[Federal Register Volume 69, Number 215 (Monday, November 8, 2004)]
[Notices]
[Pages 64796-64797]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3051]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50617; File No. SR-FICC-2004-01]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change to Amend the Government Securities 
Division and the Mortgage-Backed Securities Division Membership Rules

November 1, 2004.

I. Introduction

    On January 9, 2004, the Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') and on April 28, 2004, amended proposed rule change 
SR-FICC-2004-01 pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act'').\1\ Notice of the proposal was published in the 
Federal Register on September 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. 50402 (September 16, 
2004), 69 FR 57111.
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II. Description

    FICC is amending the membership rules of its Government Securities 
Division (``GSD'') and its Mortgage-Backed Securities Division 
(``MBSD'') to (1) eliminate the requirement that the conversion to U.S. 
dollars be made by the applicant or member prior to

[[Page 64797]]

submitting financial information to FICC unless such conversion is 
specifically requested by FICC, (2) eliminate the requirement that FICC 
make a determination as to the adequacy of an applicant's personnel, 
physical facilities, books and records, accounting systems, or internal 
procedures, (3) require that a non-U.S. applicant represent to FICC in 
writing that it is regulated in a way that is generally comparable to 
the way in which domestic FICC members are regulated, (4) add a 
requirement to the GSD's rules that a non-U.S. netting applicant 
represent in writing that it is in compliance with the financial 
reporting and responsibility standards of its home country, and (5) 
eliminate the requirement that GSD comparison-only applicants submit 
financial information to FICC.

1. Amend the Rules of the GSD and MBSD That Require Financial 
Information Submitted by an Applicant To Be in Dollar Equivalents

    When FICC receives financial information from non-U.S. members and 
applicants, FICC's credit risk staff will perform the conversion to 
U.S. dollars whenever it is necessary. The credit risk staff will 
perform the conversion as of the date of the financial statements. 
Therefore, FICC is eliminating the current requirement that the 
conversion to U.S. dollars be made by the applicant or member prior to 
submitting financial information to FICC unless such conversion is 
specifically requested by FICC.

2. Amend the Operational Capability Requirement Contained in the Rules 
of the GSD and the MBSD

    FICC's current operational capability rules are too broad and 
impose upon FICC an obligation to make determinations with respect to 
the operational capability of an applicant or member that FICC staff is 
not equipped or trained to make.\3\ Such determinations are more 
appropriately left to the applicant or member's designated examining 
authority. The operational capability aspect that is relevant to FICC 
and upon which FICC must make a determination is the ability of an 
applicant or member to send input to FICC and to receive output from 
FICC on a timely and accurate basis. Therefore, FICC is eliminating the 
requirement that it make a determination as to the adequacy of an 
applicant's personnel, physical facilities, books and records, 
accounting systems, or internal procedures.
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    \3\ For example, the GSD rules currently require that a 
determination be made with respect to whether the membership 
applicant has adequate personnel, physical facilities, and 
accounting systems, among other things, to satisfactorily handle 
transactions.
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3. Amend the Comparability Requirement of the GSD's Rules for Non-U.S. 
Members

    The GSD rules currently provide that a non-U.S. entity shall be 
eligible to become a netting member if FICC has determined that the 
entity is regulated in its home country in a way that is generally 
comparable to the way in which similar domestic members are regulated. 
The comparability determination has been difficult to make because 
there is no objective set of guidelines that FICC can use to confirm 
the comparability requirement. As a result, comparability 
determinations have necessarily become judgment calls made by FICC 
staff using information provided by the applicant.
    Because the netting service is a guaranteed service and because 
FICC only accepts regulated entities as members, FICC should focus on 
making sure that its non-U.S. members (as is the case with its domestic 
members) are regulated by a financial regulatory authority in their 
home country in certain key areas as opposed to being concerned with 
``comparability'' of regulation. These key areas are maintenance of 
relevant books and records, regular inspections and examinations, and 
minimum financial standards. Therefore, FICC is amending the 
comparability requirement to require that the applicant represent to 
FICC in writing that it is regulated in these key areas.\4\ In 
conjunction with this change, FICC is adding a requirement to the GSD's 
rules that a non-U.S. netting applicant represent in writing that it is 
in compliance with the financial reporting and responsibility standards 
of its home country.\5\
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    \4\ This approach is currently used by the Emerging Markets 
Clearing Corporation (``EMCC'').
    \5\ Id.
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4. Amend the GSD's Rules That Require Comparison-Only Applicants and 
Members To Submit the Same Financial Information as Netting Applicants 
and Members

    The GSD's comparison-only service is not a guaranteed service. 
Comparison-only members do not have minimum financial requirements and 
are not required to make clearing fund deposits. Therefore, FICC is 
eliminating the requirement that GSD comparison-only applicants submit 
financial information to FICC. The GSD's rules will continue to give 
FICC the ability to require comparison-only members to submit financial 
information.
    In addition to these proposed rule changes, FICC is making a 
technical change to the rules of the MBSD to move language relating to 
cross-guaranty agreements to a more appropriate place in the rules.

III. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to remove impediments to the perfection of 
a national system for the prompt and accurate clearance and settlement 
of securities transactions and must not be designed to permit unfair 
discrimination in the admission of participants or among participants 
in the use of FICC.\6\ The Commission finds that FICC's proposed rule 
change is consistent with these requirements because it refines and 
improves FICC's rules and procedures with regard to applicants and 
members.
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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 Section 17A of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-FICC-2004-01) 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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E4-3051 Filed 11-5-04; 8:45 am]
BILLING CODE 8010-01-P