Federal Register / Vol. 66, No. 6 / Tuesday, January 9, 2001 / Notices 1709

8 17 CFR 200.30–3(a)(12).

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

2The Commission has modified parts of these

statements.

proposed rule change (SR–CHX–00–28),

is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.8

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–537 Filed 1–8–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43791; File No. SR–GSCC–

00–02]

Self-Regulatory Organizations;

Government Securities Clearing

Corporation; Notice of Filing of a

Proposed Rule Change Relating to the

Enhancement of Risk Management

Processes

January 2, 2001.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

April 17, 2000, the Government

Securities Clearing Corporation

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

Exchange Commission (‘‘Commission’’)

the proposed rule change, as described

in Items I, II, and III below, which items

have been prepared primarily by GSCC.

The Commission is publishing this

notice to solicit comments on the

proposed rule change from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The proposed rule change will

enhance one of the components of

GSCC’s clearing fund formula by

reducing the liquidation amount from

25 percent to 10 percent.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

GSCC included statements concerning

the purpose of and basis for the

proposed rule change and discussed any

comments it received on the propose

rule change. The text of these statements

may be examined at the places specified

in Item IV below. GSCC has prepared

summaries, set forth in sections (A), (B),

and (C) below, of the most significant

aspects of such statements.2

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

As part of its ongoing review of its

risk management process, GSCC is

seeking authority to enhance one of the

components of its clearing fund

formula. Specifically, GSCC is

proposing to lower the liquidation

amount from 25 percent to 10 percent.

GSCC believes that this would more

appropriately balance the level of

margin it collects against the liquidity

needs of its members.

Background

A netting member’s clearing fund

requirement is based on a formula

designed to take into account the three

basic risks posed to GSCC by netting

members. These risks include: (1) That

a member might not pay a funds only

settlement amount due to GSCC; (2) that

a member may fail to settle a long-term

repo; and (3) that a member might not

deliver or take delivery of securities that

comprise a net settlement position.

As a result, there are three

components to each member’s clearing

fund deposit requirement, as described

below, with the sum of the three being

a member’s overall requirement:

Funds Adjustment (FAD) Component

This component is based on each

member’s average funds only settlement

amount. The relevant variable in this

calculation is the size of the settlement

amount. It does not matter whether the

funds are to be collected from the

member or paid to the member.

Repo Volatility Component

This component reflects the interest

rate exposure incurred by GSCC in

guaranteeing the contractual rate of

interest on a repo transaction. The repo

volatility factor essentially represents an

estimate of the amount that repo.

Receive/Deliver Settlement Component

This component is based on the size

and nature of net settlement positions.

The margin collected on net settlement

positions is determined by applying

margin factors that are designed to

estimate security price movements. The

factors are expressed as percentages and

are determined by in historical daily

price volatility. By multiplying security

settlement values by their

corresponding margin factors, GSCC

estimate the amount of loss to which it

is potentially exposed from price

changes.

Margin amounts on receive (long) and

deliver (short) positions are allowed to

offset each other. The extent to which

an offset is allowed is determined by

product and the degree of similarly in

time remaining to maturity.

GSCC computes four receive/deliver

settlement amounts each day. The four

results are compared daily, and the

largest amount is applied to the clearing

fund requirement. The four receive/

deliver computations are as follows:

(1) Post-Offset Margin Amount

(POMA): This computation offsets gains

against losses in liquidating a member’s

positions that are anticipated based on

historical experience. The POMA

essentially is the total margin on the

current day’s positions and forward net

settlement positions taking into account

allowable offset percentages.

(2) Average POMA: This computation

is based on the member’s twenty highest

POMA amounts occurring in the most

recent 75 business days.

(3) Adjusted POMA: This computation

is the same as the POMA with the

exception that it excludes all trades that

are scheduled to settle on the current

day. This is done based on the

assumption that those trades will in fact

settle on the current day and that

calculating POMA in this manner will

more accurately reflect GSCC’s

settlement exposure during the current

day.

(4) Liquidation Amount: This

computation is a floor amount designed

to ensure that if the margin offsets

ordinarily allowed in calculating the

receive/deliver settlement component

do not reflect actual market conditions

during a liquidation period, GSCC

nonetheless will have a sufficient level

of collateral protection. In other words,

this minimum requirement, which is 25

percent of the total margin on all net

long and short positions without offsets,

protects against the risk that during a

liquidation period the yield curve will

be aberrational. In such a situation,

collection of a minimum amount of

margin based on gross calculation

should ensure that GSCC will have

sufficient collateral to cover liquidation

losses.

Proposed Change

GSCC proposes to lower the

percentage calculated on the net long

and net short positions in the

liquidation amount calculation from 25

percent to 10 percent. GSCC believes

that 25 percent is overly conservative

for the reasons set forth below.

First, the current received/deliver

settlement component calculation is

overly conservative. GSCC’s experience

has demonstrated that its POMA and

average POMA calculations provide

adequate protection against potential

settlement risks. The POMA, by itself, is

1710 Federal Register / Vol. 66, No. 6 / Tuesday, January 9, 2001 / Notices

3 17 CFR 200.30–3(a)(12).

1 17 CFR 240.19b–4.

2 15 U.S.C. 78s(b)(1).

3Securities Exchange Act Release No. 43538

(November 9, 2000), 65 FR 69596.

4The Commission approved the Exchange’s

mediation program and administrative conference

rule on a two-year pilot basis through November 20,

2000. See Securities Exchange Act Release No.

40695 (November 19, 1998), 63 FR 65834

(November 30, 1998). On October 31, 2000, the

Exchange’s current pilot programs for mediation

and administrative conferences were extended for

an additional six months. See Securities Exchange

Act Release No. 43496, (October 31, 2000).

a conservative calculation that is a

function of: (1) Margin factors that are

designed to cover one day market

movements as least 95 percent of the

time but that typically exceed this

confidence level and (2) a cautious

disallowance scheme providing only

limited credits (benefits) for hedging

across offset classes (for example, GSCC

does not allow offsets of zeros against

non-zeros).

Furthermore, by calculating an

average POMA (based on a member’s

twenty highest POMA amounts

occurring in the most recent 75 business

days), GSCC ensures that it calculates a

historically sufficient receive/deliver

settlement component for a member

even when current activity results in a

relatively low requirement.

Finally, periodic studies conducted

by GSCC assessing the risks presented to

it from the potential default by a

member on its obligations to GSCC have

concluded that GSCC’s methodogies for

identifying and computing its risks

provide it with a high level of protection

on a individual and aggregate basis.

Second, the liquidation amount

ignores and negates much of the

protection afforded by a hedging

strategy. The more a member engages in

a hedging strategy with respect to its

trading, the more it protects its clearing

corporation from the risk of its failure.

However, GSCC believes that the

current 25 percent minimum margin

call effectively disregards the protection

afforded to GSCC by a member that

engages in trading activity on a fully

hedged basis. In addition, it penalizes

the member by forcing it to post

excessive collateral with GSCC.

In sum, the liquidation amount

calculation is necessary because it

recognizes the fact that an aberrational

yield curve may exist at the time of a

liquidation. However, GSCC believes

that the use of 25 percent is overly

conservative and ties up excessive

amounts of collateral of netting

members. Thus, GSCC believes that the

percentage in liquidation amount

calculation should be lowered to 10

percent.

GSCC believes that the proposed rule

change will revise GSCC’s risk

management processes in a prudent

manner that is consistent with

minimizing collateral and operational

burdens on and maximizing the

liquidity of GSCC netting members.

Thus, GSCC believes that the proposed

rule change is consistent with Section

17A of the Act because the proposed

rule change will facilitate the prompt

and accurate clearance and settlement of

securities transactions and will in

general protect investors and the public

interest.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

GSCC does not believe that the

proposed rule will have an impact on or

impose a burden on competition.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants, or Others

Comments on the proposed rule

change have not yet been solicited.

Members will be notified of the rule

filing and comments will be solicited by

an Important Notice. GSCC will notify

the Commission of an written comments

received by GSCC.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within thirty-five days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

ninety days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which GSCC consents, the

Commission will:

(A) By order approve such proposed

rule change or

(B) Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Act.

Persons making written submissions

should file six copies with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street NW.,

Washington, DC 20549–0609. Copies of

the submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room in Washington, DC. Copies of

such filing will also be available for

inspection and copying at the principal

office of GSCC. All submissions should

refer to File No. SR–GSCC–00–02 and

should be submitted by January 30,

2001.

For the Commission by the Divisioin of

Market Regulation pursuant to delegated

authority.3

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–539 Filed 1–8–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

(Release No. 34–43785; File No. SR–NYSE–

00–39)

Self-Regulatory Organizations; New

York Stock Exchange, Incorporated;

Order Approving Proposed Rule

Change To Amend Arbitration Rules

Regarding Pilot Programs for

Mediation and Administrative

Conferences

December 29, 2000.

I. Introduction

On September 29, 2000, the New York

Stock Exchange, Inc. (‘‘NYSE’’ or

‘‘Exchange’’) filed with the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’), pursuant to section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’) 1 and Rule 19b–4

thereunder,2 a proposed rule change

amending and extending the pilot

programs for mediation and

administrative conferences. Notice of

the proposal appeared in the Federal

Register on November 17, 2000.3 The

Commission received no comments on

the proposal. This order approves the

proposed rule change.

II. Description

The Exchange proposes to amend and

extend the pilot programs under NYSE

Rules 638 and 639 for mediation and

administrative conferences. The

Exchange is amending and extending

the pilot programs to continue to offer

mediation as a way for parties to settle

cases earlier with lower costs.4 The

Exchange believes that the

administrative conference allows the