[Federal Register Volume 70, Number 14 (Monday, January 24, 2005)]
[Notices]
[Pages 3410-3412]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-218]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51037; File No. SR-FICC-2004-18]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Clarify Certain Sections of 
the Loss Allocation Rule of its Government Securities Division

January 13, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 1, 2004, the Fixed 
Income Clearing Corporation (``FICC'') filed with the Securities and 
Exchange Commission (``Commission'') and on October 27, 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

    The purpose of this proposed rule change is to clarify certain 
sections of the loss allocation rule of the Government Securities 
Division (``GSD'') of FICC.

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),

[[Page 3411]]

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 purpose of this proposed rule change is to clarify certain 
sections of the loss allocation rule of the Government Securities 
Division (``GSD'') of FICC. If the GSD, upon liquidating a defaulting 
member's positions, incurs a loss due to the failure of the defaulting 
member to fulfill its obligations to the GSD, the GSD looks to the 
margin collateral deposited by that defaulting member to satisfy the 
loss. If the defaulting member's margin collateral is insufficient to 
cover the loss and if there are no other funds available from any 
applicable cross-margining and/or cross-guaranty arrangements, the GSD 
would have a ``Remaining Loss'' \3\ and would institute its loss 
allocation process to cover such Remaining Loss. In doing so, the GSD 
would determine the types of transactions from which the Remaining Loss 
has arisen, such as direct transactions and member brokered 
transactions, and would allocate the Remaining Loss as set forth in 
Sections 8(d)(i) through (v) of Rule 4 of the GSD Rules.
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    \3\ GSD Rules, Rule 4, Section 8(d).
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    The allocations in Section 8(d)(ii) of Rule 4 to cover a Remaining 
Loss that is due to member brokered transactions distributes the loss 
between the affected broker, including repo brokers, and non-broker 
members that dealt with the defaulting member, are limited as an 
initial matter. Specifically, a broker netting member will not be 
subject to an allocation of loss, for any single loss-allocation event 
in an amount greater than $5 million, and a non-broker netting member 
will not be subject to an allocation of loss for any single loss-
allocation event in an amount greater than the lesser of $5 million or 
five percent of the overall loss amount allocated to non-broker netting 
members. If the Remaining Loss from member brokered transactions is not 
covered due to these limitations on allocations, the uncovered loss 
will be reallocated as set forth in Section 8(e) of Rule 4. This 
section calls for a pro rata allocation to the netting membership in 
general based on each netting member's average daily required clearing 
fund deposit over the twelve-month period immediately prior to the 
insolvency. The proposed rule change makes clear that the amounts 
allocated pursuant to Section 8(e) will be assessed to a netting member 
in addition to any loss amount allocated pursuant to Section 8(d)(ii). 
Therefore, a netting member may be subject to an aggregate allocation 
of loss that may exceed the applicable limitation set forth in Section 
8(d)(ii).
    Even with the allocation pursuant to Section 8(e) of Rule 4, a 
broker netting member would not be subject to an aggregate loss 
allocation for any single loss allocation event in an amount greater 
than $5 million. In addition, what has been intended, but is not clear 
in the current rules, is that a non-broker netting member can terminate 
its GSD membership and thus cap any additional loss allocation 
obligation due to the application of Section 8(e) at the amount of its 
required clearing fund deposit. Therefore, FICC is proposing to make 
its GSD rules clear that any allocations to members resulting from the 
application of Section 8(e) of Rule 4 or another firm's failure to pay 
its assessed share are limited to the extent of a member's required 
clearing fund deposit if such member chooses to terminate its GSD 
membership.\4\
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    \4\ If a member elects to terminate its membership in FICC, its 
liability for a loss allocation obligation is limited to the amount 
of its required clearing fund for the business day on which the 
notification of such loss allocation is provided to the member.
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    In addition, FICC wishes to make clear that the ability to 
terminate and cap a loss allocation obligation at the amount of the 
clearing fund deposit is also applicable to a netting member (aside 
from the defaulting party) where an auction purchase is the reason for 
any Remaining Loss. In these instances, as in the instances described 
above, the netting member assessed a loss allocation obligation will 
have had no participation in the transaction which led to the Remaining 
Loss, and therefore will be allowed to cap its total losses at the 
amount of the clearing fund deposit.
    FICC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \5\ and the rules and 
regulations thereunder applicable to FICC because the proposed rule 
change would clarify the GSD's rules and procedures with regard to loss 
allocation assessments to netting members in the event of a default 
thereby providing enhanced protections to FICC and its members and 
promoting the prompt and accurate clearance and settlement of 
securities.
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    \5\ 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-2004-18 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-2004-18. 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

[[Page 3412]]

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-2004-18 
and should be submitted on or before February 14, 2005.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).

J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E5-218 Filed 1-21-05; 8:45 am]
BILLING CODE 8010-01-P