On November 16, 1999, the Government Securities Clearing Corporation (“GSCC”) filed with the Securities and Exchange Commission (“Commission”) a proposed rule change (File No. SR-GSCC-99-05) 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 January 5, 2000. No comment letters were received. For the reasons discussed below, the Commission is granting approval of the proposed rule change.
I. Description
Under the rule change, GSCC seeks Commission approval to become an initial shareholder and to serve on the board of directors of the European Securities Clearing Corporation (“ESCC”). ESCC will be a new entity formed under the laws of the United Kingdom by GSCC, the Euroclear Clearance System Societe Cooperative (“Euroclear”), and the London Clearing House (“LCH”). ESCC will be owned equally by GSCC, Euroclear, and LCH.
In 1998, GSCC's board of directors requested that GSCC explore the possibility of providing in Europe the types of comparison, netting, and risk management services that GSCC provides in the United States. GSCC originally planned to provide these services through a joint venture with Euroclear and its operator Morgan Guaranty Trust Company of New York, Brussels Branch. Specifically, GSCC and Euroclear had planned to use J.P. Morgan Benelux, S.A., an existing Morgan subsidiary, as the netting vehicle that would have been renamed the European Securities Clearing Corporation. In a separate development, LCH was also asked by its members to provide these same services in Europe. In response, in April 1999 LCH began offering its RepoClear service through which LCH provides netting services for European sovereign debt repo transactions. To achieve greater efficiency, GSCC, Euroclear, and LCH have agreed that it would be more efficient to provide the services for European sovereign debt purchases and repo transactions through a single netting vehicle, RepoClear.
ESCC's main role will be to oversee the scope and nature of the netting services being offered through LCH's RepoClear. It is intended that ESCC will be governed by its market participant users, which are expected to be major participants in the European fixed-income marketplace. GSCC's involvement in ESCC will be a governance role that should help ensure, among other things, that RepoClear will draw upon GSCC's experience and knowledge and will have United States-style features such as single-ticket data input, settlement of contracts at current market value, the facilitation of substitutions, and the admission of inter-dealer brokers.
In accordance with the agreement between GSCC, Euroclear, and LCH, LCH will transfer control of RepoClear to ESCC. For a description of LCH's RepoClear, see note 3.
GSCC's role in ESCC will further help to ensure that the RepoClear service will use, to the extent appropriate, GSCC's mark-to-market and margining methodologies to provide comprehensive, uniform risk management processes. GSCC intends to help ensure that: (i) Processing efficiencies will be attained through the utilization of standardized SWIFT message formats for input and output; (ii) participants' margin requirements will be reduced through cross-margining both their European Government securities activity and their combined United States and European activity; (iii) participants' balance sheets will be reduced and they will experience increased capital utilization through a maximization of the offsets available from repo and reverse repo activity; (iv) the RepoClear service will support global electronic trading systems which will allow for more efficient settlement of side-by-side cash and futures activities through coordinated mark-to-market and margining processes, standardized clearance and settlement practices, and optimized cross-margining of correlated positions.
The proposed cross-margining arrangement will be the subject of a separate rule filing by GSCC in the future. GSCC, Euroclear, and LCH intend to work toward implementing the cross-margining arrangement by early 2001.
II. Discussion
Section 17A(b)(3)(F) of the Act requires that the rules of a clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions and to foster cooperation and coordination with persons engaged in the clearance and settlement of securities transactions. For the reasons set forth below, the Commission believes that GSCC's proposed rule change is consistent with GSCC's obligations under the Act.
GSCC's participation in ESCC as a shareholder and a member of the board of directors should help to ensure that ESCC is able to provide both to United States organizations operating abroad, either directly or through their European affiliates, and to non-United States organizations a clearance and settlement system that provides for the prompt and accurate clearance and settlement of buys and sells and repo transactions involving European sovereign debt instruments. GSCC's participation in ESCC should also foster cooperation and coordination between itself, Euroclear, and LCH, all of which are major providers of clearance and settlement services.
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-99-05) be and hereby is approved.
For the Commission by the Division of Market Regulation, pursuant to delegated authority.7
Jonathan G. Katz,
Secretary.
[FR Doc. 00-11254 Filed 5-4-00; 8:45 am]
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