[Federal Register Volume 69, Number 225 (Tuesday, November 23, 2004)]
[Notices]
[Pages 68200-68201]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3285]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50671; File No. SR-FICC-2004-08]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Provide Interpretive 
Guidance to Members Regarding the Criteria Used To Place Members on 
Surveillance Status

November 16, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on March 29, 2004, the Fixed 
Income Clearing Corporation (``FICC'') filed with the Securities and 
Exchange Commission (``Commission'') 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 provide interpretive guidance regarding an 
approved rule change that amended the criteria used to place members on 
surveillance status.\2\
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    \2\ Securities Exchange Act Release No. 49158 (January 30, 
2004), 69 FR 5624 (February 5, 2004) [File No. SR-FICC-2003-03].
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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.\3\
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    \3\ 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

    FICC is seeking to provide interpretive guidance to members 
pertaining to the member surveillance rules of the Government 
Securities Division (``GSD'') and the Mortgage-Backed Securities 
Division (``MBSD'') of FICC.
1. Background
    Prior to the Commission's approval of SR-FICC-2003-03,\4\ the GSD 
had the ability to place a member in a surveillance status class 
depending on whether the member satisfied one or more of the enumerated 
financial and operational criteria in the specific class. Upon approval 
of SR-FICC-2003-03, FICC implemented new criteria for placing members 
on surveillance. Specifically, all domestic broker-dealers and banks 
that are GSD netting members and/or MBSD clearing members are now 
assigned a rating that is generated by entering financial data of the 
member into a matrix (``Matrix''). Members who receive a low rating are 
placed on an internal ``watch list'' and are monitored more closely. 
All other types of netting and clearing members (those who are not 
domestic banks or broker-dealers) are not included in the Matrix 
process but are monitored by FICC's credit risk staff using financial 
criteria deemed relevant by FICC.
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    \4\ Supra at 2.
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2. Clarification of Rules Provisions
    In describing the process by which Credit Risk staff would review 
members and implement the Matrix process, FICC included in SR-FICC-
2003-03 several explanatory footnotes. Specifically, in footnotes 2 and 
3 of Amendment I of the filing, FICC explained that members would be 
placed on the Matrix after a thorough review had been performed of 
various quantitative factors. FICC also stated that members would be 
evaluated for certain parameter breaks based on applicable monthly or 
quarterly reports generated by credit risk staff.\5\ FICC at

[[Page 68201]]

this time wishes to clarify its procedures in this regard.
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    \5\ In Amendment I to FICC-2003-03, footnote 2 stated, ``FICC's 
approach to the analysis of members will be based on a thorough 
quantitative analysis. A member's rating on the Matrix will be based 
on factors including (for broker/dealers): Size (total excess net 
capital), capital, leverage, liquidity and profitability. Banks will 
be reviewed based on: size, capital, asset quality, earnings and 
liquidity.'' Footnote 3 stated, ``Members will also be evaluated 
based on their compliance with certain ``parameter breaks'' which 
will be determined based on applicable monthly and/or quarterly 
exception reports generated by Credit Risk. A member may be placed 
on the Watch List for failure to fall within, for example, 
prescribed excess net capital, excess liquid capital, aggregate 
indebtedness, leverage ratio or financial membership requirement 
parameters.''
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    Credit risk staff approaches its analysis of members pursuant to 
the new procedures in the following manner. First, as mentioned above, 
domestic broker-dealers and domestic banks are run through the Matrix 
and assigned a rating. Low-rated members are placed on the watch list. 
At this point, credit risk staff may downgrade a particular member's 
score based on various qualitative factors. For example, one 
qualitative factor might be that the member in question received a 
qualified audit opinion on its annual audit. In order to protect FICC 
and its other members, it is important that credit risk staff maintain 
the discretion to downgrade a member's rating on the Matrix and thus 
subject the member to closer monitoring. Members who receive a 
downgraded rating which makes them eligible for the watch list are also 
placed on the watch list. All rated members, including those on the 
watch list, are monitored monthly or quarterly, depending upon the 
member's financial filing frequency, against basic minimum financial 
requirements and other parameters.
    All broker-dealer members included on the watch list are monitored 
more closely. This means that they are also monitored for various 
parameter breaks, which may include but are not limited to, a defined 
decline in excess net capital over a one month or three month period, a 
defined period loss, a defined aggregate indebtedness/net capital 
ratio, a defined net capital/aggregate debit items ratio, and a defined 
net capital/regulatory net capital ratio. All bank members included on 
the watch list are also monitored more closely for watch list parameter 
breaks, which may include but are not limited to, a defined quarter 
loss, a defined decline in equity, a defined tier one leverage ratio, a 
defined tier one risk-based capital ratio, and a defined total risk-
based capital ratio. FICC wishes to make clear that monitoring for the 
above more stringent parameter breaks is only applicable to those 
members placed on the watch list.
    In addition, FICC would like to address footnote 5 of Amendment I 
to rule filing SR-FICC-2003-03. That footnote stated that credit risk 
staff would monitor those members not included in the Matrix process 
(this includes netting and clearing members who are not domestic banks 
and broker dealers) using the same criteria as those used for members 
included on the Matrix. FICC wishes to make clear that credit risk 
staff will not be reviewing the same criteria for these members but 
will use similar criteria. As stated in the narrative of SR-FICC-2003-
03, these criteria may include failure to meet minimum financial 
requirements, experiencing a significant decrease in equity or net 
asset value, or a significant loss. This class of members may be placed 
on the watch list based on credit risk staff's analysis of this 
information.
    FICC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \6\ and the rules and 
regulations thereunder applicable to FICC because it will facilitate 
the safeguarding of securities and funds which are in its custody or 
control or for which it is responsible and in general will protect 
investors and the public interest by improving FICC's member 
surveillance process.
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    \6\ 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-2004-08 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-2004-08. This 
file 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. 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-2004-08 and should be submitted on 
or before December 14, 2004.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
Margaret H. McFarland,
Deputy Secretary.
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    \7\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E4-3285 Filed 11-22-04; 8:45 am]
BILLING CODE 8010-01-P