[Federal Register Volume 66, Number 206 (Wednesday, October 24, 2001)]
[Notices]
[Pages 53816-53819]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-26727]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-44946; File No. SR-GSCC-2001-01]
Self-Regulatory Organizations; Government Securities Clearing
Corporation; Order Granting Approval of a Proposed Rule Change Relating
to the Redesign of Comparison Rules
October 17, 2001.
On January 16, 2001, the Government Securities Clearing Corporation
(``GSCC'') filed with the Securities and Exchange Commission
(``Commission'') and on April 11 and August 17, 2001,\1\ amended the
proposed rule change (File No. SR-GSCC-2001-01) pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\2\ Notice of
the proposal was published in the Federal Register on May 16, 2001.\3\
No comment letters were received. For the reasons discussed below, the
[[Page 53817]]
Commission is granting approval for the proposed rule change.
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\1\ The August 17, 2001, amendment withdrew a portion of the
proposed rule change which was reflected by GSCC in a subsequent
proposed rule change. Securities Exchange Act Release No. 44907
(October 4, 2001), 66 FR 51988 (October 11, 2001) [File No. SR-GSCC-
2001-09]. As such, republication of notice was not required.
\2\ 15 U.S.C. 78s(b)(1).
\3\ Securities Exchange Act Release No. 44282 (May 8, 2001), 66
FR 27190.
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I. Description
The purpose of the filing is to redesign GSCC's comparison rules in
order to implement real-time interactive services. In a white paper
distributed to all members in early 1997, GSCC outlined its long-range
plans to provide straight-through processing and a point-of-trade
guarantee to its members primarily through the implementation of real-
time interactive services. Last years, GSCC announced that it would
implement its interactive services in three phases. Phase 1 will
introduce interactive messaging to support real-time comparison; phase
2 will introduce interactive messaging to support netting; and phase 3
will introduce support of same-day settlement of repo start legs.
During the latter part of 2000, GSCC implemented the necessary
technical changes to its automated system to implement the first phase
of its interactive processing service (i.e., making available the
interactive messaging facility to support real-time comparison). Up
until this point, GSCC's processing experience has been essentially
batch. Members now have the ready ability, from a technological
perspective, to submit trade input on an automated basis to GSCC
intraday as trades are executed. While GSCC will continue to support
its existing batch input and output facilities initially, it plans to
eventually stop supporting these older formats. Members will be
encouraged to make the shift from batch to interactive processing as
soon as it is feasible for them to do so. At some point in time, once a
sufficient nucleus of members has begun processing interactively, GSCC
will implement disincentives to discourage members from continuing to
submit and receive data via the old batch formats.\4\
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\4\ GSCC will file with the Commission pursuant to Section 19 of
the Act proposed rule changes with respect to any fees intended as
disincentives to discourage members from using batch formats.
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Concurrent with this development, GSCC has been redesigning its
matching and comparison procedures to better meet the needs of its
members during their transition from batch to an interactive
environment. This redesign is the subject of this proposed rule change.
GSCC's central goal in this redesign is to provide straight-through
processing by allowing for the easy identification and resolution of
trades intraday to achieve 100 percent comparison. GSCC believes that
interactive messaging and enhanced real-time matching processing are
critical steps in helping to reduce risk by ensuring that more
transactions are compared earlier in the day and then eventually also
netted and guaranteed through GSCC so that intraday credit exposure to
counterparties is minimized.
In the current environment, with the exception being certain
locked-in trades, most trades such as members' Federal Reserve auction
purchases are compared within the GSCC system as a result of bilateral
comparison. To facilitate real-time comparison while still providing
members with the flexibility to transition from batch to interactive
submission according to a timeframe suitable to their own needs and
resources, GSCC is proposing to: (i) Amend its rules to provide for
three types of trade comparison: (a) bilateral comparison, (b) demand
comparison, and (c) locked-in comparison; and (ii) make certain other
related rules changes as further discussed below.
Bilateral Comparison
Bilateral comparison, which is the traditional method of
comparison, will continue to require that the two trade counterparties
(or if one or both of the counterparties are not GSC members, the
members acting on their behalf) submit trades to GSCC in which certain
mandatory details either match or fall within predefined parameters to
effect a match. Bilateral comparison will remain the primary comparison
type for dealer-to-dealer trades and will be available in both real-
time and batch. Members may elect to submit interactively regardless of
whether their trade counterparties do so.
A new feature of bilateral comparison will be the ability for
members to ``DK'' any trades they ``do not know''. The proposed rule
change introduces the term ``DK Notice'' to GSCC's rules. If a member
determines that a request for comparison is invalid or incorrect, it
can send a DK notice to GSCC which will be forwarded to the original
submitter. The receipt of the DK notice by GSCC will prevent the trade
from comparing on GSCC's system. If a member that sent a DK notice
determines that it did so erroneously, the member will be able to
remove the DK and enable comparison to occur if it does so within the
timeframes prescribed by GSCC for such purpose.
Demand Comparison
Demand comparison is a new type of comparison that has been
designed to provide members with flexibility and control over the
comparison process for trades executive via intermediaries. Demand
comparison strikes a balance between bilateral comparison, where the
member is required to submit trade data in order for its trade to
compare, and locked-in comparison (discussed in more detail below),
where the trade has essentially been operationally compared before
being submitted to GSCC.
Demand trades will be submitted by approved intermediaries (e.g.,
brokers) that will be called ``demand trade sources.'' Demand trade
sources must be able to communicate with GSCC interactively. In order
for GSCC to accept trades from a demand trade source on a member's
behalf, the member must provide GSCC with prior written authorization.
The intermediary must also be approved and authorized by GSCC to be a
demand trade source.
GSCC will deem a demand trade compared upon receipt of the trade
data from the demand trade source. However, if a member does not know a
trade submitted on its behalf by a demand trade source, the member will
be able to submit a DK notice to GSCC. The receipt of a DK notice by
GSCC will cause the demand trade to no longer be eligible for
comparison. If a member that sent a DK notice determines that it did so
erroneously, the member will be able to remove the DK and enable
comparison to occur if it does so within the timeframes prescribed by
GSCC for such purpose.
GSCC is making incidental rules changes to Rules 11, 16, 18, 21,
22, and 39 to take into account the introduction of demand trades.
Locked-In Comparison
Locked-in comparison will be similar to that currently provided for
in GSCC's rules. Locked-in comparison presumes that a member would
elect not to submit corresponding trade details to affect a match
because the trade has been precompared by the trade source. An example
of a trade appropriate for locked-in comparison would be one executed
through a ``pure'' electronic trading system that is terminal-driven
and that no discretion over trade details is exercised once the trade
is submitted.
In order to participate, the locked-in trade source must be
authorized by both the members of whose behalf it will be submitting
trade data and by GSCC. With the exception of some current locked-in
sources, such as the Federal Reserve banks, locked-in trade sources
will be expected to communicate interactively with GSCC.
Locked-in trades will be deemed compared upon receipt by GSCC. The
DK feature will also be available for locked-in trades. However, unlike
the case of demand trades, a DK of a locked-in trade will be treated by
GSCC as a
[[Page 53818]]
request for cancellation to the locked-in trade source. In order to
actually cancel the trade on GSCC's system, the locked-in trade source
will have to respond to the request by submitting a trade cancellation.
The locked-in trade source can modify the trade in response to a DK
notice.
Submission Methods
In order to set forth the concept of a member submitting
interactively versus submitting in one of the batch modes, GSCC is
adding three new definitions to its rules: ``interactive submission
method,'' ``multiple batch submission method,'' and ``single batch
submission method.'' The proposed rules changes make clear which
submission type is required for each type of comparison. In addition,
GSCC is adding a definition of ``real time'' in its rules to be used to
indicate when a particular process (e.g., the enhanced comparison
processes set forth in Rule 10) will be performed by GSCC in real time
as opposed to at end of day.
Submission of Full-Sized Trades
GSCC is permitting members to submit full-sized trades. Currently,
non-GCF Repo trades are submitted in $50 million increments. Because
members' internal systems tend to reflect the full size of each trade
(as opposed to the pieces that they submit to GSCC), the submission of
full-sized trades will permit members to better reconcile their trading
activity. GSCC recognizes that not all members will be able to begin
processing full-sized trades immediately. Therefore, GSCC will not
require that members exercise this option.
Timing of Key Processes of GSCC
GSCC's key processes are comparison, netting, novation, and
guaranty of settlement. GSCC is changing the timing of the comparison
and guaranty of settlement processes.
With respect to the timing of comparison, GSCC's rules currently
provide that it occurs when GSCC makes its comparison output available
to members. GSCC is amending its rules to state that, while comparison
will continue to occur upon issuance of the comparison message by GSCC
with respect to trades submitted for bilateral comparison, comparison
will be deemed to occur upon receipt of trade data from the authorized
trade source with respect to trades submitted for demand comparison and
locked-in comparison.
With respect to the timing of netting, GSCC's rules currently
provide that netting occurs upon issuance of the report of or output on
net settlement positions by GSCC. This will continue to be the case.
Similarly, GSCC's rules currently provide that novation, the process by
which GSCC becomes the substituted counterparty to trades submitted to
it, occurs upon the issuance of the report of or output on net
settlement positions by GSCC. This will also remain unchanged.
With respect to the timing of GSCC's guaranty of settlement, GSCC's
current rules provide that GSCC guarantees the settlement of a netting-
eligible trade upon issuance of the report/output that sets forth the
member's net settlement position.\5\ The proposed rule changes will
move the timing of GSCC's guaranty to the point of comparison. This
means that a netting-eligible trade submitted for bilateral comparison
will be guaranteed upon issuance of the comparison message by GSCC, and
a netting-eligible trade submitted for demand or locked-in comparison
will be guaranteed upon receipt of trade, data from the authorized
trade source. If a trade is DKed (and with respect to a locked-in trade
cancelled by the locked-in trade source), GSCC's guaranty will no
longer be in effect with respect to that trade. As a transition measure
that recognizes that members may need some time to switch to
interactive processing, GSCC is proposing that it maintain its policy
of guaranteeing blind brokered repo trades entered into in good faith
upon trade execution through the year 2001.
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\5\ The exception to this rule is GSCC's policy of guaranteeing
blind brokered repos entered into in good faith upon trade
execution. GSCC adopted this policy in order to comfort dealers that
have intraday credit exposure to brokers through whom they execute
such transactions. The policy only applies to such transactions that
are entered into in good faith, which means, for example, that GSCC
would not honor it in the event that a dealer entered into a
transaction knowing that the counterparty was insolvent.
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General Responsibilities of Members
GSCC's comparison rule contains a provision that requires members
to review documents that they receive from GSCC. GSCC desires to expand
the provision to cover any type of communication provided to members by
GSCC and to require members to inform GSCC promptly, but in no event
later than ten calendar days upon receipt of the communication, if
there is any error, omission, or other problem with respect to the
communication. GSCC's netting rule contains a similar provision with
respect to which GSCC is adding the ten-day requirement. GSCC believes
that the ten-day time frame will provide members with a sufficient
amount of time within which to detect problems in a communication from
GSCC.
Amendments to Schedules
GSCC is making incidental changes to certain of its Schedules for
clarification purposes and to bring them into conformity with the
proposed rules changes discussed above. Specifically, GSCC is expanding
the output time slot in its ``Schedule of Timeframes'' from ``midnight
to 2:00 a.m.'' to ``8:00 p.m. to 2:00 a.m.'' This change reflects the
fact that GSCC may be able to provide certain output earlier given the
implementation of real-time trade matching and also the recent shift to
the 8:00 p.m. trade submission deadline.
GSCC is also adding language to make clear that the 10:30 a.m.
deadline for satisfaction of a clearing fund deficiency call is
approximate because members have two hours after a call is made to
fulfill their obligation.
GSCC is also updating its ``Schedule of Required Match Data,''
``Schedule of Required Data Submission Items,'' and its ``Schedule of
Required Data Submission Items for a Right of Substitution'' to make
clear that the only locked-in trades to which those schedules do not
apply are Treasury/Federal Reserve auction purchases and GCF repo
transactions.
GSCC is also amending its fee structure to set fees for demand
trades which will be the same as those currently imposed on locked-in
trades.
II. Discussion
Section 17A(b)(3)(F) \6\ 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 assure the
safeguarding of securities and funds which are in the custody or
control of GSCC. The rule change, which allows GSCC to implement
interactive messaging to support real-time comparison, will enable GSCC
to reduce risk by enabling firms to know earlier of any trades which do
not compare and to have more time to resolve the problems. This should
reduce the number of failed trades at GSCC. The rule change also
provides for more efficient procedures in the comparison process
thereby facilitating prompt and accurate clearance and settlement of
securities at GSCC. Therefore, the Commission finds that the rule
change is consistent with Section 17A and the rules and regulations
thereunder.
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\6\ 15 U.S.C. 78q-1(b)(3)(F).
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III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the
[[Page 53819]]
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-2001-01) be and hereby
is approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-26727 Filed 10-23-01; 8:45 am]
BILLING CODE 8010-01-M