[Federal Register Volume 62, Number 182 (Friday, September 19, 1997)]
[Notices]
[Pages 49283-49284]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24866]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39060; File No. SR-GSCC-97-03]
Self-Regulatory Organizations; Government Securities Clearing
Corporation; Order Approving a Proposed Rule Change Relating to
Eligibility of Forward-Starting Repos for Netting and Guaranteed
Settlement Prior to Their Scheduled Start Date
September 11, 1997.
On May 8, 1997, the Government Securities Clearing Corporation
(``GSCC'') filed with the Securities and Exchange Commission
(``Commission'') and on June 13, 1997, amended a proposed rule change
(File No. SR-GSCC-97-03) pursuant to section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act).\1\ Notice of the proposal was published
in the Federal Register on July 30, 1997.\2\ No comment letters were
received. 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).
\2\ Securities Exchange Act Release No. 38871 (July 24, 1997),
62 FR 40877.
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I. Description
The proposed rule change amends several of GSCC's rules to make
transactions in forward-starting repurchase agreements (``repos'')
eligible for netting and guaranteed settlement before they reach their
scheduled start date.\3\ Previously, forward-starting repos were not
eligible for netting and guaranteed settlement until they reach their
scheduled settlement date.
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\3\ Forward-starting repo transactions are repo transactions
that have start legs settling one or more business days in the
future.
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Since November 1995, GSCC has provided netting services for repo
transactions.\4\ After GSCC nets repo transactions, it interposes
itself between the submitting participants for transaction settlement
purposes as it does for cash transactions. In doing so, GSCC guarantees
settlement of all repos that enter its netting system. GSCC's guarantee
for netted repos includes guaranteeing the return of repo collateral to
repo participants, the return of principal (i.e., repo start amount) to
reverse participants, and the payment of repo interest to the full term
of the repo to reverse participants.
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\4\ Each business day, all eligible repo transactions are netted
with regular cash activity and Treasury auction purchases in the
same CUSIP to establish a single net position in the security for
each netting member participating in the repo netting process. For
netting purposes, the settlements associated with repo close legs
and reverse start legs are treated as long positions. The
settlements associated with repo start legs and reverse close legs
are treated as short positions. The difference between a
participant's total short activity and its total long activity
within a CUSIP is the participant's net position in the CUSIP.
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Forward-starting repos generally are either: (1) ``specific
collateral'' repos for which the underlying CUSIP is known from the
date of execution of the repo, or (2) ``general collateral'' repos for
which the specific security and par amount that will be transferred
from the repo participant to the reverse participant on the start date
are not known at the time of execution. Repo participants submitting to
GSCC data on general collateral repo transactions will use one of the
seventeen generic CUSIP numbers established by the CUSIP service bureau
for identifying collateral. These CUSIP numbers identify the type of
Government security (e.g., bill, bond, or note) and indicate the
remaining length to maturity for the issue. In addition, the par amount
of the underlying collateral is no longer an item that must be included
when the repo is submitted to GSCC. This will allow GSCC to match
submitted trades in general collateral forward-starting repos upon
their submission to GSCC without inclusion of the par amount. The
parties to a general collateral forward-starting repo have the
obligation to inform GSCC when the specific CUSIPs and associated par
values that will be used for settlement purposes are determined. The
notification must be made to GSCC no later than by the close of
business on the business day prior to the date on which the repo is
scheduled to start.\5\
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\5\ The notification must be made by submitting an ``intent to
substitute'' notification that provides specific collateral details
to GSCC using an on-line function (i.e., a screen input facility)
provided by GSCC. If one of the members that has submitted the data
on the repo is a broker, GSCC will accept the ``intent to
substitute'' notification solely from that broker without the need
for a matching notification from the dealer counterparty. If neither
of the members that submitted the data on the repo are brokers, GSCC
will accept the ``intent to substitute'' notification from the
member in the short or delivering position without the need for a
matching notification from the dealer counterparty. However, GSCC
will attempt to verify manually with the other member the accuracy
of the details of the notification from the member with the short
position.
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Until a forward-starting repo actually starts, the forward margin
and clearing fund requirements applied to it will differ from those
applied to all other repos. With regard to forward margin, because a
forward-starting repo that has not yet started presents only interest
rate exposure and not exposure to movements in the value of the
underlying collateral, only an interest
[[Page 49284]]
rate mark-to-market will be applied.\6\ This interest rate mark
component will be calculated by multiplying the principal value of the
repo first by a factor equal to the absolute difference between the
system and contract repo rates and then by a fraction where the
numerator is the number of calendar days from the scheduled start date
of the repo until the scheduled close date for the repo and the
denominator is 360. The interest rate mark differs from the financing
mark applied to repos that have already started in that, because the
exposure presented to GSCC is a pure rate risk exposure, it can be a
debit to either the short side or the long side.\7\ The clearing fund
requirement for a forward-starting repo during its forward-starting
period will be based solely on the interest rate mark.
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\6\ As a part of the morning funds-only settlement process, GSCC
collects and passes through on a daily basis forward margin based on
its ongoing exposure on each forward net settlement position. For
repos, the market value is subtracted from the repo's contract value
(i.e., the amount of money that was exchanged for the collateral),
and a debit or credit is established depending upon the result of
the calculation and whether or not the participant is on the reverse
or repo side of the transaction. The forward margin calculation for
repos differs from that for cash market trades in that there is an
additional financing mark component. The financing mark component
reflects the fact that, if GSCC replaced the reverse side of the
repo by buying securities and putting them out on repo, a financing
cost would be incurred. The financing mark is debited to the reverse
side and credited to the repo side.
\7\ For repos for which the underlying collateral has already
been exchanged, each day GSCC guarantees to the reverse repo party
the interest payment on the principal amount. However, until the
repo begins, GSCC only guarantees the difference between the agreed
upon repo rate and the rate the party could receive in the open
market.
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In addition to the changes relating to forward-starting repos, the
proposal clarifies that a right of substitution continues after GSCC
novates the trade. Section 4 to Rule 18 specifies the method of
substituting collateral. Should a repo participant want to implement a
substitution, either it or its broker must submit an ``intent to
substitute'' notification to GSCC using GSCC's on-line collateral
substitution function. For money fill substitutions, the par amount
and/or CUSIP may change, and for par fill substitutions, the principal,
CSUIP, and/or end money may change. GSCC does not review the
appropriateness of the substitute collateral. All movements associated
with the substitution will be made through GSCC.
Regardless of the type of substitution, GSCC will maintain accrued
interest information throughout the life of the repo across multiple
collateral substitutions as required. GSCC also will reverse any
previous mark-to-market and clearing fund monies calculated for the
collateral being replace. These amounts will be recalculated using the
security information for the replacement collateral.
Finally, the proposal makes eligible for GSCC's netting system
repos with underlying collateral that matures on or prior to the
scheduled close date by eliminating from the list of requirements for
netting-eligibility the requirement that the maturity date of the
underlying securities be on or later than the scheduled settlement date
of the close leg. Section 6 of Rule 18 requires that if a repo
participant has transferred securities as underlying collateral that
mature prior to the settlement date of the close leg, that participant
must substitute equivalent securities with a later maturity date prior
to the business day before the maturity date.
II. Discussion
Section 17A(b)(3)(F) requires that the rules of the clearing agency
be designed to promote the prompt and accurate clearance and settlement
of securities transactions and to ensure the safeguarding of securities
and funds which are in the custody and control of the clearing agency
or for which it is responsible.\8\ The Commission believes that
proposal will enhance GSCC's ability to clear and to settle forward-
starting repos. GSCC will be better able to evaluate participants' true
positions by including more of participants' pending positions in the
margin and clearing fund calculations. By collecting funds based on a
more accurate reflection of a participant's actual risk, the proposal
assists GSCC in safeguarding securities and funds. By guaranteeing
forward-starting repos earlier in the process, the proposal increases
the likelihood that these trades will eventually settle.
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\8\ 15 U.S.C. 78q-1(b)(3)(F).
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Furthermore, by making forward-starting repos eligible for netting
and guaranteed settlement, the proposal should increases the number of
repos that will be cleared and settled through GSCC and should increase
the utility of GSCC's clearance system. By enhancing the settlement
process, GSCC's proposal is consistent with the prompt and accurate
clearance and settlement of securities.
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with 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-97-03) be and hereby is
approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-24866 Filed 9-18-97; 8:45 am]
BILLING CODE 8010-01-M