regulatory organizations; proposed rule changes: Government Securities Clearing Corp.,

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Federal Register: February 17, 1999 (Volume 64, Number 31)NoticesPage 7932-7934From the Federal Register Online via GPO Access [wais.access.gpo.gov]

DOCID:fr17fe99-145

SECURITIES AND EXCHANGE COMMISSION

Release No. 34-41022; File No. SR-GSCC-99-01Self-Regulatory Organizations; Government Securities Clearing Corporation; Notice of Filing of a Proposed Rule Change Regarding the Expansion of GSCC's GCF Repo Service

February 5, 1999.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''), \1\ notice is hereby given that on January 27, 1999, the Government Securities Clearing Corporation (``GSCC'') filedwith the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I, II, and III below, which items have been prepared primarily by GSCC. The Commission is publishing this notice to solicit comments from interested persons on the proposed rule change.

\1\15 U.S.C. 78(b)(1).

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The proposed rule change will expand GSCC's GCF Repo service to allow participating dealers to engage in GCF Repo trading with participating dealers that use different clearing banks.\2\

\2\ The complete text of the proposed rule change is attached as Exhibit A to GSCC's filing, which is available for inspection and copying at the Commission's public reference room and through GSCC.

[Page 7933]II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, GSCC included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. GSCC has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of such statements.\3\

\3\ The Commission has modified the text of the summaries prepared by GSCC.

  (A) Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

The GCF Repo service allows GSCC members that are not interdealer brokers (``dealers'') to trade general collateral repos involving U.S. Government securities throughout the day without requiring trade for trade settlement on a delivery versus payment basis (``DVP'').\4\ GSCC believes that the GCF Repo service will bring benefits to the Government securities marketplace, including increased liquidity, enhanced ability to trade general collateral repos (which are an alternative collateral source for dealers), risk protection, and access to a broad spectrum of industry participants.

\4\ For a detailed description of the GFC Repo Service, refer to Securities Exchange Act Release No. 40623 (October 30, 1998) 63 FR 59831 (November 5, 1998) [File No. SR-GSCC-98-02] (order approving proposed rule).

GSCC believes that these benefits cannot be fully realized without an after-hours interbank securities allocation.\5\ The need for an after-hours allocation arises because not all of the GSCC dealer members clear at the same bank. As a result of free and unrestricted trading among all GSCC members, on any particular business day net securities and cash positions with respect to GFC Repo transactions will most likely not balance within each clearing bank. That is, the net securities borrowed position will not match the net securities loaned position across dealers intrabank (although these positions will balance across the clearing banks).

\5\ GSCC is discussing with the staff of the Federal Reserve Bank of New York (``FRBNY'') and the Board of Governors of the Federal Reserve System (``Board of Governors'') reopening the securities Fedwire for a brief period of time after the normal 3:30 p.m. close to accomplish after-hours DVP movement of securities and cash between the clearing banks. However, GSCC understands that an after-hours DVP window cannot be established until FRBNY completes its Year 2000 systems changes and the Board of Governors issues a proposal for public comment and determines that establishing such a window is in the public interest.

GSCC's proposed solution is to introduce the GCF Repo service in phases. On November 23, 1998, GSCC implemented the GCF Repo service within each participating clearing bank separately. As a result, a participating dealer can trade GCF Repos only with other participating dealers that use the same clearing bank. This first phase allows GSCC and its members to monitor the GCF Repo process in operation on a limited basis and to detect processing inefficiencies before the service is made more widely available. However, GSCC believes that this first phase results in a fragmented marketplace that has limited liquidity, both of which run contrary to the goals of the GCF Repo project.

Therefore, GSCC now seeks to expand the GCF Repo service to allow a participating dealer to engage in GCF Repo trading with dealers that use different clearing banks. GSCC has enlisted the assistance of its two clearing banks, The Bank of New York (``BONY'') and The Chase Manhattan Bank (``Chase''), to establish an alternate mechanism to permit an after-hours movement of cash and securities between the clearing banks.

Each clearing bank will establish a special clearance account in the name of GSCC to be used exclusively to effect this after-hours movement of securities. At the end of each business day, GSCC will establish the net GCF Repo settlement position and collateral allocation obligation or entitlement for each participating dealer with respect to each generic CUSIP number, and each clearing bank will make all possible internal cash and securities GCF Repo deliveries between GSCC and the dealers that clear at that bank. At this stage, the clearance customers of one of the two banks--assume that it is Chase-- will be in an aggregate net funds borrower position (or aggregate net short securities position), and the customers of the other bank--assume that it is BONY--will be in aggregate net funds lender position (or aggregate net long securities position). GSCC will then instruct Chase to allocate to the special GSCC clearance account at Chase securities in an amount equal to the net short securities position.

GSCC will establish on its own books and records two ``securities accounts'' as defined in Article 8 of the New York Uniform Commercial Code (``NYUCC''), one in the name of Chase and one in the name of BONY. The Chase securities account will be comprised of the securities in GSCC's special clearance account maintenance by BONY, and the BONY securities account will be comprised of the securities in GSCC's special clearance account maintained by Chase. GSCC will appoint Chase as its agent to maintain GSCC's books and records with respect to the BONY securities account, and GSCC will appoint BONY as its agent to maintain GSCC's books and records with respect to the Chase securities account.

The BONY and Chase securities accounts will enable the bank that is in the net long securities position to receive securities after the close of the securities Fedwire. Once the bank has received the securities, it can credit them by book-entry to a GSCC account and then to the dealers that clear at that bank that are net long securities in connection with GCF repo trades. The establishment of the securities accounts by GSCC also will give each clearing bank a ``securities entitlement'' under Article 8 of the NYUCC and the comfort of relying on GSCC as its ``securities intermediary'' as defined in Article 8 of NYUCC.

In the example described above, Chase will transmit to BONY a description of the securities in the BONY securities account. Based on this transmission, BONY will transfer funds equal to the aggregate net funds borrowed position to a demand deposit account in the name of GSCC that is maintained by Chase. Upon receipt of the funds by Chase, Chase will release any liens it may have on the special GSCC clearance account, and GSCC will release any liens it may have on the BONY securities account (both these accounts being comprised on the same securities). BONY will credit the securities in the BONY securities account to GSCC's regular GCF Repo clearance account at BONY, and BONY will further credit these securities to dealers participating in the GCF Repo service that clear at BONY and that are in a net long securities position. Thus, GSCC, Chase, and BONY will have accomplished an after-hours movement of securities between clearing banks that will enable dealers that clear at both banks to trade GCF Repo with each other.

All securities and funds movements occurring on a particular business day between the participating clearing banks will be reversed the next business day within a timeframe established by GSCC and the clearing banks. This timeframe will correspond to the timeframe already established by GSCC's Rule 20 for the reversal of GCF Repo transactions between GSCC and its participating netting members.

[Page 7934]

GSCC believes the proposed rule change is consistent with the requirements of Section 17A of the Act \6\ and the rules and regulations thereunder because it will broaden access to GSCC's existing GCF Repo service for members and increase market liquidity.

\6\15 U.S.C. 78-1.

  (B) Self-Regulatory Organization's Statement on Burden on Competition

GSCC does not believe that the proposed rule change will have any impact or impose any burden on competition.

  (C) Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others

Written comments relating to the proposed rule change have not yet been solicited or received. Members will be notified of the rule change filing, and comments will be solicited by an Important Notice. GSCC will notify the Commission of any written comments received by GSCC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

Within thirty-five days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to ninety days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will:

  (A) By order approve such proposed rule change or

  (B) Institute proceedings to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filedwith the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of5 U.S.C. 552 will be available for inspection and copying in the Commission's Public Reference Section, 450 Fifth Street, NW, Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of GSCC. All submissions should refer to File No. SR-GSCC-99-01 and should be submitted by March 10, 1999.

For the Commission by the Division of Market Regulation, pursuant to delegated authority.\7\

\7\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland, Deputy Secretary.

FR Doc. 99-3771Filed2-16-99; 8:45 amBILLING CODE 8010-01-M

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