65076 Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Notices

10 17 CFR 200.30–3(a)(12) (1994).

1CCOS is a wholly-owned subsidiary of the Board

of Trade Clearing Corporation (‘‘BOTCC’’) which

provides clearing services for futures and

commodities transactions executed on the Board of

Trade of the City of Chicago (‘‘CBOT’’).

2 15 U.S.C. § 78q–1 (1988).

3 17 CFR 240.17Ab2–1 (1994).

4Securities Exchange Act Release No. 32481 (June

16, 1993), 58 FR 34105 [File No. 600–27] (notice of

filing of application for exemption from registration

as a clearing agency) (‘‘CCOS Release’’).

5A complete list of comment letters for File No.

600–27 is available for review in the Commission’s

Public Reference Room.

6Letter from Dennis Dutterer, Executive Vice

President and General Counsel, BOTCC, to Jonathan

Katz, Secretary, Commission (October 6, 1993).

Letter from Fred Grede, Vice President, Board of

Trade of the City of Chicago (‘‘CBOT’’), to Brandon

Becker, Director, Division of Market Regulation

(‘‘Division’’), Commission (October 6, 1993).

7 15 U.S.C. § 78o-5 (1988).

8 15 U.S.C. § 78o-5(e)(1) (1988).

9Securities Exchange Act Release No. 33911

(April 15, 1994) 59 FR 19263 [File No. 600–27]

(notice of filing of amendment to application for

exemption from registration as a clearing agency).

10Supra note 5.

eligibility depending upon whether a

new issue is distributed by an

underwriting syndicate before or after

the date a securities depository system

is available for monitoring repurchases

of the distributed shares by syndicate

members (i.e., a ‘‘flipping tracking

system’’).

Currently, a flipping tracking system

is being developed that will include a

securities depository service that (i) can

be activated upon the request of the

managing underwriter for a period of

time that the managing underwriter

specifies, (ii) in certain circumstances

will require the delivering participant to

provide to the depository information

sufficient to identify the seller of such

shares as a precondition to the

processing of book-entry delivery

instructions for distributed shares, and

(iii) will report to the managing

underwriter the identify of any other

syndicate member or selling group

member whose customer(s) sold

distributed shares (but will not report to

the managing underwriter the identity

of such customer[s]) and in certain

circumstances will report to such

syndicate member or selling group

member the identity of such

customer(s). Prior to the availability of

a flipping tracking system, the managing

underwriter may delay the date a

security is deemed ‘‘depository eligible’’

for up to three months after trading has

commenced in the security. After the

availability of a flipping tracking

system, a new issue must be depository

eligible before commencement of

trading on CBOE.

The proposed rule change is

consistent with Section 6(b)(5) of the

Act in that by reducing the number of

transactions in depository eligible

securities for which settlement is

effected by the delivery of physical

securities, by requiring that transactions

between member firms and transactions

between member firms and clients that

settle on a DVP or RVP basis generally

occur in a book-entry environment, and

by requiring securities listed in CBOE be

depository eligible, the efficiency of the

U.S. clearance and settlement system

will be enhanced and the potential for

systemic risk will be reduced.

Furthermore, the proposal is designed to

foster cooperation and coordination

with persons engaged in regulatory,

clearing, settling, and facilitating

transactions in securities and to remove

impediments to and perfect the

mechanism of a free and open market

and a national market system.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

The CBOE does not believe that the

proposed rule change will impose any

burden on competition.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants, or Others

Written comments on the proposed

rule change were neither solicited nor

received.

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 CBOE 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 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. Copies of such filing

will also be available for inspection and

copying at the principal office of CBOE.

All submissions should refer to File No.

SR–CBOE–95–62 and should be

submitted by January 8, 1996.

For the Commission, by the Division

of Market Regulation, pursuant to

delegated authority.10

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–30661 Filed 12–15–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–36573; File No. 600–27]

Self-Regulatory Organizations;

Clearing Corporation for Options and

Securities; Order Approving

Application for Exemption From

Registration as a Clearing Agency

December 12, 1995.

On December 14, 1992, the Clearing

Corporation for Options and Securities

(‘‘CCOS’’) 1 filed with the Securities and

Exchange Commission (‘‘Commission’’)

an application for exemption from

registration as a clearing agency

pursuant to Section 17A of the

Securities Exchange Act of 1934

(‘‘Act’’) 2 and rule 17Ab2–1 thereunder.3

Notice of CCOS’s application was

published in the Federal Register on

June 23, 1993.4 Fourteen comment

letters were received in response to the

notice of filing of the CCOS

application.5 On October 7, 1993, CCOS

filed an amendment to its application 6

setting forth its intention to register

Chicago Board Brokerage, Inc. (‘‘CBB’’)

as a U.S. government securities broker

pursuant to Section 15C of the Act 7 and

to proceed with CBB’s membership with

the National Association of Securities

Dealers (‘‘NASD’’) as required by that

section.8 Notice of the amendment was

published in the Federal Register on

April 22, 1994, to solicit comments.9

One hundred eleven comment letters

were received in response to the notice

of filing of the amendment.10 This Order

grants CCOS’s application for
Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Notices 65077

11CBB is a wholly-owned subsidiary of the CBOT

and has requested no-action relief from the

Commission staff with respect to the operation of

the automated trading system for government

securities. Letter from Mark D. Young, Kirkland and

Ellis, Counsel for CBB, to Richard R. Lindsey,

Division Director, Commission (December 11,

1995). The staff issued a no-action letter to CBB

granting the relief requested and the Commission is

issuing this order based on its belief that CBB is in

compliance with the terms and conditions of the

no-action letter. Letter from Richard R. Lindsey,

Division Director, Commission, to Mark D. Young,

Kirkland and Ellis, Counsel for CBB (December 12,

1995).

12Supra note 6.

13The government securities listed for purchase

or sale through the CBB system will consist of U.S.

Treasury bills, notes, and bonds in their various

maturities which are deliverable under financial

futures contracts traded on the CBOT.

14Only CBOT individual members, employees of

individual members, and employees of CBOT

member firms will be permitted to operate

terminals. Each terminal will be uniquely identified

in its communication with the central site, and each

terminal operator will be assigned an identification

number. CBB will maintain complete, timesequenced electronic audit trails on all orders

entered on, and all transactions executed through,

the CBB trading system. The recorded activity will

indicate, for a given order or transaction, the

identity of the terminal operator entering, changing,

or cancelling orders, the time such entry or change

was effected, and the date, time, volume, security,

and price of each transaction executed through the

trading system.

15A basis trade is a trade in which the

participants agree to simultaneously buy or sell

government securities against the offsetting

equivalent CBOT treasury futures contract. The

basis represents the price differential between a

government security and the futures delivery price.

16 In a dollar roll transaction, the seller of the

contract delivers notes or bonds to the buyer in

exchange for cash. Settlement occurs the same day.

At the time of execution, the seller and buyer also

agree to reverse the transaction at a price that

includes a financing interest amount with

settlement occurring the next day.

17The Board of Directors of CCOS may permit

other clearing agencies registered with the

Commission or that are exempted from registration

by the Commission access to some or all of the

services offered by CCOS according to terms and

conditions prescribed by the Board of Directors.

Clearing agencies that are granted access to CCOS’s

services pursuant to CCOS Rule 309 will not be

considered participants of CCOS under the rules

except as determined by the Board of Directors.

Letter from John C. Hiatt, President and Chief

Executive Officer, BOTCC, to Jonathan Kallman,

Associate Director, Commission (September 13,

1994).

18The CBB trading system is based on a

modification of the CBOT’s Project A trading

system. Project A, available to CBOT members, is

an electronic order entry facility developed to allow

trading over a local area network (for example,

within the CBOT building) of CBOT’s futures

contracts, options on futures contracts, and other

financial products. The Project A system is

designed to facilitate trading by active order

matching or through the posting of bids/offers on

an electronic bulletin board.

19Quotation vendors will offer CBB trading

screens and order entry capability through their

terminals which are served by national

telecommunications networks. CBB will contract on

a nonexclusive basis with one or more quotation

vendors, each having interactive capabilities, to

carry the CBB system for use by CBOT members.

20The futures leg of the basis trade will take the

last reported trade price from the CBOT trading

floor as the futures transaction price. The

transaction ticket for the government securities leg

of basis trades will include the commission charges

and accrued interest. Settlement for the government

securities leg will occur on the next business day

in the same manner as outright government

securities trades.

21The CBB terminals will list the dollar roll

spreads through bid and offer financing rates

reflecting the annualized interest rates paid or

received on the transactions. The transaction

amount or value price on the trade date will reflect

the settlement value of the first leg of the dollar roll.

The settlement value is the amount of funds

required to make or take delivery of the security.

The transaction amount for the second leg of the

dollar roll will reflect the fact that the holder of the

overnight bond will not earn the coupon interest

during the term of the transaction.

22Unless otherwise noted, all times stated are

Eastern Standard Time. 23CBB will create, operate, and maintain the

computer system that enables orders to be entered

and executed. CBB has developed trade matching

Continued

exemption from registration as a

clearing agency subject to certain

limitations and conditions as set forth

below.

I. Description

A. Trade Clearance and Settlement

1. Overview

CCOS will provide clearance and

settlement facilities for trades executed

by CBB and its customers in the CBB

trading system.11 As described in the

amendment,12 CBB’s business will be

limited to acting as an intermediary for

U.S. government securities transactions

paired through its computer system.13

The CBB trading system is designed to

offer CBOT members an opportunity to

execute a customized package of

transactions related to Treasury futures

contracts traded on the CBOT.14 The

system will permit the trading of

government securities, independently

and in conjunction with CBOT futures

on government securities (‘‘basis

trades’’),15 and repurchase and reverse

repurchase agreement contracts in

government securities (‘‘dollar rolls’’).16

Using the CBB trading system, therefore,

CBOT traders in government securities

will be able to buy and sell the

government securities underlying CBOT

futures contracts and using dollar rolls

will be able to execute trades that help

inventory management. CBB will

execute transactions for system

participants as broker. All trades will be

effected through the CBB’s electronic

network. The settlement date for

outright purchase and sale transactions

will be the next business day except for

when-issued (‘‘WI’’) securities which

will settle on the day of issuance by the

U.S. Treasury.

Under the terms of the proposal, any

CCOS participant or any customer of a

CCOS participant that is also a CBOT

member or member firm (hereinafter

collectively referred to as a CBOT

member) will be able to obtain a CBB

trading terminal.17 Each CCOS

participant will be required to enter into

an agreement with CBB setting forth the

terms and conditions of access to and

use of CBB’s terminals. Using a CBB

terminal, a terminal operator will be

able to view the terminal displays to see

the prices and quantities of current bids

and offers, which are displayed on an

anonymous basis, and to review its

trading activity.

CBB is developing several methods

for market participants to access the

CBB trading system. CBB will: (1)

provide CBOT work station terminals

which will access the CBB trading

system and include other market

information and trading systems

available through the CBOT; 18 (2)

provide an interface between CBB’s

central computer and a CBOT member’s

internal computer network; and (3)

provide access through an interface with

quotation vendors.19

The system will permit users to

execute basis trades as a single

transaction where the price will reflect

the spread in basis points between the

futures contract and the underlying

government securities. The government

securities will be priced at a certain

number of basis points above or below

the futures contract.20

The system also will provide users

with the ability to execute dollar roll

transactions. Dollar roll transactions are

designed to facilitate the financing of

government securities through the

lending of government securities in

exchange for cash and to facilitate the

lending of funds in exchange for

government securities.21 Dollar rolls

will result in the creation of two

simultaneous government trades.

CBB will have a morning trading

session for dollar rolls from the opening

of trading at 8:00 a.m. to 11:00 a.m. and

an afternoon session for dollar rolls

from 3:15 p.m. to 5:00 p.m.22 For dollar

rolls executed during the morning

session, the first leg will be for same day

(‘‘T’’) settlement, and the second leg

will be for next day (‘‘T+1’’) settlement.

For dollar rolls executed during the

afternoon session, the first leg will settle

on T+1, and the second leg will settle

on the following business day (‘‘T+2’’).

CBB will match member trades and

will submit the matched trades to CCOS

on a real time basis so that trade data

executed through CBB immediately

flows to CCOS.23 CCOS will perform the
65078 Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Notices

software for U.S. Treasury bills, notes, and bonds,

including when-issued securities, basis trades, and

dollar rolls. 24Because all CCOS members are also BOTCC

members or CBOT members affiliated with a

BOTCC member, all accounts at CCOS are crossmargin accounts.

25Original margin represents a performance bond

that both buyers and sellers must post when

executing trades to assure that their respective

contractual obligations will be satisfied. Variation

margin is a mark to the market payment collected

on a twice daily basis to account for changes in the

value of the positions before the delivery process.

26BOTCC collects clearing member margin on a

portfolio, or net basis, reflecting the overall risk to

the clearing corporation associated with the totality

of contracts in that clearing member’s portfolio.

BOTCC uses a portfolio-based simulation model,

the Standard Portfolio Analysis (‘‘SPAN’’) system,

which establishes parameters to collect original

margins based on the simulated losses of clearing

member portfolios under various scenarios.

27BOTCC, as facilities manager, will perform all

margin collection/payment functions on behalf of

CCOS. CCOS will collect commissions and

settlement payments through its agent, the Bank of

New York.

28 In establishing the original margin for

government securities it clears, CCOS began with

the premise that cross-margined government

securities and futures products have essentially the

same market and credit risks. Therefore, CCOS will

use the original margin rates for futures contracts

established by the Board of Governors of BOTCC

following recommendations of the BOTCC Risk

Management Committee.

The BOTCC Risk Management Committee is

comprised of five of the nine Governors of the

BOTCC Board of Governors. All nine Governors are

owners or officers of BOTCC clearing member firms.

The BOTCC Risk Management Committee meets

once a month or at the call of the BOTCC Board

Chairman or the Risk Management Committee

Chairman. The Committee bases its

recommendation upon review by BOTCC and CBOT

staff of the conditions of the market place,

including: statistical analysis of central tendencies,

dispersion, and correlations between price changes

of different commodities. Additionally, the

Committee draws upon the experiences of its

members and uses their judgement to predict

market conditions in the near future. From this

information, the Risk Management Committee will

typically set margin rates that cover approximately

the 99th percentile of absolute daily price changes

over the previous one, three, and six month periods.

29The formula for the conversion of government

securities is:

Futures-Equivalents=Government Securities Par

Amounts×Conversion Factor÷Futures Par Amount

Since bonds being delivered into futures contract

obligations will have greater or lesser value than the

futures, the conversion factor is a means of equating

bonds with various coupons and maturity dates

with the standard bond set by BOTCC. The standard

bond, which is equal to the corresponding future,

has an 8% coupon and a conversion factor of 1.

For example, assume there are two bonds, Bond

X and Bond Y. Bond X is the standard bond having

an 8% yield to maturity and conversion factor of

1 (Bond X is equal to the corresponding future).

Bond Y is worth 1.5 times Bond X (Bond Y could

have greater coupon rates or a longer period to

maturity). If the future is trading at 85, then Bond

X is worth 85, and Bond Y is worth 1.5 times 85.

Therefore, 1.5 is the conversion factor for Bond Y.

In order to determine the number of futures that

equate with Bond Y, the face amount of Bond Y is

multiplied by the conversion factor, producing the

futures value amount. The futures value amount is

then divided by 100,000 (each futures contract

equals $100,000) to give the number of futures

contracts equal to the bond.

30Futures on government securities act as an

index of the many bonds deliverable into them.

Treasury bonds (‘‘T-bonds’’) having at least fifteen

years remaining to maturity are deliverable into the

T-bond future. Ten-year Treasury notes (‘‘T-notes’’)

must have maturities between six and one-half and

ten years to be deliverable into the ten-year T-note

future. Five-year T-note futures accept Treasury

notes with time to maturity between four years,

three months and five years, three months. Twoyear notes having maturities between one year, nine

months and two years are deliverable into the twoyear T-note future.

31CCOS will withhold distribution of any

variation margin gains from participants with

original margin requirement deficits.

32The transaction value provided by CBB to

CCOS will include the accrued interest paid or

received on each transaction. For normal deliveries

the accrued interest at the time of the transaction

and at marking to market are the same amount, but

clearance and settlement functions for

transactions executed through CBB,

including: delivery versus payment

processing, position consolidation, and

original and variation margin

calculation and processing as discussed

below.

2. CCOS & BOTCC Cross-Margining

Agreement

CCOS and BOTCC will establish a

cross-margining arrangement whereby

all CCOS members, all of which are

BOTCC members or CBOT members

affiliated with a BOTCC member, will

hold certain futures and government

securities cleared by the respective

clearing organizations in special crossmargin accounts.24 All futures positions

will be held at BOTCC, and all

government securities will be held at

CCOS. Government securities and

futures held in the cross-margin

accounts at the respective clearing

organization will be margined as if held

in a single account based upon the net

risk of the positions. To facilitate the

cross-margining arrangement, CCOS and

BOTCC will establish procedures

whereby CCOS and BOTCC each will

have a security interest in the positions

held in the cross-margin accounts to

secure all obligations of the clearing

members arising in connection with

those positions.

B. System Safeguards

1. Margin Payment/Collection

CCOS will adopt, as one of its

principal safeguards, a practice of

collecting original margin and variation

margin on participant obligations.25 In

essence, CCOS will use the margin

calculation and payment time frames

currently used by BOTCC in connection

with its clearance of CBOT futures

contracts.26 CCOS will modify BOTCC’s

margining system to address risks

specific to the U.S. government

securities market.

CCOS will calculate margin

requirements at least twice daily, with

one calculation reflecting trading

activity occurring from the 8:00 a.m.

opening to 1:30 p.m. and with another

calculation reflecting trading activity

from 1:30 p.m. to 5:00 p.m. CCOS will

collect margin deficiencies arising from

participants’ morning trading activity at

4:00 p.m. on that trade date (‘‘T’’) and

will collect margin deficiencies arising

from participants’ afternoon trading

activities at 7:40 a.m. on T+1. In the

event a clearing member fails to perform

its obligations to CCOS, the original

margin will be used to cover any

financial liabilities which may result

from the failed obligation. CCOS will

retain the authority to collect additional

margin at any time.27

In order to margin government

securities and futures positions in a

parallel fashion, CCOS will convert

government securities to futures

contract equivalents prior to original

margin determination.28 CCOS will

convert government securities positions

to futures-equivalents based upon

conversion factors established and

published by the CBOT for the most

similar futures delivery month and the

most similar futures contract par

amounts (i.e., face values).29 CCOS will

net the futures-equivalent positions of

all government securities deliverable

with the corresponding futures contracts

to produce a net futures-equivalent

position.30 The performance bond for all

trades generally will be collected at 7:40

a.m. on T+1.

CCOS will calculate each participant’s

variation margin pay/collect amount

and transmit the data to BOTCC for

margin payment or collection. Payment

or collection amounts for each

participant will include the combined

variation effects of the government

securities and futures positions in the

participant’s cross-margined account.

Participants will pay or collect midday

variation margin in same-day funds by

4:00 p.m. each day, through their

settlement banks. BOTCC will pay out

80% of variation gains in excess of

original margin deficits 31 and will

collect 100% of variation losses.

2. Settlement Values

At 3:00 p.m., CCOS will establish a

settlement value for government

securities trades executed between 8:00

a.m. and 1:30 p.m. That value will be

based on the prices collected at 2:30

p.m. from GovPx, a government

securities pricing vendor. CCOS will

mark new positions from their

transaction value,32 which will be
Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Notices 65079

for failed deliveries, the seller will have to pay the

incremental accrued interest for each day the fail

continues. The daily variation margin payments

will include this incremental accrued interest.

33Settlement values will reflect the settlement

price established twice a day and will include

accrued interest but will not include commissions

and finance charges from dollar rolls. 34Participants may transact dollar rolls (with

same-day settlement for the first leg) between 8:00

a.m. and 11:00 a.m. on T+1 to offset delivery

obligations due to settle on T+1.

35As discussed below, $6 billion is the maximum

average daily net settlements of transactions in

government securities agreed to by CCOS and the

Division during the exemptive period. Also as

agreed to by CCOS and the Division, CCOS’s

operations will be limited to a maximum of $24

billion average daily net settlements of dollar rolls.

These limits represent approximately five percent

or less of government securities and average daily

volumes in dollar rolls. The Commission believes

these limits are appropriate at this time in that they

are large enough to allow CCOS to commence

effective operations yet of a limited nature that

allows the Commission to observe the effects of the

CCOS clearing and settlement activities on the

government securities market. 36 I.e., $30 million from CCOS’s guaranteed credit

facilities (repayment of which is guaranteed by

BOTCC) plus $30 million from BOTCC under its

guarantee of cross-margining losses.

37Supra note 5.

38Commenters raised additional issues in

opposition to CCOS’s application. These issues

included the concern that the introduction of CCOS

as another government securities clearing agency

would result in an increase in costs for U.S.

Treasury brokers and the concern that in the future

decisions at GSCC will be made based on the fear

of losing potential customers to CCOS rather than

based on the best interest of the participants. With

regard to the first point, the Commission believes

that if in fact any increase in costs results from

granting CCOS’s exemption application, the

benefits to the government securities market, such

as innovation arising from competition, will

outweigh any such costs. With regard to the second

point, while the Commission believes that GSCC

will continue in the future to base its decisions on

what is in the best interest of its participants and

the government securities market and not on any

fear of losing current or potential participants,

commenters should be comforted by the fact that

GSCC is subject to Section 19(b) of the Act which

requires SROs to file with the Commission any

proposed changes to their procedures, operations,

or rules.

39The comment letters and CCOS’s responses are

discussed in detail in the Discussion section of this

order.

40Letters from Jean A. Webb, Secretary, CFTC, to

Jonathan G. Katz, Secretary, Commission (July 23,

1993 and May 31, 1994).

41Letter from Jean A. Webb (July 23, 1993), supra

note 40.

42Ultimately, this concern was alleviated by

changing the general BOTCC guarantee to a

guarantee of a limited committed credit facility.

Refer to ‘‘BOTCC Guarantee’’ above.

43Letter from Jean A. Webb (May 31, 1994), supra

note 40.

established at the execution of the trade,

to their settlement value,33 which will

reflect gains or losses in the interim

period, and CCOS will mark open

positions that were previously marked

to the prior day’s settlement value to the

new settlement value.

Trades executed from 1:30 p.m.

through the 5:00 p.m. end of the day’s

trading session will be marked to the

3:00 p.m. settlement value, and the

variation margin on the entire position

will be calculated at the end of the day.

Participants will pay or collect the

second variation margin obligation the

following morning at 7:40 a.m. CCOS

will send delivery instructions for

normal settlement of government

securities transactions executed on T to

the participants’ settlement banks at

11:30 a.m. on T+1.34

3. Loss Allocation and Liquidity

Sources

CCOS will begin operations with an

initial capitalization of $2 million.

Together with CCOS’s earnings, BOTCC

will commit to provide CCOS with

additional capital as necessary to cover

CCOS’s continuing costs of operations.

Because CCOS will rely on BOTCC for

certain liquidity resources and because

BOTCC’s capital and credit lines are

committed to its futures business,

BOTCC has agreed to dedicate specific

credit and financial resources to CCOS,

and CCOS and BOTCC have established

a framework for allocating losses arising

from cross-margined accounts between

the two entities.

With respect to liquidity, CCOS will

establish a committed credit facility

which will be guaranteed by BOTCC.

The credit facility initially will be $5

million and will be increased in

increments of $5 million for each $1

billion increase in CCOS’s daily average

net settlements of government securities

transactions over a ninety day period.

When the credit facility reaches $30

million as a result of daily average net

settlements of government securities

reaching $6 billion, CCOS will review

the size of the credit facility in

consultation with the Division staff.35

With respect to loss allocation, under

the cross-margining arrangement

between CCOS and BOTCC, all

government securities positions cleared

by CCOS will be maintained in a crossmargin account for which BOTCC and

CCOS have agreed to assume joint

responsibility in the event that a default

or failure to settle occurs and there is a

shortfall in that account. BOTCC and

CCOS each are guaranteeing up to 50%

of the obligations owed to each other

with respect to a defaulting participant’s

cross-margin account after use of the

original margin deposits of the

participant and proceeds from the

liquidation of the participant’s

positions. Therefore, CCOS will have

adequate resources to protect itself and

to fulfill its settlement obligations for a

loss up to at least $60 million.36

II. Comment Letters

Public comment both supported and

opposed CCOS’s application.37 More

than sixty commenters, including

several common members of the

Government Securities Clearing

Corporation (‘‘GSCC’’) and CCOS,

supported the proposal. More than forty

commenters opposed the proposal,

raising three basic arguments as to why

the Commission should deny the

exemption request.38 These arguments

include the potential fragmentation of

clearance and settlement facilities for

the U.S. Treasury market the concern

that exempting CCOS will mean

ineffective and unequal regulation of

clearing facilities for those securities,

and the concern that approval of CCOS

will not promote fair competition

among clearing agencies. CCOS filed

several responses to the comments.39

The Commission received two letters

from the Commodity Futures Trading

Commission (‘‘CFTC’’) regarding

CCOS’s application.40 BOTCC, as a

futures clearing organization, is subject

to regulation by the CFTC under the

Commodity Exchange Act (‘‘CEA’’);

therefore, the Commission carefully

considered the comments of the CFTC

regarding CCOS’s application. In its first

letter to the Commission,41 the CFTC

noted that because of its position as the

regulator of BOTCC, it would have to

consider and address the potential

impact of CCOS’s activity on the

financial integrity of BOTCC and on the

futures market for which it clears.

Specifically, the CFTC was concerned

with BOTCC’s role as a guarantor of

CCOS’s obligations and the impact on

BOTCC’s financial integrity of any

minimum capitalization or other

requirements imposed on CCOS by the

Commission.42 The CFTC also stated

that any arrangements presenting crossjurisdictional issues between the CFTC

and the Commission would require

approval by both agencies. This would

include cross-margining programs, the

imposition of clearing limits and/or

minimum margin requirements, and

futures/cash basis trades traded on the

CBB and cleared through BOTCC and

CCOS. The CFTC urged a cooperative

effort between itself and the

Commission to avoid duplicative or

inconsistent regulation being imposed

on the affected entities.

The CFTC’s second letter 43 responded

to CCOS’s amended application in

which CBOT set forth its intention to

register CBB as a government securities

broker and its willingness to enter into

certain linkage arrangements with

GSCC. The CFTC noted that the

proposal to enter into a linkage
65080 Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Notices

44 Market Reform Act of 1990, S. Rep. 101–300 at

58–62. President’s Working Group on Financial

Markets, Interim Report, Appendix D (May 1988).

45Letter from Richard R. Lindsey, Division

Director, Commission, to John G. Macfarlane III,

Chairman of the Board, GSCC, and David Johnson,

Chairman of the Board, BOTCC (December 12,

1995). The Commission believes it is appropriate

for CCOS to begin limited operations prior to the

implementation of such arrangements because these

arrangements, while important to coordinating

GSCC’s and CCOS’s systems, are not necessary for

CCOS to commence operations.

46 15 U.S.C. §§ 78q–1 (a)(2)(A)(ii) and (d)(1)

(1988). 47 Joint Report on the Government Securities

Market, issued by the Department of Treasury, the

Securities and Exchange Commission and the Board

of Governors of the Federal Reserve System

(January 1992) at 31 (recommending that an

efficient processing system for government

securities repo activity be developed).

48For legislative history concerning Section 17A

of the Act, see, e.g., Report of Senate Comm. on

Housing and Urban Affairs, Securities Acts

Amendments of 1975: Report to Accompany S. 249,

S. Rep. No. 75, 94th Cong., 1st Sess., 4 (1975);

Conference Comm. Report to Accompany S. 249,

Joint Explanatory Statement of Comm. of

Conference, H.R. Rep. No. 229, 94th Cong., 1st

Sess., 102 (1975).

arrangement with GSCC could have

positive effects on the government

securities market, that the CBB/CCOS

amended proposal could increase

competition among market participants,

that the CBB electronic trading system

would provide government securities

market participants with easier access to

market information, and that the

registration of CCOS as a clearing

agency might lower the level of risk

present in the government securities

market. While the CFTC’s comments

were generally positive, it also reiterated

its regulatory interests and the need to

review the potential impact of the

various arrangements on BOTCC’s

financial integrity and to assure

compliance with the CEA.

The Commission recognizes the

validity of the CFTC’s concerns and

understands the importance of

coordinating efforts among all regulators

concerned with the government

securities market. The Commission will

continue to coordinate with these

regulatory agencies to safeguard one of

the world’s largest securities markets.

III. Discussion

A. Overview

The Commission is granting CCOS’s

application for exemption subject to the

conditions described below. The

Commission believes such action is

consistent with the Act including the

goals of fostering cooperation and

coordination with persons engaged in

the clearance and settlement of

securities transactions, removing

impediments to and perfecting the

mechanism of a national system for the

prompt and accurate clearance and

settlement of securities transactions,

and protecting investors and the public

interest.

As noted above, CCOS proposes to

provide clearing facilities in support of

CBB’s and CBOT’s proposals. CBB’s

proposed automated trading system for

government securities represents an

effort to make government securities

more readily available to CBOT

members that trade futures on

government securities and thereby

improves the efficiency of arbitrage

between the futures and cash markets

and potentially increases liquidity in

both of those markets. Traders in these

markets often are called upon to accept

position or market risks from

participants in the market for

government securities. The market for

U.S. Treasury bonds, bills, and notes is

the deepest, most liquid market in the

world. While these securities are traded

all over the world, the primary U.S.

marketplace involves a core group of

dealers, brokers’ brokers, banks, and

institutional investors that trade

extensively among themselves over-thecounter. These market participants often

rely on futures markets, such as the

CBOT, for their derivative products as a

way to transfer to traders on these

markets position and market risks

related to U.S. government securities.

Traders on the futures exchanges, in

turn, must be able to buy and sell

government securities to help manage

their own risk and position exposures

efficiently.

Approval of the CCOS application

will allow CCOS and its parent, BOTCC,

to provide the clearance and settlement

services that are necessary to support

the CBB and CBOT proposals. This in

turn should help foster greater

integration of clearing facilities that

serve the futures market and the

underlying cash markets and should

facilitate the development of crossmargin facilities between those markets.

BOTCC already has extensive

arrangements with its clearing bank

network to receive and deliver

government securities among its

clearing members, and its clearing

members maintain government

securities at those banks for their

proprietary and customer accounts. As

described above, CCOS plans to build

on those arrangements in providing its

services in support of CBB. Exempting

CCOS from clearing agency registration

should allow CBB to move forward with

its proposal and should allow CCOS and

BOTCC to obtain greater experience in

managing risk exposures before taking

on self-regulatory responsibilities that

would otherwise accompany clearing

agency registration.

Because many of CCOS’s likely users

are GSCC members and use GSCC’s

services to clear and settle trades among

themselves, a linkage among CCOS,

BOTCC, and GSCC to facilitate efficient

clearance of trades is essential.44 To this

end, the Boards of Directors of GSCC,

BOTCC, and CCOS have been requested

to establish a joint user committee to

settle the outstanding linkage and crossmargining issues and to report to the

GSCC, BOTCC, and CCOS Boards the

committee’s proposal for linkage and

cross-margining within three months of

formation of the committee.45

The Commission will monitor closely

efforts in this regard and expects prompt

action to implement linkages and crossmargin systems that are acceptable to

the common membership so that

appropriate linkages are in place when

warranted. If it does not appear after six

months that the parties are able to agree

to establish appropriate linkage and

cross-margining facilities, the

Commission will consider whether to

mandate the development of linkage

and cross-margining facilities. If

necessary, the Commission will use its

authority under the Act to direct that

the responsible parties act in their best

interests to establish ‘‘linked or

coordinated facilities for clearance and

settlement of transactions in securities

* * * [and] contracts of sale for future

delivery * * *.’’ 46

Approval of the application also

should help foster innovation in

clearance and settlement of government

securities. The CCOS proposal will

provide central clearing facilities for

dollar rolls, which represent a type of

repurchase agreement transaction.

CCOS’s proposal was one of the first

formal responses to the

recommendations of the 1992 Joint

Report on the Government Securities

Market,47 and the Commission believes

that the CCOS proposal may well have

encouraged others, including GSCC, to

develop similar or wider services.

B. Section 17A of the Act

1. Grant of Exemption

Section 17A(b)(1) of the Act

authorizes the Commission to exempt

applicants from some or all of the

clearing agency requirements of Section

17A if the Commission finds such

exemptions are consistent with the

public interest, the protection of

investors, and the purposes of Section

17A including the prompt and accurate

clearance and settlement of securities

transactions and the safeguarding of

securities and funds.48 While the
Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Notices 65081

49E.g., in the Commission’s order approving

GSCC’s temporary registration as a clearing agency,

the Commission temporarily exempted GSCC from

compliance with the statutory standards of Sections

17A(b)(3)(B) and 17A(b)(4)(B) of the Act regarding

a clearing agency’s rules designating classes of

participants and the standards used by the clearing

agency to determine participation. The Commission

also exempted GSCC from Section 17A(b)(3)(C)

regarding fair representation of clearing agency

participants in the selection of its directors.

Securities Exchange Act Release No. 25740 (May

24, 1988), 53 FR 19839.

50 Gerald Corrigan, President of the Federal

Reserve Bank of New York (‘‘FRBNY’’), noted:

‘‘[T]he greatest threat to the stability of the financial

system as a whole [during the 1987 market break]

was the danger of a major default in one of these

clearing and settlement systems.’’ Luncheon

Address: Perspectives on Payment System Risk

Reduction by E. Gerald Corrigan, President, FRBNY,

reprinted in The U.S. Payment System: Efficiency,

Risk and the Role of the Federal Reserve 129–30

(1990).

51Section 17A, as amended by the Market Reform

Act, directs the Commission to use its authority to

facilitate the establishment of linked or coordinated

facilities for clearance and settlement of

transactions in securities, securities options,

contracts of sale for future delivery and options

thereon, and commodity options. [Market Reform

Act of 1990, § 5, amending § 17A(a)(2) of the

Securities Exchange Act of 1934, 15 U.S.C. 78q–1

(1990)].

52The limits are described in Section III., Part D.,

Conditions.

53Securities Exchange Act Release Nos. 16900

(June 17, 1980), 45 FR 41920 (announcement of

standards for the registration of clearing agencies)

and 20221 (September 23, 1983), 48 FR 45167

(omnibus order granting full registration as clearing

agencies to The Depository Trust Company, Stock

Clearing Corporation of Philadelphia, Midwest

Securities Trust Company, The Options Clearing

Corporation, Midwest Clearing Corporation, Pacific

Securities Depository, National Securities Clearing

Corporation, and Philadelphia Depository Trust

Company).

Refer also to Section 19 of the Act, 15 U.S.C. 78s

(1988), and Rule 19b–4, 17 CFR 240.19b–4 (1992),

setting forth certain procedural requirements for

registration and continuing Commission oversight

of clearing agencies and other self-regulatory

organizations. 54 15 U.S.C. 78q–1(b)(3) (A) and (F) (1988).

In addition to BOTCC’s responsibilities as

facilities manager, CCOS must assure itself that

BOTCC complies with all of the safeguards, as

appropriate, set forth in the section of the Standards

Release regarding the safeguarding of securities and

funds and prompt and accurate clearance and

settlement of securities transactions; and that these

operations will be subject to examination by

CCOS’s independent public accountant, the

Commission and the appropriate regulatory agency

to the same extent as in the case of a clearing

agency which carries out its own processing.

Standards Release, supra note 53.

55Clearing agencies should have an audit

committee which selects or makes

recommendations to the Board of Directors of the

clearing agency regarding the selection of the

clearing agency’s public accountant. CCOS Rule 213

requires the establishment of an audit committee

consisting of at least three nonmanagement

directors of CCOS. The committee will, among

other things, make recommendations to the Board

of Directors regarding the selection of CCOS’s

independent public accountants.

Continued

Commission has never exercised its

authority to exempt an applicant

entirely from the requirements of

Section 17A, it has granted newly

registered clearing agencies narrowly

drawn, temporary exemptions from

specific statutory requirements imposed

by Section 17A in a manner that

achieves those statutory goals.49

The market break in October 1987 and

the markets’ decline in October 1989

demonstrated the central role of clearing

agencies in U.S. securities markets in

reducing risk, improving efficiency, and

fostering investor confidence in the

markets.50 In light of the foregoing, the

Commission believes it is appropriate

for applicants requesting exemption

from clearing agency registration to

meet standards substantially similar to

those required of registrants in order to

assure that the fundamental goals of

Section 17A (i.e., safe and sound

clearance and settlement) will be

achieved.

Because the Commission believes that

CBB and CCOS will promote innovation

in the trading and clearing of

government securities and will further

the integration of the futures and

government securities markets, it is

approving CCOS’s application for

exemption in order that CCOS may

begin limited operations without

meeting the entire panoply of clearing

agency registration requirements.51

Although, as described below, CCOS is

being held to substantially the same

standards as other registered clearing

agencies, certain areas of CCOS’s

operation require further development

before CCOS can be considered for

registration under Section 17A of the

Act. The Commission believes that

granting CCOS an exemption from

registration subject to the regulatory

requirements and Commission oversight

on CCOS during the exemptive period

should allow CCOS to further develop

its system for clearing and settling

government securities in a safe and

sound manner before its seeks full

registration as a clearing agency. In

granting CCOS an exemption from

clearing agency registration, the

Commission believes that such an

exemption is consistent with the

requirements of Section 17A and that

the framework of the exemption is such

that the Commission retains adequate

regulatory power and oversight to

ensure that CCOS’s services do not pose

a threat to the stability of the

government securities markets.

The Commission is imposing

significant limits on CCOS as set forth

below.52 Should CCOS determine that a

change in its operations or procedures is

necessary, CCOS will be required

pursuant to this exemptive order to

amend its CA–1 and request that the

Commission modify the exemptive

order. The Commission’s oversight of

CCOS, in conjunction with the CFTC’s

oversight responsibilities of BOTCC,

should help nurture the establishment

of safety mechanisms, such as crossmargining, that further the goals of

competition and integration in the

government securities and futures

markets. Furthermore, as competition

leads to innovation and progress, the

Commission believes CCOS’s entry into

the clearance and settlement of

government securities should be a

positive step towards the continued

development of the world’s largest

government securities market.

2. Registration Standards

Before granting registration to a

clearing agency, Section 17A of the Act

requires that the Commission make a

number of determinations with respect

to the clearing agency’s organization,

capacity, and rules. Paragraphs (A)

through (F) of Section 17A(b)(3) set

forth general criteria which a clearing

agency must satisfy in order to be

registered. Congress reserved to the

Commission the task of making specific

determinations as to whether an

applicant’s organization, capacity, and

rules satisfy the general criteria. In

Securities Exchange Act Release No.

16900, the Division set forth its views

and positions concerning satisfaction of

the general criteria (‘‘Standards

Release’’).53

These statutory standards are

designed to assure the safety and

soundness of the clearance and

settlement system. As previously stated,

the Commission, in granting CCOS’s

exemption is requiring CCOS to meet in

substantial form these same statutory

standards and is satisfied that CCOS’s

operation will not be a threat to the

safety or soundness of the national

market system. Furthermore, the

Commission will continue to monitor

CCOS’s operations to assure its

soundness in the clearance and

settlement of government securities.

a. Safeguarding of Securities and Funds

Sections 17A(b)(3) (A) and (F) of the

Act require a clearing agency be

organized and its rules designed to

facilitate the prompt and accurate

clearance and settlement of securities

transactions for which it is responsible

and to safeguard securities and funds in

its custody or control or for which it is

responsible.54 The Commission believes

that CCOS meets these standards.

Among other things, CCOS will

maintain appropriate audit and internal

controls 55 and will make available
65082 Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Notices

CCOS proposes to employ outside independent

auditors rather than establish an internal audit

department for CCOS. The outside independent

auditors will perform those duties typically

performed by an internal audit department and will

report to the audit committee, and conduct audit

reviews as requested by the audit committee, but

not less than once per fiscal year. The Commission

believes that CCOS’s method of establishing an

audit committee and its use of outside independent

auditors meets the requirements of the Act.

Although the Standards Release recommends the

use of an internal audit department, the

Commission has on previous occasions found the

use of outside auditors acceptable and falling

within the requirements of the Act. See Securities

Exchange Act Release No. 27611 (January 12, 1990),

55 FR 1890 (order granting Delta Government

Options Corp. temporary registration as a clearing

agency).

56The Standards Release noted that the objectives

of internal accounting control are presumed to be

a fundamental aspect of management’s

responsibilities. CCOS proposes to direct its

independent public accountants to prepare an

annual report on CCOS’s system of internal

accounting controls, and present the report to the

CCOS Board of Directors. CCOS’s proposal to use

independent public accountants to produce an

annual report on its system of internal accounting

controls meets the requirements of the Act with

regard to the security and accuracy requirements

under Section 17A(b)(3) (A) and (F) because it aids

in assessing the safety and integrity of the clearing

agency operations and promotes confidence and

increased participation in the national clearance

and settlement system.

57CCOS proposes three levels of safeguards to

prevent or minimize interruption of service as a

result of hardware, systems software, or

applications software failures. The first level

addresses procedural practices within CCOS to

control migration of changes in application systems

to the production environment and the

implementation of new systems. The second and

third levels address interruptions in service due to

equipment and systems software failures at

different levels of severity, i.e. short and long term

interruptions. 58Standards Release, supra note 53.

59For a detailed description of the Commission’s

policy on self-regulatory organization systems

reviews, refer to Securities Exchange Act Release

No. 29185 (May 9, 1991), 56 FR 22490 [File No. S7–

12–91] (release setting forth the Commission’s

second automation review policy statement [‘‘ARP

II’’]). 60CCOS Rule 214 states that within 60 days after

the end of each of the Corporation’s fiscal years,

CCOS shall deliver to each participant

unconsolidated audited financial statements for the

fiscal year then ended covered by a report prepared

by CCOS’s independent public accountants. CCOS

Rule 214 also states that upon request by any

participant, CCOS shall deliver unconsolidated,

unaudited quarterly financial statements.

61As provided in CCOS Rule 501, the

Participant’s Advisory Committee will be

comprised of three to ten participants who may

advise CCOS on matters pertaining to the operation

of CCOS. The purpose of the Participant’s Advisory

Committee is to provide representation to

participants on matters which are of concern to

them. In addition, participants will have prior

notice of changes to rules that may affect their

rights, obligations, or clearing requirements. CCOS

will accept comments from participants with

respect to any such changes; however, the

Participant’s Advisory Committee serves only in an

advisory capacity and any advice or

recommendation of the Committee is not binding

on CCOS. 62Because CCOS is being granted full exemption

from registration as a clearing agency, a specific

exemption is not being issued with regard to fair

representation. Rather, the exemption from these

requirements is included within the grant of a

complete exemption from registration as a clearing

agency.

reports to participants concerning its

internal accounting controls.56 In

addition, CCOS has developed several

procedures to safeguard securities and

funds; prevent loss or destruction of

securities, funds, or data; and to recover

from losses that do occur.57

i. Organization and Processing Capacity

A clearing agency should be

organized in a manner that effectively

establishes operational and audit

controls while fostering director

independence.58 As in the example set

forth in the Standards Release, CCOS

meets these standards by keeping its

Board of Directors informed of its

operations and the impact that new or

expanded services or volume increases

would have on its processing capacity.

CCOS also will keep its Board of

Directors informed by reporting on

periodic risk assessments of CCOS’s

operations, automated data processing

systems, and facilities and by

supervising the establishment,

maintenance and updating of

safeguards.59 The Commission is

satisfied that CCOS’s organizational and

processing capacity meets the

requirements of the Act, explained in

the Standards Release, by providing a

necessary flow of information to its

Board of Directors which will allow it

to oversee management’s performance

and to assure the operational capability

and integrity of CCOS.

ii. Financial Reports

Participants that have made clearing

fund contributions or have money or

securities in a clearing agency’s system

should receive timely, audited annual

financial statements. CCOS meets the

requirements regarding financial

reports, and the distribution of financial

statements will enable CCOS’s Board of

Directors and participants to remain

apprised of the clearing agency’s

financial condition and the adequacy

and accuracy of its records.60 By making

the financial statements available, CCOS

is assisting the Commission and other

appropriate regulatory agencies in the

discharge of their regulatory

responsibilities by facilitating access to

important information that is necessary

in evaluating the safety and soundness

of clearing agencies.

b. Fair Representation

Section 17A(b)(3)(C) of the Act

requires that the rules of a clearing

agency provide for fair representation of

the clearing agency’s shareholders or

members and participants in the

selection of the clearing agency’s

directors and administration of the

clearing agency’s affairs. This section

contemplates that users of a clearing

agency have a significant voice in the

direction of the affairs of the clearing

agency.

CCOS is a privately owned for profit

corporation run for the benefit of its sole

shareholder, BOTCC. Therefore, the

Board of Directors of CCOS will be

selected from members of the Board of

Governors of BOTCC, and the officers of

CCOS will be elected by the Board of

Directors. While CCOS participants will

have the opportunity to provide input to

the CCOS Board through the CCOS

Participant’s Advisory Committee, this

committee is only advisory in nature

and its advice or recommendations is

not binding on CCOS.61

The Commission believes that neither

the method in which CCOS’s directors

are selected nor the method for

participant input meets the

requirements of fair representation

under Section 17A(b)(3)(C) of the Act

but that the request for an exemption is

appropriate in this context, as it was in

the context of Delta Government

Options Corp. CCOS expects that if its

clearing volumes grow, it will file with

the Commission for full registration as

a clearing agency. At that time, the

Commission will reevaluate whether

CCOS’s methods for assuring

participants representation in the

selection of its Board of Directors and in

the administration of its affairs is

consistent with the Act. If in its

reevaluation the Commission believes

that because of changed circumstances

an exemption that does not comport

with the fair representation requirement

is no longer justified, the Commission

will modify the conditions or terminate

CCOS’s clearing agency exemption.62

c. Financial Risk Management

Commenters expressed concern about

the financial resources available to

CCOS in the event of liquidity

problems. Because CCOS will rely on

BOTCC for certain liquidity resources

and because BOTCC’s capital and credit

lines are committed to its futures

business, commenters expressed

concern that a shortfall could occur if a

member common to BOTCC and CCOS

were to fail. In response, BOTCC has

agreed to dedicate specific credit and

financial resources to CCOS, and CCOS

and BOTCC have established a

framework for allocating losses between

the two entities. As a condition to its

exemption, CCOS has agreed to evaluate
Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Notices 65083

63Since 1980, the Chicago Mercantile Exchange

(‘‘CME’’) and BOTCC have been sharing original

margin and pay/collect information. In 1987, an

information sharing agreement was executed

between all U.S. commodity clearing houses. The

Options Clearing Corporation (‘‘OCC’’) became a

party to this information sharing agreement in 1993.

Letter from Dennis Dutterer, Executive Vice

President and General Counsel/Secretary, BOTCC,

to Margaret R. Blake, Attorney, Division of Market

Regulation, Commission (May 5, 1995). Pursuant to

the information sharing agreement, each commodity

clearing house and the OCC send its margin

requirements and daily cash flow information to

BOTCC every night. The following morning,

BOTCC sends the information back to the clearing

houses so they can compare the margin account

excesses, deficits, and cash flows.

64The SCG was established in 1989 as a result of

developments surrounding the October 1987 Market

Break and subsequent studies on the causes of the

Market Break. The stated purpose of the SCG is to

increase cooperation and coordination among

securities clearing entities and to facilitate the

sharing of certain clearance and settlement

information regarding surveillance and member risk

monitoring. While SCG membership is limited to

registered clearing agencies, the Commission

encourages SCG to review its membership

standards and consider whether certain clearing

agencies with conditional registration exemptions

should be eligible for membership.

65Supra note 28. The Commission believes that

the method by which CCOS converts government

securities to futures equivalents in its margin

calculations is a prudent risk management measure.

66As discussed above, CCOS will begin

operations with an initial capitalization of $2

million and BOTCC’s commitment to provide

additional capital as necessary to cover CCOS’s

continuing costs of operations. CCOS will calculate

margin requirements at least twice daily and will

collect margin deficiencies from participants on T

and on T+1 while retaining the authority to collect

additional margin at any time. CCOS will establish

a committed credit facility guaranteed by BOTCC.

The credit facility initially will be $5 million and

will be increased in increments of $5 million for

each $1 billion increase in CCOS’s daily average net

settlements over a 90 day period.

67CCOS will monitor each participant’s financial

condition as measured by its financial stability, the

level and quality of its earnings, and other generally

accepted measures of liquidity, capital adequacy,

and profitability.

68BOTCC’s by-laws require BOTCC members to

be CBOT members, approved by the CBOT board

of directors for BOTCC membership. In addition,

the BOTCC board of directors sets, from time to

time, BOTCC membership requirements, including,

but not limited to, financial and operational

requirements, continuing compliance with CBOT

and BOTCC rules, financial and other reporting,

and such other factors as the BOTCC board may

consider necessary or appropriate in assessing an

applicant’s suitability for participation in BOTCC.

BOTCC also has the authority to require additional

capital on a discretionary basis and parental

guarantees on member proprietary positions. See,

e.g., BOTCC By-Law 401.

BOTCC’s minimum financial requirements for

BOTCC corporate futures commission merchants

(‘‘FCM’’) include the greater of a specified amount

of capital or a percentage of funds required to be

segregated and secured pursuant to the

Commodities Exchange Act, 7 U.S.C. §§ 1, et seq.

(1988), combined with non-customer margin

requirements for proprietary trading. Once

admitted, a clearing member may operate below the

initial minimum, but must maintain a specific

minimum amount of capital with no formal action

taken (Level I). When the clearing member’s initial

minimum falls below the Level I minimum, but

remains above the Level II minimum, the clearing

member is subject to detailed financial analysis

with a written report provided to senior

management recommending no action or a change

in status to Level III. At Level III the clearing

member must maintain a minimum amount of

capital and is immediately subject to 125% of

normal margin requirements and provision of pro

forma weekly capital computations for one month.

If the capital ratios do not meet Level I standards

by the next month, the clearing member will be

moved to Level IV status. The Risk Management

Committee is notified when the firm is subject to

Level III requirements. When the clearing member

falls below the Level III minimum they will be

immediately subject to 150% of normal margin

requirements. A formal report will be prepared for

the Risk Management Committee outlining the

problem with a recommendation for appropriate

action which may include a further increase in

margin requirements, restrictions on business

activities or suspension or termination of clearing

privileges. Letter from Dennis A. Dutterer, General

Counsel, BOTCC, to Margaret R. Blake, Attorney,

Division of Market Regulation, Commission (May 1,

1995).

69Clearing agencies that are granted access to

CCOS’s services are not considered participants of

CCOS for the purposes of CCOS’s Rules except to

the extent determined by the Board of Directors.

Continued

its capital and liquidity resources

periodically, and BOTCC has agreed to

supplement, in consultation with the

Commission and the CFTC, CCOS’s

liquid resources as necessary to meet

prudential standards. In addition to its financial resources,

CCOS has facilities to identify its

potential financial exposure from its

participants and to collect margin

deposits or other collateral adequate to

address that exposure. As discussed

above, CCOS in conjunction with

BOTCC will calculate margin

requirements and collect margin

deposits from its participants for open

positions. CCOS will obtain information

from its participants regarding their

financial condition and will have the

authority to collect additional margin or

collateral if it deems it appropriate.

CCOS and BOTCC also will cooperate in

sharing risk management information, to

the extent possible, with securities and

futures clearing organizations where

CCOS and BOTCC members also are

members.

The Commission believes that

entering into additional information

sharing agreements is an area in which

CCOS should explore in order to help

ensure the safety and soundness of the

clearance and settlement system and to

promote financial risk management. The

Commission recommends that CCOS

become a part of the information sharing

system established between all of the

commodities clearing houses.63 In

addition, the Commission encourages

CCOS to pursue obtaining membership

in the Securities Clearing Group

(‘‘SCG’’).64 The Commission believes

that CCOS’s membership in both of

these information sharing systems

should permit CCOS and other clearing

organizations to be more aware of

common member risks and to

implement effective crisis management

procedures if needed.

The Commission believes that CCOS’s

rules and procedures are adequately

designed to protect CCOS and its

participants against financial losses

associated with its services. CCOS’s

financial risk management initiatives,

including its initial capitalization, its

twice daily margin collection,65 and its

committed credit facility, are aimed at

preventing financial loss by participants

and CCOS.66 As a result, the

Commission believes that CCOS’s rules

and procedures and the methods by

which CCOS proposes to safeguard the

financial security of its clearing

facilities adequately satisfies the

requirements of the Act.

d. Participation standards

Section 17A(b)(3)(B) of the Act

enumerates certain categories of persons

that a clearing agency’s rules must

authorize as potentially eligible for

access to clearing agency membership

and services. Section 17A(b)(4)(B) of the

Act contemplates that a registered

clearing agency have financial

responsibility, operational capability,

experience, and competency standards

that are used to accept, deny, or

condition participation of any

participant or any category of

participants enumerated in Section

17A(b)(3)(B). The Commission believes

that an exempt clearing agency should

impose the same standards. In addition,

the Act recognizes that a clearing agency

may discriminate among persons in the

admission to or the use of the clearing

agency if such discrimination is based

on standards of financial responsibility,

operational capability, experience and

competence.

CCOS Rule 301 requires each member

to maintain personnel and facilities

adequate to ensure the expeditious and

orderly transaction of business with

CCOS or other participants. In addition,

CCOS Rule 302 requires participants in

CCOS to meet initial and continuing

financial and operational standards as

determined by the CCOS Board of

Directors and administered by CCOS

management.67 Participation in CCOS

will be open to members of BOTCC and

members of the CBOT that are affiliated

with members of BOTCC.68 The Board

of Directors also may approve access by

other clearing agencies that are

regulated by the Commission or are

excepted from regulation by the

Commission.69
65084 Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Notices

Following Commission approval of its application

and upon receipt of a bona fide request for access,

CCOS will prepare and submit to the Commission

for review, rules providing broader access to CCOS

services for persons other than those currently

envisioned by the CCOS Rules, consistent with the

requirements of Section 17A of the Act.

70CCOS Rule 302 and Rule 309 anticipate the

determination of participant financial standards by

the Board of Directors. At this time, however, the

standards remain undefined.

71One-account settlement enables a market

participant to settle all of its trades through one

clearing agency regardless of the location of the

other parties to the trades and regardless of the

markets in which the trades were executed.

72Standards Release, supra note 53.

73Securities Acts Amendments of 1975, Pub. L.

No. 94–29 § 17A(a), 89 Stat. 97.

74 In the Commission release addressing

conditions for the National Securities Clearing

Corporation’s (‘‘NSCC’’) approval as a clearing

agency, the Commission stated that ‘‘even though

a broker-dealer would be able to achieve one

account processing through any one of the clearing

corporation components of the National System, a

broker-dealer would be able to use more than one

clearing corporation if the broker-dealer chose to do

so.’’ Later in that same release the Commission

stated, ‘‘The development and expansion of

interfaces during the past year, particularly the

establishment of regional interfaces for the

processing of over-the-counter transactions, has

made one-account processing almost universally

available.’’ Securities Exchange Act Release No.

12954 (November 3, 1976), 41 FR 49722.

75Supra note 45.

The Commission believes that

temporarily exempting CCOS from

Sections 17A(b)(3)(B) and 17A(b)(4)(B)

of the Act is appropriate. CCOS rules do

not meet the requirements of Section

17A(b)(3)(B) of the Act with regard to

participants because CCOS rules do not

provide for membership by all of the

enumerated categories of persons. In

addition, CCOS rules do not specify

applicant and member financial

standards as contemplated in Section

17A(b)(4)(B) of the Act.70 Financial and

operational membership standards

depend on factors that CCOS will

develop based on the scope of CCOS’s

operations. CCOS’s Board of Directors

will review these factors from time to

time and establish membership

standards based on its findings.

Presently, however, the participant

standards have not been determined as

required by the Act, and an exemption

from participation requirements is

appropriate.

C. Comments and the Commission’s

Responses

1. Fragmentation of the Clearance and

Settlement of Government Securities

Some commenters believe that

approval of CCOS’s exemption

application will result in fragmentation

of the clearance and settlement of

government securities and will preclude

one account settlement. These

commenters believe allowing CCOS to

settle government securities trades in a

manner not effectively integrated with

the existing registered clearing

corporation process would be

deleterious to the systemic risk

management currently provided by

GSCC by causing lowered overall

netting capability, incomplete

management of the risk exposure

presented by individual firms, and

impairment of crisis management. The

commenters argue that government

securities transactions will operate in

the safest and most efficient manner if

participants have all of their

government securities trades netted,

margined, and settled through one

central facility (‘‘one account

settlement’’).71

Although commenters fear

fragmentation in the clearance and

settlement of government securities, the

clearance and settlement of government

securities transactions already is subject

to diverse clearing arrangements. While

GSCC is the only registered clearing

agency providing clearance and

settlement services in the government

securities market, it is not the sole

government securities clearing facility.

Banks currently clear and settle

substantial amounts of government

securities transfers among themselves

through the Federal Reserve System’s

book-entry wire system without any

involvement by GSCC. Furthermore,

BOTCC provides clearance and

settlement services for futures and

options on government securities

including the physical delivery of

government securities to satisfy futures

delivery obligations.

Section 17A(a)(2) of the Act directs

the Commission, having due regard for

the maintenance of fair competition

among clearing agencies, to facilitate the

establishment of linked or coordinated

facilities for clearance and settlement of

transactions in securities, securities

options, contracts of sale for future

delivery and options thereon, and

commodity options.72 Moreover, the

requirement in Section 17A(b)(3)(B)(ii)

that clearing agencies admit other

clearing agencies as participants appears

to indicate that Congress, and the

Commission which worked with

Congress in developing the 1975

Amendments,73 contemplated a national

system for the clearance and settlement

of securities transactions in which there

could be multiple clearing agencies

serving a securities market.

Where more than one clearing agency

for a market exists, the Commission

believes that the linking of these

clearing agencies, such as the

envisioned linkage of CCOS, BOTCC,

and GSCC, promotes competition and

innovation while still allowing for oneaccount settlement. The Commission

believes that one-account settlement can

be achieved in a multiple-clearing

agency environment through the use of

interclearing agency links and

interfaces.74

The approach to one-account

processing for the clearance and

settlement of government securities

transactions advocated by GSCC, where

one clearing agency compares, nets, and

settles all trades in government

securities, is not the approach taken by

the Commission when establishing the

National System for clearance and

settlement. The Commission believes

that rather than mandate centralized

clearance and settlement in the

government securities market, it should

encourage the coordination of any

competing systems through

economically efficient linkages that

ultimately will foster both competition

and investor confidence. For these

reasons, the Commission, as a part of its

granting CCOS an exemption from

clearing agency registration, is urging

CCOS, BOTCC, and GSCC to develop

settlement interface and cross-margining

programs.75

2. Illusory Regulatory Oversight

As stated above, BOTCC will be the

sole shareholder and will act as the

facilities manager for the CCOS

operations. Because of the relationship

between CCOS and BOTCC, some

commenters expressed concern that the

Commission would be unable to oversee

appropriately the operations of CCOS.

Furthermore, these commenters stated

that the Commission’s regulatory

authority over CCOS would be illusory

because CCOS would be controlled and

operated by BOTCC. These commenters

stated that CCOS is merely a shell for

BOTCC and that approval of CCOS’s

application will allow BOTCC to

provide clearance and settlement

services for government securities.

Finally, several commenters noted their

concern with and objection to CCOS

performing the services of a registered

clearing agency without the federal

oversight imposed upon all other

registered clearing agencies. These

commenters argued that for the safety

and soundness of the national clearance

and settlement system, CCOS should be

subject to the same standards and

requirements as all other registered

clearing agencies.

Under the proposal, CCOS will share

office space and staff with BOTCC, and

BOTCC will perform all margin

calculations and collection and payment
Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Notices 65085

76 In 1988, GSCC began operations with a

facilities management agreement with NSCC

whereby NSCC provides GSCC with the necessary

administrative and technical services. GSCC

continues to share staff and office space with its

affiliates, NSCC and International Securities

Clearing Corporation. In fact, NSCC and GSCC do

not operate their own clearance and settlement

systems; instead, they contract that function out to

the Securities Industry Automation Corporation.

77Standards Release, supra note 53.

78As discussed below, because CCOS will operate

under an exemption from registration as a clearing

agency, it will not file rule changes under the

Section 19(b) process. Rather, CCOS will have to

file amendments to its Form CA–1 exemption

application and request modification of its

exemptive order to change its rules or procedures.

79The Commission generally has not required

that facilities management contracts specifically

grant the Commission unlimited access to a

facilities manager’s premises. If in the future the

Commission perceives a need for express authority

for such access, it will revisit the issue at that time.

80 Id.

81Letters from John C. Hiatt, President and Chief

Executive Officer, BOTCC, to Jonathan G. Katz,

Secretary, Commission (May 23 and June 22, 1994).

82 15 U.S.C. 78q–1(b)(3)(I) (1988).

83Securities Exchange Act Release No. 26153

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

nonproprietary cross-margining program between

OCC and ICC).

84E.g., Securities Exchange Act Release Nos.

30413 (February 26, 1992), 57 FR 7830 (order

approving OCC/Kansas City Board of Trade

Clearing Corporation cross-margining program for

proprietary positions); 29991 (November 26, 1991),

56 FR 61458 (order approving expansion of OCC/

CME cross-margining program to include positions

held for market professionals); 29888 (October 31,

1991), 56 FR 56680 (order approving OCC/BOTCC

cross-margining program for proprietary positions);

27296 (September 26, 1989), 54 FR 41195 (order

approving OCC/CME cross-margining program for

proprietary positions).

85Shortly after the 1987 market break, then

Treasury Secretary Nicholas F. Brady referred to the

clearance and settlement system as the weakest link

in the nation’s financial system and noted that

improvements to the clearance and settlement

system, such as those provided by cross-margining

arrangements, would ‘‘help ensure that a securities

market failure does not become a credit market

failure.’’ The Market Reform Act of 1989: Joint

Hearings on S. 648 before the Subcomm. on

Securities and the Senate Comm. on Banking,

Housing and Urban Affairs, 101st Cong., 1st Sess.

225 (Oct. 26, 1989) (statement of Nicholas F. Brady,

Secretary of the Treasury).

86Supra note 45.

functions for CCOS. Sharing office space

and staff among clearing agencies and

contracting out certain clearing agency

functions is not unusual.76

The standards established for

registration of a clearing agency that

hires a facility manager to perform data

or other processing functions requires

the clearing agency to maintain

appropriate procedures to insure the

prompt and accurate clearance and

settlement of securities transactions.77

The clearing agency also should assure

itself that the facilities manager

complies with all of the appropriate

safeguards set forth in the Standards

Release. The Standards Release also

requires any such clearing agency to

assure itself that its facility manager will

cooperate fully with clearing agency

auditors, Commission examiners,

independent public accountants, and

any other appropriate regulatory agency

to the same extent as a clearing agency

which conducts its own processing

functions.

The Commission’s experience with

facilities management arrangements is

that the Commission can carry out its

clearing agency oversight

responsibilities through its jurisdiction

over the clearing agencies. Facilities

managers cannot, for example,

unilaterally make systems changes that

would alter the rules of the clearing

agency or the rights and obligations of

clearing agency participants without

having those changes filed by the

clearing agency with the Commission.78

To the extent that the Commission

needs access to a facilities manager’s

premises or personnel, the Commission

expects and has found clearing agencies

and their facilities managers to be

cooperative with Commission staff.79

Regarding commenters’ concerns

about the need for uniform federal

oversight, in granting its application for

exemption the Commission is requiring

CCOS to meet basically the same

standards as those registered clearing

agencies must meet, and believes that

CCOS has set forth a plan to enable it

to meet those standards.80 CCOS

recognizes that it must comply with the

regulatory standards governing the

operations of clearing agencies in a

manner consistent with its operational

structure and with the specific services

it will offer. CCOS has represented that

it intends to comply fully with all

relevant regulatory requirements

applicable to other clearing agencies.81

3. Fair Competition

Some commenters believe that the

approval of CCOS’s application will not

promote fair competition among

clearing agencies as contemplated by

Section 17A of the Act because CCOS

will have exclusive access to crossmargining with BOTCC with respect to

government securities. The Commission

recognizes that to promote competition

among clearing agencies, the benefits of

CCOS’s operations (e.g., greater access

to the government securities market by

persons other than primary dealers, the

development of improved systems

capabilities and new services, and

perhaps lower prices to participants)

must not ‘‘impose any burden on

competition not necessary or

appropriate in furtherance of the

purposes’’ of the federal securities

laws.82

Since approval of the first crossmargining program in 1988,83 the

Commission repeatedly has found that

cross-margining programs are consistent

with clearing agency responsibilities

under Section 17A of the Act. As the

Commission has previously noted,

cross-margining programs, among other

things, tend to enhance clearing member

and systemic liquidity both in times of

normal trading and in times of stress.84

Under routine trading, clearing

members that participate in crossmargining programs have lower margin

requirements which help clearing

members manage their cash flows by

increasing available cash to be used for

other purposes. In times of market stress

and high volatility, lower margin

requirements could prove crucial in

maintaining the liquidity of clearing

members and thus could enhance

liquidity in the market as a whole. By

enhancing market liquidity, crossmargining arrangements remove

impediments to and help perfect the

mechanism of a national system for the

prompt and accurate clearance and

settlement of securities transactions.85

Because CCOS and BOTCC have

proposed a cross-margining plan

between themselves, the Commission

has encouraged CCOS, BOTCC, and

GSCC to create and implement a crossmargin arrangement so that fair

competition in the clearing of

government securities will exist. The

Commission believes that competition

among clearing agencies should not be

based on margin levels but should be

based on technology, services, or

product types offered by the competing

clearing agencies. Therefore, the

Commission views the implementation

of a cross-margining arrangement among

CCOS, BOTCC, and GSCC as vital to the

satisfaction of the statutory goals of

Section 17A of the Act. Towards this

end, CCOS, BOTCC, and GSCC have

entered into negotiations regarding

cross-margining and linkage agreements.

However, because such an agreement

has not yet been finalized, the

Commission believes it is appropriate to

allow CCOS to begin operations with

certain limits in place prior to the

implementation of cross-margining and

linkage agreements.86

D. Conditions

This Order exempts CCOS from

registration as a clearing agency under

Section 17A of the Act subject to certain

conditions which the Commission

believes are appropriate for an entity

operating under an exemptive

framework. As explained in detail

below, these conditions include:
65086 Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Notices

87As noted, a joint user committee established by

the Boards of Directors of GSCC, BOTCC, and CCOS

will provide to the respective Boards within three

months of formation of the committee a report of

its analysis and proposed resolutions to the

outstanding linkage and cross-margining issues.

The Commission expects prompt action with regard

to the establishment of linkage and cross-margining

facilities, and if necessary, the Commission will use

its authority under the Act to direct that such

facilities be established. Supra notes 45–46 and

accompanying text.

88These amounts are half of the maximum daily

net settlement amounts agreed to by CCOS and the

Division, as discussed in note 35. The Commission

believes these limits are large enough to allow

CCOS to begin effective operations while it works

with GSCC to develop linkage and cross-margining

facilities to advance efficient clearance and

settlement.

89These are the maximum average daily net

settlements agreed to by CCOS and the Division

during the exemptive period. In addition, limits on

CCOS’s clearing capacity must be considered in

light of the limits to be placed on CBB as a

government securities broker. CCOS will be limited

to clearing $6 billion in net daily cash securities

and $24 billion in dollar rolls on an average basis

over a ninety-day period. Supra note 35.

90 15 U.S.C. § 78s(b)(1) (1988).

91CCOS will be required to amend its CA–1

application for any proposed changes to its stated

policies, practices, or interpretations as that phrase

is defined in Rule 19b-4 (17 CFR 240.19b-4).

92Securities Exchange Act Release Nos. 27445

(November 16, 1989) [54 FR 48704] (‘‘ARP I’’), and

29185 (May 9, 1991) [56 FR 22489], (‘‘ARP II’’).

1. Establishment of acceptable linkage and

cross-margining agreements between CCOS,

BOTCC, and GSCC;

2. The Commission’s access to CCOS and

related BOTCC facilities and records in order

to inspect CCOS’s operations and to insure

CCOS’s compliance with the federal

securities laws and this Order;

3. The requirement that all proposed

material changes to CCOS’s rules, operations,

and systems be submitted as proposed

amendments to its Form CA–1;

4. The requirement that CCOS notify the

Commission of participant defaults;

5. The establishment of sound automation

review programs including system change

notification procedures and system outage

notification procedures; and

6. Until the establishment of acceptable

linkage and cross-margining agreements

between CCOS, BOTCC, and GSCC, the

requirement that CCOS limit its activity to no

more than $3 billion net daily settlement for

government securities and $12 billion for

dollar rolls.

1. Linkage and Cross-Margining

Throughout this Order, the

Commission has emphasized the

importance of linkage and crossmargining agreements between CCOS,

BOTCC, and GSCC. While the

Commission recognizes that such

agreements will entail substantial

negotiations among the parties, the

Commission also recognizes the

importance of allowing CCOS to begin

operations without further delay.87

Therefore, the Commission is approving

CCOS’s application for exemption and

will allow CCOS to commence operating

with a volume cap of $3 billion net

daily settlement for government

securities and $12 billion for dollar

rolls.88 During CCOS’s initial period of

operation, the Commission anticipates

that CCOS, BOTCC, and GSCC will

finalize linkage and cross-margining

agreements pursuant to the

Commission’s recommendations at

which time CCOS will be permitted to

proceed to its exemptive limits of $6

billion and $24 billion.89 Either upon

CCOS’s request or by its own initiative,

the Commission may review whether

the current volume limitations should

be modified or removed. Such review

may be conducted even if the linkage

and cross-margining agreements among

CCOS, BOTCC, and GSCC have not been

finalized.

2. Inspection

As noted above, pursuant to this

Order the Commission has the authority

to inspect at any time the operations of

CCOS in order to insure its compliance

with its obligations to safeguard

securities and funds and to provide

prompt and accurate clearance and

settlement of securities transactions. As

facilities manager for CCOS, BOTCC’s

facilities and operations as they pertain

to CCOS are also subject to inspection

by the Commission in order that the

Commission may assure itself that

BOTCC’s operations with regard to

CCOS are in compliance with the safety

and soundness requirements set forth in

the Act. The Commission expects to

coordinate any inspections of BOTCC

with the CFTC.

3. Rule Changes

Under Section 19(b)(1) of the Act,90 a

registered clearing agency as a selfregulatory organization must file

proposed rule changes with the

Commission for approval. The

Commission uses the rule filing process

as a method to monitor and regulate the

operations of clearing agencies. Because

CCOS is not a registered clearing

agency, amendments to its rules need

not be made through use of the Section

19(b) process. As a condition to this

Order, however, should CCOS desire to

amend its rules, it must submit

proposed amendments to its Form CA–

1 for Commission review.91 The

Commission believes that this method

of notifying the Commission of

proposed changes at CCOS will allow

the Commission to conduct a thorough

examination of each proposed change

and its potential effects on CCOS and

the clearance and settlement of

government securities. Submission by

CCOS of a proposed amendment to its

Form CA–1 each time it proposes to

make a change in its rules, operations,

or systems is an appropriate method by

which the Commission can exercise its

regulatory responsibilities with regard

to CCOS.

4. Notice of Defaults

CCOS will be required to notify the

Commission of any defaults by

participants so that the Commission can

monitor the situation and determine if

all appropriate methods of recovery are

being utilized. Failure by a participant

or user could create or exacerbate

systemic risks. Prompt notification

should help facilitate cooperation and

coordination among regulators and

market participants.

5. Automation Review

CCOS also will be required to

establish a sound automation review

program based upon the Commission’s

second automation review policy

statement (‘‘ARP II’’).92 The automation

review program should include

appropriate planning processes (i.e.,

contingency planning and security

assessment), independent reviews by

CCOS of its systems, notification to the

Commission of significant systems

changes, and procedures for timely

notification of significant system

outages. The Commission believes the

automation review program is essential

for the safety and soundness of CCOS’s

operations and the national market

system because it will require, among

other things, CCOS to evaluate regularly

its processes related to the capacity and

vulnerabilities of its automated systems.

6. Limits on Activity

The Commission believes that until

acceptable linkage and cross-margining

plans are in place, CCOS’s clearing

activity should be limited to one half of

the maximum daily net settlement

amounts agreed to by CCOS and the

Division. These limit amounts are no

more than $3 billion in net daily

settlement for government securities,

and $12 billion for dollar rolls. Once the

linkage and cross-margining plans are in

place, CCOS’s activity may proceed to

the full amounts agreed to in this Order.

The Commission reserves the right to

modify by order the terms, scope, or

conditions of CCOS’s exemption from

registration as a clearing agency,

including such terms, scope, or

condition that the Commission may

issue in the future regarding

amendments to CCOS’s Form CA–1, if

the Commission determines that such

modification is appropriate for the
Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Notices 65087

protection of investors or in the public

interest. Furthermore, the Commission

reserves the right to suspend or revoke

this exemption or to censure or impose

limitations upon the activities,

functions, and operations of CCOS if the

Commission finds that CCOS has

violated or is unable to comply with any

of the provisions set forth in this Order

or in its own rules or that CCOS has

failed without reasonable justification to

enforce compliance with any provision

of its own rules by one of its

participants.

IV. Conclusion

The Commission finds that CCOS’s

application for exemption from

registration as a clearing agency meets

the standards and requirements deemed

appropriate for such an exemption

including those standards set forth

under Section 17A of the Act.

It is therefore ordered, pursuant to

Section 19(a)(1) of the Act, that the

application for exemption from

registration as a clearing agency filed by

the Clearing Corporation for Options

and Securities (File No. 600–27) be, and

hereby is, approved subject to the

conditions listed in this Order.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–30660 Filed 12–15–95; 8:45 am]

BILLING CODE 8010–01–P ′

SMALL BUSINESS ADMINISTRATION

Data Collection Available for Public

Comments and Recommendations

ACTION: Notice and request for

comments.

SUMMARY: In accordance with the

Paperwork Reduction Act of 1995, this

notice announces the Small Business

Administration’s intentions to request

approval on a new, and/or currently

approved information collection.

DATES: Comments should be submitted

on or before February 16, 1996.

FOR FURTHER INFORMATION CONTACT:

Jacqueline White, Management Analyst,

Small Business Administration, 409 3rd

Street, S. W., Suite 5000, Washington,

D. C. 20416. Phone Number: 202–205–

6629. Copies of these collections can

also be obtained.

SUPPLEMENTARY INFORMATION:

Title: Office of Women’s Business

Ownership Year End Follow Up

Survey

Type of Request: New Information

Collection

Description of Respondents: Womenowned businesses

Annual Responses: 2,750

Annual Burden: 825

Comments: Send all comments

regarding this information collection to

Harriet Fredman, Small Business

Administration, Women’s Business

Ownership, 409 3rd Street, S. W., Suite

6200, Washington, D. C. 20416. Phone

No. 202–205–6673. Send comments

regarding whether this information

collection is necessary for the proper

performance of the function of the

agency, accuracy of burden estimate, in

addition to ways to minimize this

estimate, and ways to enhance the

quality.

Dated: December 13, 1995.

Jacqueline White,

Acting Chief, Administrative Information

Branch.

[FR Doc. 95–30679 Filed 12–15–95; 8:45 am]

BILLING CODE 8025–01–P

Data Collection Available for Public

Comments and Recommendations

ACTION: Notice and request for

comments.

SUMMARY: In accordance with the

Paperwork Reduction Act of 1995, this

notice announces the Small Business

Administration’s intentions to request

approval on a new, and/or currently

approved information collection.

DATES: Comments should be submitted

on or before February 16, 1996.

FOR FURTHER INFORMATION CONTACT:

Jacqueline White, Management Analyst,

Small Business Administration, 409 3rd

Street, SW., Suite 5000, Washington, DC

20416. Phone Number: 202–205–6629.

Copies of these collections can also be

obtained.

SUPPLEMENTARY INFORMATION:

Title: Prime Contracts Program

Quarterly Report.

Type of Request: Extension of a

currently approved information

collection.

Description of Respondents:

Procurement Center Representatives.

Annual Responses: 1,340.

Annual Burden: 670.

Comments: Send all comments

regarding this information collection to

Susan Monge, Small Business

Administration, Office of Government

Contracting, 409 3rd Street, SW.,

Washington, DC 20416. Phone No.: 202–

205–6471.

Send comments regarding whether

this information collection is necessary

for the proper performance of the

function of the agency, accuracy of

burden estimate, in addition to ways to

minimize this estimate, and ways to

enhance the quality.

Jacqueline White,

Acting Chief, Administrative Information

Branch.

[FR Doc. 95–30680 Filed 12–15–95; 8:45 am]

BILLING CODE 8025–01–P

DEPARTMENT OF TRANSPORTATION

Coast Guard

[CGD 95–084]

Review of Icebreaking Program for the

East Coast of the United States

AGENCY: Coast Guard, DOT.

ACTION: Request for comments.

SUMMARY: The Coast Guard is reviewing

its domestic icebreaking mission along

the east coast of the United States from

Maine to Virginia. Consistent with the

President’s effort to reinvest

government, this review is necessary to

assess the effectiveness of the present

program, the impacts resulting from

changes in the Coast Guard’s

icebreaking fleet, and the needs of the

future. The Coast Guard is requesting

comments and data to assist in this

review.

DATES: Comments must be received on

or before February 16, 1996.

ADDRESSES: Written comments may be

mailed to the Chief, Ice Operations

Division, U.S. Coast Guard

Headquarters, 2100 Second Street S.W.,

Washington, DC 20593–0001, or may be

delivered to room 1202A at the above

address between 8 a.m. and 3 p.m.,

Monday through Friday, except Federal

holidays. The telephone number is (202)

267–1450.

FOR FURTHER INFORMATION CONTACT:

LCDR Robert Garrett, Icebreaker

Facilities Branch, Ice Operations

Division, Office of Navigation Safety

and Waterway Services between 7:30

a.m. and 4 p.m., Monday through

Friday, except Federal holidays.

Telephone (202) 267–1460, telefax (202)

267–4425.

SUPPLEMENTARY INFORMATION:

Request for Comments

The Coast Guard encourages

interested persons to participate in this

review by submitting written views and

data on icebreaking operations on the

east coast of the United States. Persons

submitting comments should include

their names and addresses, identify this

docket (CGD 95–084), identify the

aspect of icebreaking operations on