[Federal Register Volume 61, Number 236 (Friday, December 6, 1996)]
[Notices]
[Pages 64779-64780]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31086]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37995; File No. SR-GSCC-96-07]
Self-Regulatory Organization's; Government Securities Clearing
Corporation; Order Approving Proposed Rule Change Modifying the Rights
and Responsibilities of Interdealer Broker Netting Members
November 27, 1996.
On July 2, 1996, the Government Securities Clearing Corporation
(``GSCC'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change (File No. SR-GSCC-96-07)
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ to modify the rights and responsibilities of interdealer
broker (``IDB'') netting members. GSCC amended the filing on July 23,
1996.\2\ Notice of the proposed rule change, as amended, was published
in the Federal Register on August 20, 1996.\3\ On August 16, 1996, and
on August 21, 1996, GSCC filed amendments No. 2 and No. 3 to the
filing.\4\ Because the amendments were substantive in nature, notice of
the proposed amendments was published in the Federal Register on
September 12, 1996.\5\ No comment letters were received regarding the
proposed rule change or proposed amendments. For the reasons discussed
below, the Commission is approving the proposed rule change, as
amended.
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\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ Letter from Karen Walraven, Vice President and Associate
Counsel, GSCC, to Jerry W. Carpenter, Assistant Director, Division
of Market Regulation (``Division''), Commission (July 18, 1996).
\3\ Securities Exchange Act Release No. 37565 (August 14, 1996),
61 FR 43103.
\4\ Letter from Karen Walraven, Vice President and Associate
Counsel, GSCC, to Jerry W. Carpenter, Division, Commission (August
12, 1996, and August 15, 1996).
\5\ Securities Exchange Act Release No. 37658 (September 6,
1996), 61 FR 48190.
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I. Description
This rule change modifies GSCC's loss allocation and clearing fund
requirements for IDBs.\6\ The percentage allocated collectively to IDBs
from losses arising from member brokered transactions is raised to
fifty percent with a dollar cap on each IDB's potential liability, as
discussed below. Each IDB's individual share of the collective broker
allocation will be allocated pro rata based on the dollar value of its
trading activity with the defaulting member. By implementing this
change, the IDB will no longer be subject to an allocation of a portion
of a loss arising from the default of a firm with which the IDB never
traded. Because only Category 2 IDBs may enter into brokered
transactions with nonmembers,\7\ the entire loss from such a
transaction will be allocated among Category 2 IDBs pro rata based on
the level of their trading activity with the defaulting member.
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\6\ Unless otherwise indicated, the term IDB refers to both
Category 1 and Category 2 IDBs. Under current rules, Category 1 IDBs
act exclusively as brokers, trade exclusively with GSCC netting
members and certain grandfathered nonmember firms, and must maintain
$10 million in net or liquid capital. Category 2 IDBs may transact
up to 10% of their trading volume with nonmembers and must maintain
$25 million in net worth and $10 million in excess net or liquid
capital.
\7\ A nonmember brokered transaction is a brokered transaction
where either the buyside or sellside counterparty to the IDB is a
nonmember.
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Currently, the loss amount allocated to each IDB is capped at $1.6
million per calendar year for losses attributable to brokered
transactions with members. The proposed rule change raises the maximum
amount of loss that can be allocated to each IDB to $5 million per loss
allocation event as opposed to a calendar year maximum.\8\
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\8\ As noted above, Category 2 IDBs are subject to an unlimited
loss allocation, based on trading volume, for losses related to
brokered transactions with nonmembers.
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GSCC is raising the clearing fund requirement for Category 1 IDBs
from a fixed $1.6 million to a fixed $5 million and raising the minimum
clearing fund requirement for Category 2 IDBs from $1.6 million to $5
million. Under the proposed rule change, at least thirty percent of a
Category 1 IDB's clearing fund deposit must consist of cash or eligible
netting securities, and no more than seventy percent of the clearing
fund deposit may be met by pledging eligible letters of credit.
Category 2 IDBs will be subject to the same clearing fund deposit
composition requirement as other non-Category 1 IDB netting members,
which is ten percent of the required fund deposit ($500,000) must be in
cash, and no more than seventy percent of the total may consist of
eligible letters of credit.
Category 1 IDBs are now subject to all of the surveillance
requirements of Section 3 of GSCC Rule 4, including GSCC's authority to
increase the amount of clearing fund deposit for any IDB on
surveillance status. Category 1 IDBs are now required to participate in
the daily funds-only settlement process. In addition, the proposed rule
change eliminates the exception in Section 3 of GSCC Rule 11 that
permitted IDBs to exclude trades from GSCC's netting system if the
inclusion of such trade would have resulted in the IDB having a net
settlement position other than zero. GSCC Rule 11, Section 3 will
continue to permit netting members to exclude repo transactions from
the
[[Page 64780]]
netting system in accordance with GSCC Rule 18.
II. Discussion
The Commission finds that the proposed rule change is consistent
with the Act and specifically with Section 17A(b)(3)(F).\9\ Section
17A(b)(3)(F) requires the rules of a clearing agency be designed to
assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible.
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\9\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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By changing the loss allocation procedures for IDBs, GSCC is
increasing the percentage allocated among IDBs from losses arising from
brokered transactions. IDBs will share on a collective basis equally
with the dealers any loss allocation arising from brokered transactions
and in proportion to the amount of trading the IDB conducted with the
defaulting member. The Commission believes that the new loss allocation
procedures should give IDBs a greater incentive to assess the
creditworthiness of their counterparties, which should reduce the risk
to GSCC of the trades submitted from IDBs. The Commission believes that
by reducing the number of trades with financially suspect participants
that are submitted to GSCC, the proposed rule change should enhance
GSCC's ability to safeguard securities and funds. Furthermore, by
placing a dollar cap on each IDB's share of a loss, the IDBs will
continue to be protected from unusually large loss allocations.
The Commission believes that increasing the clearing fund
requirement for IDBs should provide GSCC with more readily accessible
funds if needed to cover a member's default. Moreover, the Commission
believes that by requiring IDBs to fulfill a larger portion of their
clearing fund deposit with cash and eligible netting securities, GSCC
will increase the liquidity of its clearing fund thereby further
enabling GSCC to assure the safeguarding of securities and funds in its
control or for which it is responsible.
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with Section 17A of the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-GSCC-96-07) be and hereby is
approved.
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) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-31086 Filed 12-5-96; 8:45 am]
BILLING CODE 8010-01-M
