01-25703. Self-Regulatory Organizations; Government Securities Clearing Corporation; Order Approving Proposed Rule Change Relating to the Submission of Repo Collateral Substitutions

September 25, 2001.

On September 11, 2000, the Government Securities Clearing Corporation (“GSCC”) filed with the Securities and Exchange Commission (“Commission”) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) ^[1] a proposed rule change (File No. GSCC-00-10) and on November 20, 2000, and August 28, 2001, amended the proposed rule change.^[2] Notice of the proposal was published in the Federal Register on January 11, 2001.^[3] No comment letters were received. For the reasons discussed below, the Commission is approving the proposed rule change.

I. Description

The rule change enables GSCC to reduce the risk to itself and its members caused by the repurchase (“repo”) collateral substitution process. Due to a variety of reasons, this process has recently stressed GSCC's and its inter-dealer broker members' operational infrastructures, and has caused undue fail-financing expenses for other members. GSCC's new rules relating to repo collateral substitutions processes and the fees associated with such substitutions will prohibit certain practices and will impose an additional risk management measure on the repo substitution process.

First, GSCC will amend Rule 18 (“Special Provisions for Repo Transactions”), its Schedule of Timeframes, and its Fee Schedule to initially impose: (i) a deadline of noon (12:00 p.m. for the submission of repo collateral substitution notifications after which time the dealer member that initiated the substitution will be subject to a late fee of $500 per substitution notification and (ii) an absolute deadline of 12:30 p.m. for the submission of repo collateral substitution notifications after which time GSCC will reject the substitution notification.^[4] GSCC will extend these submission deadlines by one hour on those days that The Bond Market Association announces in advance will be extraordinary volume days. All required information must be included in the substitution notification in order for it to be deemed to be received by the deadlines. Substitution notifications or amendments will no longer be accepted verbally but instead will only be accepted through the use of GSCC's designated messaging utility that is available to all repo-netting participants.

Second, GSCC will revise Rule 12 (“Securities Settlement”) to make clear that the use of reversal codes in certain situations is improper and that members may not use a reversal code for a securities delivery obligation to GSCC unless the member has obtained GSCC's prior consent. The rule change also provides that if GSCC is required to obtain overnight financing with respect to securities delivered in violation of this new rule, the entire amount of the financing cost will be borne by the offender.^[5]

Third, for risk management reasons, GSCC will amend Rule 18 to add a requirement that all collateral substitutions with regard to repos that are on GSCC's books pending settlement must be made through GSCC.

Fourth, GSCC will amend Section 4 of Rule 18 to permit a repo broker to submit a repo collateral substitution. As part of this change, GSCC will add the definition of repo broker to its definitions under Rule 1. A repo broker will be defined as an inter-dealer broker or a division or other separate operating unit within a dealer netting member that operates in the same manner as a broker and that participates in GSCC's repo netting service pursuant to the same requirements imposed under Rule 15 governing special provisions for certain netting members and Rule 19 governing special provisions for brokered repo transactions.

II. Discussion

The Commission finds 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) ^[6] of the Act, which 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. The commission finds that GSCC's rule change meets these conditions because it implements procedures designed to prohibit practices that pose risk and operational difficulties to GSCC.

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 the requirements of 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-00-10) be, and hereby is, approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[7]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  Because the second amendment merely modified the language in GSCC's rule to better reflect what was discussed and comment requested on in the notice, notice of the amendment and comment is not required.

3.  Securities Exchange Act Release No. 43794 (January 3, 2001), 66 FR 2466.

4.  The 12 p.m. deadline is one hour after which time the broker should have received all of the requisite substitution information under The Bond Market Association guidelines. In the future, GSCC may change these deadlines depending on market practice. Prior to making any such change, GSCC will make an appropriate filing under Section 19 of the Act and Rule 19(b)(4) thereunder and notify its members in advance.

5.  A GSCC member may continue to use a reversal code under circumstances where it wishes to indicate to GSCC (where GSCC is the initiating party of a securities delivery to the member) that it “does not know” (“DK”) the transaction. For example, if GSCC sends a securities delivery to a member in error, it is appropriate for the member to DK such delivery.

6.  15 U.S.C. 78q-1(b)(3)(F).

7.  17 CFR 200.30-3(a)(12).