[Federal Register Volume 70, Number 31 (Wednesday, February 16, 2005)]
[Notices]
[Pages 7984-7985]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-647]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51146; File No. SR-FICC-2004-13]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of a Proposed Rule Change To Amend the Rules of the 
Mortgage-Backed Securities Division To Impose Fines on Members for 
Violations of Minimum Financial Standards and To Modify the Penalty 
Assessment Process for Failures of Members To Submit Requisite 
Financial Reports on a Timely Basis

February 7, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 24, 2004, the Fixed 
Income Clearing Corporation (``FICC'') filed with the Securities and 
Exchange Commission (``Commission'') and on February 2, 2005, 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\ 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 amend the rules of its Mortgage-Backed 
Securities Division (``MBSD'') to impose fines on members for 
violations of minimum financial standards and to modify the penalty 
assessment process for failures of members to submit requisite 
financial reports on a timely basis.

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.\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 proposed rule change would amend the rules of the MBSD by 
imposing fines on members for violations of minimum financial standards 
and by modifying the penalty assessment process for failures of members 
to submit requisite financial reports on a timely basis.
1. Violations of Minimum Financial Standards
    The rules of the MBSD require clearing members to meet and maintain 
certain minimum financial standards at all times. While the majority of 
MBSD members consistently satisfy their minimum financial requirements, 
occasionally members do breach these requirements and create undue risk 
for FICC and its members.
    Currently, the MBSD rules do not impose specific margin 
consequences for falling out of compliance with minimum financial 
requirements but allow the Membership and Risk Management Committee in 
its discretion to impose conditions which can include an increase to 
the participant's minimum required deposits to the Participants Fund.
    Under the proposed rule change, a violation of a minimum financial 
requirement by an MBSD clearing participant would result in the 
imposition on such member of a margin premium equal to the greater of 
(a) 25 percent of the member's unadjusted \3\ Participants Fund 
requirement or (b) $1,000,000, to continue for ninety calendar days 
after the later to occur of (i) the member's return to compliance with 
applicable minimum financial standards or (ii) FICC's discovery of the 
applicable violation.\4\ In addition, such violation would result in 
(1) a report of the violation to the FICC Membership and Risk 
Management Committee at its next regularly scheduled meeting or sooner 
if deemed appropriate by FICC and (2) the placement of such member on 
FICC's ``watch list'' subjecting it to frequent and thorough 
monitoring. None of these consequences would preclude FICC from 
imposing any other margin consequences permitted by the MBSD rules.
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    \3\ ``Unadjusted'' means the standard calculation before any 
additional assessments.
    \4\ The required clearing fund deposit premium that will be 
assessed for violation of applicable minimum financial standards 
will be effective beginning on the day of the violation but will 
begin to be assessed on the date FICC becomes aware of the 
violation.
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2. Failure To Submit Requisite Financial Reports on a Timely Basis
    Certain members that are required to provide monthly or quarterly 
financial data to FICC at times have violated MBSD's membership 
requirements by not timely providing such financial data. In such 
instances, management contacts each offending member and follows up 
with a letter.
    Failure to timely receive required information creates risk to FICC 
and as a result hinders FICC's ability to appropriately assess the 
financial condition of such members. To encourage timely submission of 
required financial data, FICC has established a mechanism to fine 
delinquent participants.\5\ FICC is now proposing two additional 
measures to enforce timely filing of financial information.
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    \5\ Securities Exchange Act Release No. 49947 (June 30, 2004), 
69 FR 41316 [File No. SR-FICC-2003-01].
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    First, FICC proposes to subject delinquent participants to a more 
stringent Participants Fund requirement. Specifically, the proposed 
rule filing would automatically impose a margin premium equal to the 
greater of (1) 25 percent of the member's unadjusted Participants Fund 
requirement or (2) $1,000,000. The margin premium would be applied 
until appropriate financial data is submitted to FICC and reviewed for 
compliance purposes. In addition, delinquent members would be precluded 
from taking back any excess Participants Fund collateral to which they 
might ordinarily be entitled.
    Second, participants that fail to submit requisite financial 
reports on a timely basis would also automatically be placed on FICC's 
``watch list'' and

[[Page 7985]]

subject to frequent and thorough monitoring.
    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 assures the 
safeguarding of securities and funds which are in the custody or 
control of FICC by encouraging participants to maintain their minimum 
financial standards and to submit their required financial reports on a 
timely basis. As a result, FICC's ability to maintain a financially 
sound participant base should be enhanced.
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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-2004-13 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-2004-13. 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/gov/gov.docs.jsp?NS-query. 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-2004-13 and 
should be submitted on or before March 9, 2005.

    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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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E5-647 Filed 2-15-05; 8:45 am]
BILLING CODE 8010-01-P