03-26646. Self-Regulatory Organizations; Government Securities Clearing Corporation; Order Granting Approval of a Proposed Rule Change Relating to the Elimination of the Comparison-Only Requirement for New GSCC Netting Members

October 15, 2003.

I. Introduction

On September 5, 2002, the Government Securities Clearing Corporation (“GSCC”) ^[1] filed with the Securities and Exchange Commission (“Commission”) a proposed rule change (File No. SR-GSCC-2002-07) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”).^[2] Notice of the proposed rule change was published in the Federal Register on June 20, 2003.^[3] No comment letters were received. For the reasons discussed below, the Commission is granting approval of the proposed rule change.

II. Description

GSCC's rules currently provide that an entity is eligible to become a netting member if, among other things, it has been a comparison-only member for at least six months unless the requirement is waived by GSCC's Membership and Risk Management Committee (“Committee”). The comparison-only membership requirement was included in GSCC's rules when GSCC first began operations. The purpose of this provision was to give GSCC staff the opportunity to ensure that a firm was operationally sound and had the ability to properly communicate with GSCC before being permitted to participate in the netting system. Over the years, GSCC netting membership has become more critical for active market participants, and it has become increasingly common for management to seek and receive approval to waive the six month comparison-only membership requirement. Unlike other netting membership requirements, such as minimum financial standards and regulation by an established regulatory entity, the comparison-only membership requirement has not been necessary to ensure the integrity of the admission and membership processes. GSCC staff has gained significant experience in making determinations about a firm's operational capability without having any comparison-only membership history. The granting of netting membership based on reviews without any comparison-only membership history has not presented GSCC with any operationally-deficient netting members.

For these reasons, GSCC is amending its rules to (1) eliminate the six month comparison-only membership requirement as a routine matter and (2) permit GSCC to require an applicant to be a comparison-only member for a time period GSCC deems necessary if GSCC believes such action, in order to protect itself and its members, is necessary to assess the operational capability of the applicant. GSCC's determination to impose a comparison-only membership requirement shall be based on the presence of one or more of the following conditions: (a) The applicant is a newly-formed entity with little or no functional history; (b) its operational staff lacks significant experience; (c) if one of the above conditions is present, it has not engaged a service bureau or correspondent clearing member with which GSCC has had a relationship; or (d) any other factor that management believes might suggest insufficient operational ability.

III. Discussion

Section 17A(b)(3)(F) of the Act requires, among other things, that the rules of a clearing agency be designed to assure the safeguarding of securities and funds which are in its custody or control or for which it is responsible.^[4] GSCC believes that in most cases it can adequately and without compromising its ability to safeguard its members securities and funds make the determination about an applicant's operational capability and can grant netting membership without requiring the applicant to be a comparison-only member for at least six months. In those situations where GSCC believes it would be prudent to require an applicant to be a comparison-only member for some period of time, GSCC has retained the ability to do so. Accordingly, the proposed rule change should not negatively affect GSCC's ability to safeguard securities and funds which are in its custody or control or for which it is responsible.

IV. Conclusion

On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act and in particular with the requirements of Section 17A of the Act and the rules and regulations thereunder.

It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (File No. SR-GSCC-2002-07) be and hereby is approved.

For the Commission by the Division of Market Regulation, pursuant to delegated authority.^[5]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  On January 1, 2003, MBS Clearing Corporation (“MBSCC”) was merged into the Government Securities Clearing Corporation (“GSCC”) and GSCC was renamed the Fixed Income Clearing Corporation (“FICC”). Securities Exchange Act Release No. 47015 (December 17, 2002), 67 FR 78531 (December 24, 2002) [File Nos. SR-GSCC-2002-09 and SR-MBSCC-2002-01].

2.  15 U.S.C. 78s(b)(1).

3.  Securities Exchange Act Release No. 48010 (June 10, 2003), 68 FR 37035.

4.  15 U.S.C. 78q-1(b)(3)(F).

5.  17 CFR 200.30-3(a)(12).