[Federal Register Volume 69, Number 130 (Thursday, July 8, 2004)]
[Notices]
[Page 41316]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15491]



[[Page 41316]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49947; File No. SR-FICC-2003-01]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Relating to the 
Implementation of Fines

June 30, 2004.

I. Introduction

    On January 3, 2003, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-FICC-2003-01 pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'').\1\ On January 8, 2003, 
June 8, 2003, and February 25, 2004, FICC filed amendments to the 
proposed rule change. Notice of the proposal was published in the 
Federal Register on January 30, 2004.\2\ No comment letters were 
received. For the reasons discussed below, the Commission is granting 
approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 49125 (January 26, 
2004), 69 FR 4547. Although the proposed rule change was amended 
after it was noticed for comment in the Federal Register, 
republication of the notice is not necessary because the post-notice 
amendment made only a technical change to the proposed rule change.
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II. Description

    The proposed rule change enables FICC to implement fines for the 
failure to timely submit required financial reports and to meet certain 
additional reporting requirements.\3\ Pursuant to Rule 2, section 5 of 
FICC's Government Securities Division (``GSD'') Rules and Article III, 
Rule 2, section 10 of FICC's Mortgage Backed Securities Division 
(``MBSD'') Rules and in furtherance of FICC's obligation to minimize 
risk to all members, FICC requires that on a periodic basis its members 
submit financial reports detailing certain information about their 
financial status.\4\ These reports are crucial to FICC surveillance 
procedures because they allow FICC credit risk personnel to review and 
monitor the financial condition of members. While the majority of 
FICC's members satisfy their reporting obligations in a timely manner, 
from time to time certain members are late in submitting their reports 
to FICC. Late submissions adversely affect FICC's financial 
surveillance processes and ultimately create risk for FICC and its 
members. To remedy this situation, FICC is implementing of a fine 
schedule to promote improved compliance with reporting timeframes.
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    \3\ The Commission incorrectly stated in the notice that the 
proposed rule change would also eliminate a provision in FICC's 
rules allowing foreign members to prepare their financial statements 
in accordance with accounting standards other than U.S. Generally 
Accepted Accounting Principles (``GAAP''). The proposed rule change 
does not deal with accounting standards.
    \4\ These reports include monthly FOCUS and FOGS reports, 
quarterly CALL reports, annual audited financial statements, and 
other periodic financial data as outlined in FICC's rules.
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    Historically, GSCC and MBSCC, FICC's predecessors, have instituted 
fines and late fees to enforce various deadlines, rules, and 
procedures. Since February 2002, GSCC has been charging its members 
fees for failure to provide repo collateral substitution notifications 
in a timely manner. In July 2001, GSCC began imposing fees on those 
members that submit trade data on a non-interactive basis. In addition, 
since 1998 GSCC has had the authority to impose fines in order to 
promote greater compliance with its funds settlement debit and clearing 
fund deposit deficiency call deadlines. MBSCC likewise charges members 
additional fees for late submissions of settlement balance order market 
differential payments and cash adjustment payments.
    As with other fines that are currently in place, members will be 
able to contest these new fines through the process set forth in Rule 
37 of GSD's Rules and in Article V, Rule 7 of MBSD's Rules.
    FICC is also amending both GSD's and MBSD's Rules to require 
members to submit to FICC concurrently with their submission to the 
applicable regulators copies of certain filings which members are 
required to file pursuant to the Sarbanes-Oxley Act of 2002 and any 
amendments thereunder. FICC will determine from time to time which of 
such filings it will require its members to submit. In addition, FICC 
is amending GSD's Rules to require members to submit to FICC 
concurrently with their submission to the applicable regulators all 
reports or other notifications required to be filed when their capital 
levels fall below required minimums.\5\
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    \5\ Both GSD and MBSD require broker-dealer participants to 
submit copies of supplemental reports filed pursuant to Rule 17a-11 
under the Act to FICC concurrently with their submission to the 
Commission. Rule 17a-11 requires registered broker-dealers to notify 
the Commission of a decline in net capital below minimum Commission 
requirements. However, members (including broker-dealer members) may 
have other similar regulatory notification requirements (imposed by 
the Commission, another regulator, or similar authority) when their 
capital levels or other financial requirements fall below required 
levels. The Rules of MBSD were recently amended to include the 
requirement that members submit such notifications to FICC 
concurrently with their submission to the relevant regulatory 
authority. Securities Exchange Act Release No. 49156 (January 30, 
2004), 69 FR 5881 (February 6, 2004) [File No. SR-MBSCC-2001-06]. 
This present rule filing imposes the same requirement in the Rules 
of GSD.
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III. Discussion

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a clearing agency be designed to assure the safeguarding 
of securities and funds which are in its custody or control or for 
which it is responsible.\6\ By requiring its members to submit 
additional financial reports triggered by falling capital levels and by 
implementing fines for failure to submit financial reports on a timely 
basis, the proposed rule change is designed to improve FICC's ability 
to monitor the financial condition of its members. Accordingly, the 
proposed rule should help FICC limit financial risk to itself and its 
members and therefore should help FICC to assure the safeguarding of 
securities and funds which are in its custody or control or for which 
it is responsible
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular with the requirements of section 17A of the Act and the 
rules and regulations thereunder applicable.
    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-FICC-2003-01) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-15491 Filed 7-7-04; 8:45 am]
BILLING CODE 8010-01-P