[Federal Register Volume 60, Number 66 (Thursday, April 6, 1995)]
[Notices]
[Pages 17598-17600]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8493]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35557; File No. SR-GSCC-94-10]
Self-Regulatory Organizations; Government Securities Clearing
Corporation; Order Approving Proposed Rule Change Relating to
Implementing a Comparison Service for Repurchase and Reverse Repurchase
Transactions Involving Government Securities as the Underlying
Instrument
March 31, 1995.
On December 30, 1994, the Government Securities Clearing
Corporation (``GSCC'') filed with the Securities and Exchange
Commission (``Commission'') a proposed rule change (File No. SR-GSCC-
94-10) pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934 (``Act'').\1\ Notice of the proposal was published in the Federal
Register on February 2, 1995.\2\ No comment letters were received
regarding the proposed rule change. For the reasons discussed below,
the Commission is approving the proposed rule change.
\1\15 U.S.C. 78s(b)(1) (1988).
\2\Securities Exchange Act Release No. 35288 (January 27, 1995),
60 FR 6580.
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I. Description
GSCC is amending its rules to provide comparison services for
repurchase and reverse repurchase transactions involving government
securities as the underlying instrument (``repos''). GSCC ultimately
intends to provide comparison, netting, and risk management services
for the opening (``on'') and closing (``off'') legs of all overnight
repos (also referred to as next-day repos), term repos (also referred
to as forward settling repos), and open repos, including the same-day
settling aspects of those repos.\3\
\3\GSCC also intends to include such services as the tracking of
rate changes and open repo interest, the provision to the funds
borrower of coupon protection, the provision to all parties of a
comprehensive audit trail for their repo activity, and the
monitoring and facilitation of collateral substitutions.
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GSCC will offer its repo services in three phases. The first phase
will involve the provision of comparison and netting services. The
pending proposal would authorize GSCC to implement the initial stage of
the first phase, which is the provision of comparison services for
overnight and term repos whether or not the on leg occurs before, on,
or after the submission date.\4\ GSCC will accept and compare data on
all of the components of a repo transaction, including information on
the on and off legs of a repo, with members providing such data via a
single input. The second implementation phase of GSCC's planned repo
services will focus on the provision of comparison, netting, and risk
management services for open repos. The last phase of GSCC's planned
implementation of repo services will focus on providing intraday
netting and risk management services for the same-day settling aspects
of repo transactions, including settlement of same-day settling start
legs and close-outs of open repos.
\4\GSCC will file proposed rule changes for the authority to
implement both the next stage of the first phase of repro services,
which is the provision of netting and risk management services for
the non-same-day settling aspects of next-day and forward settling
repo transactions, and future phases of repo services.
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The Phase 1 comparison process for repos is substantially similar
to the comparison process offered by GSCC today. Each party to a repo
will submit its transaction data to GSCC.\5\ As is the case now for
non-repo transactions, comparison of a repo trade will occur
immediately upon the receipt by GSCC from two members of matching data.
If all mandatory data fields that are required to match do in fact
match, GSCC will generate a comparison.\6\
\5\The proposed rule change establishes a new schedule of
required data submission items applicable to all trades. In addition
to the items on the schedule of required match data, a member must
submit the broker reference number, contra submitting member's
executing firm, executing firm, external reference number, price
(rate), pricing method, and trade date. These fields are not
matched.
\6\The following items must match for a trade to compare: (1)
Contra member identifying information, (2) CUSIP number, (3)
member's identifying number, (4) par amount (quantity), (5)
settlement amount, (6) settlement date, and (7) transaction type
(i.e., buy, sell, repo, or reverse). In addition, these required
match data items must match only for repo transactions: (1) start
amount (i.e., the contract value for the start leg of the repo
transaction) and (2) start date (i.e., the settlement date for the
start leg of a repo transaction).
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If the data on a repo remains uncompared at end-of-day, the
submitter of the repo data will receive a report of an uncompared
trade, and the participant being submitted against will receive an
advisory. If a repo transaction has not yet been compared, it may be
unilaterally canceled, and the submitter will receive notification of
the cancellation. To cancel a repo that has [[Page 17599]] been
compared, bilateral agreement is required. GSCC will delete trade data
on repo transactions that remain uncompared from GSCC's comparison
system the later of (1) the processing cycle after the second business
day after the repo start date or (2) the processing cycle after the
second business day after the date of submission of such data.
GSCC comparison output will continue to be available on an on-line
basis. To be eligible for comparison, both submitting members must be
deemed eligible for repo comparison processing by GSCC. GSCC will make
such a determination based on the demonstration by a member of its
ability to submit designated input to and receive designated output
from GSCC.
The implementation of Phase 1 comparison services for repos
requires certain modifications to GSCC's comparison processes. The
``transaction type'' data field will be expanded to include two
additional transaction types: ``repo'' (designating the side of the
repo transaction that is borrowing funds and lending securities) and
``revr'' (designating the side of the repo transaction that is lending
funds and borrowing securities). Repos and reverse repos will compare
only with each other and not with buy and sell activity. Two optional
data fields have been added to bolster the comparison process for
repos, the give-up broker field and the secondary reference number
field. Dealer members may use the give-up broker field to identify the
broker, if any, used to conduct the repo. GSCC will provide members
with a standardized list of brokers for this purpose. The secondary
reference number field may be used by dealers to provide additional
identification information on the repos.
Two new mandatory match items for repo transactions will be
introduced: start date and start amount. The repo start date will
indicate the settlement date for the start leg of the repo. The repo
start amount will contain the contract value for the start leg of the
repo. Initially, a $1 per repo transaction tolerance for start amount
will be established.
The repo rate will be a required submission field but will not be
matched. If a participating member does not submit the settlement
amount, GSCC will calculate it using the start amount, repo rate, and
the number of days from start date to settlement date. Initially, a $1
per $1 million tolerance will be established for settlement amount.
When the settlement amounts differ, but the difference falls within the
tolerance, GSCC will generate the comparison based upon the amount
submitted by the broker (for brokered trades) or upon the amount
submitted by the deliverer of the repo close leg.
GSCC currently permits transactions that do not match in a few
selected fields to compare in a process referred to as ``phased
comparison.'' This program allows those transactions that do not match
during real-time comparison to be compared at the end of the day based
upon assumptions regarding which party submitted the correct data.
Phased comparison of par summarization, settlement amount, and trade
date will not apply to repo transactions.\7\ Par summarization is the
comparison of a trade based on a match of either the total of the par
amounts on two or more buy sides equaling the par amounts on one or
more sell sides or the total of the par amounts on two or more sell
sides equaling the par amounts on one or more buy sides. The phased
comparison tolerance of $40 per $1 million for unmatched settlement
amounts on buy/sell trades will not apply to repo transactions. This
tolerance is used by GSCC in its phased comparison process to account
for commission differences.\8\
\7\Phased comparison of trade date does not apply to repos
because trade date is not a mandatory input field for repo
comparison.
\8\However, as noted above, a $1 per $1 million tolerance will
be applied to settlement amounts during real-time comparison.
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Phased comparison of the executing firm field and the contra party
field will apply to repo transactions. Under phased comparison of the
executing firm field, GSCC will compare trades having unmatched
executing firm data based upon a match between the participant numbers
of the two submitting members. Under phased comparison of the contra
party field, GSCC may compare a trade if all details match except the
contra party field, and the contra party affiliate submits the matching
detail.
II. Discussion
The Commission believes 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).\9\ Section 17A(b)(3)(F) requires that the rules of a
clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions and 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
initiation of comparison services for overnight and term repos will
begin the process whereby GSCC will provide the benefits of
centralized, automated comparison to a broader segment of government
securities transactions.
\9\15 U.S.C. 78q-1(b)(3)(F) (1988).
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Encompassing repos in CSCC's automated comparison process will
provide industry participants with many benefits, including: (1)
Elimination of the need for physical confirmations, (2) timely
comparison of repo trade data, (3) enhanced ability for identification
and correction of errors, (4) easier recordkeeping, (5) easier access
to audit trail information, and (6) on-line inquiry capabilities. The
proposal thus enhances the prompt and accurate clearance of repo
transactions.
The proposed rule change also will implement a recommendation of
the Joint Report on the Government Securities Market.\10\ The Joint
Report indicated that the market for repurchase and reverse repurchase
agreements could benefit from automated comparison. Moreover, the Joint
Report noted that automated comparison could enable regulators to
obtain data on repos as necessary for surveillance purposes at little
or no cost to market participants.\11\
\10\See, Joint Report on the Government Securities Market
(January 1992) (``Joint Report''), prepared by the Department of the
Treasury, the Securities and Exchange Commission and the Board of
Governors of the Federal Reserve System.
\11\Id. at 31. Activity in the government securities repo market
is sizable. Centralized repo processing may give regulators a truer
picture not only of the government securities market but also of
each market participant's total risk profile, enabling GSCC, other
clearing agencies, and regulators to refine their risk reduction
policies.
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GSCC noted in its filing that it has two physically-remote data
processing sites with redundant hardware configuration. Further GSCC
has run a pilot program whereby it collected live data to assess the
impact of repo processing on its existing systems. The Commission
believes that GSCC's automated facilities are sufficient to implement
the comparison services for repos that are approved in this order, and
the addition of these services will not diminish GSCC's ability to
provide its current services for non-repo transactions in a safe,
efficient, and timely manner.
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(b)(3)(F) 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-94-10) be, and hereby
is approved.
[[Page 17600]] For the Commission by the Division of Market
Regulation, pursuant to delegated authority.\12\
\12\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-8493 Filed 4-5-95; 8:45 am]
BILLING CODE 8010-01-M
