03-18991. Self-Regulatory Organizations; Government Securities Clearing Corporation; Order Approving Proposed Rule Change To Reduce the Permitted Use of Letters of Credit to Twenty-Five Percent of a Member's Required Clearing Fund Deposit

July 21, 2003.

I. Introduction

On October 10, 2002, the Government Securities Clearing Corporation (“GSCC”) ^[1] filed with the Securities and Exchange Commission (“Commission”) proposed rule change SR-GSCC-2002-11 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”).^[2] Notice of the proposal was published in the Federal Register on June 17, 2003.^[3] For the reasons discussed below, the Commission is approving the proposed rule change.

II. Description

The purpose of the proposed rule change is to reduce the permitted use of letters of credit (“LCs”) to twenty-five percent of a member's required clearing fund deposit. One of GSCC's most important risk management tools is its maintenance of clearing fund collateral. GSCC's clearing fund is comprised of cash, certain netting-eligible securities, and eligible LCs. The purposes served by the clearing fund are (1) to have on deposit from each netting member assets sufficient to satisfy any losses that may be incurred by GSCC as the result of the default by the member and the resultant close-out of that member's settlement positions and (2) to ensure that GSCC has sufficient liquidity at all times to meet its payment and delivery obligations.

Currently, GSCC's rules permit up to 70 percent of a member's required clearing fund deposit to be in the form of LCs. Although GSCC believes that it will always receive funds from the presentment of an LC for payment, GSCC has recognized that in a period of market crisis there is the potential that GSCC might not receive the funds on a timely basis. To ensure that GSCC can always meet its liquidity needs on a timely basis in the unlikely event of a member default and in times of market crisis, GSCC is reducing the permitted use of LCs to 25 percent of a member's required clearing fund deposit. Thus, the minimum level of cash and securities required to be maintained on deposit will increase from 30 percent to 75 percent of a member's required clearing fund deposit.^[4]

III. Discussion

Section 17A(b)(3)(F) of the Act requires that the rules of a clearing agency be designed 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.^[5] The Commission finds that GSCC's proposed rule change is consistent with this requirement because it will protect GSCC and its members by ensuring that GSCC has adequate liquidity resources in the event of member insolvency or during times of market crisis.

IV. Conclusion

On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act and in particular Section 17A of the Act and the rules and regulations thereunder.

It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (File No. SR-GSCC-2002-11) be and hereby is approved.

For the Commission by the Division of Market Regulation, pursuant to delegated authority.^[6]

Jill M. Peterson,

Assistant Secretary.

Footnotes

1.  On January 1, 2003, MBS Clearing Corporation (“MBSCC”) was merged into GSCC under New York law, and GSCC was renamed the Fixed Income Clearing Corporation (“FICC”). The functions previously performed by GSCC are now performed by the Government Securities Division (“GSD”) of FICC, and the functions previously performed by MBSCC are now performed by the Mortgage-Backed Securities Division (“MBSD”) of FICC. The GSD succeeded to the GSCC proposed rule change upon the merger of MBSCC and GSCC. To avoid confusion and maintain consistency with the Notice, in this Order we will continue to refer to GSCC as such. Securities Exchange Act Release No. 47015 (December 17, 2002), 67 FR 78531 [File Nos. SR-GSCC-2002-09 and SR-MBSCC-2002-01].

2.  15 U.S.C. 78s(b)(1).

3.  Securities Exchange Act Release No. 48016 (June 11, 2003), 68 FR 35925.

4.  The new LC limitation will not affect the requirement that certain non-US GSCC members post additional collateral in the form of LCs to protect GSCC against legal risk presented by the insolvency laws in those members' home countries. These members will not be required to increase the amount of their deposit that is in the form of cash and securities from 30 percent to 75 percent of their required clearing fund deposit.

5.  15 U.S.C. 78q-1(b)(3)(F).

6.  17 CFR 200.30-3(a)(12).