Self-Regulatory Organizations; Government Securities Clearing Corporation; Notice of Filing of a Proposed Rule Change Relating to the Establishment of a Cross-Margining Program

[Federal Register Volume 64, Number 27 (Wednesday, February 10, 1999)]
[Notices]
[Pages 6727-6731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3219]



[[Page 6727]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41019; File No. SR-GSCC-98-04]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Notice of Filing of a Proposed Rule Change Relating to the 
Establishment of a Cross-Margining Program

February 3, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 16, 1998, the 
Government Securities Clearing Corporation (``GSCC'') filed with the 
Securities and Exchange Commission (``Commission'') a 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 from interested persons on the proposed rule 
change.
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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

    Under the proposed rule change, GSCC will establish a cross-
margining arrangement initially with the Commodity Clearing Corporation 
(``CCC'') and thereafter with other futures clearing organizations.

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 such 
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

    The proposed cross-margining arrangement would be available to a 
GSCC member that is or that has an affiliate \3\ that is a member of a 
participating futures clearing organization (``FCO'').\4\ Any such 
common 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 forward positions at GSCC and 
offsetting positions in related futures contracts carried at the FCO. 
As a result, the common member's or pair of affiliated members' margin 
requirement at each clearing organization could potentially be lowered. 
GSCC believes that this will provide the member firm with significant 
benefits such as greater liquidity, more efficient use of collateral, 
and reduced operational costs.
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    \3\ Under the proposed agreement between GSCC and CCC, 
``affiliate'' means a clearing member of one clearing organization 
that: (1) Directly or indirectly controls, (2) is directly or 
indirectly controlled by, or (3) is under common control with a 
clearing member of another clearing organization. Ownership of 10% 
or more of the common stock of an entity is deemed control of the 
entity under the definition.
    \4\ The term ``FCO'' would be defined in GSCC's Rules as a 
clearing organization for a board of trade designated as a contract 
member under Section 5 of the Commodity Exchange Act that has 
entered into a cross-margining agreement with GSCC. This would 
include CCC and any other futures clearing organization with which 
GSCC establishes a cross-margining arrangement.
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    Margining based on the net risk of correlated positions will be 
made possible by an arrangement under which GSCC and the FCO agree, in 
effect, to share the proceeds from correlated positions and supporting 
collateral. Under the GSCC cross-margining proposal, each clearing 
organization will hold and manage its own collateral. The amount of 
collateral collected by each clearing organization may be reduced to 
reflect offsets between the cross-margining participant's (or its 
affiliate's) futures positions at the FCO and the cross-margining 
participant's positions at GSCC.
    Each clearing organization will guaranty the cross-margining 
participant's (or its affiliate's) performance to the other clearing 
organization up to a specified maximum amount. In effect, therefore, 
each clearing organization will reduce its margin requirement in 
exchange for a guaranty from the other clearing organization. The 
amount of the margin reduction will ordinarily be equal to the amount 
of the guaranty. Each clearing organization's guaranty, in turn, will 
be backed by the positions and margin deposits of its cross-margining 
participant. Loss sharing between clearing organizations will be 
subject to a cap.
    The GSCC proposal would involve a hub and spoke concept when more 
than one futures clearing organization is involved. A member's long or 
short position in government securities at GSCC would be apportioned 
pro rata among the member's offsetting short or long positions (if any) 
at each FCO. All possible offsets among positions carried by a cross-
margining participant within a single clearing organization will be 
effected before any offsets between clearing organizations.
    At least initially, the GSCC cross-margining arrangement will be 
applicable on the future side only to positions in a proprietary 
account of a cross-margining participant (or its affiliate) at an FCO. 
The arrangement will not apply to positions in a customer account at an 
FCO that would be subject to segregation requirements under the 
Commodity Exchange Act.
    GSCC believes that the implementation of a cross-margining 
arrangement will enhance the overall safety and soundness of the 
settlement process for the government securities marketplace by: (1) 
Providing clearing organizations with more accurate data concerning the 
true risk of members' intermarket positions (which is especially 
valuable during stressed market conditions); (2) allowing for enhanced 
sharing of collateral resources; and (3) establishing coordinated 
liquidation processes for a joint participant, or a participant and its 
affiliate, in the event of an insolvency. GSCC further believes that 
cross-margining programs will benefit the clearing members that 
participate in them by providing members with more efficient use of 
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 crash gave support to the concept of 
cross-margining. For example, The Report of the President's Task Force 
on Market Mechanisms (January 1988) (known as the ``Brady Report'') 
noted that the absence of a cross-margining 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 Commission and the 
Commodity Futures Trading Commission facilitate cross-margining 
programs among clearing organizations. This support resulted in more 
urgent attention from the regulatory agencies, and the first

[[Page 6728]]

cross-margining arrangement was approved in 1988.\5\
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    \5\ Securities Exchange Act Release No. 26153 (October 3, 1988), 
53 FR 39567 [File No. SR-OCC-86-17] (order approving cross-margining 
program between The Options Clearing Corporation and the Intermarket 
Clearing Corporation).
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    GSCC believes that a properly designed cross-margining program can 
reduce margin requirements for market participants and can enhance the 
safety and stability of clearing and settlement systems. When margin is 
held in the form of cash or cash equivalents to cover the risk of a 
market position whose liquidation cost may be highly volatile, there is 
always risk that the amount of margin held will be insufficient if the 
market moves beyond reasonably anticipated limits. In contrast, where 
an obligation is hedged by a position on the other side of the market 
based on the same or a similar underlying asset an increase in the cost 
of liquidating the obligation should be offset in whole or in part by a 
corresponding increase in the value of the hedge.
    GSCC believes that cross-margining arrangements between or among 
clearing organizations enhance the effectiveness of intermarket hedge 
positions and therefore can reduce clearing system exposure in the 
event of market stress. By reducing the need for clearing organizations 
to call for large amounts of additional original margin in volatile 
markets, cross-margining reduces the risk of a liquidity crisis of the 
kind that threatened the clearing system in October 1987.
    GSCC's proposed cross-margining program would be the first program 
for cross-margining positions in futures contracts with positions in 
the underlying securities (as opposed to cross-margining between 
futures and securities options). GSCC believes that the most efficient 
and appropriate approach for establishing these cross-margining links 
in the case of government securities related products is to do so on a 
multilateral basis with GSCC acting as the ``hub.''
GSCC's ``Hub'' Approach to Cross-Margining
    Uniform treatment: Each FCO will be a party to a separate cross-
margining agreement between the FCO and GSCC. It is anticipated, 
however, that each of these agreements will have essentially similar 
terms, and no preference will be given by GSCC to one FCO or its 
members over another.
    Residual Margin Amounts Allocated Pro-Rata: In the case of each 
cross-margining participant, GSCC will offset the participant's 
residual margin amount at GSCC against the offsetting residual margin 
amounts of the participant (or its affiliate) at each FCO pro rata 
based upon the residual margin amount available at each.\6\
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    \6\ For example, if a cross-margining participant has a $9 
million residual short margin amount at GSCC and residual long 
margin amounts in the same product of $8 million at FCO 1 and $4 
million at FCO 2, GSCC will use two-thirds of the $9 million margin 
amount, or $6 million, for offset against the participant's FCO 1 
activity and one-third of the $9 million margin amount, or $3 
million, for offset against FCO 2 activity.
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    Pro Rata Guaranties and Loss Allocation: GSCC will issue a guaranty 
to each FCO with respect to a cross-margining participant (or its 
affiliate) in an amount determined on the basis of the pro rata 
allocation among the FCOs of the participant's residual margin amounts. 
Accordingly, in the event of a default and liquidation of a cross-
margining participant, the loss sharing arrangements as between GSCC 
and each FCO will be based on the same pro rata shares.
Procedures for Members To Become Cross-Margining Participants
    GSCC and each FCO will determine which of their members are 
eligible to participate in the cross-margining program. In order to be 
a cross-margining participant, a GSCC member must either: (a) Itself 
also be a member of an FCO or (b) have an affiliate that is a member of 
an FCO. The GSCC member must sign (together with its affiliate, if any) 
an appropriate agreement under which the member (and its affiliate, if 
there is one) agrees to be bound by the cross-margining agreement and 
which allows GSCC to apply the member's margin collateral to satisfy 
any obligation of GSCC to an FCO that results from the default of the 
member (or its affiliate) and vice versa in the case of an FCO.
    Subject to the foregoing, GSCC and each FCO will determine which of 
their members are eligible to participate in the cross-margining 
program.
Summary of the Operation of the Cross-Margining Program
    Data exchange: Within an agreed upon time frame, GSCC and each FCO 
will exchange daily position and margin data for each cross-margining 
participant with respect to each product eligible for cross-margining.
    Collateral management: Margin collateral will be collected, 
maintained, valued, and returned separately by each clearing 
organization pursuant to its own rules and procedures. The proposed 
arrangement does not involve the pooling of collateral between clearing 
organizations. GSCC will not maintain cross-margining accounts for a 
cross-margining participant separate from its regular account at GSCC, 
and there will be no separate collateral pool at GSCC for cross-
margining activity.
    Unified margin calculation: GSCC will agree with each of the FCOs 
on the particular products cleared by each that are sufficiently price 
correlated to be eligible for cross-margining treatment (e.g., cash 
positions in two-year Treasury notes and futures on two-year Treasury 
notes). Such products will be referred to as ``eligible products,'' and 
a cross-margining participant's long or short positions in eligible 
products will be called ``eligible positions.'' GSCC and each FCO will 
agree upon a common margin formula including the percentage of 
principal amount to be used as the base margin calculation each long or 
short position in each eligible product, the disallowance factors, if 
any, to be applied when offsetting long and short margin amounts in 
different eligible products, and the minimum charges for offsetting 
positions.\7\
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    \7\ According to GSCC, an appropriate conversion method will be 
agreed upon to equate size of futures and cash positions for offset 
purposes.
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    Coordinated mark to market process: GSCC and each FCO will 
coordinate their daily mark to market and variation margin processes so 
that if a cross-margining participant does not pay its debit mark or 
make a required clearing fund or margin deposit to one clearing 
organization on a particular business day, the other will be so 
informed and will not pay out any credit mark or clearing fund or 
margin withdrawal relating to cross-margined activity to that 
participant.
    Daily calculation of cross-margining reduction and cross-
guaranties: On each business day, GSCC will complete its own internal 
margining process for buy-sell, repo, and Treasury auction transactions 
for each cross-margining participant (including the setting off or 
netting, to the extent permitted in GSCC's rules, of GCF repo 
transactions with other activity).\8\ Each FCO will perform an 
equivalent internal process for each member, offsetting long margin 
amounts against short margin amounts for futures and options on futures

[[Page 6729]]

contracts that are eligible products to the extent specified in its 
rules.\9\
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    \8\ The term ``GCF repo transaction'' is defined in GSCC's rules 
as ``a Repo Transaction involving Generic CUSIP Numbers the data on 
which are submitted to the Corporation on a Locked-In-Trade basis 
pursuant to the provisions of Rule 7, for netting and settlement by 
the Corporation pursuant to the provisions of Rule 20.'' See also 
Securities Exchange Act Release No. 40623 (October 30, 1998), 63 FR 
59831 [File No. SR-GSCC-98-02] (order approving implementation of 
GSCC's GCF Repo service).
    \9\ On each business day, GSCC and CCC each will calculate for 
each cross-margining participant an initial margin requirement with 
respect to eligible positions. This calculation will be done 
independently, based upon an agreed upon method, without the other 
clearing corporation's review. However, GSCC and CCC will review 
generally each other's margining process on a periodic basis, and 
each will have the obligation to inform the other of any material 
changes to its margining process.
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    As a result of the internal margining process, each clearing 
organization may have ``residual'' long or short margin amounts for a 
member in various eligible products. The residual long or short margin 
amount is the amount of long or short margin (i.e., margin with respect 
to a long position or a short position) that has not been ``used up'' 
in the internal offsetting process.\10\
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    \10\ A margin amount may be ``used up'' whether or not there has 
been a full offset against it. For example, assume that a GSCC 
member has a $1 million gross margin requirement on a short position 
in the 10-year note (offset class F) that is offset against a $1 
million gross margin requirement on a long position in the long bond 
(offset class G). Because there is a 20% disallowance on offsets 
between classes F and G, the member has a $200,000 margin 
requirement after the offset. However, both $1 million amounts have 
now been entirely used up, and nothing is available for further 
offset either within GSCC or for cross-margining with an FCO.
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    Each FCO will provide information to GSCC for each cross-margining 
participant as to the residual long or short margin amount in each 
eligible product that the FCO intends to make available for cross-
margining offsets on that day. GSCC then will determine for each cross-
margining participant the amount, if any, of the long or short residual 
margin offered by each FCO that GSCC intends to use as an offset 
against the participant's short or long residual margin amounts at GSCC 
for purposes of determining the cross-margining reduction.\11\ GSCC 
will inform each FCO of the cross-margining reduction as between GSCC 
and that FCO for each cross-margining participant. The cross-margin 
reduction is the amount by which GSCC and FCO may each appropriately 
reduce its cross-margining participant's margin requirement to reflect 
the cross-margining offset.\12\
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    \11\ The total amount used will be in GSCC's sole discretion. 
However, except in unusual circumstances the total amount used will 
be allocated pro rata among the participating FCOs as described 
above.
    \12\ If a cross-margining participant has eligible positions at 
more than one participating FCO, the participant's total margin 
reduction at GSCC will be the sum of the cross-margining reductions 
between GSCC and each FCO.
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    Accordingly, the maximum cross-margining reduction that may be 
achieved by a cross-margining participant will be determined by the 
amount of residual taken by GSCC. For example, if an FCO offers $1 
million in residual short margin for a particular member in 2-year note 
futures, and GSCC sets all of that amount off against a $2 million cash 
position in the 2-year note, then the cross-margin reduction amount is 
$1,000,000 for GSCC and $1,000,000 for the FCO, or $2 million in total. 
That is the anticipated amount of margin reduction that the cross-
margining participant will enjoy.
    Under the terms of the cross-margining agreement, GSCC will be 
deemed to have extended its ``guaranty'' of a cross-margining 
participant's (or its affiliate's) obligation to each FCO in a base 
amount equal to the cross-margining reduction as between GSCC and that 
FCO. Similarly, that FCO will be deemed to have extended its 
``guaranty'' of the cross-margining participant's obligation to GSCC in 
the same base amount. The base amount of these ``cross-guaranties'' 
represents a cap on the amount of loss that either GSCC or the FCO 
could incur as the result of a default by a participating member (or 
its affiliate) to the other.\13\ Thus, for example, if GSCC had a 
residual short margin amount in a product of $10 million and it was 
offset against an FCO's residual long margin amount of $4 million, then 
GSCC would collect only $6 million in margin, and the FCO would have 
guaranteed a maximum of $4 million or the amount of any net surplus 
held by the FCO after liquidating the participant. GSCC and each FCO 
will retain the right to reduce a cross-margining participant's 
clearing fund or margin requirement by less than the amount of the 
cross-margining reduction or not to reduce it at all.\14\
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    \13\ For instance, if a cross-margining participant had a 
residual short margin amount of $10 million at GSCC and it was 
offset against a residual long margin amount of $4 million at an 
FCO, then the base amount of the cross-guaranties would be $4 
million. As noted below, the ``maximum guaranty amount'' of GSCC or 
the FCO would exceed $4 million only to the extent that the paying 
clearing organization had funds of the participant remaining (i.e., 
a ``net surplus'') after satisfying all other obligations of the 
participant to the paying clearing organization.
    \14\ The ``cross-margining reduction'' is determined by the 
residual margin amounts made available by an FCO and ``used'' by 
GSCC in determining the amount of the cross-guaranties. It does not 
depend upon the amount, if any, by which either GSCC or an FCO 
actually reduces a cross-margining participant's margin requirement. 
In other words, after an offer by an FCO of $1 million in residual 
margin and acceptance by GSCC of that amount for offset, the cross-
margining reduction would be $1 million and the base amount of the 
cross-guaranties would be fixed at that amount. However, either 
clearing organization might nevertheless determine to reduce the 
cross-margining participant's clearing fund or margin requirement by 
less than $1 million or not at all, and the cross-margining 
reduction for all purposes under the cross-margining agreement would 
still be $1 million. The clearing organization would simply have 
made a determination to hold more collateral without affecting the 
amount of the guaranty it receives from the other clearing 
organization.
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    Each clearing organization will represent to the other that it will 
margin a cross-margining participant's positions such that the amount 
of margin is adequate to cover the cross-margining participant's 
obligations to that clearing organization, including the obligation to 
reimburse any payment under the guaranty. In addition, on any day that 
is a business day for an FCO and not for GSCC or vice versa, the cross-
guaranties as they existed on the immediately preceding business day 
will remain in effect, and it shall be the responsibility of the 
clearing organization that is open for business on such day to adjust 
its margin requirements with respect to cross-margining participants to 
cover such cross-margining participants' obligations.\15\
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    \15\ This is necessary because the cross-margining participant's 
margin or clearing fund deposit will remain fixed at the clearing 
organization that is closed, and the closed clearing organization 
must therefore continue to rely on the guaranty based on the 
previous day's cross-margining reduction. On the other hand, the 
clearing organization that is open ordinarily will be able to assess 
and collect additional margin or clearing fund deposits if needed to 
reflect updated positions in the participant's account on its own 
books as well as the fixed guaranty obligation that is still 
outstanding to the other clearing organization.
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    Default of a cross-margining participant: liquidation and loss-
sharing: If a cross-margining participant becomes insolvent and its 
eligible positions are liquidated by GSCC and the FCOs, each clearing 
organization will calculate its ``net loss'' or ``net surplus'' from 
the liquidation.\16\ GSCC

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and each FCO will use their best efforts to coordinate the liquidation 
of eligible positions so that offsetting or hedged positions can be 
closed out simultaneously. GSCC and each FCO may unilaterally elect not 
to terminate or suspend and liquidate the eligible positions of its 
cross-margining participant. Any clearing organization that does so 
will remain liable to the other with respect to its guaranty. A 
clearing organization that has elected not to liquidate the eligible 
positions of a defaulting participant will be deemed to have no net 
loss and no net surplus.
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    \16\ Under the proposed cross-margining agreement between GSCC 
and CCC, net surplus and net loss will be calculated as follows: In 
the event that (i) the sum of available margin and any proceeds of 
eligible positions realized by such clearing organization (including 
securities deliverable to and amounts receivable with respect to 
securities deliverable by such cross-margining participant in 
settlement of eligible positions) and any mark to market payments or 
other settlement amounts due from such clearing organization with 
respect to eligible positions exceeds (ii) the sum of the mark to 
market payments or other settlement amounts owed to such clearing 
organization with respect to or as a result of the closeout of 
eligible positions (including securities deliverable by or amounts 
payable with respect to securities deliverable to such cross-
margining participant with respect to eligible positions) plus any 
interest expense, fees, commissions or other costs reasonably 
incurred in such closeout or otherwise arising from such eligible 
positions, then the amount of such excess shall be deemed to be the 
net surplus. In the event that the sum referred to in clause (i) of 
the preceding sentences is less than the amount referred to in 
clause (ii), the difference shall be the net loss.
    ``Available margin'' is defined as the amount of clearing fund 
deposits, margin, or other collateral remaining after satisfaction 
of all obligations of the cross-margining participant to the 
clearing organization other than obligations arising from eligible 
positions.
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    If either GSCC or the FCO, after liquidation of a cross-margining 
participant, has a net loss and the other has a smaller net loss, no 
net loss, or a net surplus, then the one with the larger net loss (the 
``worse-off party'') is entitled to receive a payment from the other 
(the ``better-off party'') that equalizes their losses. The amount of 
this equalizing payment will be capped at the least of: (1) The 
``maximum guaranty amount'' of the better-off party; (2) if the better-
off party has a net loss, an amount that together with its net loss 
equals its total cross-margining reduction (loss cap); or (3) the 
worse-off party's net loss. The ``maximum guaranty amount'' is the 
greater of the cross-margining reduction or the net surplus of the 
guarantor clearing organization.\17\
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    \17\ Where a cross-margining participant had eligible positions 
at more than one FCO, GSCC's net loss or net surplus for purposes of 
the cross-margining agreement between GSCC and any one FCO will be a 
portion of GSCC's aggregate net loss or net surplus from all 
eligible positions and available margin at GSCC that is equal to the 
portion of the residual margin at GSCC that was offset against the 
residual margin at that FCO. For example, assume that FCO 1 and FCO 
2 each offer GSCC $2 million in residual short margin based on a 
$200 million short position in futures on the 10-year note that is 
haircut at 1%. If GSCC has only $2 million in residual long margin, 
it would ``take'' $1 million residual from each FCO for offset 
purposes. If GSCC incurs a $10 million loss in liquidating the $200 
million futures position, GSCC's ``net loss'' for purposes of its 
agreement with FCO 1 would ordinarily be half of that or $5 million. 
However, the cross-margining agreements will also contain provisions 
permitting further contribution by FCO 1 if FCO 1's net surplus 
exceeds $5 million and FCO 2 contributes less than $5 million.
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    Thus, for example, if:
    •  GSCC had a net surplus of $5 million and the FCO had a net 
loss of $3 million, and if GSCC's applicable cap were $3 million or 
more, then it would give the FCO $3 million, and if its cap were under 
$3 million, it would give the FCO its cap amount.
    •  GSCC had a net surplus of $5 million and the FCO had a net 
loss of $10 million, GSCC would give the FCO $7.5 million, except that 
if its cap were under $7.5 million, then it would give the FCO the cap 
amount.
    •  GSCC had a net loss of $5 million and the FCO had a net 
loss of $10 million, if: (a) The applicable cap amount were $5 million 
or less, than GSCC would give the FCO nothing, (b) if the cap amount 
were $6 million, then GSCC would give the FCO $1 million, and (c) if 
the cap amount were $7.5 million or more, GSCC would give the FCO $2.5 
million.
    •  GSCC had a net surplus of $5 million and the FCO had a net 
loss of $1 million and the loss cap is $5 million, GSCC would give the 
FCO $1 million.
Information Specific to the GSCC-CCC Cross-Margining Agreement
    Participation in the program. Any netting member of GSCC other than 
an interdealer broker will be eligible to participate. Any clearing 
member of CCC will be eligible to participate.
    Positions subject to cross-margining: The products that will 
initially be eligible for cross-margining are: for GSCC, its offset 
classes for the 2-year note, 5-year note, 10-year note, and 30-year 
bond; and for CCC, its 2-year note, 5-year note, 10-year note, and 30-
year bond futures products. Initially, as a conservative measure, 
residual margin amounts will be applied only within the same ``offset 
class'' (e.g., the 2-year note against the 2-year note future). All 
eligible positions maintained by a cross-margining participant in its 
account at GSCC and in its (or its affiliate's) proprietary account at 
CCC will be eligible for cross-margining.
    Unified margin factors: The margin factors that GSCC and CCC will 
apply to eligible positions are GSCC's margin factors.
    Daily procedures: On each business day by midnight, CCC will inform 
GSCC of the residual margin amounts it is making available. Thereafter, 
by 2:00 a.m., GSCC will inform CCC of how much, if any, of these 
residual margin amounts it will use.
GSCC Rule Changes
    Required changes in the text of GSCC's rules are limited because 
cross-margining participants will be bound by the cross-margining 
agreement with CCC (and with each other FCO in the future), and these 
agreements will contain much of the substance of the cross-margining 
arrangements. Definitions relating to cross-margining will be added to 
GSCC Rule 1.\18\ These definitions correspond generally to certain 
terms that are defined in the cross-margining agreement(s).
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    \18\ The text of the proposed amendments to GSCC's rules is 
attached as an exhibit to GSCC's filing, which is available for 
inspection and copying at the Commission's Public Reference Room and 
through GSCC.
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    Section 2 of GSCC Rule 4 will be amended to provide that the 
required fund deposit otherwise calculated for a cross-margining 
participant will be further reduced in an amount not to exceed the sum 
of the cross-margin reductions calculated under the various cross-
margining agreements. As provided in the cross-margining agreements, 
GSCC will receive a guaranty of the participant's obligations from each 
FCO, the sum of which will not be less than the total cross-margining 
reduction.
    Sections 5 and 6 of Rule 4 will be amended to clarify the 
application of those provisions in the context of the cross-margining 
arrangements. Specifically, the amendments will provide that GSCC may 
set off a cross-margining participant's obligation to reimburse GSCC 
for the payment of a guaranty against any asset of the participant that 
GSCC holds as collateral and against any amounts due to the 
participant. Section 6 of Rule 4 will make clear that GSCC can apply a 
member's clearing fund deposits to satisfy a loss without necessarily 
treating the member as insolvent.
    A provision will be added to Section 2 of Rule 22 to specify that 
GSCC may but is not required to consider a cross-margining participant 
to be insolvent if the member is declared to be insolvent by an FCO. 
GSCC believes that this is an appropriate provision because under the 
terms of the cross-margining agreement GSCC has credit exposure to a 
cross-margining participant as a result of its obligations to the FCO, 
and GSCC must be able to limit its exposure by closing out the 
positions of a cross-margining participant if the FCO does so.
    New Rule 43 will set forth some basic provisions as to how a GSCC 
netting member may become a cross-margining participant. Section 3 of 
Rule 43 will provide explicitly that a cross-margining participant has 
the obligation to reimburse GSCC for any amount paid out by GSCC to an 
FCO on the participant's behalf under a cross-margining guaranty and 
will cross-reference the corresponding provisions of the cross-
margining agreement. The effect will be that the participant's 
defaulted obligations to the FCO, if any, would be netted against any 
amounts held by or due to the participant as a

[[Page 6731]]

result of its positions at GSCC. As a result, the participant would be 
entitled to receive from the close out of its positions and margin at 
GSCC only the residual after netting out the sum of its obligations to 
GSCC and the FCOs. Section 4 of Rule 43 will provide that if a cross-
margining participant or its affiliate defaults to an FCO (thus causing 
GSCC to make payment under its guaranty), the cross-margining 
participant must either immediately deposit the amount of the guaranty 
with GSCC or be declared insolvent itself.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    GSCC does not believe that the proposed rule change would impose 
any burden on competition.

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

    Written comments with respect to the proposed rule change have not 
been solicited or received. Members will be notified of the rule change 
filing, and comments will be solicited by an Important Notice. GSCC 
will notify the Commission of any written comments it receives.

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 GSCC 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, N.W., Washington, D.C. 20549. 
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, N.W., 
Washington, D.C. 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-98-04 and should be 
submitted by March 3, 1999.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-3219 Filed 2-9-99; 8:45 am]
BILLING CODE 8010-01-M