On March 7, 2000, the Government Securities Clearing Corporation (“GSCC”) filed with the Securities and Exchange Commission (“Commission”) a proposed rule change (File No. SR-GSCC-00-01) pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”). Notice of the proposal was published in the Federal Register on July 11, 2000. No comment letters were received. For the reasons discussed below, the Commission is granting approval of the proposed rule change.
Securities Exchange Act Release No. 42997, (June 30, 2000), 65 FR 42739.
I. Description
According to GSCC, it occasionally is required to obtain financing in connection with its securities settlement process. For example, a member with a net short position may deliver securities so near the close of the securities Fedwire that GSCC is unable to redeliver the securities to member(s) with the net long position(s). Currently, GSCC's rules provide for GSCC to obtain financing under these circumstances in the form of loans because the rules expressly permit GSCC to grant security interests in the securities in question. The costs or expenses that GSCC incurs in obtaining such financing are generally allocated pro rata among all netting members based upon usage of GSCC's services.
GSCC Rule 12, section 8.
GSCC's rules also provide that if the GSCC Board determines in its sole discretion that a netting member has on a frequent basis and without good cause caused GSCC to incur such financing costs, the member can become obligated to pay for or to reimburse GSCC for the entire amount of the financing costs.
Another situation where GSCC might need to obtain financing is when a GCF inter-dealer broker has a GCF net settlement position as the result of a data submission error. As a result, GSCC is required to finance the settlement of the other-side of the transaction. Again, GSCC's rules currently contemplate that GSCC will obtain the requisite cash or securities through loans or securities borrowing/lending transactions. The rule change gives GSCC the option to obtain the requisite financing in the situations such as the ones described above by entering into repurchase transactions with GSCC netting members and clearing agent bank members.
GCF inter-dealer broker netting member that GSCC has: (1) determined to be eligible to participate in GSCC's netting system services for repo transactions pursuant to GSCC Rule 18 and (2) designated as eligible to submit to GSCC data on GCF repo transactions on a locked-in basis.
GSCC already has the authority to enter into repurchase agreements in connection with clearing fund deposits and proprietary funds.
The rule change also addresses the situation where an inter-dealer broker netting member obtains financing of a net settlement position. For example, an inter-dealer broker may have a net settlement position as the result of an uncompared trade. Under the proposed rule change, if the inter-dealer broker-netting member obtains financing of a net settlement position, it must obtain such financing by entering into overnight repurchase transactions only with GSCC netting members or clearing agent bank members. GSCC may reimburse the inter-dealer broker for the costs of such financing if the net settlement position was incurred through no fault of the inter-dealer broker.
GSCC may also reimburse certain dealer netting members in a similar situation. This additional possibility for reimbursement would apply to a division or other separate operating unit within a dealer netting member that GSCC has determined: (a) operates in the same manner as a broker and (b) has agreed to and does participate in the repo netting service pursuant to the same requirements imposed under GSCC's rules on inter-dealer broker netting members that participate in that service.
II. 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. For the reasons set forth below, the Commission believes that GSCC's proposed rule change is consistent with GSCC's obligations under the Act.
By allowing GSCC to enter into repurchase transactions with its highly creditworthy netting members and clearing agent bank members, GSCC should be able to obtain more favorable financing terms that should result in lower financing costs being allocated to members. As repurchase transactions are safe, widely accepted financing mechanisms, there should be no reduction in GSCC's ability to safeguard securities and funds which are in the custody or control of GSCC or for which it is responsible.
Accordingly, the Commission finds that the ability to enter into repurchase transactions with GSCC netting members and/or clearing agent bank members satisfies GSCC's obligations to assure the safeguarding of securities and funds which are in the custody or control of GSCC or for which it is responsible.
III. 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-00-01) 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. 00-29887 Filed 11-21-00; 8:45 am]
BILLING CODE 8010-01-M