Skip to Content

Notice

Self-Regulatory Organizations; Government Securities Clearing Corporation; Notice of Filing of Proposed Rule Change Relating to Permitting Clearing Fund Offsets for Category 2 Dealer Netting Members and Futures Commission Merchants

Document Details

Information about this document as published in the Federal Register.

Published Document

This document has been published in the Federal Register. Use the PDF linked in the document sidebar for the official electronic format.

Start Preamble Start Printed Page 2465 January 3, 2001.

Pursuant to section 19(b)(1) [1] of the Securities Exchange Act of 1934 (“Act”), notice is hereby given that on July 31, 2000, the Government Securities Clearing Corporation (“GSCC”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by GSCC. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

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

The proposed rule change would enable GSCC to provide offsets in the clearing fund calculation for Category 2 Dealer Netting Members and Category 2 Futures Commission Merchants (“FCMs”) (collectively, “category 2 members”) that meet all of GSCC's requirements for participating in its netting system.

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 rules change and discussed any comments it received on the proposed rules 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.[2]

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

GSCC has established two membership categories (“category 1” and “category 2”) for dealers and FCMs that want to participate in GSCC's netting system. GSCC established a “Category 2” membership for dealers and FCMs that meet all of GSCC's requirements for participating in the netting system but have less net worth than GSCC's category 1 members. The minimum net worth requirement for category 1 members is $50 million, and the minimum net worth requirement for category 2 members is $25 million.[3]

While category 2 members have a lower net worth threshold than category 1 members, category 2 members currently have a more stringent clearing fund requirement under GSCC Rule 4, section 2(d). Specifically, the clearing fund requirement for category 2 members is calculated (i) without the benefit of any of the offsets across opposite net settlement positions [4] that are permitted for category 1 members and (ii) with margin factors set at the 99 percent-of-movements confidence level [5] (while margin factors for a category 1 member are set at the 95 percent confidence level). In addition, if a category 2 member elects to receive credit forward margin amounts [6] in its daily funds-only settlements, its margin factors are set at levels that are based on the greater of: (i) the category 2 margin factors or (ii) margin factors adjusted to reflect GSCC's historical two-day price volatility data covering 95 percent of all movements.[7]

GSCC currently has no active category 2 members. GSCC believes that certain entities that meet the eligibility requirements for category 2 membership and who recognize the many benefits of GSCC's netting system have not applied for membership because they consider the liquidity burden associated with the current clearing fund calculation to be too onerous. In order to broaden the availability of GSCC's netting services, GSCC proposes to allow for offsets in the clearing fund calculation for category 2 members. The current prohibition of offsets for category 2 members was implemented years ago as a conservative measure designed to avoid any risk arising from the creation of the category 2 level. Now, after many years of experience in conducting risk assessments, netting, and calculating margin, GSCC believes that prohibiting offsets is overly conservative and punitive. In addition, expanding the roster of GSCC netting members should also enhance the netting benefits for the existing members that currently trade with potential category 2 members.

Recognizing that category 2 members have smaller net worth bases and may therefore be deemed to pose a greater risk of default than category 1 members, the margin factors applied to category 2 members will continue to be set at the 99 percent confidence level (versus 95 percent for category 1 members). Furthermore, category 2 members will still be required to make an election regarding the receipt of forward margin. By permitting certain offsets for category 2 members and at the same time maintaining the more stringent margin factor requirements, GSCC will collect sufficient margin from duly approved category 2 members while expanding the range of netting members in a prudent manner.

GSCC believes that the proposed rule change is consistent with section 17A(b)(3)(F) [8] of the Act and the rules and regulations thereunder because it will (i) permit new entities to join GSCC and realize the benefits of participating in its netting system and (ii) enhance the netting benefits of existing members that currently trade with the potential members.

B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

Written comments relating to the proposed rule change have not yet been solicited or received.[9] 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 Start Printed Page 2466Register 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 20549-0609. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with 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 of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room in Washington, DC. Copies of such filing will also be available for inspection and copying at GSCC's principal office. All submissions should refer to File No. SR-GSCC-00-08 and should be submitted by February 1, 2001.

Start Signature

For the Commission by the Division of Market Regulation, pursuant to delegated authority.[10]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

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

Back to Citation

3.  Both categories have identical requirements for minimum excess net or liquid capital of $10 million.

Back to Citation

4.  This means that GSCC does not allow category 2 members to offset long positions versus short positions.

Back to Citation

5.  This means that the category 2 margin factors are based on GSCC's historical daily price volatility data covering 99 percent of all movements.

Back to Citation

6.  A credit forward margin amount refers to GSCC's daily process of computing a member's collateral by marking to market the member's transactions that will settle in the future. The result will produce a net credit or a net debit. If the member has a net credit, it can elect to have GSCC pay it the value of the net credit. If the member has a net debit, it must pay GSCC.

Back to Citation

7.  A category 2 member that elects to receive credit forward margin amounts will have higher margin factors than a category 2 member that does not make that election.

Back to Citation

8.  15 U.S.C. 78q-1(b)(3)(F).

Back to Citation

9.  Members will be notified of the rule change filing, and comments will be solicited by an Important Notice.

Back to Citation

[FR Doc. 01-897 Filed 1-10-01; 8:45 am]

BILLING CODE 8010-01-M