[Federal Register Volume 69, Number 183 (Wednesday, September 22, 2004)]
[Notices]
[Pages 56809-56810]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2287]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50392; File No. SR-FICC-2003-14]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving a Proposed Rule Change Relating to Amending Impractical 
or Inconsistent Rules and Adding Rules To Protect the Clearing 
Corporation and Its Members

September 15, 2004.
    On November 17, 2003, the Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ (File No. SR-FICC-
2003-14) and on January 15, 2004, and March 3, 2004, amended the 
proposed rule change. Notice of the proposal was published in the 
Federal Register on March 23, 2004.\2\ No comment letters were 
received. For the reasons discussed below, the Commission is approving 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 49421 (Mar. 16, 2004), 
69 FR 13604.
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I. Description

    The proposed rule change will eliminate and amend certain of FICC's 
Government Securities Division (``GSD'') and Mortgage-Backed Securities 
Division (``MBSD'') rules that are inconsistent with current practice.
    1. Remove the term ``Clearing Agent Bank Member'' and corresponding 
references to it in GSD's rules.
    This category of GSD membership no longer has any practical meaning 
and is not used. Entities that are clearing agent banks that wish to 
join the netting service would become bank netting members.\3\
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    \3\ GSD Rule 1.
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    2. Amend GSD's Rules to remove outdated eligibility qualifications 
for comparison-only members.
    Prior to this rule change, GSD's rules provided for the following 
types of entities to be eligible to become a comparison-only member: 
(i) A registered government securities broker or dealer, (ii) a 
clearing agent bank, or (iii), if neither (i) nor (ii), an entity that 
has demonstrated to FICC that its business and capabilities are such 
that it could reasonably expect material benefit from direct access to 
FICC's services.\4\
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    \4\ GSD Rule 2, Section 1.
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    FICC believes that GSD's comparison system provides a riskless 
service whose use should be advantageous to any entity regardless that 
is an active market participant regardless of the entity's legal or 
regulatory structure. Accordingly, FICC believes that a better approach 
to the eligibility criteria for comparison-only entities which would 
also be consistent with the way that FICC's management views the 
purpose of comparison-only membership, would be to replace (i) and (ii) 
with the requirement that a comparison-only applicant be a legal entity 
that is eligible to apply to be a GSD netting member. FICC would 
maintain the current (iii) renumbered as (ii).
    3. Clarify GSD's rule on voluntary termination of membership.
    The proposed change will modify the language in GSD Rule 2, Section 
11, to provide that: (i) a member must provide 10 days written notice 
of terminating its membership but GSD can accept such notice of 
termination within a shorter period, (ii) the requested termination of 
membership would not be effective until accepted by GSD, and (iii) 
GSD's acceptance would be evidenced by a notice to all members 
announcing the termination date of such member. Paragraphs (ii) and 
(iii) are new.
    4. Add a provision to GSD's Rules to permit it to have access to 
the books and records of members.
    Prior to this rule change, GSD's rules permited GSD to access an 
applicant's books and records but not a member's books and records. 
Extending GSD's authority to review member's books and records is 
consistent with other clearing agencies' rules such as those of the 
National Securities Clearing Corporation.\5\
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    \5\ New Section 13 of GSD Rule 2.
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    5. Add a provision to MBSD's Rules to provide for the confidential 
treatment of documents submitted by applicants as part of the 
application process.
    This rule change will provide appropriate comfort to applicants and 
will make MBSD's rules consistent with GSD's rules.\6\
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    \6\ New Section 11 of MBSD Rules, Article III, Rule 1.
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    6. Add a new provision to MBSD's Rules that provides that at the 
request of FICC a non-domestic participant must provide an update of 
the legal opinion submitted by the foreign member or a written status 
report on FICC's rights under the relevant non-domestic law and add a 
similar new provision to GSD Rules.\7\
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    \7\ New language to subsection (g) of GSD Rule 2, Section 3; 
proposed new subsection (iii) of MBSD Article III, Rule 1, Section 
14.
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    FICC believes that the old language of this MBSD rule is ambiguous 
and potentially burdensome for members. FICC believes that a better 
approach would be to provide that if FICC is alerted to a change in 
circumstances or to an issue of law that brings into question the 
reliability of the legal opinion previously submitted by a non-domestic 
participant, FICC will have the right to require the participant to 
revisit its legal opinion and to provide an update as to the status of 
FICC's rights under the relevant non-domestic law. FICC will add this 
provision to GSD's Rules as well.

II. Discussion

    Section 17A(b)(3)(F) of the Act \8\ requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds in its custody or control or for which it is responsible. The 
Commission finds that the proposed rule change is consistent with 
FICC's obligations under Section 17A(b)(3)(F) because clarifying FICC's

[[Page 56810]]

rules relating to membership, books and records, and legal opinions 
will provide greater certainty as to FICC's participants' rights and 
obligations and will enhance FICC's ability to mitigate legal risk 
posed by non-domestic participants.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \9\ and the 
rules and regulations thereunder.
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    \9\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-FICC-2003-14) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-2287 Filed 9-21-04; 8:45 am]
BILLING CODE 8010-01-P