[Federal Register Volume 66, Number 81 (Thursday, April 26, 2001)]
[Notices]
[Pages 21032-21033]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-10391]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44206; File No. SR-GSCC-00-05]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Approving a Proposed Rule Change Relating to 
Enhancements to the GCF Repo Service and Clarifying Certain Risk 
Management Practices of the Service

April 20, 2001.
    On June 5, 2000, the Government Securities Clearing Corporation 
(``GSCC'') filed with the Securities and Exchange Commission 
(``Commission'') and on July 13, 2000, amended a proposed rule change 
(File No. SR-GSCC-00-05) 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 December 4, 2000.\2\ No comments 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. 43626 (November 27, 
2000), 65 FR 75750.
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I. Description

    GSCC introduced its GCF Repo Service in November 1998.\3\ The GCF

[[Page 21033]]

Repo Service allows GSCC's non-inter-dealer broker netting members 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 
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 Reprocessing. 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 agency 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 two years, GSCC is now enhancing 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 enhancement by GSCC applies to the collateral allocation 
obligations of securities lenders \5\ in GCF Repo transactions. 
Securities lenders will now be permitted to satisfy their collateral 
allocation requirements \6\ in connection with their GCF Repo activity 
with, in addition to ``comparable securities'' \7\ and cash, U.S. 
Treasury securities (i.e., bills, notes, or bonds). 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 substitutes 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.
    \6\ ``Collateral Allocation Obligation'' is defined in GSCC's 
Rules as ``the obligation of a Netting Member to allocate securities 
or cash for the benefit of the Corporation to secure such Member's 
GCF Net Funds Borrower Position.''
    \7\ In its Rules, GSCC has defined the term ``Comparable 
Securities'' to mean ``a security or securities that are represented 
by a particular Generic CUSIP Number, any other security or 
securities that are represented by the same Generic CUSIP Number.''
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    The second enhancement by GSCC applies where the securities 
borrower due to reasons beyond its control and despite its exercising 
best efforts is not able to return in a timely manner the securities 
that were delivered on the day before by the securities lender. In such 
a situation, the securities borrower will now have the right to return 
(1) comparable securities, (2) U.S. Treasury bills, notes, or bonds, or 
(3) cash. The securities borrower will be responsible make the 
securities lender whole (through GSCC) for any actual damages directly 
suffered by the securities lender as a result of its not receiving back 
the same securities that it originally loaned.

(ii) Insolvency Situation Involving Mortgage-Backed Securities

    The third enhancement by GSCC clarifies its risk management 
procedures associated with the CGF 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 in such a situation is that securities lenders in 
repurchase transactions would not expect to receive the same MBS back.
    GSCC's Rule 22, section 4 is being amended to give GSCC the 
authority in an insolvency situation, where MBS were the underlying 
collateral, to delivery back to a securities lender comparable 
securities or U.S. Treasury bills, notes, or bonds. Alternatively, the 
rule will permit GSCC to give a securities lender the right to close 
out the transaction by buying comparable securities or U.S. Treasury 
bills, notes, or bonds 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 bills, notes, or bonds.

II. Discussion

    Section 17A(b)(3)(F) \8\ of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and to assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible. The 
Commission believes that the proposed rule change is consistent with 
these obligations because it should further enable GSCC to help 
facilitate the prompt and accurate clearance and settlement of GCF 
repos involving U.S. Government securities and to remove impediments to 
and help perfect the mechanism of the national clearance and settlement 
system for securities transactions.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the 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-00-05) 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. 01-10391 Filed 4-25-01; 8:45 am]
BILLING CODE 8010-01-M