[Federal Register Volume 60, Number 237 (Monday, December 11, 1995)]
[Notices]
[Pages 63555-63558]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30069]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36544; International Series Release No. 897; File No.
SR-GSCC-95-05]
Self-Regulatory Organizations; Government Securities Clearing
Corporation; Notice of Filing of a Proposed Rule Change Permitting
Entities Established or Organized in a Foreign Country to Become
Members of GSCC's Netting System
December 1, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on October 6, 1995,
Government Securities Clearing Corporation (``GSCC'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change (File No. SR-GSCC-95-05) as described in Items, I, II, and III
below, which items have been prepared primarily by GSCC. On October 30,
1995, GSCC filed an amendment to the proposed rule change.\2\ The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ Letter from Jeffrey F. Ingber, General Counsel and
Secretary, GSCC, to Jerry W. Carpenter, Assistant Director, Division
of Market Regulation, Commission (October 26, 1995).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The purpose of the proposed rule change is to amend GSCC's rules to
enable entities that are established or organized in a foreign country
and regulated in a manner comparable to domestic entities eligible for
GSCC membership to become members of GSCC's netting system.\3\
\3\ The netting system is a system for aggregating and matching
offsetting obligations resulting from trades submitted by or on
behalf of members in eligible securities. The resulting deliver,
receive, and payment obligations are settled through designated
clearing banks.
[[Page 63556]]
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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),
(C), and (B) below, of the most significant aspects of such
statements.\4\
\4\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
The purpose of this proposed rule change is to permit entities that
are organized or established under the laws of a country other than the
United States (``foreign entities'') and that are regulated in a manner
comparable to domestic entities eligible for GSCC membership to become
members of GSCC's netting system. Currently, a foreign entity is
eligible to apply to become a comparison-only member if it has
demonstrated to GSCC that its business and capabilities are such that
it could reasonably expect material benefit from direct access to
GSCC's services. The proposed rule change also will establish new
requirements applicable to foreign comparison-only members.
Currently, GSCC has eleven enumerated categories of netting system
membership. A foreign entity is not eligible for any of these
categories of netting membership. Nevertheless, foreign entities are
among the most significant participants in the government securities
marketplace and trade actively with many current netting members. Six
of the seven firms on GSCC's list of grandfathered entities (Daiwa
Europe Ltd.; Nikko Europe PLC; The Nikko Securities Co., Ltd., Tokyo;
Nomura International PLC, London; Nomura International Inc., Tokyo; and
Nomura Securities Co., Ltd., Tokyo) are foreign entities.\5\ GSCC
believes it is appropriate for regulated foreign entities to be
eligible for netting system membership and proposes to establish a new
category of netting system membership for such foreign entities.
\5\ GSCC maintains a list of ``grandfathered'' entities which
are non-netting system members that historically have done business
with GSCC's interdealer netting members. Business done by the
interdealer broker netting members with grandfathered entities is
treated by GSCC as business done with an actual netting member.
GSCC's goal is to eliminate the list of granfathered entities by
having each of the entities on that list become a member of the
netting system.
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GSCC recognizes that admitting foreign entities to netting system
membership raises various unique issues and concerns for GSCC in
connection with the legal and financial requirements for those
entities, information sharing obligations, the requirements of the
foreign entities' home country, and the physical presence of the
foreign entities in the United States. GSCC's proposed rule change
addresses each of these issues as discussed below. Except as otherwise
indicated, the requirements set forth below are not applicable to a
foreign entity that applies for membership only in GSCC's comparison
system.
1. Legal Considerations
In order to address the particular legal concerns raised by the
admission of foreign entities to netting system membership, GSCC will
require foreign netting system applicants to enter into a special
netting member agreement (``Agreement''). The Agreement, which
generally requires the foreign netting system applicant to adhere to
GSCC's rules, will provide that the Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
Under the Agreement, the foreign entity (i) irrevocably waives all
immunity for attachment of its assets in this country, (ii) irrevocably
submits to the jurisdiction of a court in the U.S. with respect to any
action or proceeding brought against it relating in any way to the
Agreement, (iii) irrevocably waives any objection to the laying of
venue in a court in the U.S., (iv) expressly states that any judgment
obtained against it by GSCC may be enforced in the courts of any
jurisdiction where it or any of its property may be found and will
irrevocably submit to the jurisdiction of each such court, (v) agrees
that payment of any judgment obtained by GSCC shall be in U.S. dollars,
and (vi) agrees to provide GSCC with information on its financial
condition and/or trading activity that is deemed pertinent by GSCC and
understands and agrees that any such information may be provided by
GSCC to the Commission.
GSCC further will require the foreign netting system applicant to
submit an opinion of foreign counsel (``Opinion''). The Opinion must
provide that the execution by the foreign entity of the Agreement with
GSCC, the foreign entity's performance under the Agreement, and the
exercise by GSCC of its rights and remedies under the Agreement will
not conflict with or be impeded by the laws or regulations of the
foreign entity's home country and will be respected by the foreign
entity's primary foreign regulator. In addition, the Opinion must state
that the Agreement's provision for governance by and construction in
accordance with the laws of the State of New York will be recognized
and given effect by the courts of the foreign entity's home country.
The Opinion also must provide the (i) The waiver by the foreign
entity of all immunity from attachment of its assets in the U.S. is
valid and will be recognized and given effect by the courts of the
foreign entity's home country, (ii) for foreign entity has the power to
irrevocably submit to the jurisdiction of a court in the U.S. and to
waive all objections to venue, (iii) any judgment obtained against the
foreign entity by GSCC may be enforced in the courts of any
jurisdiction where the foreign entity or any of its property may be
enforced in the courts of any jurisdiction where the foreign entity or
any of its property may be found and its submission to the jurisdiction
of each such court is valid and will be recognized and given effect by
the courts of the foreign entity's home country, (iv) GSCC can
institute in the foreign entity's home country an action for breach of
the Agreement without first having to obtain a judgment against the
entity in the U.S., and (v) GSCC can institute in the U.S. an action
for breach of the Agreement without first having to obtain a judgment
against the entity in the entity's home country. Finally, the Opinion
must state that the foreign entity has the power to provide GSCC with
information in its financial condition and/or trading activity that is
deemed pertinent by GSCC and that neither the foreign entity's
compliance with such a request nor the sharing by GSCC of such
information with the Commission will conflict with or be impeded by the
laws or regulations of the foreign entity's home country and will be
respected by the foreign entity's primary foreign regulator.
In addition to the Agreement and the Opinion, GSCC also will
require any foreign netting system applicant to submit a designation
specifying an appropriate person or persons located in the State of New
York as its agent to receive service of process or other legal summons.
While there will be no special agreement applicable to a foreign
entity that applies for membership in GSCC's comparison system, such
entity will be required to provide to GSCC an opinion of foreign
counsel stating that (i) the execution by the foreign entity of the
[[Page 63557]]
comparison-only member agreement (``Comparison Agreement'') with GSCC,
its performance under that agreement, and the exercise by GSCC of its
rights and remedies under that agreement will not conflict with or be
impeded by the laws or regulations of the foreign entity's home country
and will be respected by the foreign entity's primary foreign regulator
and (ii) the language in the Comparison Agreement providing that the
agreement shall be governed by and construed in accordance with the
laws of the State of New York will be recognized and given effect by
the courts of the foreign entity's home country.
2. Minimum Financial Standards and Clearing Fund Requirements
GSCC also seeks to amend its rules to establish minimum financial
standards and clearing fund requirements for foreign netting system
applicants. The minimum financial standards, the clearing fund deposit,
and any other payments or deposits called for under GSCC's rules
required to be met by a foreign meeting system member will be the same
as those applicable to the domestic netting system membership category
that in GSCC's sole determination is most comparable in type to the
foreign entity. In making this determination, GSCC will take into
account, among other things, whether the entity's trading activity is
done primarily for itself or for others. If a foreign netting system
members falls out of compliance with its minimum financial
requirements, the consequences of such noncompliance shall be
determined by reference to the subsection of GSCC Rule 3, Section 5
that is applicable to the netting system membership category upon which
the foreign entity's minimum financial standards are based.
3. Home Country Standards
In order to be eligible for netting system membership, the foreign
entity will have to be in compliance with the financial reporting and
responsibility standards of its home country. The foreign entity
applying for netting system membership will have to be regulated in its
home country in ways and pursuant to provisions comparable to those
imposed on domestic members of a comparable type.
4. Information Sharing/Regulatory and Financial Reporting
To insure appropriate information sharing, the foreign entity
applying for netting system membership must have a home country
regulator that has entered into a memorandum of understanding with the
Commission regarding the sharing or exchange of information. In its
application for membership (either comparison-only or netting system),
the foreign entity will have to agree to provide GSCC with all material
regulatory filings made with its primary home country regulator over
the prior year, audited financial statements for the prior three years,
and any other financial information deemed by GSCC to be necessary in
order to protect GSCC and its members. Upon acceptance to comparison-
only or netting system membership, a foreign member must provide GSCC
with all material regulatory filings made with its primary home country
regulator promptly following its filing with such regulator, audited
financial statement, and any other financial information deemed by GSCC
to be necessary in order to protect GSCC and its members.
GSCC ordinarily will accept for financial monitoring purposes
audited financial statements prepared in accordance with the home
country's generally accepted accounting principles (``GAAP''). If GSCC
believes that those statements are not satisfactory, it will assess
whether the foreign entity can provide information equivalent to that
information provided by financial statements prepared in accordance
with U.S. GAAP. All required financial and other reports will have to
be submitted to GSCC in English. All required financial reports will
have to be submitted to GSCC in dollar equivalents indicating the
conversion rate and date used.
As noted above, pursuant to the Agreement the foreign netting
system member will have agreed to provide GSCC with information on its
financial condition and/or trading activity deemed pertinent by GSCC
and that GSCC may share this information with the Commission. In
addition, GSCC will expect the foreign entity to prepare and provide to
GSCC information in the form of unaudited financials sufficient for
GSCC to monitor and assess the entity's financial condition on no less
than a quarterly basis.
5. Physical Presence
With respect to the foreign netting member's physical presence in
the U.S., GSCC will require every foreign entity to maintain an office
in the U.S. either directly or through a suitable agent that (i) has
available individuals fluent in English who are knowledgeable about the
entity's business and can assist GSCC representatives as necessary and
(ii) ensures that the foreign member can meet its data submission and
settlement obligations to GSCC.
GSCC believes the proposed rule change is consistent with the
requirements of Section 17A of the Act and the rules and regulations
thereunder because the rule proposal will extend the benefits of GSCC's
netting and risk management processes to a broader segment of
government securities market participants and will provide those
benefits to trades of current members with foreign entity
counterparties.
(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.
GSCC members will be notified of the rule filing and comments will be
solicited by an important notice. 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 in 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. 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 provisions of
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5 U.S.C. Sec. 552, will be available for inspection and copying in the
Commission's Public Reference Section, 450 Fifth Street NW.,
Washington, DC 20549. Copies of such filing also will be available for
inspection and copying at the principal office of GSCC. All submissions
should refer to the file number SR-GSCC-95-05 and should be submitted
by January 2, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\6\
\6\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-30069 Filed 12-8-95; 8:45 am]
BILLING CODE 8010-01-M
