[Federal Register Volume 70, Number 5 (Friday, January 7, 2005)]
[Notices]
[Page 1485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-32]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50955; File No. SR-FICC-2004-05]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change To Amend Rules 
Relating to the Participants Fund Deposit Requirements of Its Mortgage-
Backed Securities Division

January 3, 2005.

I. Introduction

    On March 3, 2004, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') and 
on March 11, 2004, amended proposed rule change File No. SR-FICC-2004-
05 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 November 22, 2004.\2\ No comment letters were 
received. For the reasons discussed below, the Commission is now 
granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 50665 (November 15, 
2004), 69 FR 67972.
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II. Description

    The proposed rule change amends the rules of FICC's Mortgage-Backed 
Securities Division (``MBSD'') to eliminate the basic deposit component 
of the Participants Fund deposit requirement for participants that are 
registered with the Commission as registered investment companies 
(``RICs'') pursuant to the Investment Company Act of 1940.\3\
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    \3\ 15 U.S.C. 80a-1.
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    In 2003, FICC received a no-action letter \4\ from the Commission's 
Division of Investment Management (``IM'') stating that IM would not 
recommend to the Commission enforcement action under Section 17(f) of 
the Investment Company Act of 1940 against any RIC or its custodian if 
the RIC or its custodian placed the RIC's cash and/or securities in the 
custody of the MBSD for purposes of meeting the Participants Fund 
requirements imposed by the MBSD. IM's no-action letter was based upon 
the fact that the main portions of the MBSD's Participants Fund, the 
``minimum market margin differential deposit'' and the ``market margin 
differential deposit,'' are intended to benefit the non-defaulting 
participants of the MBSD because these portions are intended to provide 
assurances that each participant's contributions to the Participants 
Fund will be adequate to satisfy all open commitments recorded with the 
MBSD. In contrast, the remaining portion of the Participants Fund, the 
``basic deposit,'' is designed to protect FICC by ensuring that each 
participant's fees owing to the MBSD will be paid if the participant is 
unable to meet such fee obligations.
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    \4\ No-Action Letter under the Investment Company Act of 1940--
Section 17(f) and Rule 17f-4, to Fixed Income Clearing Corporation 
(March 13, 2003).
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    In granting no-action relief to FICC, IM staff relied upon FICC's 
representation that RICs would be exempt from the basic deposit 
requirement. FICC determined that this representation would not subject 
it to undue risk because the basic deposit is a relatively minimal 
amount and because this exemption affects very few participants.\5\ The 
management of FICC returned the basic deposits posted by its RIC 
clearing members under perceived authority given to it under Article 
IV, Rule 1, Section 3 of its Rules. FICC nonetheless believes it would 
be prudent to expressly state in the MBSD Rules that RICs are exempt 
from the basic deposit requirement.\6\
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    \5\ Currently, the basic deposit is determined semiannually and 
is the greater of (a) $1,000 or (b) the participant's average 
monthly bill (per account) with a maximum of $10,000. The MBSD 
currently has only two RIC clearing members.
    \6\ FICC will also state in the MBSD's Schedule of Charges that 
the basic deposit does not apply to RICs.
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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.\7\ The Commission finds that FICC's proposed rule change 
is consistent with this requirement because by exempting RICs from its 
basic deposit requirement, FICC is enabling RICs to become participants 
while still doing so in a manner that allows FICC to safeguard the 
securities and funds in its custody or control or for which it is 
responsible.
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    \7\ 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,\8\ that the proposed rule change (File No. SR-FICC-2004-05) be and 
hereby is approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E5-32 Filed 1-6-05; 8:45 am]
BILLING CODE 8010-01-P