[Federal Register Volume 65, Number 3 (Wednesday, January 5, 2000)]
[Notices]
[Pages 541-542]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-112]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42279; File No. SR-GSCC-99-05]
Self-Regulatory Organizations; Government Securities Clearing
Corporation; Notice of Filing of Proposed Rule Change Relating to the
Formation of and Involvement in the European Securities Clearing
Corporation
December 28, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on November 16, 1999, 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 parties.
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\1\ 15 U.S.C.. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The proposed rule change seeks the Commission's approval for GSCC
to become an initial shareholder and serve on the Board of Directors of
the European Securities Clearing Corporation (``ESCC'').
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, GSCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. GSCC has prepared summaries, set forth in sections (A),
(B) and (C) below, of the most significant aspects of these
statements.\2\
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\2\ The Commission has modified the text of the summaries
prepared by GSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In 1998, GSCC was requested by its board of directors, which is
composed of representatives of many organizations active in the
government debt securities cash and repo markets both in the United
States and in Europe, to explore the possibility of providing in Europe
the types of comparison, netting, and risk management services that
GSCC provides in the United States. GSCC originally planned to provide
these services through a joint venture with the Euroclear Clearance
System Societe Cooperative (``Euroclear'') \3\ and its operator, Morgan
Guaranty Trust Company of New York, Brussels Branch (``Morgan'').\4\
Specifically, GSCC and Euroclear had planned to use J.P. Morgan
Benelux, S.A. (``Benelux''), an existing Morgan subsidiary, as the
netting vehicle. Benelux would have been renamed the European
Securities Clearing Corporation.\5\ The London Clearing House (``LCH'')
was also asked by its members to provide these same services in
Europe.\6\ In response, LCH began offering its RepoClear service in
August 1999 through which LCH provides netting services for European
sovereign debt repo transactions.
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\3\ Euroclear was created in 1968 to provide clearance and
settlement for internationally traded securities. It provides
related services such as custody, securities lending, and money
transfer. Euroclear has extensive experience in European securities
settlement.
\4\ Morgan and Euroclear recently announced that they have
signed a letter of intent to create a new, market-owned European
bank to succeed Morgan as operator and banker of Euroclear. The
transition from Morgan to the new bank operator is expected to occur
within approximately twenty months.
\5\ It was intended that GSCC would acquire a minority ownership
interest in Benelux.
\6\ LCH was created in 1888 to clear certain commodities
transactions. It currently provides clearing and netting services
for a wide array of financial products, including futures, equities,
swaps, and repos. LCH is a ``recognized clearing house'' under the
United Kingdom's Financial Services Act of 1986.
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GSCC, Euroclear, and LCH (collectively, the ``parties'' and, each
individually, a ``party'') have determined that it would be more
efficient to provide the services for European sovereign debt buy-sell
and repo transactions through a single netting vehicle, which will be
LCH through its RepoClear service.\7\ This plan allows for a logical
consolidation of the efforts of the three parties and maximizes the
synergies to be achieved by them. Each of the parties brings its unique
knowledge and experience to the effort. GSCC has extensive netting and
risk management expertise as the leading provider of these services for
the buy-sell and repo markets in the United States. Euroclear has over
thirty years experience providing settlement, custody, and collateral
management services in Europe. As mentioned above, LCH provides
clearing and netting services for a wide array of financial products,
including repos. The parties also share a large common membership
(mostly through affiliated entities).
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\7\ It should be noted that there is at least one other
competing netting vehicle in Europe, ClearNet, which is owned by the
ParisBourse. LCH to ESCC. ESCC will be owned equally by the three
parties. It is intended that ESCC be governed by its market
participant users, who are expected to be major participants in the
European fixed-income marketplace.
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The parties will form a new entity, ESCC, which is proposed to be a
United Kingdom company and whose purpose will be oversee the scope and
nature of the netting services offered by LCH. Thus, there will be a
transition of control of LCH's RepoClear service from LCH to ESCC. ESCC
will be owned equally by the three parties. It is intended that ESCC be
governed by its market participant users, who are expected to be major
participants in the European fixed-income marketplace.
GSCC's involvement in ESCC at the outset will be a governance role
that should help ensure, among other things, that LCH/RepoClear will
draw upon GSCC's experience and knowledge and
[[Page 542]]
carry United States-style features, such as single-ticket data input,
settlement of contracts at current market value, the facilitation of
substitutions, and the admission of inter-dealer brokers. These
features have proven very successful of the U.S. Government debt market
in the United States.
GSCC's management role in ESCC will further ensure that the
RepoClear service will use, to the extent appropriate, GSCC's mark-to-
market and margining methodologies to provide comprehensive, uniform
risk management processes. GSCC intends to help ensure that: (i)
Processing efficiencies will be attained through the utilization of
standardized SWIFT message formats for input and output; (ii)
participants' margin requirements will be reduced through cross-
margining both their European Government securities activity and their
combined United States and European activity; \8\ (iii) participants'
balance sheets will be reduced and they will experience increased
capital utilization through a maximization of the offsets available
from repo and reverse repo activity; and (iv) the RepoClear service
will support global electronic trading systems, allowing for more
efficient settlement of cash and futures activities engaged in side-by-
side through coordinated mark-to-market and margining processes and
standardized clearance and settlement practices and through optimized
cross-margining of correlated positions.
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\8\ The proposed cross-margining arrangement will be the subject
of a separate rule filing in the future. The parties intend to work
towards implementing the cross-margining arrangement by early 2001.
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GSCC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act \9\ and the rules and
regulations thereunder applicable to GSCC because it should help to
ensure that United States organizations operating abroad either
directly or through their European affiliates obtain the significant
netting, risk management, and other services and associated benefits
that GSCC provides in the United States.
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\9\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition
GSCC does not believe that the proposed rule change will have any
impact or impose any burden on completion.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
Written comments relating to the proposed rule change have not yet
been solicited or received. GSCC will notify the Commission of any
written comments received by GSCC.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period: (i) As the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which the self-regulatory organization consents,
the Commission will:
(A) By order approve such proposed rule change or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-
0609. Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Section 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing also will be available
for inspection and copying at the principal office of GSCC. All
submissions should refer to File No. SR-GSCC-99-05 and should be
submitted by January 26, 2000.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-112 Filed 1-4-00; 8:45 am]
BILLING CODE 8010-01-M
