[Federal Register Volume 68, Number 232 (Wednesday, December 3, 2003)]
[Notices]
[Pages 67709-67711]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30051]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48848; File No. SR-FICC-2003-07]


Self-Regulatory Organization; Fixed Income Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Rebates to Members

November 26, 2003.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

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(``Act''),\1\ notice is hereby given that on August 5, 2003, Fixed 
Income Clearing Corporation (``FICC''),\2\ filed with the Securities 
and Exchange Commission (``Commission'') the proposed rule change as 
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).
    \2\ The Government Security Clearing Corporation (``GSCC'') and 
the MBS Clearing Corporation (``MBSCC'') merged into the Fixed 
Income Clearing Corporation (``FICC'') effective January 1, 2003. 
FICC operates through two divisions, the Government Securities 
Division (the ``GSD,'' formerly GSCC) and the Mortgage-Backed 
Securities Division (``MBSD,'' formerly MBSCC). Each division has 
retained its own set of rules. This rule filing will address changes 
to the rules of GSD.
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I. Self-Regulatory Organization's Statement of the Terms of Substances 
of the Proposed Rule Change

    The purpose of the proposed rule change is to allow FICC to modify 
how rebates are calculated and distributed under Section IX of the 
Government Securities Division (``GSD'') fee structure.

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.\3\
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    \3\ 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

    The GSD's rules currently provide for FICC's periodic disbursement 
of rebates of excess net income back to GSD members (``Rebate 
Policy'').\4\ At the time the Rebate Policy was established by GSCC, 
management and the board of directors determined that $30 million in 
shareholders' equity was sufficient to provide GSCC adequate risk 
protection and also to provide a monetary ``cushion'' for temporary 
losses and decreases in volumes. Pursuant to the Rebate Policy, 
shareholders' equity over and above the $30 million threshold would be 
rebated, pro rata, to members.
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    \4\ GSCC established the Rebate Policy in 2001, Securities 
Exchange Act Release No. 44502 (July 2, 2001), 66 FR 36351 (July 11, 
2001) [SR-GSCC-2001-05].
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    Subsequent to implementing the Rebate Policy, several events 
occurred which adversely impacted GSCC's, and later FICC's, ability to 
issue the rebates as planned. Due to the terrorist attacks on the World 
Trade Center on September 11, 2001, GSCC experienced a inordinate 
number of operational problems that resulted in increased interest 
payment obligations and liability issues. These matters were not fully 
resolved until the fourth quarter of 2002 and ultimately resulted in a 
reduction of GSCC's capital to $29.2 million, below the threshold 
provided for in GSCC's rules pertaining to the Rebate Policy. The 
events of 9/11 also made the need for dramatically improved business 
continuity planning of paramount importance. Industry consensus as to 
how to best achieve improvements in this area were being developed on 
an ongoing basis which makes it difficult for GSCC to anticipate future 
expenses. Finally, following the merger of GSCC and MBSCC to create 
FICC, the Fixed Income Operations and Planning Committee approved an 
increase in the amount of the GSD's shareholders' equity required 
before a rebate from the $30 million minimum to $35 million.
    FICC is now in a position in this calendar year (2003) to 
distribute rebates to GSD members due to an adequate level of 
shareholder equity and higher-than-anticipated income levels at the 
GSD. In an effort to make the process of distributing these rebates as 
fair as possible to all GSD members and also to allow FICC sufficient 
flexibility to address adverse business and risk conditions, FICC is 
proposing to modify the GSD's Rebate Policy.
    Going forward, when calculating rebate amounts, the GSD will take 
into account each member's payment of comparison, netting, and 
clearance fees paid to the GSD. While previously only comparison and 
netting fees were considered, FICC has reconsidered this formula and 
believes that the inclusion of clearance fees in the rebate calculation 
will result in a fairer distribution of rebates to all members. When 
rebates are calculated, GSD members who paid the highest gross amount 
in all of these fees combined will receive the largest rebates.\5\ In 
addition, in order to adequately take into account unexpected expenses 
in a rapidly changing business environment and allow for flexibility in 
rebate calculation in instances of a member's consolidation or merger, 
FICC will alter the GSD's Rebate Policy to allow the GSD needed 
flexibility in determining when rebates should be distributed and the 
amount of each rebate allotted members. FICC believes that these 
changes will result in a Rebate Policy that is equitable to the GSD 
members while also allowing FICC to protect its members by maintaining 
sufficient shareholders' equity for business and risk management 
purposes.
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    \5\ Rebate amounts will be adjusted for miscellaneous charges as 
the rule currently provides today.
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    FICC anticipates distributing rebates using the revised formula in 
August of 2003 (subject to Board consideration and approval). The 
August rebates will take into account fees paid by members from January 
1 through June 30, 2003.
    The proposed rule change is consistent with Section 17A(b)(3)(F) of 
the Act \6\ and the rules and regulations thereunder because it will 
allow FICC to fulfill its mission of operating in a not-for-profit 
manner consistent with maintaining the integrity of FICC's capital 
base, financial structure, and risk management process.
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    \6\ 15 U.S.C. 77(q-1)(b)(3)(F).
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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 an 
impact on 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. 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

    The foregoing rule change will take effect upon filing pursuant to 
Section 19(b)(3)(A)(ii) of the Act \7\ and Rule 19b-4(f)(2) \8\ 
thereunder because the proposed rule constitutes a due, fee, or other 
charge. At any time within sixty days of the filing of such rule 
change, the Commission could have summarily abrogated such rule change 
if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \7\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \8\ 17 CFR 240.19b-4(f)(2)

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[[Page 67711]]

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-2003-07. 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 20549-0609. 
Copies of such filing also will be available for inspection and copying 
at the principal office of FICC and on FICC's Web site at http://www.ficc.com/gov/gov.other.docs.jsp?NS-query=.com. All submissions 
should refer to File No. SR-FICC-2003-07 and should be submitted by 
December 24, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-30051 Filed 12-2-03; 8:45 am]
BILLING CODE 8010-01-M