential.\10\ The GCF Repo interest rate mark will be incorporated 
into GSCC's regular daily funds-only settlement process. Additionally, 
there will be a separate marking process for forward-starting GCF Repos 
that will be the same as the marking process currently employed for 
marking forward-starting DVP repos.
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    \9\ Because all GCF Repos will be processed using generic 
CUSIPs, the underlying collateral will not be marked by GSCC. 
However, clearing banks will be responsible for ensuring that 
allocated collateral conforms to the terms of the contract and that 
the collateral value is equal to 100% of the principal value of the 
repo.
    \10\ The rate differential will be equal to the difference 
between the contractual repo rate for the term and the GSCC 
replacement cost repo rate.
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    (b) Clearing Fund. GSCC requires its netting members to maintain 
deposits in the GSCC clearing fund account to provide adequate risk 
protection and liquidity in the event of a participant failure. The 
clearing fund guards against potential market exposure that could occur 
between the current date and the liquidation date of an insolvent 
participant's obligations. GSCC accomplishes this by calculating the 
net effect of: (1) Estimated daily changes in the value of the 
securities underlying each participant's transactions; (2) estimated 
daily fluctuations in repo rates for the participant's repo activity; 
and (3) each participant's estimated funds settlement exposure. All of 
these estimates of exposure are based on an extensive analysis of 
historical rate and price volatility and cover at least two standard 
deviations of all historical movements. GCF Repo activity will be 
included in all three clearing fund calculations.
(i) Securities Liquidation Component
    The risk associated with security receive and deliver obligations 
is based on price volatility. If a participant were to default, GSCC 
would ensure that all of that participant's obligations settled. This 
would expose GSCC to differences in current market value and 
liquidation value. The securities liquidation component of the clearing 
fund accounts for this exposure. In order to provide appropriate 
protection for the market risk associated with the underlying 
collateral, for GCF Repo activity GSCC will calculate the securities 
liquidation component based upon a representative portfolio of 
securities as designated by each generic general collateral CUSIP.
(ii) Repo Volatility Component
    Where market exposure related to the underlying collateral is 
provided for in the securities liquidation component of the clearing 
fund, the risk pertaining to the interest amount is accounted for in 
the repo volatility component. The repo volatility component estimates 
the amount repo rates might change over the course of a repo. 
Calculations for this component are based on analysis of historical 
repo rate volatility.
(iii) Funds Adjustment (``FAD'') Component
    The FAD portion of the clearing fund is based on each participant's 
average funds-only settlement amount. The relevant variable in this 
calculation is the size of the settlement amount. It does not matter 
whether the funds are collected or paid. The FAD component is the 
average of the absolute value of the twenty largest funds-only 
settlement amounts over the most recent seventy-five business days.
    (c) Intraday Risk Protections. GSCC plans to manage intraday risk 
by maintaining the capability to run clearing fund calculations 
multiple

[[Page 31542]]

times throughout the day to assess the impact of significant changes in 
position on clearing fund deposit requirements and by making margin 
calls as necessary. Further, the calculation of net settlement 
positions arising from GCF Repo activity will be dynamic which will 
allow GSCC and clearing banks to perform real time position monitoring.
    (d) Loss Allocation Procedure. GSCC has analyzed the 
appropriateness of its current loss allocation procedure in light of 
the unique aspects of the GCF Repo service. GSCC has concluded that its 
current loss allocation procedure remains the most fair and equitable 
means of allocating any loss that might arise from the insolvency of a 
member that engaged in GCF Repo activity. Thus, GSCC's loss allocation 
procedure will remain the same for GCF Repo activity.
(11) Trade Modification/Cancellation
    The rules for GCF Repo trade modification are: (1) Any data input 
field on an unaffirmed trade may be modified unilaterally by the broker 
at any time during the processing day and (2) dealers may not modify 
any data on GCF repos; rather they must cancel (or request cancellation 
of) the trade. The modification of an unaffirmed trade will result in 
the immediate replacement of the original trade and all affected 
processing screens will be immediately updated accordingly.
    The submission of a request for cancellation of an affirmed trade 
will result in the generation of a trade cancellation request to the 
original broker or dealer. Upon approval of the cancel request, the 
approving dealer will automatically be replaced by the broker in the 
transaction. The broker will carry the position and incur all 
associated responsibilities unless and until the broker submits a 
correcting entry (i.e., an entry where the broker enters a new single-
sided transaction with the correct dealer to eliminate the broker's 
position).
    The two basic rules for canceling GCF Repos are: (1) An unaffirmed 
trade may be unilaterally canceled by either the broker or the dealer 
at any time during the processing day and (2) a trade that has been 
affirmed, either by a dealer or by the system as part of end-of-day 
processing, will require bilateral cancellation. This means that a 
broker may cancel a trade unilaterally at any time during the day if it 
has not been affirmed by either the dealer or by the system. A 
unilateral cancellation of a GCF Repo trade by the broker will result 
in the cancellation of both sides of the trade. Trade cancellation by 
the broker will result in the cash and collateral positions being 
reversed by the amount of the canceled trade and taken out of account 
balances.
    A dealer may cancel a GCF Repo trade unilaterally at any time 
during the day if it has not been affirmed either by the dealer or by 
the system. Trade cancellation will result in the dealer's cash and 
collateral position balances being adjusted by the amount of the 
canceled trade, and the automatic replacement of the dealer by the 
broker in the transaction. The broker will carry the position and incur 
all associated responsibilities unless and until the broker submits a 
correcting entry (i.e., an entry where the broker enters a new single-
sided transaction with the correct dealer to eliminate the broker's 
position). Cancellation of a trade by the dealer results in the 
cancellation of that dealer's side only. The other dealer's side of the 
trade will remain intact.
    Cancellation of trades that have been affirmed by the dealer or by 
the system will be required to be bilateral (i.e., if the dealer 
requests a cancellation, the broker must approve it and vice-versa). A 
dealer or broker request for cancellation of an affirmed trade that is 
not acted upon by the counterparty will require manual intervention by 
GSCC operations to determine whether or not the trade should be 
canceled.
(12) Output and Reports
    GSCC will establish a separate reporting stream to produce a full 
range of machine-readable output (``MRO'') and print image end-of-day 
reports for the GCF Repo service, which will be substantially similar 
to the output currently provided to participants in conjunction with 
their regular cash and repo trading activity. In accommodating the GCF 
Repo service, GSCC will attempt to limit the number and magnitude of 
changes made to existing MRO formats in order to minimize the 
development effort required by participating members.
(13) Benefits
    GSCC believes that the GCF Repo service will bring numerous 
benefits to the Government securities marketplace, including the 
following:
    (a) Increased Liquidity. The GCF Repo service should improve market 
liquidity by adding an additional resource to current borrowing options 
(i.e., bank loans and triparty repos). Liquidity should be further 
enhanced by providing to the dealer community open access to a 
multitude of funds providers and by allowing for the bulk movement of 
collateral between dealers.
    (b) Enhanced Ability to Trade General Collateral Repos. The GCF 
Repo service should enhance the ability to trade general collateral 
repos by removing the current constraints of collateral allocation and 
notification imposed on every transaction. As a result, dealers will be 
able to freely trade rate and term while having only one settlement on 
a net basis at the end of the day.
    (c) Additional Collateral Source. The GCF Repo service provides an 
alternative vehicle for dealers to buy or sell collateral, finance 
positions, or swap collateral.
    (d) Risk Protection. Through netting and novation, GSCC will become 
the legal contraparty to all GCF repos within minutes of execution and 
thereby eliminate counterparty risk. In addition to GSCC's current risk 
management procedures, dynamic risk assessment processes will be 
implemented to address any intraday risk associated with the GCF Repo 
service.
    (e) Open Access. The GCF Repo service will be available to a broad 
spectrum of industry participants. These will include brokers, dealers, 
securities lenders, money borrowers, and any qualified clearing bank 
that provides clearance services to GSCC members.
(14) Statutory Basis for the Proposed Rule Change
    GSCC believes that the proposed rule change is consistent with the 
requirements of the Section 17A of the Act \11\ and the rules and 
regulations thereunder because they will allow GSCC to offer to all of 
its netting members on an equal basis a service that will provide them 
with enhanced ability to engage in general collateral trading activity 
in a safe and efficient manner.
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    \11\ 15 U.S.C. 78q-1.
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(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.

[[Page 31543]]

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 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 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-98-02 and should be submitted by June 
30, 1998.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-15214 Filed 6-8-98; 8:45 am]
BILLING CODE 8010-01-M
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