[Federal Register Volume 69, Number 182 (Tuesday, September 21, 2004)]
[Notices]
[Pages 56467-56468]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2278]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50386; File No. SR-FICC-2003-05]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Relating to 
Additional Account Structures

September 15, 2004.

I. Introduction

    On July 9, 2003, Fixed Income Clearing Corporation (``FICC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-FICC-2003-05 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal 
was published in the

[[Page 56468]]

Federal Register on February 13, 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. 49212 (February 9, 
2004), 69 FR 7273.
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II. Description

    The proposed rule change amends the rules of both the Government 
Securities Division (``GSD'') and the Mortgage-Backed Securities 
Division (``MBSD'') of FICC with respect to their additional account 
structures. GSD and MBSD both permit members to open and maintain 
accounts in addition to their primary accounts. These additional 
accounts developed as an administrative convenience for members that 
wanted to keep certain activities segregated from their primary 
accounts. The proposed rule change addresses certain legal risks 
associated with these accounts.

Government Securities Division

    For each additional account opened for a member, GSD assigns a 
unique participant ID number and separately calculates daily clearing 
fund requirements, funds-only settlement requirements, and net 
settlement positions based solely upon the activity in the additional 
account.\3\ Currently, the opening and maintenance of additional 
accounts requested by a GSD member is governed by an agreement between 
the member and GSD.\4\ Pursuant to the additional account agreement, 
the member agrees to be responsible for all of the obligations and 
liabilities associated with the additional account; however, GSD's 
rules do not address the opening and maintenance of these additional 
accounts.\5\
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    \3\ The maintenance of such accounts has billing implications as 
set forth in GSD's fee structure.
    \4\ The additional account structure permitted by GSD should be 
contrasted with GSD's executing firm feature, which permits a member 
to submit trades of a non-GSD member with which the member has a 
correspondent relationship. Executing firm trades are commingled 
with the member's own trades in the member's GSD account and are not 
separated from the member's other activity (including other 
executing firm activity) for any purpose. Therefore, the member's 
clearing fund requirement, funds-only settlement requirement, and 
net settlement position reflects all executing firm activity in its 
GSD account.
    \5\ The only exceptions to this are with respect to repo brokers 
that are expressly required to open second accounts for their 
brokered repo activity and GSD's fee structure which includes 
charges associated with the maintenance of additional accounts.
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    The proposed rule change reflects the principles set forth in the 
additional account agreement and those that FICC management has defined 
to govern these accounts. Specifically, additional accounts that are 
opened for someone other than a member itself or for the member's 
wholly-owned subsidiary shall require the approval of FICC's Membership 
and Risk Management Committee. The proposed rule change makes clear 
that GSD members will be responsible for all of the obligations arising 
under GSD's rules that are associated with additional accounts. The 
additional account entity will not have any proprietary interest with 
respect to the additional account and will not have any rights or 
privileges of GSD members. GSD will have the right to deny the opening 
of an additional account if it believes that the additional account 
entity presents risk to FICC, such as legal risk from an insolvency 
regime that is adverse to GSD's rights.

Mortgage-Backed Securities Division

    Currently, MBSD rules expressly permit participants to open 
additional accounts upon request for themselves or for any other 
entity. FICC has reviewed MBSD's current rules and is enhancing them by 
making clear that (i) additional account holders do not have membership 
or property rights with respect to additional accounts and (ii) MBSD 
may apply collateral associated with one account of a participant to 
satisfy obligations among any or all of that participant's accounts. 
These provisions will serve to protect MBSD in the event an additional 
account holder makes a claim with respect to the property, proceeds, or 
collateral associated with the activity of the account.

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\ The proposed rule change, by clarifying the 
rights and obligations of FICC and of its members with respect to 
additional accounts established by FICC's members for their own use or 
for the use of non-members, is designed to protect FICC and its members 
from any unnecessary financial risks. Accordingly, the proposed rule 
change should help to assure the safeguarding of securities and funds 
which are in FICC's 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-2003-05) 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. E4-2278 Filed 9-20-04; 8:45 am]
BILLING CODE 8010-01-P