[Federal Register Volume 60, Number 237 (Monday, December 11, 1995)]
[Notices]
[Pages 63555-63558]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30069]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36544; International Series Release No. 897; File No. 
SR-GSCC-95-05]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Notice of Filing of a Proposed Rule Change Permitting 
Entities Established or Organized in a Foreign Country to Become 
Members of GSCC's Netting System

December 1, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 6, 1995, 
Government Securities Clearing Corporation (``GSCC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change (File No. SR-GSCC-95-05) as described in Items, I, II, and III 
below, which items have been prepared primarily by GSCC. On October 30, 
1995, GSCC filed an amendment to the proposed rule change.\2\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Letter from Jeffrey F. Ingber, General Counsel and 
Secretary, GSCC, to Jerry W. Carpenter, Assistant Director, Division 
of Market Regulation, Commission (October 26, 1995).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The purpose of the proposed rule change is to amend GSCC's rules to 
enable entities that are established or organized in a foreign country 
and regulated in a manner comparable to domestic entities eligible for 
GSCC membership to become members of GSCC's netting system.\3\

    \3\ The netting system is a system for aggregating and matching 
offsetting obligations resulting from trades submitted by or on 
behalf of members in eligible securities. The resulting deliver, 
receive, and payment obligations are settled through designated 
clearing banks.

[[Page 63556]]

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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), 
(C), and (B) below, of the most significant aspects of such 
statements.\4\

    \4\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 purpose of this proposed rule change is to permit entities that 
are organized or established under the laws of a country other than the 
United States (``foreign entities'') and that are regulated in a manner 
comparable to domestic entities eligible for GSCC membership to become 
members of GSCC's netting system. Currently, a foreign entity is 
eligible to apply to become a comparison-only member if it has 
demonstrated to GSCC that its business and capabilities are such that 
it could reasonably expect material benefit from direct access to 
GSCC's services. The proposed rule change also will establish new 
requirements applicable to foreign comparison-only members.
    Currently, GSCC has eleven enumerated categories of netting system 
membership. A foreign entity is not eligible for any of these 
categories of netting membership. Nevertheless, foreign entities are 
among the most significant participants in the government securities 
marketplace and trade actively with many current netting members. Six 
of the seven firms on GSCC's list of grandfathered entities (Daiwa 
Europe Ltd.; Nikko Europe PLC; The Nikko Securities Co., Ltd., Tokyo; 
Nomura International PLC, London; Nomura International Inc., Tokyo; and 
Nomura Securities Co., Ltd., Tokyo) are foreign entities.\5\ GSCC 
believes it is appropriate for regulated foreign entities to be 
eligible for netting system membership and proposes to establish a new 
category of netting system membership for such foreign entities.

    \5\ GSCC maintains a list of ``grandfathered'' entities which 
are non-netting system members that historically have done business 
with GSCC's interdealer netting members. Business done by the 
interdealer broker netting members with grandfathered entities is 
treated by GSCC as business done with an actual netting member. 
GSCC's goal is to eliminate the list of granfathered entities by 
having each of the entities on that list become a member of the 
netting system.
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    GSCC recognizes that admitting foreign entities to netting system 
membership raises various unique issues and concerns for GSCC in 
connection with the legal and financial requirements for those 
entities, information sharing obligations, the requirements of the 
foreign entities' home country, and the physical presence of the 
foreign entities in the United States. GSCC's proposed rule change 
addresses each of these issues as discussed below. Except as otherwise 
indicated, the requirements set forth below are not applicable to a 
foreign entity that applies for membership only in GSCC's comparison 
system.
1. Legal Considerations
    In order to address the particular legal concerns raised by the 
admission of foreign entities to netting system membership, GSCC will 
require foreign netting system applicants to enter into a special 
netting member agreement (``Agreement''). The Agreement, which 
generally requires the foreign netting system applicant to adhere to 
GSCC's rules, will provide that the Agreement shall be governed by and 
construed in accordance with the laws of the State of New York.
    Under the Agreement, the foreign entity (i) irrevocably waives all 
immunity for attachment of its assets in this country, (ii) irrevocably 
submits to the jurisdiction of a court in the U.S. with respect to any 
action or proceeding brought against it relating in any way to the 
Agreement, (iii) irrevocably waives any objection to the laying of 
venue in a court in the U.S., (iv) expressly states that any judgment 
obtained against it by GSCC may be enforced in the courts of any 
jurisdiction where it or any of its property may be found and will 
irrevocably submit to the jurisdiction of each such court, (v) agrees 
that payment of any judgment obtained by GSCC shall be in U.S. dollars, 
and (vi) agrees to provide GSCC with information on its financial 
condition and/or trading activity that is deemed pertinent by GSCC and 
understands and agrees that any such information may be provided by 
GSCC to the Commission.
    GSCC further will require the foreign netting system applicant to 
submit an opinion of foreign counsel (``Opinion''). The Opinion must 
provide that the execution by the foreign entity of the Agreement with 
GSCC, the foreign entity's performance under the Agreement, and the 
exercise by GSCC of its rights and remedies under the Agreement will 
not conflict with or be impeded by the laws or regulations of the 
foreign entity's home country and will be respected by the foreign 
entity's primary foreign regulator. In addition, the Opinion must state 
that the Agreement's provision for governance by and construction in 
accordance with the laws of the State of New York will be recognized 
and given effect by the courts of the foreign entity's home country.
    The Opinion also must provide the (i) The waiver by the foreign 
entity of all immunity from attachment of its assets in the U.S. is 
valid and will be recognized and given effect by the courts of the 
foreign entity's home country, (ii) for foreign entity has the power to 
irrevocably submit to the jurisdiction of a court in the U.S. and to 
waive all objections to venue, (iii) any judgment obtained against the 
foreign entity by GSCC may be enforced in the courts of any 
jurisdiction where the foreign entity or any of its property may be 
enforced in the courts of any jurisdiction where the foreign entity or 
any of its property may be found and its submission to the jurisdiction 
of each such court is valid and will be recognized and given effect by 
the courts of the foreign entity's home country, (iv) GSCC can 
institute in the foreign entity's home country an action for breach of 
the Agreement without first having to obtain a judgment against the 
entity in the U.S., and (v) GSCC can institute in the U.S. an action 
for breach of the Agreement without first having to obtain a judgment 
against the entity in the entity's home country. Finally, the Opinion 
must state that the foreign entity has the power to provide GSCC with 
information in its financial condition and/or trading activity that is 
deemed pertinent by GSCC and that neither the foreign entity's 
compliance with such a request nor the sharing by GSCC of such 
information with the Commission will conflict with or be impeded by the 
laws or regulations of the foreign entity's home country and will be 
respected by the foreign entity's primary foreign regulator.
    In addition to the Agreement and the Opinion, GSCC also will 
require any foreign netting system applicant to submit a designation 
specifying an appropriate person or persons located in the State of New 
York as its agent to receive service of process or other legal summons.
    While there will be no special agreement applicable to a foreign 
entity that applies for membership in GSCC's comparison system, such 
entity will be required to provide to GSCC an opinion of foreign 
counsel stating that (i) the execution by the foreign entity of the 

[[Page 63557]]
comparison-only member agreement (``Comparison Agreement'') with GSCC, 
its performance under that agreement, and the exercise by GSCC of its 
rights and remedies under that agreement will not conflict with or be 
impeded by the laws or regulations of the foreign entity's home country 
and will be respected by the foreign entity's primary foreign regulator 
and (ii) the language in the Comparison Agreement providing that the 
agreement shall be governed by and construed in accordance with the 
laws of the State of New York will be recognized and given effect by 
the courts of the foreign entity's home country.
2. Minimum Financial Standards and Clearing Fund Requirements
    GSCC also seeks to amend its rules to establish minimum financial 
standards and clearing fund requirements for foreign netting system 
applicants. The minimum financial standards, the clearing fund deposit, 
and any other payments or deposits called for under GSCC's rules 
required to be met by a foreign meeting system member will be the same 
as those applicable to the domestic netting system membership category 
that in GSCC's sole determination is most comparable in type to the 
foreign entity. In making this determination, GSCC will take into 
account, among other things, whether the entity's trading activity is 
done primarily for itself or for others. If a foreign netting system 
members falls out of compliance with its minimum financial 
requirements, the consequences of such noncompliance shall be 
determined by reference to the subsection of GSCC Rule 3, Section 5 
that is applicable to the netting system membership category upon which 
the foreign entity's minimum financial standards are based.
3. Home Country Standards
    In order to be eligible for netting system membership, the foreign 
entity will have to be in compliance with the financial reporting and 
responsibility standards of its home country. The foreign entity 
applying for netting system membership will have to be regulated in its 
home country in ways and pursuant to provisions comparable to those 
imposed on domestic members of a comparable type.
4. Information Sharing/Regulatory and Financial Reporting
    To insure appropriate information sharing, the foreign entity 
applying for netting system membership must have a home country 
regulator that has entered into a memorandum of understanding with the 
Commission regarding the sharing or exchange of information. In its 
application for membership (either comparison-only or netting system), 
the foreign entity will have to agree to provide GSCC with all material 
regulatory filings made with its primary home country regulator over 
the prior year, audited financial statements for the prior three years, 
and any other financial information deemed by GSCC to be necessary in 
order to protect GSCC and its members. Upon acceptance to comparison-
only or netting system membership, a foreign member must provide GSCC 
with all material regulatory filings made with its primary home country 
regulator promptly following its filing with such regulator, audited 
financial statement, and any other financial information deemed by GSCC 
to be necessary in order to protect GSCC and its members.
    GSCC ordinarily will accept for financial monitoring purposes 
audited financial statements prepared in accordance with the home 
country's generally accepted accounting principles (``GAAP''). If GSCC 
believes that those statements are not satisfactory, it will assess 
whether the foreign entity can provide information equivalent to that 
information provided by financial statements prepared in accordance 
with U.S. GAAP. All required financial and other reports will have to 
be submitted to GSCC in English. All required financial reports will 
have to be submitted to GSCC in dollar equivalents indicating the 
conversion rate and date used.
    As noted above, pursuant to the Agreement the foreign netting 
system member will have agreed to provide GSCC with information on its 
financial condition and/or trading activity deemed pertinent by GSCC 
and that GSCC may share this information with the Commission. In 
addition, GSCC will expect the foreign entity to prepare and provide to 
GSCC information in the form of unaudited financials sufficient for 
GSCC to monitor and assess the entity's financial condition on no less 
than a quarterly basis.
5. Physical Presence
    With respect to the foreign netting member's physical presence in 
the U.S., GSCC will require every foreign entity to maintain an office 
in the U.S. either directly or through a suitable agent that (i) has 
available individuals fluent in English who are knowledgeable about the 
entity's business and can assist GSCC representatives as necessary and 
(ii) ensures that the foreign member can meet its data submission and 
settlement obligations to GSCC.
    GSCC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act and the rules and regulations 
thereunder because the rule proposal will extend the benefits of GSCC's 
netting and risk management processes to a broader segment of 
government securities market participants and will provide those 
benefits to trades of current members with foreign entity 
counterparties.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    GSCC does not believe that the proposed rule will have an impact on 
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

    Comments on the proposed rule change have not yet been solicited. 
GSCC members will be notified of the rule 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 in 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. 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 provisions of 

[[Page 63558]]
5 U.S.C. Sec. 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 the file number SR-GSCC-95-05 and should be submitted 
by January 2, 1996.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\

    \6\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-30069 Filed 12-8-95; 8:45 am]
BILLING CODE 8010-01-M