[Federal Register Volume 67, Number 116 (Monday, June 17, 2002)]
[Notices]
[Pages 41285-41287]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-15136]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46053; File No. SR-GSCC-00-12]
Self-Regulatory Organizations; Government Securities Clearing
Corporation; Notice of Filing of Proposed Rule Change Relating to
Insolvency and Clearing Fund Requirements
June 10, 2002.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on October 5, 2000,
Government Securities Clearing Corporation (``GSCC'') filed with the
Securities and Exchange Commission (``Commission''), and on December
14, 2000, amended 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 on the
proposed rule change from interested parties.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change would allow GSCC to amend its clearing
fund and insolvency rules to better protect itself and its members from
certain types of legal risk.
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 these
statements.\2\
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\2\ The Commission has modified the text of the summaries
prepared by GSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
On January 30, 1996, the Securities and Exchange Commission
(``Commission'') issued an order (``Commission's Order'') approving
GSCC's proposed rule change permitting foreign entities to become
members of GSCC's netting system.\3\ The rule change established
application and continuing membership requirements for foreign
entities, including the delivery to GSCC of an opinion of foreign
counsel addressing the particular jurisdictional concerns raised by the
admission of a foreign entity to netting system membership.\4\
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\3\ Securities Exchange Act Release No. 36788 (January 30,
1996), 61 FR 4500 (February 6, 1996).
\4\ GSCC also requires each prospective foreign member to
provide an insolvency law opinion discussing applicable U.S. Federal
and state laws.
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Having gained experience from reviewing the legal opinions
regarding foreign law that were provided in connection with the
applications of the foreign banks that GSCC has admitted to its netting
system to date, GSCC has determined to clarify its insolvency rule,
Rule 22, in the manner described in subsection (i) below so that the
insolvency rule more appropriately references the types of insolvency
proceedings to which a foreign member
[[Page 41286]]
might become subject. GSCC is also proposing to make conforming
language changes to GSCC's rules dealing with applications for
membership and continuing membership standards as they apply to foreign
members.
Some of the legal opinions referred to in the previous paragraph
have indicated that GSCC would be exposed to ``legal risk'' as a result
of the application of the particular jurisdiction's law to a foreign
member's insolvency or bankruptcy. The legal risk can take the form of
prohibiting or delaying GSCC from: accessing some or all of the
clearing fund deposit of the member; performing its netting, close-out,
or liquidation of transactions; or the setting off of obligations as
set forth in its clearing fund rule (Rule 4), its ceasing to act rule
(Rule 21), or its insolvency rule (Rule 22), or the taking of any other
action contemplated by these rules. GSCC is proposing to amend its
rules to better protect itself and its members from these types of
legal risk in the circumstances where GSCC reasonably determines based
upon factors such as outside legal advice or a discussion with a
relevant regulator that such legal risk exists. The proposed rule
changes are described more fully in subsection (ii) below.
GSCC's experience in connection with the admission of U.S. branches
of foreign banks has also indicated that certain issues that are
described in these opinions could affect GSCC's rights in the event of
the insolvency or bankruptcy of a domestic member. GSCC believes, given
the importance of its being able to exercise its rights as set forth in
its clearing fund rule, its ceasing to act rule, and its insolvency
rule that the proposed rule changes discussed below in subsection (ii)
should also apply to domestic members that present GSCC with legal
risk. GSCC would reasonably determine that such legal risk exists based
upon factors such as outside legal advice or a discussion with a
relevant regulator.
GSCC is also proposing to add language to GSCC's clearing fund rule
clarifying GSCC's right to rehypothecate the cash deposits of its
clearing fund.
(i) Changes to Insolvency Rule
GSCC's insolvency rule contains a section that lists the various
types of events or proceedings which would permit GSCC to treat a
member as insolvent. The rule was written utilizing terms common in
United States insolvency or bankruptcy proceedings. GSCC is proposing
to amend its insolvency rule to add language so that the rule more
appropriately references the types of insolvency proceedings to which a
foreign member might become subject. GSCC has broad discretion pursuant
to its rules to impose additional terms and conditions on members that
it deems to be necessary to protect itself and its members. GSCC's
foreign membership agreements have already been expanded to incorporate
the insolvency triggering events that GSCC now proposes to make part of
its rules. The proposed changes will bring the rules into conformity
with the foreign membership agreements and specifically give GSCC the
right pursuant to its rules to declare a foreign member to be insolvent
under the requisite circumstances.\5\
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\5\ In addition, the proposed rule change makes conforming
language changes to GSCC's Rule 2 (Members) and Rule 3 (Financial
Responsibility and Operational Capability Standards) as they apply
to foreign members.
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(ii) Clearing Fund Requirements
One of GSCC's most important risk management tools is its clearing
fund, which is comprised of three components: (1) cash; (2) certain
netting-eligible securities; and (3) eligible letters of credit. The
purposes served by the clearing fund are to: (1) have on deposit from
each netting member assets sufficient to satisfy any losses that may be
incurred by GSCC as the result of the default by the member and the
resultant close-out of that member's settlement positions; (2) maintain
a total asset amount sufficient to satisfy potential losses to GSCC and
its members resulting from the failure of more than one member (and the
failure of such members' counterparties to pay their pro rata
allocation of loss); and (3) ensure that GSCC has sufficient liquidity
at all times to meet its payment and delivery obligations.
A clearing fund deposit, to serve its intended purpose, should be
immediately accessible to GSCC in the event of the member's bankruptcy
or insolvency. However, the application of certain domestic or foreign
laws could delay or prevent GSCC from accessing the portion of the
member's clearing fund deposit that is in the form of cash and
securities. The portion of the clearing fund deposit that is in the
form of letters of credit (``LCs'') is generally not subject to the
same risk because LCs are typically not considered to be part of the
bankrupt/insolvent entity's estate.
The rules with respect to the calculation of a member's clearing
fund deposit do not currently address the legal risk detailed above. In
order to better protect itself and its members, GSCC is seeking the
authority to require a domestic or foreign member that in management's
reasonable view (which may be based upon factors such as outside legal
advice or discussion with a relevant regulator) presents heightened
legal risk to GSCC to: (1) deposit additional collateral over what
would normally be required under GSCC's clearing fund rule and/or (2)
post some additional portion of its clearing fund deposit requirement
in the form of an LC.\6\
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\6\ GSCC's clearing fund rule requires that LCs constitute no
more than 70 percent of a member's clearing fund deposit. GSCC is
seeking the authority to ask for a higher percentage in the form of
an LC if circumstances warrant.
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(iii) Clarification of Rehypothecation Right with Respect to Cash
Deposits
GSCC's clearing fund rule contains a provision that permits GSCC to
rehypothecate, transfer, or assign its clearing fund collateral in the
event that GSCC needs to secure a loan or to satisfy an obligation
incurred by it, in each case incident to its clearance and settlement
business. GSCC desires to clarify the reference in the provision to the
portions of the clearing fund that may be rehypothecated, transferred,
or assigned by GSCC. The provision refers to the securities and the LCs
that members pledge or deposit to the clearing fund as well as the
``deposits or other instruments in which the cash deposits'' to the
clearing fund may be invested. GSCC believes that this language could
be read to not actually refer to the cash deposits themselves. GSCC
believes that it is prudent to specifically add a reference to ``cash
deposits'' to eliminate any doubt as to GSCC's ability to use the cash
portion of the clearing fund in the manner set forth in the clearing
fund rule.
The proposed rule change is consistent with the requirements of
Section 17A of the Act \7\ and the rules and regulations thereunder
applicable to GSCC because it will help protect GSCC and its members in
the event of the insolvency of a foreign member.
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\7\ 15 U.S.C. 78q-1.
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(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 Received From Members, Participants or Others
Written comments relating to the proposed rule change have not yet
been solicited or received. GSCC will notify the Commission of any
written comments received by GSCC.
[[Page 41287]]
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 20549-0609.
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 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-00-12 and should be submitted by July
8, 2002.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-15136 Filed 6-14-02; 8:45 am]
BILLING CODE 8010-01-P