[Federal Register Volume 69, Number 10 (Thursday, January 15, 2004)]
[Notices]
[Pages 2375-2376]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-877]



[[Page 2375]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49048; File No. SR-FICC-2003-09]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Establish a Comprehensive 
Standard of Care and Limit the Mortgage-Backed Securities Division's 
Liability to Its Participants

January 9, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 19, 2003, the Fixed 
Income Clearing Corporation (``FICC'') filed with the Securities and 
Exchange Commission (``Commission'') 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 establish a comprehensive standard of care and 
limitation of liability with respect to participants of the Mortgage-
Backed Securities Division (``MBSD'').\2\
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    \2\ On January 1, 2003, MBS Clearing Corporation (``MBSCC'') was 
merged into the Government Securities Clearing Corporation 
(``GSCC'') and GSCC was renamed FICC. The functions previously 
performed by GSCC are now performed by the Government Securities 
Division (``GSD'') of FICC, and the functions previously performed 
by MBSCC are now performed by MBSD of FICC. Securities Exchange Act 
Release No. 47015 (December 17, 2002), 67 FR 78531 [File Nos. SR-
GSCC-2002-09 and SR-MBSCC-2002-01].
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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

    FICC is seeking to establish a comprehensive standard of care and 
limitation of liability for the participants of MBSD that is identical 
to that of FICC's Government Securities Division (``GSD'').\4\ 
Historically, the Commission has left to user-governed clearing 
agencies the question of how to allocate losses associated with, among 
other things, clearing agency functions.\5\ The Commission has reviewed 
clearing agency services on a case-by-case basis and in determining the 
appropriate standard of care has balanced the need for a high degree of 
clearing agency care with the effect the resulting liabilities may have 
on clearing agency operations, costs, and safekeeping of securities and 
funds.\6\ Because standards of care represent an allocation of rights 
and liabilities between a clearing agency and its participants, which 
are sophisticated financial entities, the Commission has refrained from 
establishing a unique federal standard of care and has allowed clearing 
agencies and other self-regulatory organizations and their participants 
to establish their own standard of care.\7\
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    \4\ The Commission approved identical rule language for GSD 
establishing a comprehensive standard of care and limitation of 
liability to its members. Securities Exchange Act Release No. 48201 
(July 21, 2003), 68 FR 44128 [File No. SR-GSCC-2002-10].
    \5\ Securities Exchange Act Release Nos. 20221 (September 23, 
1983), 48 FR 45167 and 22940 (February 24, 1986), 51 FR 7169.
    \6\ Id.
    \7\ Id.
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    MBSD rules already provide for a standard of care similar to that 
now provided for in the GSD rules. The proposed rule changes make this 
provision identical to that of the GSD. Thus, in addition to being 
responsible to participants for gross negligence and willful 
misconduct, the proposed rule changes provide that MBSD will be liable 
for direct losses caused by its violation of Federal securities laws 
for which there is a private right of action. Also, MBSD will not be 
liable for the acts or omissions of third parties unless MBSD was 
grossly negligent, engaged in willful misconduct, or in violation of 
Federal securities laws for which there is a private right of action in 
selecting such third party. Moreover, the proposed changes will relieve 
MBSD of any liability for consequential and other indirect damages. By 
making these changes to MBSD rules, both GSD and MBSD rules will be 
identical, lending consistency to FICC's approach to these issues.
    FICC believes that adopting a uniform rule \8\ limiting FICC's 
liability to its members to direct losses caused by FICC's gross 
negligence, willful misconduct, or violation of Federal securities laws 
for which there is a private right of action: (a) Memorializes an 
appropriate commercial standard of care that will protect FICC from 
undue liability; (b) permits the resources of FICC to be appropriately 
utilized for promoting the accurate clearance and settlement of 
securities; and (c) is consistent with similar rules adopted by other 
self-regulatory organizations and approved by the Commission.\9\
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    \8\ The proposed rule language for MBSD Clearing Rules Article 
V, Rule 6, Sections 1(a) and (b) and for MBSD EPN Rulebook Article 
X, Rule 6, Sections 1(a) and (b) is as follows:
    (a) The Corporation will not be liable for any action taken, or 
any delay or failure to take any action, hereunder or otherwise to 
fulfill the Corporation's obligations to its Participants [EPN users 
and Participants], other than for losses caused directly by the 
Corporation's gross negligence, willful misconduct, or violation of 
Federal securities laws for which there is a private right of 
action. Under no circumstances will the Corporation be liable for 
the acts, delays, omissions, bankruptcy, or insolvency, of any third 
party, including, without limitation, any depository, custodian, 
sub-custodian, clearing or settlement system, transfer agent, 
registrar, data communication service or delivery service (``Third 
Party''), unless the Corporation was grossly negligent, engaged in 
willful misconduct, or in violation of Federal securities laws for 
which there is a private right of action in selecting such Third 
Party; and
    (b) Under no circumstances will the Corporation be liable for 
any indirect, consequential, incidental, special, punitive or 
exemplary loss or damage (including, but not limited to, loss of 
business, loss of profits, trading losses, loss of opportunity and 
loss of use) howsoever suffered or incurred, regardless of whether 
the Corporation has been advised of the possibility of such damages 
or whether such damages otherwise could have been foreseen or 
prevented.
    \9\ See, e.g., Securities Exchange Act Release Nos. 37421 (July 
11, 1996), 61 FR 37513 [SR-CBOE-96-02] and 37563 (August 14, 1996), 
61 FR 43285 [SR-PSE-96-21].
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    FICC believes that the proposed rule change is consistent with the 
requirements of section 17A of the Act \10\ and the rules and 
regulations thereunder applicable to FICC because it will permit the 
resources of FICC to be appropriately utilized for promoting the 
accurate clearance and settlement of securities.
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    \10\ 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.

[[Page 2376]]

(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-2003-09. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your 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 and on FICC's Web site at http://www.ficc.com.
    All submissions should refer to File No. SR-FICC-2003-09 and should 
be submitted by February 5, 2004.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-877 Filed 1-14-04; 8:45 am]
BILLING CODE 8010-01-P