[Federal Register Volume 59, Number 108 (Tuesday, June 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13735]
[[Page Unknown]]
[Federal Register: June 7, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34134; File No. SR-GSCC 94-2]
Self-Regulatory Organizations; Government Securities Clearing
Corporation; Order Approving a Proposed Rule Change Relating to the
Comparison and Netting of Non-Member Trades
May 31, 1994.
On March 28, 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 allow GSCC
to continue to offer comparison and netting services for trades which
have been submitted to GSCC by netting members on behalf of non-member
executing firms. On April 25, 1994, 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
permanently approves the proposal.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\Securities Exchange Act Release No. 33887 (April 8, 1994), 59
FR 19743.
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I. Description
On December 13, 1991, the Commission approved, on a temporary basis
through December 31, 1992, a rule change authorizing GSCC to implement
a non-member, ``executing firm'' information feature as an enhancement
to its comparison service.\3\ On December 23, 1992, the Commission
extended its temporary approval of the executing firm feature until
June 30, 1994.\4\ The proposed rule change allows GSCC netting members
to submit trading activity of non-members to GSCC. The proposal
effectively expands the scope of trades eligible for GSCC's comparison
and netting systems by allowing GSCC to identify, compare, and net
trades where one or both sides to the transaction are non-members that
have entered into clearing or correspondent arrangements with a GSCC
member. The proposal will not result in GSCC's interacting directly
with non-members.
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\3\Securities Exchange Act Release No. 30078 (December 13,
1991), 56 FR 66110.
\4\Securities Exchange Act Release No. 31651 (December 23,
1992), 57 FR 62586.
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Prior to its first submission on behalf of a non-member
(``executing firm''), the GSCC member (``submitting member'') must
provide notice to GSCC of each executing firm on whose behalf the
submitting member intends to act. The submitting member must indicate
whether the executing firm's trades are to be compared and netted, or
compared only. The submitting member's obligations to GSCC with respect
to the non-member trade are the same as if the submitting member had
executed the trade. Therefore, if the submitting member permits non-
member trades to be included in GSCC's netting system, such member's
margin and clearing fund deposits will be calculated based on its
trades and non-member trades submitted to the netting system. The
submitting member also will be required to complete delivery, receipt,
and payment on netted trades of executing firms.
A submitting member would submit trades to GSCC on behalf of an
executing firm that it clears for by indicating to the comparison
system: (1) The name of the executing party associated with the member;
and (2) the name of the executing party associated with the contra-
party member. In general, for a comparison to be generated by GSCC,
there must be an exact match of all required match data,\5\ except for
the contract value for which GSCC may set a tolerance on a systemwide
basis. In order to minimize the number of uncompared trades that this
system could initiate, GSCC in some instances may permit comparison
even if certain fields do not match. If the identity of the executing
firm does not match, GSCC may still compare a trade based on a match of
submitting members. If the submitting party for the contra-party
executing firm is incorrectly identified, GSCC may compare the trade if
it has received notice from a GSCC member that it wishes to be deemed
the appropriate submitting party for such executing firm. If data on a
trade submitted against a member does not compare, but would compare if
matched against data submitted by an affiliate of such member, GSCC may
compare the transaction as if the member had submitted the trade
against the affiliate.\6\ If a trade is submitted without identifying
an executing party, GSCC will compare the trade as if there is no
executing party for that side of the trade. GSCC would, if requested,
translate a member's internal contra-participant identifiers to a valid
GSCC member identifying number.\7\
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\5\The required items that must match are participant/contra-
participant, par value, CUSIP number, buy versus sell indication,
trade date, settlement date, final money or yield and commission,
and executing firm/contra-executing firm.
\6\Prior to this comparison, GSCC must have received notice from
the two parties stating that they are affiliates and that each
wishes to be presumed to be the correct contra-party to a side of a
trade submitted with the other as contra-party.
\7\This would assist GSCC members that, for operational reasons,
have more than one contra-trading account set up for a given member.
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II. Discussion
Section 17A(b)(3)(F) of the Act provides that the rules of a
clearing agency must promote the prompt and accurate clearance and
settlement of securities transactions and remove impediments to perfect
the mechanism of a national system for the prompt and accurate
clearance and settlement of securities transactions. By accepting non-
member trades into GSCC's comparison system, a greater number of trades
are included in the national clearance and settlement system. These
trades are given the benefit of a centralized clearance and settlement
system.
In the initial approval order,\8\ the Commission stated that GSCC
should encourage its members to be more accurate in the data they
submit in order to reduce, and eventually eliminate, the need for GSCC
to substitute or supplement data on behalf of members. The Commission
also stated that GSCC should track the identity of the submitting
member and the executing firm in order to identify by type of match
each trade involving a non-member. The Commission stated that the
tracking should provide a basis for GSCC to test the accuracy of member
input. Finally, the Commission requested that GSCC provide on a
quarterly basis during the temporary approval period data concerning
GSCC's comparison rates.
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\8\Securities Exchange Act Release No. 30078 (December 13,
1991), 56 FR 66110.
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GSCC reports that since January of this year, the rate of
successfully compared trades executed by non-member firms was 63%.\9\
This figure is down slightly from the 69% figure reported to the
Commission for the third quarter of 1992.\10\ In order to increase the
comparison rate, GSCC issues a report each month to members indicating
the comparison rate for member trades and for non-member trades.\11\
GSCC will counsel firms that have low comparison rates for non-member
trades.
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\9\During this same period, forty trades for non-members have
been submitted each day on average. Telephone conversation between
Jeffrey Ingber, General Counsel, GSCC and Christine Sibille,
Attorney, Commission (April 8, 1994).
\10\See Securities Exchange Act Release No. 31651 (December 23,
1992), 57 FR 62586.
\11\Telephone conversation between Jeffrey Ingber, General
Counsel, GSCC and Christine Sibille, Attorney, Commission (April 11,
1994).
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Currently, twelve firms act as submitting members for a total of
271 non-member executing firms. This is a substantial increase from
December 1992, when four firms acted as submitting members, for a total
of fifty-eight non-members. GSCC should continue to attract more firms
that provide a correspondent clearing service.
The Commission believes that GSCC should be able to deem a trade as
compared when both sides of the trade do not agree as to the executing
firm information.\12\ GSCC structured the proposal in this manner to
facilitate the successful comparison of trades because not all GSCC
members' internal systems are equipped to accommodate additional
information fields. The Commission believes that as participation in
the executing firm program grows, the exceptions to the requirements
for a matched trade will help bolster the percentage of successfully
compared trades.
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\12\Other clearing agencies have programs which allow trades to
compare even though certain items do not precisely match. Securities
Exchange Act Release Nos. 31352 (October 23, 1992), 57 FR 49728
(MBSCC's Comparison and Clearing System); and 32747 (August 13,
1993), 58 FR 44530 (NSCC's Fixed Income Transaction System).
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GSCC has had more than two years experience in administering the
program. To date, GSCC has not experienced any operational or other
problems with regard to the executing firm feature. While the
Commission believes that GSCC should continue to work to improve the
comparison rate, the Commission also believes that GSCC has
demonstrated sufficient expertise to warrant permanent approval of this
rule filing.
III. 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-94-02) 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. 94-13735 Filed 6-6-94; 8:45 am]
BILLING CODE 8010-01-M
