27190 Federal Register / Vol. 66, No. 95 / Wednesday, May 16, 2001 / Notices

5 17 CFR 200.30–3(a)(12).

1Letter from Nikki M. Poulos, Vice President and

Associate General Counsel, GSCC (April 10, 2001).

Subsequent to filing GSCC–2001–01, GSCC filed a

rule proposal (SR–GSCC–2001–02) that became

immediately effective under Section 19(b)(3). The

letter states that GSCC–2001–02 amends rules

previously listed by GSCC–2001–01 in Exhibit A

and that both rule filings are consistent with each

other. The amendment does not amend any

language in GSCC–2001–01 as originally filed with

the Commission and as presented herein.

2A copy of the text of GSCC’s proposed rule

change and the attached exhibits are available at the

Commission’s Public Reference Section or through

GSCC.

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 20549–0609. 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

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. Copies of such filing will also be

available for inspection and copying at

the principal office of the CHX. All

submissions should refer to File No.

SR–CHX–2001–09 and should be

submitted by June 6, 2001.

For the Commission, by the Division

of Market Regulation, pursuant to

delegated authority.5

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–12280 Filed 5–15–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–44282; File No. SR–GSCC–

2001–01]

Self-Regulatory Organizations;

Government Securities Clearing

Corporation; Notice of Filing of

Proposed Rule Change Relating to the

Redesign of Comparison Rules

May 8, 2001.

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

Securities Exchange Act of 1934

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

January 16, 2001, the Government

Securities Clearing Corporation

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

Exchange Commission (‘‘Commission’’)

and on April 11, 2001,1 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.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The proposed rule change would

allow GSCC to redesign its comparison

rules in order to implement real-time

interactives services.2

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.

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In a white paper distributed to all

members in early 1997, GSCC outlined

its long-range plans to provide straightthrough processing and a point-of-trade

guarantee to its members primarily

through the implementation of real-time

interactive services. Last year, GSCC

announced that it would implement its

interactive services in three phases.

Phase 1 will introduce interactive

messaging to support real-time

comparison; phase 2 will introduce

interactive messaging to support netting;

and phase 3 will introduce support of

same-day settlement of repo start legs.

During the latter part of 2000, GSCC

implemented the necessary technical

changes to its automated system to

implement the first phase of its

interactive processing service (i.e.,

making available the interactive

messaging facility to support real-time

comparison). Up until this point,

GSCC’s processing experience has been

essentially batch. Members now have

the ready ability, from a technological

perspective, to submit trade input on an

automated basis to GSCC intraday as

trades are executed. While GSCC will

continue to support its existing batch

input and output facilities initially, it

plans to eventually stop supporting

these older formats. Members will be

encouraged to make the shift from batch

to interactive processing as soon as it is

feasible for them to do so. At some point

in time, once a sufficient nucleus of

members has begun processing

interactively, GSCC will implement

disincentives to discourage members

from continuing to submit and receive

data via the old batch formats.

Concurrent with this development,

GSCC has been redesigning its matching

and comparison procedures to better

meet the needs of its members during

their transition from a batch on an

interactive environment. This redesign

is the subject of this rule filing. GSCC’s

central goal in this redesign is to

provide straight-through processing by

allowing for the easy identification and

resolution of trades intraday to achieve

100 percent comparison. GSCC believes

that interactive messaging and enhanced

real-time trade matching processing are

critical steps in helping to reduce risk

by ensuring that more transactions are

compared earlier in the day and then

eventually also netted and guaranteed

through GSCC so that intraday credit

exposure to counterparties is

minimized.

In the current environment, most

trades are compared within the GSCC

system as a result of bilateral

comparison with the exception being

certain locked-in trades, such as

members’ Federal Reserve auction

purchases. To facilitate real-time

comparison while still providing

members with the flexibility to

transition from batch to interactive

submission according to a timeframe

suitable to their own needs and

resources, GSCC is proposing to: (i)

Amend its rules to provide for three

types of trade comparison: (a) Bilateral

comparison, (b), demand comparison,

and (c) locked-in comparison and (ii)

make certain other related rules changes

as further discussed below.

Bilateral Comparison

Bilateral comparison, which is the

traditional method of comparison, will

continue to require that the two trade

counterparties (or if one or both of the

counterparties are not GSCC members,

the members acting on their behalf)

submit trades to GSCC in which certain

mandatory details either match or fall

within predefined parameters to effect a

match. Bilateral comparison will remain

the primary comparison type for dealerto-dealer trades and will be available in

both real-time and batch. Members may

elect to submit interactively regardless

Federal Register / Vol. 66, No. 95 / Wednesday, May 16, 2001 / Notices 27191

3 GSCC adopted its policy of guaranteeing blind

brokered repos entered into in good faith upon

trade execution in order to comfort dealers that

have intraday credit exposure to brokers through

whom they execute such transactions. The policy

only applies to such transactions that are entered

into in good faith, which means, for example, that

GSCC would not honor it in the event that a dealer

entered into a transaction knowing that the

counterparty was insolvent.

of whether their trade counterparties do

so.

A new feature of bilateral comparison

will be the ability for members to ‘‘DK’’

any trades they ‘‘do not know.’’ The

proposed rule change introduces the

term ‘‘DK Notice’’ to GSCC’s rules. If a

member determines that a request for

comparison is invalid or incorrect, it

can send a DK notice to GSCC which

will be forwarded to the original

submitter. The receipt of the DK notice

by GSCC will prevent the trade from

comparing in GSCC’s system. If a

member that sent a DK notice

determines that it did so erroneously,

the member will be able to remove the

DK and enable comparison to occur if it

does so within the timeframes

prescribed by GSCC for such purpose.

Demand Comparison

Demand comparison is a new type of

comparison that has been designed to

provide members with flexibility and

control over the comparison process for

trades executed via intermediaries.

Demand comparison strikes a balance

between bilateral comparison, where the

member is required to submit trade data

in order for its trade to compare, and

locked-in comparison (discussed in

more detail below), where the trade has

essentially been operationally compared

before being submitted to GSCC.

Demand trades will be submitted by

approved intermediaries (e.g., brokers)

which will be called ‘‘demand trade

sources.’’ Demand trade sources must be

able to communicate with GSCC

interactively. In order for GSCC to

accept trades from a demand trade

source on a member’s behalf, the

member must provide GSCC with prior

written authorization. The intermediary

must also be approved and authorized

by GSCC to be a demand trade source.

GSCC will deem a demand trade

compared upon receipt of the trade data

from the demand trade source.

However, if a member does not know a

trade submitted on its behalf by a

demand trade source, the member will

be able to submit a DK notice to GSCC.

The receipt of a DK notice by GSCC will

cause the demand trade to no longer be

eligible for comparison. If a member that

sent a DK notice determines that it did

so erroneously, the member will be able

to remove the DK and enable

comparison to occur if it does so within

the timeframes prescribed by GSCC for

such purpose.

GSCC is making incidental rules

changes to Rules 11, 16, 18, 21, 22, and

39 to take into account the introduction

of demand trades.

Locked-In Comparison

Locked-In Comparison will be similar

to that currently provided for in GSCC’s

rules. Locked-In Comparison presumes

that a member would elect not to submit

corresponding trade details to affect a

match because the trade has been

precompared by the trade source. An

example of a trade appropriate for

locked-in comparison would be one

executed through a ‘‘pure’’ electronic

trading system that is terminal-driven

and that exercises no discretion over the

trade.

In order to participate, the locked-in

trade source must be authorized by both

the members on whose behalf it will be

submitting trade data and by GSCC.

With the exception of some current

locked-in sources, such as the Federal

Reserve banks, locked-in trade sources

will be expected to communicate with

GSCC.

Locked-In trades will be deemed

compared upon receipt by GSCC. The

DK feature will also be available for

locked-in trades. However, unlike in the

case of demand trades, a DK of a lockedin trade will be treated by GSCC as a

request for cancellation to the locked-in

trade source. In order to actually cancel

the trade on GSCC’s system, the lockedin trade source will have to respond to

the request by submitting a trade

cancellation. The locked-in trade source

can modify the trade in response to a

DK notice in order to remove the trade’s

DK status.

Submission Methods

In order to set forth the concept of a

member submitting interactively versus

submitting in one of the batch modes,

GSCC is proposing to add three new

definitions to its rules: ‘‘interactive

submission method,’’ ‘‘multiple batch

submission method,’’ and ‘‘single batch

submission method.’’ The proposed

rules changes make clear which

submission type is required for each

type of comparison.

In addition, GSCC is proposing to add

a definition of ‘‘real time’’ in its rules to

be used to indicate when a particular

process (e.g., the enhanced comparison

processes set forth in Rule 10) will be

performed by GSCC in real time as

opposed to at the end of day.

Submission of Full-Sized Trades

GSCC is also proposing to permit

members to submit full-sized trades.

Currently, non-GCF Repo trades are

submitted in $50 million increments.

Because members’ internal systems tend

to reflect the full size of each trade (as

opposed to the pieces that they submit

to GSCC), the submission of full-sized

trades will permit members to better

reconcile their trading activity. GSCC

recognizes that not all members will be

able to begin processing full-sized trades

immediately. Therefore, GSCC will not

require that members exercise this

option.

Timing of Key Processes of GSCC

GSCC’s key processes are comparison,

netting, novation, and guaranty of

settlement. GSCC is proposing to change

the timing of two of these processes

(comparison and guaranty of

settlement).

With respect to the timing of

comparison, GSCC’s rules currently

provide that it occurs when GSCC

makes its comparison output available

to members. The proposed rule filing

provides that, while comparison will

continue to occur upon issuance of the

comparison message by GSCC with

respect to trades submitted for bilateral

comparison, it will be deemed to occur

upon receipt of trade data from the

authorized trade source with respect to

trades submitted for demand

comparison and locked-in comparison.

With respect to the timing of netting,

GSCC’s rules currently provide that this

occurs upon issuance of the report of or

output on net settlement positions by

GSCC. This will continue to be the case.

Similarly, GSCC’s rules currently

provide that novation, the process by

which GSCC becomes the substituted

counterparty to trades submitted to it,

occurs upon the issuance of the report

of or output on net settlement positions

by GSCC. This will also remain

unchanged.

With respect to the timing of GSCC’s

guaranty of settlement, GSCC’s current

rules provide that GSCC guarantees the

settlement of a netting-eligible trade

upon issuance of the report/output that

sets forth the member’s net settlement

position. The exception to this rule is

GSCC’s policy of guaranteeing blind

brokered repos entered into in good

faith upon trade execution.3

The proposed rule changes will move

the timing of GSCC’s guaranty to the

point of comparison. This means that a

netting-eligible trade submitted for

bilateral comparison will be guaranteed

upon issuance of the comparison

message by GSCC and that a nettingeligible trade submitted for demand or

27192 Federal Register / Vol. 66, No. 95 / Wednesday, May 16, 2001 / Notices

4 GSCC proposed revised Rule 5, Section 5 will

state: ‘‘Each Member shall promptly review each

Report it receives from the Corporation pursuant to

this Rule. Any errors, omissions, or similar

problems noted by a Member with respect to a

Report must be promptly reported to the

Corporation, but such reporting to the Corporation

shall be made no later than ten calendar days after

the receipt of the Report.’’

5 In its rules, GSCC requires its members to

review reports received from GSCC. In its Rule 1,

‘‘Definitions,’’ GSCC defines the term ‘‘report’’ as

follows: ‘‘The term Report means any document,

record, or other output prepared by the Corporation

and made available to a Member in any format

(including, but not limited to, machine-readable

and print-image formats) or medium (including, but

not limited to, print copy, magnetic tape, video

display terminal, and CPU-to-CPU interface

formats) that provides information to such Member

with regard to the services provided by, or the

operations, of, the Corporation.’’

6 GSCC proposed revised Rule 11, Section 12 will

state: ‘‘The Netting member shall inform the

Corporation after the occurrence of any event

specified above; provided however, that the Netting

Member shall inform the Corporation no later than

ten calendar days after receiving a Report described

in subsection (b) above.’’

locked-in comparison will be

guaranteed upon receipt of trade data

from the authorized trade source. if a

trade is DKed (and with respect to a

locked-in trade, canceled by the lockedin trade source), GSCC’s guaranty will

no longer be in effect with respect to

that trade. As a transition measure that

recognizes that members may need

some time to switch to interactive

processing, GSCC is proposing that it

maintain its policy of guaranteeing

blind brokered repo trades entered into

in good faith upon trade execution

through the year 2001.

General Responsibilities of Members

GSCC’s comparison rule contains a

provision that requires members to

review documents that they receive

from GSCC.4 GSCC desires to expand

the provision to cover any type of

communication provided to members by

GSCC and require members to inform

GSCC promptly, but in no event later

than ten calendar days after receipt of

the communication, if there is any error,

omission or other problem with respect

to the communication.5 GSCC’s netting

rule contains a similar provision with

respect to which GSCC has proposed to

add the ten-day requirement.6 GSCC

believes that the ten-day timeframe will

provide members with a sufficient

amount of time within which to detect

problems in a communication from

GSCC.

Amendments to Schedules

GSCC is proposing incidental changes

to certain of its Schedules for

clarification purposes and to bring them

into conformity with the proposed rules

changes discussed above. Specifically,

GSCC is expanding the output time slot

in its ‘‘Schedule of Timeframes’’ from

‘‘midnight to 2 a.m.’’ to ‘‘8 to 2 a.m.’’

This change reflects the fact that GSCC

may be able to provide certain output

earlier given the implementation of realtime trade matching and also the recent

shift to the 8 p.m. trade submission

deadline.

GSCC is also proposing additional

amendments to the Schedule of

Timeframes in order to update it to

reflect actual practice. Specifically,

funds-only settlement payments are due

to GSCC at 10 a.m. (currently at 9 a.m.)

and funds-only settlement payments are

due from GSCC at 11 a.m.). GSCC has

proposed clarifying language to indicate

that the 10:30 a.m. deadline for

satisfaction of a clearing fund deficiency

call is approximate because members

have two hours after a call is made to

fulfill their obligation.

GSCC is also updating its ‘‘Schedule

of Required Match Data,’’ ‘‘Schedule of

Required Data Submission Items,’’ and

its ‘‘Schedule of Required Data

Submission Items for a Right of

Substitution’’ to make clear that the

only locked-in trades to which those

schedules do not apply are Treasury/

Federal Reserve auction purchases and

GCF repo transactions.

GSCC is also amending its fee

structure to set fees for demand trades

which will be the same as those

currently imposed on locked-in trades.

The proposed rules changes are

consistent with the requirements of the

Act and rules and regulations

thereunder because they will help to

eliminate risk by promoting a higher

rate of comparison and ensuring that

more transactions are compared on a

more timely basis, and then eventually

netted and guaranteed through GSCC.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

GSCC does not believe that the

proposed rules changes 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 changes have not yet been

solicited or received. Members will be

notified of the rule change filing 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 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 20549–0609. 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

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–2001–01 and

should be submitted by June 6, 2001.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–12251 Filed 5–15–01; 8:45 am]

BILLING CODE 8010–01–M