[Federal Register Volume 68, Number 210 (Thursday, October 30, 2003)]
[Notices]
[Pages 61844-61845]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-27308]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48689; File No. SR-FICC-2003-03]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Amend the Criteria Used To 
Place Members on Surveillance Status

October 24, 2003.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on March 20, 2003, the Fixed 
Income Clearing Corporation (``FICC'') filed with the Securities and 
Exchange Commission (``Commission'') and on June 3 and 18, 2003, 
amended the proposed rule change described in Items I, II, and III 
below, which items have been prepared primarily by FICC. 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

    FICC is seeking to amend the criteria it uses to place members on 
surveillance status.

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

    In its filing with the Commission, FICC 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. FICC 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 FICC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Under the current rules of both the Government Securities Division 
(``GSD'') and the Mortgage-Backed Securities Division (``MBSD'') of 
FICC, management has the ability to place a member in a surveillance 
status class depending on whether the member satisfies one or more of 
the enumerated financial and operational criteria in the specific 
class. Once placed on surveillance status, FICC closely monitors the 
member's condition. The current criteria for placing members on 
surveillance status are broadly written and capture many FICC members 
that pose minimal financial or operational risk to FICC. This creates 
administrative burdens for FICC staff who must more closely monitor 
these members that pose minimal risk.
    To remedy this problem, FICC has developed new criteria for placing 
members on surveillance. Specifically, all domestic broker-dealers and 
banks \3\ that are GSD netting members and/or MBSD clearing members 
will be assigned a rating that is generated by entering financial data 
of the member into a matrix (``Matrix'') developed by credit risk 
staff.\4\ Those members with a ``weak'' rating or deemed to pose a 
relatively higher degree of risk to FICC will be placed on an internal 
``watch list'' and monitored more closely by credit risk staff.\5\ The 
consequences of being put on the ``watch list'' will be the same as is 
currently the case with surveillance status in the GSD's rules and 
include possibly requiring the member on ``watch list'' status to 
submit additional financial reports and data and/or make additional 
clearing or participants fund deposits.\6\
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    \3\ The following categories of GSD members will receive 
ratings: Category 1 and 2 Dealer Netting Members, Category 1 and 2 
Inter-Dealer Broker Netting Members, and Bank Netting Members. In 
the MBSD, Comparison and Clearing System Participants that are 
either banks or broker-dealers will be rated. Domestic broker-
dealers and domestic banks are the only member types to which the 
Matrix will be applicable because (i) they represent the majority of 
the members of FICC and (ii) their financial reports contain 
information that lends them to the Matrix approach.
    \4\ FICC's approach to the analysis of members will be based on 
a thorough quantitative analysis. A broker-dealer member's rating on 
the Matrix will be based on factors including size (i.e., total 
excess net capital), capital, leverage, liquidity, and 
profitability. Banks will be reviewed based on size, capital, asset 
quality, earnings, and liquidity.
    \5\ Members will also be evaluated based on their compliance 
with certain ``parameter breaks'' which will be determined based on 
applicable monthly and/or quarterly exception reports generated by 
credit risk staff. A member may be placed on the ``watch list'' for 
failure to fall within, for example, prescribed excess net capital, 
excess liquid capital, aggregate indebtedness, leverage ratio, or 
financial membership requirement parameters.
    \6\ The MBSD's rules do not currently provide for surveillance 
status, but the MBSD has the right under certain circumstances to 
require additional financial reports and increased participants 
fund.
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    All other categories of netting and clearing members, including 
non-US netting members and comparison-only members, will not be 
included in the Matrix process because these members possess 
characteristics that prohibit the Matrix from effectively evaluating 
their risk to FICC. However, these members will be monitored by credit 
risk staff using financial criteria deemed relevant

[[Page 61845]]

by FICC.\7\ Based on this monitoring, such Members may also be placed 
on the ``watch list'' if they experience a financial change that 
presents risk to FICC. Some examples include failure to meet minimum 
financial requirements or experiencing a significant decrease in equity 
(for GSD members) or net asset value (for MBSD members). Members placed 
on the ``watch list'' in this way will also be monitored more closely 
by credit risk staff.
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    \7\ Credit risk staff will monitor these members by reviewing 
similar criteria as those reviewed for members included on the 
Matrix. FICC will file a proposed rule change should it decide to 
use a more applicable Matrix process to evaluate these members.
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    The GSD will continue, in accordance with its current procedures, 
to place GSD netting members on the ``watch list'' for failure to 
comply with operational standards and requirements.\8\ MBSD expects to 
implement a similar provision, as outlined in these rule changes, by 
the fourth quarter of 2003.
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    \8\ The GSD currently monitors the comparison rates of members. 
Currently, low comparison rates can result in a member being placed 
on Class 1 surveillance status. Under the proposed rule change, low 
comparison rates may result in a GSD member being placed on the 
``watch list.'' Both the GSD and the MBSD may monitor for other 
operational factors in the future such as failing to timely submit 
trade data on a frequent basis.
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    FICC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \9\ and the rules and 
regulations thereunder applicable to FICC because it will facilitate 
the safeguarding of securities and funds which are in its custody or 
control or for which it is responsible and in general will protect 
investors and the public interest by improving FICC's member 
surveillance process.
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    \9\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    FICC does not believe that the proposed rule change will have any 
impact or 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 relating to the proposed rule change have not yet 
been solicited or received. FICC will notify the Commission of any 
written comments received by FICC.

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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-FICC-2003-03. This file number should be included on the 
subject line if e-mail is used. To help us process and review comments 
more efficiently, comments should be sent in hardcopy or by e-mail but 
not by both methods.
    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 FICC.
    All submissions should refer to File No. SR-FICC-2003-03 and should 
be submitted by November 20, 2003.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-27308 Filed 10-29-03; 8:45 am]
BILLING CODE 8010-01-P