01-25536. Self-Regulatory Organizations; Government Securities Clearing Corporation; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change Relating to Funds-Only Settlement Payment Deadlines

October 4, 2001.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),^[1] notice is hereby given that on August 10, 2001, the Government Securities Clearing Corporation (“GSCC”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared primarily by GSCC. The Commission is publishing this notice and order to solicit comments from interested persons and to grant approval of the proposed rule change.

I.Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The proposed rule change will require GSCC's netting members to pay a funds-only settlement amount owed to GSCC no later than 10 a.m. and require GSCC to pay its netting members funds-only settlement payments that it owes them by 11 a.m.

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 such statement.^[2]

A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

IN 1989, GSCC established a methodology for mitigating the risks inherent in netting. One of the components of the risk management system is a funds-only settlement obligation due each day either from a netting members to GSCC or from GSCC to the netting member. GSCC initially determined that funds-only settlement amounts due from members to GSCC should be received by GSCC by 10 a.m. each day and that GSCC should pay members funds-only settlement amounts due them by 11 a.m. The funds-only settlement payment deadlines were set in the morning so that GSCC could receive the risk protection that the payments were designed to achieve soon after GSCC reports to its members its calculation of the amounts owed and soon after securities settlements begin. GSCC also gave members an appropriate amount of time after the issuance of the reports and after the opening of the cash FedWire to send their funds payments to GSCC.^[3] These deadlines were incorporated in a rule filing approved by the Commission in 1989.^[4]

In 1991, the Commission authorized GSCC to change the funds-only settlement payment deadline for members from 10 a.m. to 9 a.m.^[5] With the benefit of two years of netting experience, GSCC determined that the earlier deadline would more sufficiently protect GSCC from the consequences of potential default by a netting member. However, GSCC was unable to implement the 9 a.m. deadline as a practical matter due to a widespread inability of members to wire funds to GSCC in a timely manner.

In 1997, the Commission authorized GSCC to provide members with the option of satisfying their funds-only settlement obligations through an “auto-debit” method.^[6] This arrangement enabled netting members to authorize banks with which GSCC and those members have accounts to make and collect settlement payments early in the morning by debit/credit instructions given directly to such banks by GSCC. GSCC also determined that it would remit its funds-only settlement obligations to members by 10:00 a.m. (instead of 11 a.m.) because it would begin enforcing with the assistance of a new find schedule the 9 a.m. deadline that all netting members make their funds-only settlement payments. However, because GSCC continues to make certain manual adjustments to the final funds-only obligations until approximately 8:30 a.m., the auto-debit system could never be implemented and GSCC never enforced the 9 a.m. deadline.

Until such time as GSCC is able to report final funds-only settlement obligation amounts to its members well in advance of the 9 a.m. deadline, GSCC will continue to accept funds-only settlement payments at 10 a.m. and send members funds-only settlement payments that it owes them by 11 a.m. The purpose of this rule filing is to formally reflect these deadlines in all relevant places in GSCC's rules to ensure consistency with GSCC's current operating procedures.

GSCC believes that the proposed rules change is consistent with the requirements of section 17A of the Act and the rules and regulations thereunder because it clarifies GSCC's current practices with respect to funds-only settlement payment deadlines.

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 competition.

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 it receives.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder and particularly with the requirements of section 17A(b)(3)(A) ^[7] of the Act, which requires, among other things, that a clearing agency have the capacity to be able to comply with this provisions of the Act and the rules and regulations thereunder. The Commission finds that the proposed rule change is consistent with this obligation because this rule change will bring GSCC's written rules in line with its actual practice with respect to the deadlines for funds-only settlement procedure. The Commission notes that it is vital that the practices and operations of self-regulatory organizations, such as GSCC, be consistent with and conform to their rules.

GSCC has requested that the Commission find good cause for approving the proposed rule change prior to the thirtieth day after the date of publication of notice of filing. The Commission finds good cause for approving the proposed rule change prior to the thirtieth day after the date of publication of notice of filing because such approval will allow GSCC to immediately amend its rules to accurately reflect GSCC's practice of requiring funds-only settlement payments to be paid to GSCC by 10 a.m. and to be paid by GSCC by 11 a.m.

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, 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 GSCC's principal office. All submissions should refer to File No. SR-GSCC-2001-09 and should be submitted by November 1, 2001.

It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (File No. SR-GSCC-2001-09) be, and hereby is, approved on an accelerated basis.

For the Commission by the Division of Market Regulation, pursuant to delegated authority.^[8]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  The Commission has modified the text of the summaries prepared by GSCC.

3.  The proposed text of this rule filing takes into account the subsequent change in the opening of the cash FedWire from 8:30 a.m. to 12:30 a.m. and also revises the amount of time after the opening of the cash FedWire that a member is given to remit its funds-only settlement obligation to GSCC.

4.  Securities Exchange Act Release No. 27006 (July 7, 1989); 54 FR 29798 (July 14, 1989).

5.  Securities Exchange Act Release No. 30135 (Dec. 31, 1991), 57 FR 942 (Jan. 9, 1992). This rule filing did not change GSCC's obligation to make funds payments to its members in a funds credit position by 11 a.m.

6.  Securities Exchange Act Release No. 39309 (Nov. 7, 1997), 62 FR 61158 (Nov. 14, 1997).

7.  15 U.S.C. 78q-1(b)(3)(F).

8.  17 CFR 200.30-3(a)(12).