[Federal Register Volume 61, Number 25 (Tuesday, February 6, 1996)]
[Notices]
[Pages 4500-4502]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2406]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36788; International Series Release No. 924 File No.
SR-GSCC-95-05]
Self-Regulatory Organizations; Government Securities Clearing
Corporation; Order Approving a Proposed Rule Change Permitting Entities
Established or Organized in a Foreign Country To Become Members of
GSCC's Netting System
January 30, 1996.
On October 6, 1995, the Government Securities Clearing Corporation
(``GSCC'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change (File No. SR-GSCC-95-05)
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'').\1\ On October 30, 1995, GSCC filed an amendment to the
proposed rule change.\2\ Notice of the proposal was published in the
Federal Register on December 11, 1995.\3\ No comment letters were
received. For the reasons discussed below, the Commission is granting
approval of the proposed rule change.
\1\ 15 U.S.C. Sec. 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).
\3\ Securities Exchange Act Release No. 36544 (December 1,
1995), 60 FR 63555.
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I. Description
Currently, under GSCC's rules an entity that is organized or
established under the laws of a country other than the United States
(``foreign entity'') is eligible to apply to become a member of GSCC's
comparison system 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. Prior to this rule change, a
foreign entity was not eligible for any of GSCC's eleven enumerated
categories of netting system membership.\4\ The proposed rule change
permits foreign entities that are regulated in a manner comparable to
domestic entities eligible for GSCC membership to become members of
GSCC's netting system. The rule change also establishes application and
continuing membership requirements for foreign entities for both the
comparison and netting systems.
\4\ Foreign entities have been among the more significant
participants in the government securities marketplace and trade
actively with many current netting members. GSCC has maintained 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. 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.
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1. Legal Considerations
To address the particular jurisdictional 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'') and to submit an opinion of
foreign counsel (``Opinion''). The Agreement requires the foreign
netting system applicant to adhere to GSCC's rules and provides that
the Agreement shall be governed by and construed in accordance with the
laws of the State of New York. The Opinion must provide that the
execution by the foreign entity of the
[[Page 4501]]
Agreement, 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.
Under the Agreement, the foreign entity: (i) Irrevocably waives all
immunity from attachment of its assets in the U.S., (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
irrevocably submits to the jurisdiction of each such court, and (v)
agrees that payment of any judgment obtained by GSCC shall be in U.S.
dollars.
The Opinion must state that: (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) the 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
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.
Under the Agreement, the foreign member must provide GSCC with
information on its financial condition and/or trading activity that
GSCC deems pertinent and agrees that any such information may be
provided by GSCC to the Commission. The Opinion must state that the
foreign entity has the power to provide GSCC with information on its
financial condition and/or trading activity that GSCC deems pertinent
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, any foreign netting
system applicant must 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 is no special agreement applicable to a foreign entity
that applies for membership in GSCC's comparison system, such entity
must provide to GSCC an opinion of foreign counsel. That opinion must
state that the execution by the foreign entity of the 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. The
opinion also must state that 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
The proposed rule change also provides that the minimum financial
standards and clearing fund requirements for a foreign netting system
applicant will be the requirements applicable to the domestic netting
system membership category that GSCC in its sole discretion determines
is most comparable in type to the foreign applicant. 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 member falls out of compliance with
its minimum financial requirements, the consequences of such
noncompliance will be based on the subsection of GSCC Rule 3, Section 5
that is applicable to the netting system membership category upon which
a foreign entity's minimum financial standards are based.
3. Home Country Standards
In order to be eligible for netting system membership, a foreign
entity must be in compliance with the financial reporting and
responsibility standards of its home country. A foreign entity applying
for netting system membership also must be regulated in its home
country in ways and pursuant to provisions comparable to those imposed
on domestic GSCC netting members.
4. Information Sharing/Regulatory and Financial Reporting
To insure appropriate information sharing, the home country
regulator of a foreign entity applying for netting system membership
must have 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, a
foreign entity must 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 GSCC deems to be necessary in order to
protect GSCC and its members. After 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, all
audited financial statements, and any other financial information GSCC
deems 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. 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.
generally accepted accounting principles. All required financial and
other reports must be submitted to GSCC in English. All required
financial reports must be submitted to GSCC in dollar equivalents
indicating the conversion rate and date used.
As noted above, pursuant to the Agreement a foreign netting system
member must agree to provide GSCC with information on its financial
condition and/or trading activity
[[Page 4502]]
deemed pertinent by GSCC and must acknowledge that GSCC may share this
information with the Commission. In addition, GSCC will expect a
foreign entity to prepare and provide to GSCC information to 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 a 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.
II. Discussion
Section 17A(b)(3)(F) \5\ of the Act requires that the rules of a
clearing agency be designed to facilitate the prompt and accurate
clearance and settlement of securities transactions. The Commission
believes GSCC's proposed rule change is consistent with the
requirements of section 17A(b)(3)(F) because by permitting foreign
entities, which are significant participants in the government
securities marketplace and which actively trade with many current
netting members, to become members of GSCC's netting system, the
proposal will enable GSCC to extend the benefits of its netting and
risk management processes to a broader segment of government securities
market participants and will enable GSCC to extend those benefits to
current members in their trades with foreign entity counterparties.
Thus, a greater percentage of transactions in government securities
should be settled through the national clearance and settlement system,
which should help facilitate prompt and accurate clearance and
settlement of government securities transactions.
\5\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
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Section 17A(b)(3)(f) also requires that 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. The Commission believes that GSCC's rules adequately
take into account the unique risks raised by the admission of foreign
entities. Specifically, by requiring a foreign netting member to
execute the Agreement and submit an Opinion, GSCC's proposal should
help ensure that a foreign netting member can adhere to GSCC's rules
and that jurisdictional issues will not impede the exercise of GSCC's
rights and remedies, including, among other things, GSCC's ability to
serve process on a foreign netting member, against a foreign netting
member.
The proposed rule change also takes into account GSCC's need to
obtain information about the foreign member in order to adequately
assess risk and to ensure compliance with GSCC's rules. The Agreement
and Opinion facilitate GSCC's ability to obtain from foreign members
financial and/or trading activity information which GSCC deems
pertinent. Foreign applicants to and members of either the comparison-
only or netting systems must provide GSCC with all material regulatory
filings submitted to their home country regulator and with audited
financial statements. The requirement that a foreign netting
applicant's home country regulator must have entered into a memorandum
of understanding with the Commission regarding exchange of information
should help to ensure that the Commission has the ability to obtain
appropriate information on foreign netting members. To further reduce
potential risk arising from the absence of domestic regulatory
oversight of foreign applicants, the proposed rule change requires that
a foreign entity must be in compliance with the financial and reporting
standards of its home country and that it must be regulated in its home
country in a manner that is comparable to the regulation of domestic
netting members.
To further guard against the potential risks posed by foreign
netting members, the proposed rule change requires that every foreign
netting member maintain an office in the U.S. that will ensure that the
foreign member can meet its data submission and settlement obligations
to GSCC. Such an office must have employees who are fluent in English
and knowledgeable about the entity's business. Thus, GSCC will have an
appropriate contact person readily available in event of an emergency
situation.
The Commission believes that the foregoing conditions should help
GSCC ensure that foreign netting members are subject to appropriate
legal, financial, and information sharing requirements, that they are
regulated in a manner comparable to other GSCC members, and that they
maintain a physical presence in the United States. As a result, the
proposed rule change should help GSCC to assure the safeguarding of
securities and funds which are in its custody or control or for which
it is responsible with the expansion of its services to foreign netting
members.
III. 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 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-95-05) be and hereby is
approved.
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. 96-2406 Filed 2-5-96; 8:45 am]
BILLING CODE 8010-01-M
