Federal Register / Vol. 66, No. 99 / Tuesday, May 22, 2001 / Notices 28207

1 15 U.S.C. 78s(b)(1).

2Securities Exchange Act Release No. 43849

(January 17, 2001), 66 FR 7522.

3Securities Exchange Act Release No. 41766

(August 19, 1999), 64 FR 46737 (August 26, 1999)

[File No. SR–GSCC–98–)4]. The rule changes

necessary for GSCC to engage in cross-margining

were made in the NYCC cross-margining rule filing.

4 It is anticipated that in the interest of conformity

NYCC and GSCC will execute a new crossmargining agreement that is substantially the same

as the draft agreement with the CME.

5NYCC uses GSCC’s margin rates to determine

margin reduction. CME, which utilizes its own

rates, and GSCC will compare margin reduction

rates and will use the lower of the two in

determining margin reduction.

6 GSCC has computed and tested disallowance

factors that will be applicable to each potential pair

of positions being offset. ‘‘Disallowance factor’’

means the specified percentage in the crossmargining agreement between GSCC and CME that

is applied to reduce the residual margin amount

used to calculate the margin offset.

7 GSCC and each Participating CO unilaterally

have the right to not reduce its participant’s margin

requirement by the cross-margin reduction or to

reduce it by less than the cross-margin reduction.

However, the clearing organizations may not reduce

a participant’s margin requirement by more than the

cross-margin reduction.

for the Securities and Exchange

Commission, Office of Information and

Regulatory Affairs, Office of

Management and Budget, Room 10102,

New Executive Office Building,

Washington, DC 20503; and (b) Michael

E. Bartell, Associate Executive Director,

Office of Information Technology,

Securities and Exchange Commission,

450 Fifth Street, NW., Washington, DC

20549. Comments must be submitted to

the Office of Management and Budget

within 30 days of this notice.

Dated: May 15, 2001.

Jonathan G. Katz,

Secretary.

[FR Doc. 01–12790 Filed 5–21–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–44301; File No. SR–GSCC–

00–13]

Self-Regulatory Organizations;

Government Securities Clearing

Corporation; Order Approving a

Proposed Rule Change Relating to

Establishment of a Cross-Margining

Agreement With the Chicago

Mercantile Exchange and a

Clarification of the Government

Securities Clearing Corporation’s

Cross-Margining Rules

May 11, 2001.

On October 13, 2000, the Government

Securities Clearing Corporation

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

Exchange Commission (‘‘Commission’’)

a proposed rule change (File No. SR–

GSCC–00–13) 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 January 23, 2001.2 No comment

letters were received. For the reasons

discussed below, the Commission is

approving the proposed rule change.

I. Description

On August 19, 1999, the Commission

approved GSCC’s proposed rule change

to establish a cross-margining program

with other clearing organizations and to

begin its program with the New York

Clearing Corporation (‘‘NYCC’’).3 GSCC

is now establishing a cross-margining

arrangement with the Chicago

Mercantile Exchange (‘‘CME’’) similar to

the one GSCC already has in place with

NYCC. With the GSCC–CME crossmargining arrangement, GSCC will

implement its ‘‘hub-and-spoke’’ method

of cross-margining, which was

introduced in the rule filing establishing

the GSCC–NYCC cross-margining

arrangement and which applies when

more than one clearing organization is

involved in cross-margining with GSCC.

(i) GSCC’s Cross-Margining Program

GSCC believes that the most efficient

and appropriate approach for

establishing cross-margining links for

fixed-income and other interest rate

products is to do so on a multilateral

basis with GSCC as the ‘‘hub.’’ Each

clearing organization that participates in

a cross-margining arrangement with

GSCC (hereinafter a ‘‘Participating CO’’)

will enter into a separate crossmargining agreement between itself and

GSCC, as NYCC did and now CME will

do. Each of the agreements will have

similar terms,4 and no preference will

be given by GSCC to one Participating

CO over another.

Cross-margining is available to any

GSCC netting member (with the

exception of inter-dealer broker netting

members) that is, or that has an affiliate

that is, a member of a Participating CO.

Any such member (or pair of affiliated

members) may elect to have its margin

requirements at both clearing

organizations calculated based upon the

net risk of its cash and repo positions at

GSCC and its offsetting and correlated

positions in related contracts carried at

the Participating CO. Cross-margining is

intended to lower the cross-margining

participant’s (or pair of affiliated

members’) overall margin requirement.

The GSCC member (and its affiliate, if

applicable) signs an agreement under

which it (or they) agrees to be bound by

the cross-margining agreement between

GSCC and the Participating CO and

which allows GSCC or the Participating

CO to apply the member’s (or its

affiliate’s) margin collateral to satisfy

any obligation of GSCC to the

Participating CO (or vice versa) that

results from a default of the member (or

its affiliate).

Margining based on the net combined

risk of correlated positions is based on

an arrangement under which GSCC and

each Participating CO agree to accept

the correlated positions in lieu of

supporting collateral. Under this

arrangement, each clearing

organizations holds and manages its

own positions and collateral and

independently determines the amount

of margin that it will make available for

cross-margining (referred to as the

‘‘residual margin amount’’).

GSCC computes the amount by which

the cross-margining participant’s margin

requirement can be reduced at each

clearing organization (i.e., the ‘‘crossmargin reduction’’) by comparing the

participant’s positions and the related

margin requirements at GSCC against

those at each Participating CO.5 GSCC

offsets each cross-margining

participant’s residual margin amount

(based on related position) at GSCC

against the offsetting residual margin

amounts of the participant (or its

affiliate) at each Participating CO. If the

residual margin that GSCC has available

for a participant is greater than the

combined residual margin submitted by

the Participating COs, GSCC will

allocate a portion of its residual margin

equal to the combined residual margin

at the Participating COs. If the combined

residual margin submitted by the

Participating COs is greater than the

residual margin that GSCC has available

for that participant, GSCC will first

allocate its residual margin to the

Participating CO with the most highly

correlated position.6 If the positions are

equally correlated, GSCC will allocate

pro rata based upon the residual margin

amount available at each Participating

CO. GSCC and each Participating CO

may then reduce the amount of

collateral they collect to reflect the

offsets between the cross-margining

participant’s positions at GSCC and its

(or its affiliate’s) position at the

Participating CO.7 In the event of the

default and liquidation of a crossmargining participant, the loss sharing

between GSCC and each of the

Participating COs will be based upon

the foregoing allocations and the crossmargin reduction.

GSCC will guarantee the crossmargining participant’s (or its affiliate’s)

performance to each Participating CO

28208 Federal Register / Vol. 66, No. 99 / Tuesday, May 22, 2001 / Notices

8The draft GSCC–CME agreement requires

ownership of 50 percent or more of the common

stock of an entity to indicate control of the entity

for purposes of the definition of ‘‘affiliate.’’

9Under the GSCC–NYCC cross-margining

arrangement are Treasury bills, notes, and bonds

cleared by GSCC and Treasury futures cleared by

NYCC.

10At least initially, the GSCC–CME crossmargining arrangement will be applicable on the

futures side only to positions in a proprietary

account of a cross-margining participant (or its

affiliate) at the CME. The arrangement will not

apply to positions in a customer account at CME

that would be subject to segregation requirements

under the CEA. This is also the case with respect

to the GSCC–NYCC cross-margining arrangement.

11Securities Exchange Act Release No. 26153

(October 3, 1988), 53 FR 39567 (October 7, 1988)

[File No. SR–OCC–86–17] (order approving crossmargining program between The Options Clearing

Corporations and the Intermarket Clearing

Corporation).

12 15 U.S.C. 78s(b).

13 15 U.S.C. 78q–1(a)(2)(A)(ii).

14 15 U.S.C. 78q–1(b)(3)(F).

up to a specified maximum amount

which relates back to the cross-margin

reduction. There will always be a

specified maximum amount that one

clearing organization could be required

to pay another clearing organization.

Each Participating CO will provide the

same guaranty up to the same specified

maximum amount to GSCC.

GSCC proposed one additional rule

change, to Rule 22, Section 4, in this

present rule filing in order to further

clarify that before GSCC credits an

insolvent member for any profit realized

on the liquidation of the member’s final

net settlement positions, GSCC will

fulfill its obligations with respect to that

member under the cross-margining

agreement.

(ii) Information Specific to the Current

Agreement between GSCC and CME

(a) Participation in the crossmargining program: Any netting

member of GSCC other than an interdealer broker netting member will be

eligible to participate. Any clearing

member of CME will be eligible to

participate.8

(b) Products subject to crossmargining: The products that will be

eligible for the GSCC–CME crossmargining arrangement will be (1) the

Treasury bills, notes, and bonds that are

cleared by GSCC and (2) Eurodollar

futures contracts with ranges in

maturity from 3 months to 10 years and

options on such futures contracts

cleared by CME.9 GSCC offset classes

will be offset against CME offset classes

based on correlation studies and the

appropriate disallowance factors will be

applied. All eligible positions

maintained by a cross-margining

participant in its account at GSCC and

in its (or its affiliate’s) proprietary

account at CME will be eligible for

cross-margining.10

(c) Margin Rates: GSCC and CME

currently use different margin rates to

establish margin requirements for their

respective products. Residual margin

amounts in the GSCC–CME crossmargining arrangement will always be

computed based on the lower of the

applicable margin rates. This

methodology results in a potentially

lesser benefit to the participant but

ensures a more conservative result for

both GSCC and CME (i.e., more

collateral held at the clearing

organizations).

(d) Daily Procedures: On each

business day, it is expected that CME

will inform GSCC of the residual margin

amounts it is making available for crossmargining by approximately 10 p.m.

New York time. GSCC will inform CME

by approximately 12 a.m. New York

time how much of these residual margin

amounts it will use. Reductions as

computed will be reflected in GSCC’s

daily clearing fund calculation.

(iii) Benefits of Cross-Margining

GSCC believes that its crossmargining program enhances the safety

and soundness of the settlement process

for the government securities

marketplace by: (1) Providing clearing

organizations with more data

concerning members’ intermarket

positions (which is especially valuable

during stressed market conditions) to

enable the clearing organizations to

more accurately make decisions

regarding the true risk of such positions

to the clearing organization; (2) allowing

for enhanced sharing of collateral

resources; and (3) encouraging

coordinated liquidation processes for a

joint participant, or a participant and its

affiliate, in the event of an insolvency.

GSCC further believes that crossmargining benefits participating clearing

members by providing members with

the opportunity to more efficiently use

their collateral. More important from a

regulatory perspective, however, is that

cross-margining programs have long

been recognized as enhancing the safety

and soundness of the clearing system

itself. Studies of the October 1987

market break gave support to the

concept to the concept of crossmargining. For example, The Report of

the President’s Task Force on Market

Mechanisms (January 1988) noted that

the absence of a cross-margining system

for futures and securities options

markets contributed to payment strains

in October 19878. The Interim Report of

the President’s Working Group on

Financial Markets (May 1988) also

recommended that the SEC and CFTC

facilitate cross-margining programs

among clearing organizations. As a

result, the first cross-margining

arrangement between clearing

organizations was implemented in

1988.11

II. Discussion

Under section 19(b) of the Act, the

Commission is directed to approve a

proposed rule change of a clearing

agency if not finds that the proposed

rule change is consistent with the Act

and the rules and regulations

thereunder.12 In section 17A(a)(2)(A)(ii)

of the Act, Congress directs the

Commission to use its authority under

the Act to facilitate the establishment of

linked or coordinated facilities for

clearance and settlement of transactions

in securities, securities options,

contracts of sale for further delivery and

options thereon, and commodity

options.13 Section 17A(b)(3)(F) of the

Act requires that the rules of a clearing

agency be designed to assure the

safeguarding of securities and funds

which are in the custody or control of

the clearing agency for which it is

responsible.14 The Commission believes

that the approval of GSCC’s proposed

rule change is consistent with these

sections.

First, the Commission’s approval of

GSCC’s proposed rule change to

establish a cross-margining arrangement

with the CME and to implement its hub

and spoke approach to cross-margining

with the CME and NYCC is in line with

the Congressional directive to the

Commission to facilitate linked and

coordinated facilities for the clearance

and settlement of securities and futures.

Second, approval of GSCC’s proposal

should result in increased and better

information sharing between GSCC and

Participating COs regarding the

portfolios and financial conditions of

participating joint and affiliated

members. As a result, GSCC and

participating COs will be in a better

position to monitor and assess the

potential risks of participating joint or

affiliated members and will be in a

better position to handle the potential

losses presented by the insolvent of any

joint or affiliated member. Therefore,

GSCC’s proposal should help GSCC

better safeguard the securities and funds

in its possession or control or for which

it is responsible.

Federal Register / Vol. 66, No. 99 / Tuesday, May 22, 2001 / Notices 28209

15 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

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–00–13) be and hereby is

approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.15

Jonathan G. Katz,

Secretary.

[FR Doc. 01–12824 Filed 5–21–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–44307; File No. SR–NASD–

2001–37]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the National Association of Securities

Dealers, Inc. Relating to Trading Halt

Authority

May 15, 2001.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on May 11,

2001, the National Association of

Securities Dealers, Inc. (‘‘NASD’’),

through its subsidiary, The Nasdaq

Stock Market, Inc. (‘‘Nasdaq’’ or

‘‘Association’’), 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 by Nasdaq. 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

Nasdaq is proposing to amend NASD

Rule 4120, Trading Halts, to clarify the

extent of Nasdaq’s authority to halt

trading in a security in response to

extraordinary market activity that

Nasdaq believes may be caused by the

misuse or malfunction of an electronic

system that is operated by, or linked to,

Nasdaq. The text of the proposed rule

change is below. Proposed new

language is in italics; proposed

deletions are in brackets.

* * * * *

4120. Trading Halts

(a) No change.

(1)–(5) No change.

(6) Halt trading in a security listed on

Nasdaq when:

(i) extraordinary market activity in the

security is occurring, such as the execution

of a series of transactions for a significant

dollar value at prices substantially unrelated

to the current market for the security, as

measured by the national best bid and offer,

and

(ii) Nasdaq believes that such

extraordinary market activity may be caused

by the misuse or malfunction of an electronic

quotation, communication, reporting, or

execution system operated by, or linked to,

Nasdaq.

(b)(1)–(3) No change.

(4) Should Nasdaq determine that a basis

exists under Rule 4120(a)[(1), (a)(2), (a)(3),

(a)(4), or (a)(5)] for initiating a trading halt,

the commencement of the trading halt will be

effective simultaneously with appropriate

notice in the Nasdaq ‘‘NEWS’’ frame.

(5) No change.

(6) A trading halt initiated under Rule

4120(a)(6) shall be terminated as soon as

Nasdaq determines either that the system

misuse or malfunction that caused the

extraordinary market activity has been

corrected or that system misuse or

malfunction is not the cause of the

extraordinary market activity.

* * * * *

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

Nasdaq 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. Nasdaq 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

1. Purpose

The purpose of the proposed rule

change is clarify Nasdaq’s authority to

initiate and continue trading halts in

circumstances where Nasdaq believes

that extraordinary market activity in a

security listed on Nasdaq may be caused

by the misuse or malfunction of an

electronic quotation, communication,

reporting, or execution system operated

by, or linked to, Nasdaq. NASD Rule

4120 provides Nasdaq with authority to

halt trading in securities in a number of

circumstances in which Nasdaq deems

a trading halt necessary to protect

investors and the public interest. The

specific bases for initiating a trade halt

that are currently listed in Rule 4120

focus primarily on ensuring that

investors have access to material news

about an issuer. Thus, trading may be

halted to allow the issuer to disseminate

material news or to allow Nasdaq to

request from the issuer information

relating to material news or other

information that is necessary to protect

investors and the public interest.

Trading of a security may also be halted

in certain circumstances to ensure

coordination with a halt of the same or

a related security imposed by another

market. The decision to halt trading and

to resume trading in a particular

security are communicated to market

participants via the Nasdaq ‘‘NEWS’’

frame of the Nasdaq Workstation.

As a result of the decentralized and

electronic nature of the market operated

by Nasdaq, the price and volume of

transactions in a Nasdaq-listed security

may be affected by the misuse or

malfunction of electronic systems,

including systems that are linked to, but

not operated by, Nasdaq. In

circumstances where misuse or

malfunction results in extraordinary

market activity, Nasdaq believes that it

may be appropriate to halt trading until

the system problem can be rectified. As

is true for all trading halts initiated

under Rule 4120, a decision to halt

trading would require a determination

that the action is necessary to protect

investors and the public interest. Thus,

a misuse or malfunction that has a

limited effect on a particular security

may not warrant a trading halt. In

extraordinary circumstances, however,

the system misuse or malfunction may

generate significant misinformation

about the demand for a particular

security in a manner that distorts prices

to the detriment of investors.

Under the proposed rule change,

Nasdaq would be authorized to initiate

a halt if it believes that a particular

insurance of extraordinary market

activity may be caused by system

misuse of malfunction. However, the

trading halt would continue only until

Nasdaq determines either that the

system misuse or malfunction that

caused the extraordinary market activity

has been corrected or that system

misuse or malfunction is not the cause

of the extraordinary market activity.

Thus, the existence of extraordinary

market activity, unrelated to an instance

of system misuse or malfunction, would