97-13228. Self-Regulatory Organizations; Government Securities Clearing Corporation; Order Approving Proposed Rule Change Relating to Comparison of Transactions Between Insolvent and Solvent Members

[Federal Register Volume 62, Number 98 (Wednesday, May 21, 1997)]
[Notices]
[Page 27818]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13228]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38636; File No. SR-GSCC-97-02]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Approving Proposed Rule Change Relating to 
Comparison of Transactions Between Insolvent and Solvent Members

May 14, 1997.
    On March 11, 1997, the Government Securities Clearing Corporation 
(``GSCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change pursuant to Section 19(b)(1) 
of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder \2\ to modify GSCC's rules regarding comparison of 
transactions between insolvent and solvent members. Notice of the 
proposed rule change together with the substance of the proposal was 
published in the Federal Register.\3\ No comment letters were received. 
The Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 38472 (April 2, 1997), 
62 FR 17259.
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I. Background

    Under the ordinary application of its rules, a transaction is not 
eligible for netting and guaranteed settlement by GSCC until and unless 
it is compared. Except for purchases made through the U.S. government's 
auction of Treasury securities, GSCC's rules provide that a comparison 
can only be generated upon the matching of data provided by two 
members. GSCC believes that this poses a potential problem from a risk 
management perspective in a situation where a netting member becomes 
insolvent and does not submit trades entered into prior to its 
insolvency. Pursuant to this proposed rule change, GSCC is able to 
issue a comparison of a transaction based solely on data submitted by 
one solvent netting member, which may be an interdealer broker, under 
the following circumstances: (1) The data submitted by the solvent 
member indicates that the counterparty to the transaction is either an 
insolvent member or an executing firm that uses the insolvent member as 
its submitting member; (2) the solvent member has submitted in a timely 
manner all of its activity with the insolvent member or executing firm; 
(3) if GSCC had announced to its members that it would cease to act for 
the insolvent member as of a specified date and time and thus not 
accept any further trades submitted against such member, the 
transaction was executed before such specified date and time; (4) the 
transaction is not an ``off-the-market'' transaction as defined in 
GSCC's rules; \4\ and (5) GSCC has made a determination that the 
transaction was entered into by the solvent member or by an executing 
firm that uses the solvent member as its submitting member in good 
faith and not primarily in order to take advantage of the insolvent 
member's financial condition.
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    \4\ GSCC has filed a proposed rule change (File No. SR-GSCC-97-
01) that will add a definition of ``off-the-market'' transactions to 
its rules. Essentially, an off-the-market transaction is a trade 
that has a price that differs significantly from the prevailing 
market price. Securities Exchange Act Release No. 38601 (May 9, 
1997).
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II. Discussion

    Section 17A(b)(3)(F) of the Act \5\ requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and, in general, to 
protect investors and the public interest. The Commission believes the 
proposed rule change is consistent with these requirements because the 
proposal will provide GSCC with the authority to compare and net a 
trade where only one side has submitted the trade in an insolvency 
situation. By allowing such trades to enter GSCC's comparison and 
netting systems, the proposal extends the benefits of GSCC's risk 
management system to solvent members that entered into trades with the 
insolvent member in good faith and thereby helps to protect investors. 
Furthermore, by allowing more trades to be settled through GSCC's 
clearance system instead of ex-clearing, the proposal promotes the 
prompt and accurate clearance and settlement of securities 
transactions.
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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III. Conclusion

    The Commission finds that the proposed rule change is consistent 
with the requirements of Section 17A(b)(3)(F) of the Act \6\ and the 
rules and regulations thereunder.
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    \6\ 15 U.S.C. 78q-1(b)(3)F).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
that the proposed rule change SR-GSCC-97-02 be and hereby is approved.

    For the Commission by the Division of Market Regulation pursuant 
to delegated authority.\7\
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    \7\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13228 Filed 5-20-97; 8:45 am]
BILLING CODE 8010-01-M