[Federal Register Volume 69, Number 35 (Monday, February 23, 2004)]
[Notices]
[Pages 8251-8252]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3777]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49242; File No. SR-FICC-2003-06]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to the Assessment 
of Funds-Only Settlement Obligations

February 12, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 11, 2003, the Fixed 
Income Clearing Corporation (``FICC'') 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 persons.
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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

    The proposed rule change would eliminate the complex manual 
adjustments currently made by FICC's Operations Department with regard 
to the forward margin debit obligations and credit entitlements of repo 
broker members of the Government Securities Division (``GSD'') of 
FICC.\2\
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    \2\ Forward margin is a component of a netting member's daily 
funds-only settlement obligation. Forward margin is a mark-to-market 
payment on forward-settling positions. It is passed through in the 
form of cash from the debit side to the credit side. The amounts are 
reversed on the following day with interest collected from the 
credit side and paid through to the debit side.
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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 such 
statements.\3\
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    \3\ The Commission has modified parts of these statements.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    When GSD initially implemented its blind-brokered repurchase 
agreement (``repo'') service, it operated a system whereby the majority 
of members submitted trade data in a single batch file at the end of 
each day. The batch file submission process made it virtually 
impossible for repo brokers, who expect to net out of their position as 
middlemen in brokered repos, to timely determine the existence of 
trades on which they had positions, contact the appropriate 
counterparties, and correct trade details. As a result, any erroneous 
submissions on the part of a dealer counterparty resulted in a forward 
margin assessment to the repo broker. Realizing that a repo broker 
should always be flat from a net-settlement position perspective, FICC 
granted repo brokers relief from the forward margining process by 
providing a look through to the dealer counterparties for purposes of 
assessing forward margin obligations.\4\ However, the look through 
involves a manual adjustment process that requires complex calculations 
inconsistent with FICC's overall management policy.\5\
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    \4\ FICC, in a prior rule filing, amended its rules to allow 
management to look through brokered repo transactions in order that 
repo brokers were not left with debit or credit obligations caused 
by erroneous submissions on behalf of the dealers. Securities 
Exchange Act Release No. 38603 (May 9, 1997), 62 FR 27088 (May 16, 
1997) [File No. SR-GSCC-96-12]. In accordance with FICC's risk 
strategy at the time, the risk management process worked most 
effectively if a repo broker was netted out of its positions as a 
middleman. However, with the advent of real time trade matching and 
the ready ability of brokers to rectify dealer submission errors, 
GSD believes that risk management initiatives are better served by 
using the parameters outlined in this filing.
    \5\ On each business day, the Operations Division routinely 
adjusts the overall funds-only settlement obligation of a repo 
broker that has a forward margin debit or credit. If the repo broker 
has an overall credit forward margin, GSD will reduce its aggregate 
funds-only credit obligation or increase its aggregate funds-only 
debit entitlement by an amount equal to the forward margin credit. 
Conversely, if the repo broker is in an overall debit forward margin 
position, GSD will reduce its aggregate funds-only debit obligation 
or increase its funds-only credit entitlement by an amount equal to 
the debit; however, it then will apply that amount to the uncompared 
dealer (the dealer who failed to submit or submitted erroneously).
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    FICC has determined that it will no longer provide a look through 
to relieve repo brokers from forward margin obligations. Subsequent to 
the events of September 11, 2001, FICC decided to eliminate all 
operations functions that require complex manual adjustment or input as 
a way to reduce risk in all operations processes. In addition, almost 
all repo broker activity is now submitted to FICC on an interactive, 
real-time basis that allows brokers to readily rectify any outstanding 
data submission errors during the day. For these reasons, FICC is 
proposing to modify the forward margin adjustment process to require 
the repo brokers to satisfy their forward margin obligations including 
both paying forward margin debits and receiving forward margin credits.
    Going forward, FICC proposes to apply the following parameters with 
respect to the forward margin obligations of repo brokers. Debits and 
credits up to a predetermined dollar amount cap would be automatically 
collected or paid as applicable by the repo brokers, as is the case for 
all other netting members.\6\ Debits and credits in excess of the cap 
would be subject to hybrid processing, meaning that while the dollar 
amount up to the cap would always be collected or paid in its entirety 
by the broker, amounts over the cap (``excess debits'' or ``excess 
credits'') would be financed by GSD at the discretion of FICC.
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    \6\ The FICC Membership and Risk Management Committee will 
determine, based on historical data and risk considerations, what 
the debit and credit cap will be for forward margin debits and 
credits. The Committee has approved an initial cap of $2 million.
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    As an example of hybrid processing for an excess debit, the 
Operations Department would first request that the affected repo broker 
pay the excess debit to FICC. In the event that the repo broker is 
unable to pay the excess debit, the Operations Department, in 
consultation with the Credit Risk Department, would determine whether 
it would be appropriate for FICC to finance the excess debit. If FICC 
finances the excess debit, the broker would be charged a financing fee, 
representing the interest amount that FICC would be charged by the 
clearing bank. The member also will be subject to an administrative 
fee,\7\ and FICC's extension of financing would be secured by the 
clearing fund deposit of the repo broker. GSD would collect the 
calculated interest amount from the repo broker on the subsequent 
business day. GSD would also reserve the right in certain situations to 
assess the forward margin amounts in excess of the dollar amount cap 
excess by looking through to the dealer, as is done by the current 
manual process.\8\
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    \7\ This fee will be designed to cover FICC's cost of arranging 
financing.
    \8\ FICC will continue to look through to the dealer conterparty 
for purposes of assessing forward margin obligations in cases of a 
systemic outage where any non-submission by one counterparty versus 
a repo broker exceeds $1 billion.

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[[Page 8252]]

    In applying the hybrid processing to excess credits, the Operations 
Department, in consultation with the Credit Risk Department, would 
determine whether it would be appropriate to pass through the excess 
credit to the repo broker. To the extent that GSD did not pass through 
to the broker all or a portion of its calculated excess credit, GSD 
would calculate an interest amount tied to the rate of interest earned 
by GSD on its overnight cash investment on such unpaid excess credit 
and pay this interest amount to the repo broker on the subsequent 
business day.
    The proposed rule change would require some manual adjustments when 
the hybrid approach is used, but these instances will infrequently 
occur and would not rise to the complexity of the current process.
    FICC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act and the rules and regulations 
thereunder because it will enhance FICC's risk management strategy with 
regard to the daily funds-only settlement process.

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

    FICC does not believe that the proposed rule change would 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 nor 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 the 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-2003-06. 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 will also be available for inspection and copying 
at the principal office of FICC and on FICC's Web site at www.ficc.com. 
All submissions should refer to the File No. SR-FICC-2003-06 and should 
be submitted by March 15, 2004.

    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. 04-3777 Filed 2-20-04; 8:45 am]
BILLING CODE 8010-01-P