Federal Register: January 31, 2002 (Volume 67, Number 21)
DOCID: FR Doc 02-2371
SECURITIES AND EXCHANGE COMMISSION
Securities and Exchange Commission
DOCUMENT ID: [Release No. 34-45335; File No. SR-GSCC-2001-03]
NOTICE: NOTICES
ACTION: Self-regulatory organizations; proposed rule changes:
SUBJECT CATEGORY:
Self-Regulatory Organizations; Government Securities Clearing Corporation; Order Approving Proposed Rule Change Relating to Establishment of a Cross-Margining Agreement With the Board of Trade Clearing Corporation
DOCUMENT SUMMARY:
January 25, 2002.
I. Introduction
On April 4, 2001, the Government Securities Clearing Corporation
(``GSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SRGSCC200103 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
September 11, 2001.\2\ No comment letters were received. For the
reasons discussed below, the Commission is approving the proposed rule change.
\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 44766 (September 5, 2001), 66 FR 47251.
II. Description \3\
On August 19, 1999, the Commission approved GSCC's proposed rule
filing to establish a crossmargining program with other clearing
organizations and to begin its program with the New York Clearing
Corporation (``NYCC'').\4\ More recently, the Commission approved
GSCC's proposed rule filing to establish a similar crossmargining
program with the Chicago Mercantile Exchange (``CME'').\5\ GSCC is now
establishing a similar crossmargining arrangement with the Board of Trade Clearing Corporation.\6\
\3\ The description of GSCC's crossmargining program is drawn largely from representations made by GSCC.
\4\ Securities Exchange Act Release No. 41766 (August 19, 1999), 64 FR 46737 (August 26, 1999) [File No. SRGSCC9804]. The
requisite rule changes necessary for GSCC to engage in cross
margining programs with other clearing organizations were made in the NYCC crossmargining rule filing.
\5\ Securities Exchange Act Release No. 44301 (May 11, 2001), 66
FR 28207 (May 22, 2001) [File No. SRGSCC0013]. In addition to
approving GSCC's crossmargining program with the CME, the order
granted approval to change GSCC Rule 22, Section 4, to clarify that
before GSCC credits an insolvent member for any profit realized on
the liquidation of the member's final net settlement positions, GSCC
will fulfill its obligations with respect to that member under crossmargining agreements.
\6\ BOTCC is a Delaware corporation that acts as the clearing
organization for certain futures contracts and options on futures
contracts that are traded on the Chicago Board of Trade and that are regulated by the Commodity Futures Trading Commission.
This development is significant because the Chicago Board of Trade,
for which BOTCC clears, is by far the largest Treasury futures exchange
market, and certain of its products, such as the 10Year Note futures
contract, which will be crossmargined with GSCC products, continue to
experience growth in volume. Thus, establishing the crossmargining
program between GSCC and BOTCC has the potential to provide significant
collateral savings to the industry in general and to GSCC's and BOTCC's
common members in particular. From each clearing organization's
perspective, the crossmargining program will provide important risk
management benefits. These benefits include such things as providing
the clearing organizations with more information concerning members'
intermarket positions to enable the clearing organizations to make more
accurate decisions regarding the true risk of the positions to the
clearing organizations and encouraging coordinated liquidation
processes for a joint participant, or a participant and its affiliate, in the event of an insolvency.\7\
\7\ The GSCCBOTCC crossmargining agreement requires ownership
of 50 percent or more of the common stock of an entity to indicate control of the entity for purposes of the definition of
``affiliate.''
A. GSCC's CrossMargining Program
GSCC believes that the most efficient and appropriate approach for establishing crossmargining programs for fixedincome and other interest rate products is to do so on a multilateral basis with GSCC as the ``hub.'' Each clearing organization that participates in a cross margining program with GSCC, such as NYCC, CME, and now BOTCC, (hereinafter ``Participating CO'') enters into a separate cross margining agreement between itself and GSCC. Each of the agreements will have similar terms and no preference will be given by GSCC to one Participating CO over another.
Crossmargining is available to any GSCC netting member (with the exception of interdealer broker netting
[[Page 4769]]
members) that is, or that has an affiliate that is, a member of a
Participating CO. Any such member (or pair of affiliated members) may
elect to have its margin requirements at both clearing organizations
calculated based upon the net risk of its cash and repo positions at
GSCC and of its offsetting and correlated positions in related
contracts carried at the Participating CO. Crossmargining is intended
to lower the crossmargining participant's (or pair of affiliated
members') overall margin requirement. The GSCC member (and its
affiliate, if applicable) will sign an agreement under which it (or
they) agree to be bound by the crossmargining agreement between GSCC
and the Participating CO and which allows GSCC or the Participating CO
to apply the member's (or its affiliate's) margin collateral to satisfy
any obligation of GSCC to the Participating CO (or vice versa) that results from a default of the member (or its affiliate).
Margining based on the net combined risk of correlated positions is based on an arrangement under which GSCC and each Participating CO agree to accept the correlated positions in lieu of supporting collateral. Under this arrangement, each clearing organization holds and manages its own positions and collateral and independently determines the amount of margin that it will make available for cross margining, referred to as the ``residual margin amount.''
GSCC computes the amount by which the crossmargining participant's
margin requirement can be reduced at each clearing organization by
comparing the participant's positions and the related margin
requirements at GSCC as against those at each Participating CO. GSCC
offsets each crossmargining participant's residual margin amount at
GSCC against the offsetting residual margin amounts of the participant
(or its affiliate) at each Participating CO.\8\ If, within a given pair
of offset classes, the margin that GSCC has available for a participant
is greater than the combined margin submitted by the Participating COs,
GSCC will allocate a portion of its margin equal to the combined margin
at the Participating COs. If, within a given pair of offset classes,
the combined margin submitted by the Participating COs is greater than
the margin that GSCC has available for that participant, GSCC will
first allocate its margin to the Participating CO with the most highly
correlated position. If, within a given pair of offset classes, the
positions are equally correlated, GSCC will allocate pro rata based
upon the residual margin amount available at each Participating CO.
GSCC and each Participating CO may then reduce the amount of collateral
that they collect to reflect the offsets between the crossmargining
participant's positions at GSCC and its (or its affiliate's) positions
at the Participating CO.\9\ In the event of the default and liquidation
of a crossmargining participant, the loss sharing between GSCC and
each of the Participating COs will be based upon the foregoing allocations and the crossmargin reduction.
\8\ The residual margin amount is the long margin amount or the
short margin amount in each offset class that is available for
crossmargining after all internal offsets are conducted within and
between offset classes at a particular clearing organization.
\9\ GSCC and each Participating CO unilaterally have the right
not to reduce a participant's margin requirement by the crossmargin
reduction or to reduce it by less than the crossmargin reduction.
However, the clearing organizations may not reduce a participant's margin requirement by more than the crossmargin reduction.
GSCC will guarantee the crossmargining participant's (or its
affiliate's) performance to each Participating CO up to a specified
maximum amount based on the loss sharing formula contained in the
CrossMargining Agreement. Each Participating CO will provide the same
guaranty to GSCC. The amount of the guarantee is the lowest of: (1) The
crossmargin loss of the worse off party; (2) the higher of the cross
margin reduction or the crossmargin gain of the better off party; (3)
the amount required to equalize the parties' crossmargin results; or
(4) the amount by which the crossmargining reduction exceeds the
better off party's crossmargin loss if both parties have crossmargin losses.
B. Information Specific to the Current Agreement Between GSCC and BOTCC
1. Participation in the crossmargining program: Any netting member
of GSCC other than an interdealer broker will be eligible to
participate.\10\ Any clearing member of BOTCC will be eligible to participate.
\10\ Because interdealer brokers should not and generally do
not have positions at GSCC at the end of the day, they should have no margin requirement to be reduced.
2. Products subject to crossmargining: The products that will be
eligible for the GSCCBOTCC crossmargining arrangement are the
Treasury securities with certain remaining maturities that fall into
GSCC's Offset Classes C, E, F, and G as defined in GSCC's Rules that
are cleared by GSCC and the 2Year Note, 5Year Note, 10Year Note, and
U.S. Treasury Bond futures contracts and options on these futures
contracts that are cleared by BOTCC.\11\ All eligible positions
maintained by a crossmargining participant in its account at GSCC and
in its (or its affiliate's) proprietary account at BOTCC will be
eligible for crossmargining.\12\ Initially, as a conservative measure,
residual margin amounts will be applied only within the same offset
class (e.g., the 2Year Note against the 2Year Note future). An
appropriate disallowance factor\13\ based on correlation studies and a minimum margin factor\14\ will be applied.\15\
\11\ Nonmortgage backed agency securities will be added at a later date. GCF Repo products will not be included in the
arrangement. GSCC will notify the Commission when additional
securities and futures are added to the crossmargining program. \12\ The GSCCBOTCC crossmargining arrangement will be
applicable on the futures side only to positions in a proprietary
account of a crossmargining participant at BOTCC. The arrangement
will not apply to positions in a customer account at BOTCC that
would be subject to segregation requirements under the Commodity
Exchange Act. This is also the case with respect to the arrangements with NYCC and the CME.
\13\ The disallowance factor is the haircut reflective of the correlation analysis done by GSCC for each offset class.
\14\ The minimum margin factor is the contractually agreed upon
cap on the amount of the margin reduction that the clearing
organizations will allow. (In some of the documents submitted by
GSCC, the minimum margin factor is referred to as the minimum
disallowance factor.) Initially, the GSCCBOTCC crossmargining
program will employ a 50% minimum margin factor. Should GSCC decide
to change the minimum factor, it will submit a proposed rule filing under Section 19(b) of the Act.
\15\ GSCC will review the crossmargining parameters on a yearly
basis unless market events dictate the need for more frequent
reviews. Letter from Jeffrey F. Ingber, Managing Director, General Counsel, and Secretary, GSCC (November 6, 2001).
3. Margin Rates: GSCC and BOTCC currently use different margin rates to establish margin requirements for their respective products. Margin reductions in the GSCCBOTCC crossmargining arrangement will always be computed based on the lower of the applicable margin rates. This methodology results in a potentially lesser benefit to the participant but ensures a more conservative result (i.e., more collateral held at the clearing organization) for both GSCC and the Participating COs.
4. Daily Procedures: On each business day, it is expected that BOTCC will inform GSCC of the residual margin amounts it is making available for crossmargining by approximately 11 p.m. New York time. GSCC will inform BOTCC by approximately 1 a.m. New York time how much of these residual margin amounts it will use. Reductions as computed will be reflected in the daily clearing fund calculation.
C. Benefits of CrossMargining
GSCC believes that its crossmargining program enhances the safety [[Page 4770]]
and soundness of the settlement process for the Government securities
marketplace by: (1) Providing clearing organizations with more
information concerning members' intermarket positions (which is
especially valuable during stressed market conditions) to enable them
to make more accurate decisions regarding the true risk of such
positions to the clearing organizations; (2) allowing for enhanced
sharing of collateral resources; and (3) encouraging coordinated
liquidation processes for a joint participant, or a participant and its
affiliate, in the event of an insolvency. GSCC further believes that
crossmargining benefits participating clearing members by providing
members with the opportunity to more efficiently use their collateral.
More important from a regulatory perspective, however, is that cross
margining programs have long been recognized as enhancing the safety
and soundness of the clearing system itself. Studies of the October
1987 market break gave support to the concept of crossmargining. For
example, The Report of the President's Task Force on Market Mechanisms
(January 1988) noted that the absence of a crossmargining system for
futures and securities options markets contributed to payment strains
in October 1987. The Interim Report of the President's Working Group on
Financial Markets (May 1988) also recommended that the SEC and the
Commodity Futures Trading Commission facilitate crossmargining
programs among clearing organizations. This resulted in the first
crossmargining arrangement between clearing organizations which was approved in 1988.\16\
\16\ Securities Exchange Act Release No. 26153 (October 3,
1988), 53 FR 39567 (October 7, 1988) [File No. SROCC8617] (order
approving crossmargining program between OCC and The Intermarket Clearing Corporation).
III. Discussion
Section 19(b) of the Act directs the Commission to approve a proposed rule change of a selfregulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization. In section 17A(a)(2)(A)(ii) of the Act, Congress directs the Commission having due regard for, among other things, the public interest, the protection of investors, the safeguarding of securities and funds, to use its authority under the Act to facilitate the establishment of linked or coordinated facilities for clearance and settlement of transactions in securities, securities options, contracts of sale for future delivery and options thereon, and commodity options.\17\ Section 17A(b)(3)(F) 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 for which it is responsible.\18\ The Commission finds that the approval of GSCC's proposed rule change is consistent with these Sections. \17\ 15 U.S.C. 78q1(a)(2)(A)(ii).
\18\ 15 U.S.C. 78q1(b)(3)(F).
First, the Commission's approval of GSCC's proposed rule change to
establish a crossmargining arrangement with BOTCC and to extend its
hub and spoke approach to crossmargining to include BOTCC along with
CME and NYCC is in line with the Congressional directive to the
Commission to facilitate linked and coordinated facilities for the
clearance and settlement of securities and futures.\19\ Second,
approval of GSCC's proposal should result in increased and better
information sharing between GSCC and Participating COs regarding the
portfolios and financial conditions of participating joint and
affiliated members. As a result, GSCC and participating COs will be in
a better position to monitor and assess the potential risks of
participating joint or affiliated members and will be in a better
position to handle the potential losses presented by the insolvency of
any joint or affiliated member. Therefore, GSCC's proposal should help
GSCC better safeguard the securities and funds in its possession or
control or for which it is responsible. While crossmargining should
provide benefits and efficiencies to common participants in GSCC and
BOTCC, GSCC has determined to adopt a conservative approach in
introducing its crossmargining program with BOTCC. We believe that
that is a prudent approach consistent with maintaining the safety and
soundness of the national system for prompt and accurate clearance and settlement of transactions in securities.
\19\ 15 U.S.C. 78q1(a)(2)(A)(ii).
IV. 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. SRGSCC200103) be and hereby is approved.
For the Commission by the Division of Market Regulation, pursuant to delegated authority.\20\
\20\ 17 CFR 200.303(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 022371 Filed 13002; 8:45 am]
BILLING CODE 801001P
SUMMARY:
Government Securities Clearing Corp.,
DOCUMENT BODY 2:
January 25, 2002.
I. Introduction
On April 4, 2001, the Government Securities Clearing Corporation
(``GSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SRGSCC200103 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
September 11, 2001.\2\ No comment letters were received. For the
reasons discussed below, the Commission is approving the proposed rule change.
\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 44766 (September 5, 2001), 66 FR 47251.
II. Description \3\
On August 19, 1999, the Commission approved GSCC's proposed rule
filing to establish a crossmargining program with other clearing
organizations and to begin its program with the New York Clearing
Corporation (``NYCC'').\4\ More recently, the Commission approved
GSCC's proposed rule filing to establish a similar crossmargining
program with the Chicago Mercantile Exchange (``CME'').\5\ GSCC is now
establishing a similar crossmargining arrangement with the Board of Trade Clearing Corporation.\6\
\3\ The description of GSCC's crossmargining program is drawn largely from representations made by GSCC.
\4\ Securities Exchange Act Release No. 41766 (August 19, 1999), 64 FR 46737 (August 26, 1999) [File No. SRGSCC9804]. The
requisite rule changes necessary for GSCC to engage in cross
margining programs with other clearing organizations were made in the NYCC crossmargining rule filing.
\5\ Securities Exchange Act Release No. 44301 (May 11, 2001), 66
FR 28207 (May 22, 2001) [File No. SRGSCC0013]. In addition to
approving GSCC's crossmargining program with the CME, the order
granted approval to change GSCC Rule 22, Section 4, to clarify that
before GSCC credits an insolvent member for any profit realized on
the liquidation of the member's final net settlement positions, GSCC
will fulfill its obligations with respect to that member under crossmargining agreements.
\6\ BOTCC is a Delaware corporation that acts as the clearing
organization for certain futures contracts and options on futures
contracts that are traded on the Chicago Board of Trade and that are regulated by the Commodity Futures Trading Commission.
This development is significant because the Chicago Board of Trade,
for which BOTCC clears, is by far the largest Treasury futures exchange
market, and certain of its products, such as the 10Year Note futures
contract, which will be crossmargined with GSCC products, continue to
experience growth in volume. Thus, establishing the crossmargining
program between GSCC and BOTCC has the potential to provide significant
collateral savings to the industry in general and to GSCC's and BOTCC's
common members in particular. From each clearing organization's
perspective, the crossmargining program will provide important risk
management benefits. These benefits include such things as providing
the clearing organizations with more information concerning members'
intermarket positions to enable the clearing organizations to make more
accurate decisions regarding the true risk of the positions to the
clearing organizations and encouraging coordinated liquidation
processes for a joint participant, or a participant and its affiliate, in the event of an insolvency.\7\
\7\ The GSCCBOTCC crossmargining agreement requires ownership
of 50 percent or more of the common stock of an entity to indicate control of the entity for purposes of the definition of
``affiliate.''
A. GSCC's CrossMargining Program
GSCC believes that the most efficient and appropriate approach for establishing crossmargining programs for fixedincome and other interest rate products is to do so on a multilateral basis with GSCC as the ``hub.'' Each clearing organization that participates in a cross margining program with GSCC, such as NYCC, CME, and now BOTCC, (hereinafter ``Participating CO'') enters into a separate cross margining agreement between itself and GSCC. Each of the agreements will have similar terms and no preference will be given by GSCC to one Participating CO over another.
Crossmargining is available to any GSCC netting member (with the exception of interdealer broker netting
[[Page 4769]]
members) that is, or that has an affiliate that is, a member of a
Participating CO. Any such member (or pair of affiliated members) may
elect to have its margin requirements at both clearing organizations
calculated based upon the net risk of its cash and repo positions at
GSCC and of its offsetting and correlated positions in related
contracts carried at the Participating CO. Crossmargining is intended
to lower the crossmargining participant's (or pair of affiliated
members') overall margin requirement. The GSCC member (and its
affiliate, if applicable) will sign an agreement under which it (or
they) agree to be bound by the crossmargining agreement between GSCC
and the Participating CO and which allows GSCC or the Participating CO
to apply the member's (or its affiliate's) margin collateral to satisfy
any obligation of GSCC to the Participating CO (or vice versa) that results from a default of the member (or its affiliate).
Margining based on the net combined risk of correlated positions is based on an arrangement under which GSCC and each Participating CO agree to accept the correlated positions in lieu of supporting collateral. Under this arrangement, each clearing organization holds and manages its own positions and collateral and independently determines the amount of margin that it will make available for cross margining, referred to as the ``residual margin amount.''
GSCC computes the amount by which the crossmargining participant's
margin requirement can be reduced at each clearing organization by
comparing the participant's positions and the related margin
requirements at GSCC as against those at each Participating CO. GSCC
offsets each crossmargining participant's residual margin amount at
GSCC against the offsetting residual margin amounts of the participant
(or its affiliate) at each Participating CO.\8\ If, within a given pair
of offset classes, the margin that GSCC has available for a participant
is greater than the combined margin submitted by the Participating COs,
GSCC will allocate a portion of its margin equal to the combined margin
at the Participating COs. If, within a given pair of offset classes,
the combined margin submitted by the Participating COs is greater than
the margin that GSCC has available for that participant, GSCC will
first allocate its margin to the Participating CO with the most highly
correlated position. If, within a given pair of offset classes, the
positions are equally correlated, GSCC will allocate pro rata based
upon the residual margin amount available at each Participating CO.
GSCC and each Participating CO may then reduce the amount of collateral
that they collect to reflect the offsets between the crossmargining
participant's positions at GSCC and its (or its affiliate's) positions
at the Participating CO.\9\ In the event of the default and liquidation
of a crossmargining participant, the loss sharing between GSCC and
each of the Participating COs will be based upon the foregoing allocations and the crossmargin reduction.
\8\ The residual margin amount is the long margin amount or the
short margin amount in each offset class that is available for
crossmargining after all internal offsets are conducted within and
between offset classes at a particular clearing organization.
\9\ GSCC and each Participating CO unilaterally have the right
not to reduce a participant's margin requirement by the crossmargin
reduction or to reduce it by less than the crossmargin reduction.
However, the clearing organizations may not reduce a participant's margin requirement by more than the crossmargin reduction.
GSCC will guarantee the crossmargining participant's (or its
affiliate's) performance to each Participating CO up to a specified
maximum amount based on the loss sharing formula contained in the
CrossMargining Agreement. Each Participating CO will provide the same
guaranty to GSCC. The amount of the guarantee is the lowest of: (1) The
crossmargin loss of the worse off party; (2) the higher of the cross
margin reduction or the crossmargin gain of the better off party; (3)
the amount required to equalize the parties' crossmargin results; or
(4) the amount by which the crossmargining reduction exceeds the
better off party's crossmargin loss if both parties have crossmargin losses.
B. Information Specific to the Current Agreement Between GSCC and BOTCC
1. Participation in the crossmargining program: Any netting member
of GSCC other than an interdealer broker will be eligible to
participate.\10\ Any clearing member of BOTCC will be eligible to participate.
\10\ Because interdealer brokers should not and generally do
not have positions at GSCC at the end of the day, they should have no margin requirement to be reduced.
2. Products subject to crossmargining: The products that will be
eligible for the GSCCBOTCC crossmargining arrangement are the
Treasury securities with certain remaining maturities that fall into
GSCC's Offset Classes C, E, F, and G as defined in GSCC's Rules that
are cleared by GSCC and the 2Year Note, 5Year Note, 10Year Note, and
U.S. Treasury Bond futures contracts and options on these futures
contracts that are cleared by BOTCC.\11\ All eligible positions
maintained by a crossmargining participant in its account at GSCC and
in its (or its affiliate's) proprietary account at BOTCC will be
eligible for crossmargining.\12\ Initially, as a conservative measure,
residual margin amounts will be applied only within the same offset
class (e.g., the 2Year Note against the 2Year Note future). An
appropriate disallowance factor\13\ based on correlation studies and a minimum margin factor\14\ will be applied.\15\
\11\ Nonmortgage backed agency securities will be added at a later date. GCF Repo products will not be included in the
arrangement. GSCC will notify the Commission when additional
securities and futures are added to the crossmargining program. \12\ The GSCCBOTCC crossmargining arrangement will be
applicable on the futures side only to positions in a proprietary
account of a crossmargining participant at BOTCC. The arrangement
will not apply to positions in a customer account at BOTCC that
would be subject to segregation requirements under the Commodity
Exchange Act. This is also the case with respect to the arrangements with NYCC and the CME.
\13\ The disallowance factor is the haircut reflective of the correlation analysis done by GSCC for each offset class.
\14\ The minimum margin factor is the contractually agreed upon
cap on the amount of the margin reduction that the clearing
organizations will allow. (In some of the documents submitted by
GSCC, the minimum margin factor is referred to as the minimum
disallowance factor.) Initially, the GSCCBOTCC crossmargining
program will employ a 50% minimum margin factor. Should GSCC decide
to change the minimum factor, it will submit a proposed rule filing under Section 19(b) of the Act.
\15\ GSCC will review the crossmargining parameters on a yearly
basis unless market events dictate the need for more frequent
reviews. Letter from Jeffrey F. Ingber, Managing Director, General Counsel, and Secretary, GSCC (November 6, 2001).
3. Margin Rates: GSCC and BOTCC currently use different margin rates to establish margin requirements for their respective products. Margin reductions in the GSCCBOTCC crossmargining arrangement will always be computed based on the lower of the applicable margin rates. This methodology results in a potentially lesser benefit to the participant but ensures a more conservative result (i.e., more collateral held at the clearing organization) for both GSCC and the Participating COs.
4. Daily Procedures: On each business day, it is expected that BOTCC will inform GSCC of the residual margin amounts it is making available for crossmargining by approximately 11 p.m. New York time. GSCC will inform BOTCC by approximately 1 a.m. New York time how much of these residual margin amounts it will use. Reductions as computed will be reflected in the daily clearing fund calculation.
C. Benefits of CrossMargining
GSCC believes that its crossmargining program enhances the safety [[Page 4770]]
and soundness of the settlement process for the Government securities
marketplace by: (1) Providing clearing organizations with more
information concerning members' intermarket positions (which is
especially valuable during stressed market conditions) to enable them
to make more accurate decisions regarding the true risk of such
positions to the clearing organizations; (2) allowing for enhanced
sharing of collateral resources; and (3) encouraging coordinated
liquidation processes for a joint participant, or a participant and its
affiliate, in the event of an insolvency. GSCC further believes that
crossmargining benefits participating clearing members by providing
members with the opportunity to more efficiently use their collateral.
More important from a regulatory perspective, however, is that cross
margining programs have long been recognized as enhancing the safety
and soundness of the clearing system itself. Studies of the October
1987 market break gave support to the concept of crossmargining. For
example, The Report of the President's Task Force on Market Mechanisms
(January 1988) noted that the absence of a crossmargining system for
futures and securities options markets contributed to payment strains
in October 1987. The Interim Report of the President's Working Group on
Financial Markets (May 1988) also recommended that the SEC and the
Commodity Futures Trading Commission facilitate crossmargining
programs among clearing organizations. This resulted in the first
crossmargining arrangement between clearing organizations which was approved in 1988.\16\
\16\ Securities Exchange Act Release No. 26153 (October 3,
1988), 53 FR 39567 (October 7, 1988) [File No. SROCC8617] (order
approving crossmargining program between OCC and The Intermarket Clearing Corporation).
III. Discussion
Section 19(b) of the Act directs the Commission to approve a proposed rule change of a selfregulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization. In section 17A(a)(2)(A)(ii) of the Act, Congress directs the Commission having due regard for, among other things, the public interest, the protection of investors, the safeguarding of securities and funds, to use its authority under the Act to facilitate the establishment of linked or coordinated facilities for clearance and settlement of transactions in securities, securities options, contracts of sale for future delivery and options thereon, and commodity options.\17\ Section 17A(b)(3)(F) 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 for which it is responsible.\18\ The Commission finds that the approval of GSCC's proposed rule change is consistent with these Sections. \17\ 15 U.S.C. 78q1(a)(2)(A)(ii).
\18\ 15 U.S.C. 78q1(b)(3)(F).
First, the Commission's approval of GSCC's proposed rule change to
establish a crossmargining arrangement with BOTCC and to extend its
hub and spoke approach to crossmargining to include BOTCC along with
CME and NYCC is in line with the Congressional directive to the
Commission to facilitate linked and coordinated facilities for the
clearance and settlement of securities and futures.\19\ Second,
approval of GSCC's proposal should result in increased and better
information sharing between GSCC and Participating COs regarding the
portfolios and financial conditions of participating joint and
affiliated members. As a result, GSCC and participating COs will be in
a better position to monitor and assess the potential risks of
participating joint or affiliated members and will be in a better
position to handle the potential losses presented by the insolvency of
any joint or affiliated member. Therefore, GSCC's proposal should help
GSCC better safeguard the securities and funds in its possession or
control or for which it is responsible. While crossmargining should
provide benefits and efficiencies to common participants in GSCC and
BOTCC, GSCC has determined to adopt a conservative approach in
introducing its crossmargining program with BOTCC. We believe that
that is a prudent approach consistent with maintaining the safety and
soundness of the national system for prompt and accurate clearance and settlement of transactions in securities.
\19\ 15 U.S.C. 78q1(a)(2)(A)(ii).
IV. 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. SRGSCC200103) be and hereby is approved.
For the Commission by the Division of Market Regulation, pursuant to delegated authority.\20\
\20\ 17 CFR 200.303(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 022371 Filed 13002; 8:45 am]
BILLING CODE 801001P