[Federal Register Volume 69, Number 228 (Monday, November 29, 2004)]
[Notices]
[Page 69435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3350]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50712; File No. SR-FICC-2004-07]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change To Amend Its Rules To 
Eliminate the ``Mortgage Banker'' Category of Membership in Its 
Mortgage-Backed Securities Division

November 22, 2004.

I. Introduction

    On March 25, 2004, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') and 
on June 21, 2004, and October 13, 2004, amended proposed rule change 
File No. SR-FICC-2004-07 pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'').\1\ Notice of the proposed rule change 
was published in the Federal Register on October 20, 2004.\2\ No 
comment letters were received. For the reasons discussed below, the 
Commission is now granting approval of the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 50536 (October 13, 
2004), 69 FR 61699.
---------------------------------------------------------------------------

II. Description

    The proposed rule change amends the rules of FICC's Mortgage-Backed 
Securities Division (``MBSD'') to eliminate the ``mortgage banker'' 
category of membership. In accordance with Article III, Rule 1, Section 
2, ``Financial Requirements for Participants and Limited Purpose 
Participants,'' of MBSD's Rules, mortgage bankers are subject to a 
minimum net worth requirement of $5 million. With the exception of 
``brokers,'' all other applicants are subject to a minimum net worth or 
regulatory net capital requirement of $10 million.\3\
---------------------------------------------------------------------------

    \3\ MBSD's Rules define ``broker'' as a member that is in the 
business of buying and selling securities as agent on behalf of 
dealers. Brokers are currently subject to a minimum net or liquid 
capital requirement of $5 million.
---------------------------------------------------------------------------

    Historically, mortgage bankers (which generally act as mortgage 
originators) maintained relatively little capital. FICC considered a 
lower minimum capital standard appropriate to enable and encourage 
these types of firms to participate in FICC. The mortgage banker 
category of membership is now becoming obsolete for two principal 
reasons. First, changes in the mortgage business are causing small 
originators to use Fannie Mae and Freddie Mac, making MBSD membership 
less desirable and therefore making the relatively lower minimum 
capital standard less justified. Second, from a membership 
administration perspective there appears to be no precise, uniform 
definition for ``mortgage banker.'' \4\
---------------------------------------------------------------------------

    \4\ Mortgage originators are state-regulated entities, and 
definitions of such entities vary with each state. Generally, these 
definitions target entities whose ``primary'' business is the 
issuance of mortgages. MBSD has historically classified entities as 
mortgage bankers based upon an applicant's representations made in 
its membership application and confirmed by management's review of 
the applicant's business.
---------------------------------------------------------------------------

    The proposed rule change eliminates the mortgage banker category 
from the MBSD Rules. Entities that would have previously qualified as 
mortgage bankers will now be classified under the catch-all category of 
membership in Article III, Rule 1, Section 1, ``Applicants Eligible to 
Become Participants or Limited Purpose Participants.'' \5\ This 
reclassification will increase the minimum net worth requirement from 
$5 million to $10 million for these members. FICC does not anticipate 
that this increase will adversely affect existing mortgage banker 
members because member financial statements filed with FICC indicate 
that each mortgage banker member's capitalization currently exceeds the 
new minimum.
---------------------------------------------------------------------------

    \5\ Article III, Rule 1, Section 1(f) provides a catch-all 
category for membership for ``firms in such other categories as the 
Corporation [FICC] from time to time may determine.'' The proposed 
rule change was amended to add language to Addendum A of the MBSD 
Rules to clarify that entities that are deemed to be mortgage 
bankers would be considered to be one of the various entity types 
that fall under the catch-all category of membership.
---------------------------------------------------------------------------

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 in its custody or control or for which it is 
responsible.\6\ The Commission finds that FICC's proposed rule change 
is consistent with this requirement because by removing the mortgage 
banker category from the MBSD Rules and by providing that entities that 
currently are classified as such meet a higher minimum financial 
requirement, it enhances the ability of FICC to maintain a financially 
sound membership base without an adverse effect on itself or its 
members.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

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,\7\ that the proposed rule change (File No. SR-FICC-2004-07) be and 
hereby is approved.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-3350 Filed 11-26-04; 8:45 am]
BILLING CODE 8010-01-P