[Federal Register Volume 61, Number 178 (Thursday, September 12, 1996)]
[Notices]
[Pages 48191-48192]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23344]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37656; File No. SR-GSCC-96-06]
Self-Regulatory Organizations; Government Securities Clearing
Corporation; Order Approving a Proposed Rule Change Permitting All
Netting Members To Receive Credit Forward Mark Adjustment Payments
September 6, 1996.
On June 15, 1996, the Government Securities Clearing Corporation
(``GSCC'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change (File No. SR-GSCC-96-06)
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ to allow all netting members to receive credit forward
mark adjustment payments. Notice of the
[[Page 48192]]
proposal was published in the Federal Register on July 29, 1996.\2\ One
comment letter was received.\3\ For the reasons discussed below, the
Commission is approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ Securities Exchange Act Release No. 37461 (July 19, 1996),
61 FR 39492.
\3\ Letter from Santo C. Maggio, President, Refco Securities,
Inc., to Jonathan Katz, Secretary, Commission (July 12, 1996).
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I. Description
The rule change amends GSCC Rule 13 to permit all netting members
to receive credit forward mark adjustment payments from GSCC pursuant
to GSCC's funds-only settlement process.\4\ Currently, GSCC collects
forward mark adjustment payments from those netting members with a
negative forward mark adjustment on a particular business day with
regard to a particular CUSIP and remits forward mark adjustment
payments to eligible category one dealer and bank netting members that
are in a positive forward mark position with regard to such CUSIP. Each
member's forward mark adjustment is recalculated each day with any
debit or credit from the previous day reversed, and a new forward mark
adjustment payment obligation is established. Only cash can be used to
fund forward mark adjustment payments because GSCC passes through
credit forward mark adjustment payments.
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\4\ The forward mark adjustment is a daily mark-to-market
process for all net settlement positions designed to account for
GSCC's ongoing exposure on each forward net settlement position.
Because GSCC novates and guarantees forward settling trades prior to
the settlement of such trades, GSCC incurs multi-day settlement
exposure on such trades. To mitigate this risk, GSCC collects from
each netting member on a daily basis an amount equivalent to the
difference between the contract value of the netting member's
positions and GSCC's system value based on current market values
(``collateral mark''). GSCC also collects a financing mark based on
the rate for all forward repurchase and reverse repurchase
transactions (``repos'') which is equal to the product of the market
value of the repo, GSCC's system repo rate, and the repo term. A
member's forward mark adjustment payment is the sum of all
collateral marks and all financing marks.
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Section 1 of GSCC Rule 13 previously provided that only category
one dealer netting members and bank netting members that have been
members for at least sixty calendar days are entitled to receive credit
forward mark adjustment payments. This limitation was put into effect
in connection with the implementation of GSCC's netting service for
repurchase transactions (``repo'').\5\ Under the rule change, all
netting members are eligible to receive credit forward mark adjustment
payments, and the sixty day waiting period has been eliminated.
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\5\ GSCC believed that limiting credit pass throughs in
connection with the implementation of the netting service for repos
was a prudent measure to ensure that the revised forward mark
adjustment process did not pose undue risk to GSCC. For a complete
description of GSCC's repo netting system, refer to Securities
Exchange Act Release No. 36491 (November 17, 1995), 60 FR 49649
[File No. SR-GSCC-95-02] (order approving proposed rule change
implementing GSCC's netting services for non-same-day-settling
aspects of next-day and term repo transactions).
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Although all netting members are now eligible to receive credit
forward mark adjustment payments, special provisions apply to category
two dealer netting members and category two futures commission merchant
(``FCM'') netting members. Under GSCC's current rules, category two
dealer netting members and category two FCM netting members are
required to provide GSCC with additional clearing fund margin
protection \6\ in part because of the more modest minimum net worth
requirements for these types of netting members.\7\
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\6\ Category two dealer and FCM netting members have applicable
margin factors as set by GSCC's Board of Directors which can be no
lower than ninety-nine percent of historical one day price
volatility. All other GSCC members have applicable margin factors as
set by GSCC's Board of Directors which can be no lower than ninety-
five percent of historical one day price volatility.
\7\ For example, category two dealer netting members and FCM
netting members must maintain a net worth of $25 million, but
category one banks and category one dealers and FCMs must maintain a
minimum net worth of $100 million and $50 million, respectively.
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Accordingly, the rule change provides that each category two dealer
netting member and category two FCM netting member now have an option
as to whether it wishes to (i) receive credit forward mark adjustment
payments and have the haircut applicable to its clearing fund deposit
raised from the current levels to levels that are based on historical
two day volatility designed to cover ninety-five percent of price
movements, as determined by using the greater of the price movements
from the last quarter or the last year, or (ii) not receive credit
forward mark adjustment payments and retain its current clearing fund
margin level.
II. Comment Letters
One comment letter was received with regard to the proposed rule
change from Refco Securities, Inc. (``Refco'').\8\ In its letter
supporting the proposed rule change, Refco stated that it is an active
participant in the government securities market and wants to
participate in the repo netting process in the same manner as other
dealers but as a category two dealer netting member it is unable to do
so because it is not eligible to receive credit forward mark adjustment
payments.
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\8\ Supra note 3.
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III. Discussion
Section 17A(b)(3)(F) \9\ 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. The Commission believes that the proposed
rule change is consistent with GSCC's obligations under Section 17A of
the Act.
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\9\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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The rule change should permit GSCC to deliver credit forward mark
adjustment payments to all netting members while still assuring the
safeguarding of securities and funds within its custody or control.
GSCC has gained some experience with the new forward mark adjustment
process since the implementation of the process in November 1995 and is
now better able to assess its liquidity needs. Furthermore, GSCC will
only permit category two dealer and FCM netting members to receive
credit forward mark adjustment payments if such netting members
maintain additional clearing fund margin. If any such netting member
elects to receive credit forward mark adjustment payments, the increase
in the netting member's margin factors should help ensure that GSCC has
sufficient collateral if such netting member defaults on its settlement
obligations.
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-96-06) be and hereby is
approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\17 CFR 200.30-3(a)(12) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-23344 Filed 9-11-96; 8:45 am]
BILLING CODE 8010-01-M