[Federal Register Volume 69, Number 191 (Monday, October 4, 2004)]
[Notices]
[Pages 59283-59285]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2465]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50457; File No. SR-FICC-2004-11]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of a Proposed Rule Change To Amend the Rules of the 
Government Securities Division To Modify the Penalty Assessment Process 
for Violations of Minimum Financial Standards and for Failures of 
Members To Submit Requisite Financial Reports on a Timely Basis

September 27, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, notice is hereby given that on May 17, 2004, the Fixed 
Income Clearing Corporation (``FICC'') filed with the Securities and 
Exchange Commission (``Commission'') and on July 8, 2004, amended 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 amend the rules of its Government Securities 
Division (``GSD'') to modify the penalty assessment process for 
violations of minimum financial standards and for failures to submit 
requisite financial reports on a timely basis.

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.\2\
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    \2\ 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

    The proposed rule change would amend the rules of the GSD by 
modifying the penalty assessment process for violations of minimum 
financial standards and failure to submit requisite financial reports 
on a timely basis.
(1) Violations of Minimum Financial Standards
    The rules of the GSD require netting members and clearing members 
to meet and maintain certain minimum financial standards at all times. 
While the majority of GSD members consistently satisfy their minimum 
financial requirements, occasionally members do breach these 
requirements and create undue risk for FICC and its GSD members. FICC 
has decided that a more uniform system of enforcing minimum financial 
requirements within the GSD would enhance the ability of FICC to 
minimize risk to itself and its members in a fair and effective manner.
    Currently, the GSD Rules provide clearing fund consequences for the 
various categories of netting members that fall out of compliance with 
minimum financial requirements as follows:

------------------------------------------------------------------------
                                              Current clearing fund
      Netting membership category         consequence for falling below
                                          minimum financial standard \3\
------------------------------------------------------------------------
Bank Member............................  Treated as a Category 2 Dealer
                                          \4\
Category 1 Dealer Member...............  Treated as a Category 2 Dealer
Category 2 Dealer Netting Member.......  Impose Required Fund Deposit
                                          equal to 150 percent of the
                                          normal calculation of Required
                                          Fund Deposit.
Category 1 Futures Commission Merchant   Treated as a Category 2 Futures
 Member.                                  Commission Merchant.
Category 2 Futures Commission Merchant   Impose Required Fund Deposit
 Member.                                  equal to 150 percent of the
                                          normal calculation of Required
                                          Fund Deposit.
Category 1 Inter-Dealer Broker Member..  Treated as a Category 1 Dealer
                                          as far as Required Fund
                                          Deposit exceeds $5 million.
Category 2 Inter-Dealer Broker Member..  Treated as a Category 1 Inter-
                                          Dealer Broker, if it qualifies
                                          as such, or if it does not so
                                          qualify, impose Required Fund
                                          Deposit equal to 150 percent
                                          of the normal calculation of
                                          the Required Fund Deposit.

[[Page 59284]]

 
Government Securities Issuer Member....  Treated as a Category 2 Dealer.
 
------------------------------------------------------------------------
\3\ Each consequence remains effective for a period beginning on the
  date on which the member fell below such level and continuing until
  the 90th calendar day after the date on which such member returned to
  compliance with the applicable standard. If the consequence consists
  of a reclassification and the member does not return to compliance
  with its original minimum financial requirement within 90 calendar
  days of falling out of compliance, then the reclassification becomes
  permanent.
\4\ Treating a bank or other non-Inter-Dealer Broker Category 1 Member
  as a Category 2 non-Inter-Dealer Broker Member for clearing fund
  purposes results in a higher clearing fund requirement for such a
  member because higher margin rates are imposed on on-Inter-Dealer
  Broker Category 2 Dealer Members than are imposed on banks and non-
  Inter-Dealer Broker Category 1 Members.

    Under the proposed rule change, a violation of a minimum financial 
requirement by a member \5\ of the GSD would result in the imposition 
on such member of a margin premium equal to the greater of (a) 25 
percent of the member's unadjusted \6\ clearing fund requirement or (b) 
$1,000,000, to continue for ninety calendar days after the later to 
occur of (i) the member's return to compliance with applicable minimum 
financial standards or (ii) FICC's discovery of the applicable 
violation. This increase would not apply to Category 1 Dealer Netting 
Members, Category 1 Futures Commission Merchant Netting Members or 
Category 2 Inter-Dealer Broker Netting Members, where such members 
would continue to be reclassified as a different category netting 
member.\7\ In addition, such violation would result in (1) a report of 
the violation to the FICC Membership and Risk Management Committee at 
its next regularly scheduled meeting or sooner if deemed appropriate by 
FICC and (2) the placement of such member on FICC's ``watch list'' 
subjecting it to more frequent and thorough monitoring. None of these 
consequences would preclude FICC from imposing any other margin 
consequences permitted by GSD's Rules.
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    \5\ The proposed rule change only applies to GSD members that 
have minimum financial requirements (i.e., GSD netting members).
    \6\ ``Unadjusted'' means the standard calculation before any 
additional assessments.
    \7\ If GSD Category 1 Dealer Netting Members, GSD Category 1 
Futures Commission Merchant Netting Members and GSD Category 2 
Inter-Dealer Broker Netting Members do not meet the membership 
qualifications applicable to the new category of netting member, 
then they will be subject to the increased margin premium specified 
in clause (1) above.
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(2) Failure To Submit Requisite Financial Reports on a Timely Basis
    Certain members that are required to provide monthly or quarterly 
financial data to FICC at times have violated GSD's membership 
requirements by not timely providing such financial data. In such 
instances, management contacts each offending member and follows up 
with a letter.
    Failure to timely receive required information creates risk to FICC 
and as a result hinders FICC's ability to appropriately assess the 
financial condition of such members. To encourage timely submission of 
required financial data, FICC has established a mechanism to fine 
delinquent members.\8\ FICC is now proposing two additional measures to 
enforce timely filing of financial information.
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    \8\ Securities Exchange Act Release No. 49947 (June 30, 2004), 
69 FR 41316 [File No. SR-FICC-2003-01].
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    First, FICC proposes to subject delinquent members to a more 
stringent clearing fund requirement. Specifically, under the proposed 
rule filing FICC would automatically impose a margin premium equal to 
the greater of (1) 25 percent of the member's unadjusted clearing fund 
requirement or (2) $1,000,000. The margin premium would be applied 
until appropriate financial data is submitted to FICC and is reviewed 
for compliance purposes. In addition, delinquent members would be 
precluded from taking back any excess clearing fund collateral to which 
they might ordinarily be entitled.
    Second, members that fail to submit requisite financial reports on 
a timely basis would also automatically be placed on FICC's ``watch 
list'' and subject to more frequent and thorough monitoring.
    FICC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \9\ and the rules and 
regulations thereunder applicable to FICC because it assures the 
safeguarding of securities and funds which are in the custody or 
control of FICC by encouraging members to maintain their minimum 
financial standards and to submit their required financial reports on a 
timely basis. As a result, FICC's ability to maintain a financially 
sound membership base should be enhanced.
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    \9\ 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.

(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. Comments may be submitted by any of 
the following methods:

Electronic comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an e-mail to [email protected]. Please include 
File Number SR-FICC-2004-11 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-FICC-2004-11. This 
file

[[Page 59285]]

number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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/gov/gov.docs.jsp?NS-query. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FICC-2004-11 and should be 
submitted on or before October 22, 2004.

    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).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-2465 Filed 10-1-04; 8:45 am]
BILLING CODE 8010-01-P