[Federal Register Volume 60, Number 70 (Wednesday, April 12, 1995)]
[Notices]
[Pages 18648-18649]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8924]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35561; File No. SR-GSCC 94-8]
Self-Regulatory Organizations; Government Securities Clearing
Corporation; Order Approving a Proposed Rule Change Relating to
Mandatory Participation in the Yield-to-Price Conversion Process
April 3, 1995.
On November 8, 1994, pursuant to section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ the Government Securities Clearing
Corporation (``GSCC'') filed with the Securities and Exchange
Commission (``Commission'') a proposed rule change that will require
GSCC netting members to participate in GSCC's yield-to-price conversion
process. On February 2, 1995, the Commission published notice of the
proposed rule change in the Federal Register to solicit comment from
interested persons.\2\ No comments were received. This order approves
the proposal.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ Securities Exchange Act Release No. 35285 (January 27,
1995), 60 FR 6579.
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I. Description
On October 16, 1992, GSCC implemented its yield-to-price conversion
feature, which allows yield trades to be netted and notated on the
night the trade is entered and eliminates the need for double
submission of when-issued trades.\3\ At that time, in order not to
impose undue operational or systems burdens on certain firms,
[[Page 18649]] participation in the conversion process was not made
mandatory.
\3\ On September 24, 1991, the Commission approved a proposed
rule change on a temporary basis that provided authority for GSCC to
implement the yield-to-price conversion service. Securities Exchange
Act Release No. 29732 (September 24, 1991), 56 FR 49937. The
Commission permanently approved GSCC's conversion service on
February 4, 1993. Securities Exchange Act Release No. 31820
(February 4, 1993), 58 FR 8072.
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The conversion service permits GSCC to compare, convert, and net,
prior to the U.S. Treasury auction, trades between members in Treasury
note and bond issues that have been executed on the basis of the
current market yield. GSCC members submit to GSCC trade data for yield
trades with the price field blank. GSCC compares the trade on the basis
of the yield. At the time of conversion, GSCC calculates the assumed
coupon rate based on the par weighted average yield of trades compared
by GSCC in each CUSIP adjusted down to the nearest \1/8\%. GSCC then
uses the assumed coupon rate to convert yield trades to priced trades
based on the U.S. Treasury standard conversion formula.
Each day until the coupon rate is set and publicly available, GSCC
recalculates the assumed coupon rate for the issue, converts new yield
trades to priced trades, and adjusts the prices of previously
converted, compared, and netted yield trades. During the pre-auction
period, GSCC calucates the clearing fund contribution and the forward
mark allocation for participating and nonparticipating members. On the
day of the auction, final price data is submitted to GSCC. At that
time, the trades are compared and netted on a final price basis.
GSC believes that participation in the yield-to-price conversion
process is important for a netting member and for the settlement
process in general because otherwise a netting member's when-issued
trades do not have GSCC's guarantee of settlement until auction date.
Because of this, since October 1992, GSCC has not admitted an entity
into netting system membership unless the applicant has agreed to
participate in the yield-to-price process at the time of commencement
of participation in the netting system. Currently, only one netting
member still is not participating in the conversion process, and it is
anticipated that it will commence participation in the yield-to-price
process by the end of this year.
As a result, participation in the yield-to-price conversion process
by netting members will now be mandatory. However, there may be
temporary situations, for example when an entity commences its
participation in the netting system, in which there are operational or
other considerations that render participation in the yield-to-price
conversion process difficult for a member. In such circumstances, GSCC
will retain the ability to temporarily exempt such member from the
requirement to participate in the yield-to-price conversion process.
For GSCC's protection, however, GSCC will calculate such member's
clearing fund deposit and forward mark allocation payment obligations
as if it were participating in the yield-to-price conversion process.
II. Discussion
Section 17A(b)(3)(F) of the Act\4\ provides that the rules of a
clearing agency must promote the prompt and accurate clearance and
settlement of securities transactions and to assure the safeguarding of
securities and funds in GSCC's custody or under GSCC's control. In the
first order temporarily approving GSCC's yield-to-price conversion
service, the Commission found that such service was consistent with
Section 17A(b)(3)(F) in that it extended the benefits of GSCC's
centralized automated netting system to netting members that execute
yield trades. The Commission further stated that the service reduces
netting members' exposure to the risk arising from contraparty default
prior to the settlement of the transaction by allowing GSCC to
interpose itself between the parties to a trade and guarantee
performance of each netting member's obligation sooner.
\4\15 U.S.C. 78q-1(b)(3)(F) (1988).
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In the order permanently approving GSCC's yield-to-price conversion
service, the Commission noted its potential concern about the interplay
between voluntary submission of compared trades for GSCC netting and
the potential financial exposure to GSCC and its members resulting from
the exclusion of those trades from GSCC's netting operation. The
Commission further encouraged GSCC to reconsider the appropriateness
for netting members to withhold from the netting operation yield trades
that were compared. GSCC delayed making the netting of such trades
mandatory because some GSCC members needed to make further operational
changes to accommodate mandatory netting of trades compared through the
yield-to-price conversion system. Currently, only one member is not
participating in the conversion process, and GSCC anticipates that such
member will commence participation in the yield-to-price process by the
end of this year.
Accordingly, the Commission believes that it is appropriate to make
participation in the yield-to-price conversion process mandatory. By
including more trades in GSCC's netting system, the proposal furthers
Section 17A's goals of prompt and accurate clearance of securities
transactions. Inclusion of more member trades within GSCC's guarantee
and margin requirements is consistent with Section 17A's goals of
assurance of the safeguarding of securities and funds in GSCC's custody
or under GSCC's control. Thus, the Commission believes that the
proposed rule change is consistent with Section 17A(b)(3)(F).
Conclusion
For the reasons stated above, the Commission finds that the
proposed rule change is consistent with Section 17A of the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-GSCC-94-08) be and hereby is
approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-8924 Filed 4-11-95; 8:45 am]
BILLING CODE 8010-01-M
