02-7784. Self-Regulatory Organizations; Government Securities Clearing Corporation; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change Regarding Certain Highly Leveraged Members

March 26, 2002.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),^[1] notice is hereby given that on October 16, 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 accelerated approval of the proposal.

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

The proposed rule change amends GSCC Rules to require certain highly leveraged GSCC members to make and maintain with GSCC additional deposits to the clearing fund. The proposed rule change also amends the definition of “excess capital.”

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 statements.^[2]

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

On May 14, 2001, GSCC filed a proposed rule change with the Commission clarifying GSCC's rights with respect to its treatment of highly leveraged members.^[3] GSCC stated that it was important for it to be able to monitor the ratio of each member's clearing fund requirement to that member's level of excess regulatory capital,^[4] and wished to advise its members of specific actions that it would take pursuant to its rules with respect to any member that has a ratio in excess of 0.5. GSCC informed its members that it would require a highly leveraged member to provide it with comfort that it could fulfill its obligations to GSCC and that GSCC would be entitled to obtain or exchange margin information with respect to such member with other clearing organizations.

GSCC now proposes to take additional actions with respect to certain highly leveraged members. Specifically, GSCC proposes to require each highly leveraged member with a ratio of clearing fund requirement to excess regulatory capital greater than 1.0 to make and maintain with GSCC an additional deposit to the clearing fund. This deposit would be equal to twenty-five percent of the amount by which the member's “excess capital differential,” which is being defined as the amount by which a netting member's required clearing fund requirement exceeds the member's level of excess regulatory capital.^[5] GSCC believes that this clearing fund premium is appropriate in view of the additional credit risk that such highly leveraged members pose to GSCC.^[6] These rights are in addition to any other rights and remedies that GSCC possesses pursuant to its rules.

GSCC also proposes to make a minor change to the definition of “excess capital” to reflect the fact that some regulators (such as bank regulators) do not require the entities they regulate to maintain a minimum level of net liquid assets.^[7]

GSCC believes that the proposed rules changes are consistent with the requirements of Section 17A of the Act and the rules and regulations thereunder because they provide protection for GSCC with respect to the additional risk that highly leveraged members pose to GSCC and therefore better enable GSCC to safeguard the securities and funds in its custody or control or for which it is responsible.

(B) Self-Regulatory Organization's Statement on Burden on Competition

GSCC does not believe that the proposed rules changes will have an impact 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

Written comments relating to the proposed rules changes have not yet been solicited or received. Members will be notified of the rule change 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

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)(F).^[8] Section 17A(b)(3)(F) requires that the rules of a clearing agency be designed to assure the safeguarding of securities and funds that are in its custody or control or for which it is responsible. The Commission believes that requiring each highly leveraged GSCC member with a ratio of clearing fund requirement to excess regulatory capital greater than 1.0 to make and maintain an additional deposit to the clearing fund will give GSCC additional resources to protect itself and its members' securities and funds from the additional credit risk that highly leveraged members pose. As such, the Commission believes GSCC's proposal is consistent with its obligation to assure the safeguarding of securities and funds that are in its custody or control or for which it is responsible.

GSCC has requested that the Commission approve the proposed rule change prior to the thirtieth day after publication of the notice of the filing. The Commission finds good cause for approving the rule change prior to the thirtieth day after publication because such approval will immediately allow GSCC to better protect itself with respect to highly leveraged members.

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, 450 Fifth Street, NW, Washington, DC 20549. Copies of such filing will also be available for inspection and copying at the principal office of GSCC. All submissions should refer to File No. SR-GSCC-2001-15 and should be submitted by April 22, 2002.

It is therefore ordered, pursuant to section 19(b)(2) of the Act,^[9] that the proposed rule change (File No. SR-GSCC-2001-15) be and hereby is approved.

For the Commission by the Division of Market Regulation, pursuant to delegated authority.^[10]

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.  See Exchange Act Release No. 44995 (October 26, 2001), 66 FR 55724 (November 2, 2001) (File No. GSCC-2001-06).

4.  In this context, the term “excess regulatory capital” is used to include excess net capital, excess liquid capital, or excess adjusted net capital, as applicable, all of which are measures of an organization's net worth after adjusting for the liquidity of its balance sheet.

5.  GSCC Rule 1 and Rule 4, Section 3.

6.  GSCC will take the actions described in this rule filing against inter-dealer broker netting members as well if they have a ratio of clearing fund requirement to excess regulatory capital of greater than 1.0.

7.  GSCC Rule 1.

8.  15 U.S.C. 78q-1(b)(3)(F).

9.  15 U.S.C. 78s(b)(2).

10.  17 CFR 200.30-3(a)(12).