[Federal Register Volume 70, Number 49 (Tuesday, March 15, 2005)]
[Notices]
[Pages 12762-12763]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1102]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51340; File No. SR-FICC-2005-02]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change To Amend the Application and 
Continuing Membership Standards of the Government Securities Division 
and the Mortgage-Backed Securities Division

March 9, 2005.

I. Introduction

    On January 7, 2005, the Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') and on January 14, 2005, amended proposed rule change 
SR-FICC-2005-02 pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act'').\1\ Notice of the proposal was published in the 
Federal Register on January 28, 2005.\2\ No comment letters were 
received. For the reasons discussed below, the Commission is approving 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 51066 (January 21, 
2005), 70 FR 4167.
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II. Description

    FICC is amending the application and continuing membership 
standards of the Government Securities Division (``GSD'') and the 
Mortgage-Backed Securities Division (``MBSD'') to: (1) Provide that 
when an applicant, member, or participant \3\ becomes subject to an 
order of statutory disqualification or order of similar effect, 
including an order issued by a non-U.S. regulator or examining 
authority, the FICC Membership and Risk Management Committee 
(``Committee'') shall determine whether this shall be the basis for 
denial of the membership applicant or termination of membership rather 
than such denial or termination being automatic; (2) impose a fine on 
members that fail to notify FICC within 2 business days of falling out 
of compliance with specified membership standards, including becoming 
subject to an order of statutory disqualification or order of similar 
effect; and (3) require applicants and members to notify FICC within 
two business days if they become aware of an investigation or similar 
proceeding against them that could lead them to violate a FICC 
membership standard.
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    \3\ GSD members and MBSD participants are collectively referred 
to as members for purposes of this order.
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1. Action in Cases of Statutory Disqualification or Orders of Similar 
Effect

    The GSD and MBSD rules currently provide that a membership 
applicant that is subject to an order of statutory disqualification 
under Section 3(a)(39) of the Act or an order of similar effect is not 
eligible for membership.\4\ Currently, a waiver of this requirement by 
the Committee is necessary in order for FICC to admit such applicant 
into membership. The admission requirements also serve as continuance 
standards for current members. Therefore, if a member becomes subject 
to a statutory disqualification, a waiver must be sought in order for 
it to continue as a member of FICC.
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    \4\ For example, GSD Rule 3, ``Financial Responsibility and 
Operational Capability Standards,'' Section 1, ``Admissions Criteria 
for Comparison-Only Members,'' provides that an applicant may not be 
subject to an order of statutory disqualification or ``an order of 
similar effect issued by a Federal or State banking authority, or 
other examining authority or regulator.'' Section 3(a) (39) of the 
Act, which sets forth the definition of ``statutory 
disqualification,'' specifically covers orders issued by foreign 
financial regulatory authorities that are the equivalent to 
Commission-issued orders covered by the definition. The statutory 
definition also includes specific references to entities being 
barred from the ``foreign equivalent of a self-regulatory 
organization [or a] foreign or international securities exchange'' 
under ``any substantially equivalent foreign statute or 
regulation.''
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    At the time it was organized as a clearing agency, the Government 
Securities Clearing Corporation, the predecessor to FICC, modeled its 
rules provisions regarding statutory disqualifications on those of 
other clearing agencies which are now subsidiaries of The Depository 
Trust & Clearing Corporation. The understanding at the time was that 
instances of statutory disqualification were a rare occurrence and 
called into question the entity's ability to meet membership 
requirements or to remain a member in good standing. More recently, 
firms are increasingly becoming subject to statutory disqualification, 
but the reasons for a firm's statutory disqualification may have little 
bearing on its ability to become or remain a member in good standing. 
FICC will retain the ability to deny or terminate membership where a 
firm's ability to meet applicable membership requirements is called 
into question. However, to the extent an order of statutory 
disqualification does not call this into question, FICC does not 
believe it appropriate for the Committee to have to issue a waiver in 
order to admit or retain the member.
    The proposed rule change eliminates the automatic need to obtain a 
waiver in cases where an entity is subject to an order of statutory 
disqualification or order of similar effect but will keep such orders 
as a criterion to be considered for membership. FICC management will 
continue to present all instances of such orders to the Committee, and 
the Committee will make all final determinations with respect to these 
entities. In this manner, FICC management and the Committee will be 
able to thoroughly evaluate the risks presented by an applicant or 
member that was or that becomes subject to such an order. The proposed 
rule change allows FICC to admit and retain members that pose no risk 
to FICC.\5\ In instances where waivers are still required under the 
rules and are granted by the Committee, FICC will promptly notify the 
Commission.
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    \5\ To the extent the Committee determines to admit or retain a 
member despite a statutory disqualification, the Committee will 
still retain all rights it currently has under FICC rules to impose 
limitations or restrictions on such member or participant.
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2. Fines for Failure To Notify FICC for Falling Out of Compliance With 
Membership Criteria

    FICC's rules currently require members to promptly notify FICC in 
the event that they are not meeting membership standards. FICC is now 
implementing a fine for those members that do not promptly notify FICC 
of their noncompliance with any membership standard. The membership 
standards are set forth in GSD Rule 2, ``Members,'' and Rule 3, 
``Financial Responsibility and Operational Capability Standards,'' 
which apply to comparison-only and netting members as applicable and in 
MBSD Clearing Rules Article III, ``Participants,'' which apply to MBSD 
clearing participants. For risk management purposes, it is important 
that FICC learn of a member's failure to meet a membership standard as 
soon as possible in order that FICC can promptly determine a course of 
action that will best protect FICC. In addition, in some instances, 
such as certain cases where a member becomes subject to a statutory 
disqualification order, FICC is required to promptly notify the 
Commission.\6\ Given the importance of FICC's membership standards and 
the need for FICC to learn of noncompliance as soon as possible, FICC 
is proposing to fine members $1,000 per instance of a failure to notify 
FICC within two business days of the

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member first having knowledge of its falling out of compliance with the 
particular membership standard.\7\ Members would be afforded the same 
due process as is currently available under FICC's rules with respect 
to other types of fines. As with all fines, FICC will notify the 
Commission of all fines that are imposed pursuant to this rule change.
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    \6\ Rule 19h-1 of the Act does not require a notification or 
notice to the Commission in all cases of statutory disqualification.
    \7\ Once FICC is notified of an applicant or member's statutory 
disqualification, it will follow the provisions of Rule 19h-1 of the 
Act.
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    In addition, members that fail to timely notify FICC of falling out 
of compliance with any membership standard will automatically be placed 
on the Watch List and will be subject to more frequent and thorough 
monitoring as provided for in GSD Rule 4, Section 3 and MBSD Article 
IV, Rule 6.

3. Notification of Pending Investigations

    The proposed rule change also requires applicants and members to 
notify FICC within two business days of first having knowledge of a 
pending investigation or similar proceeding or condition that could 
lead them to violate a membership standard. The proposed rule change 
will provide an exception to this requirement in cases where disclosure 
to FICC would cause the applicant or member to violate an applicable 
law, rule, or regulation.

4. Definitions

    Finally, MBSD is proposing to add two definitions to Article I, 
``Definitions and General Provisions.'' The term ``Associated Person'' 
will be defined to mean, when applied to any ``person,'' any partner, 
officer, or director of such ``person'' or any ``person'' directly or 
indirectly controlling or controlled by such ``person,'' including an 
employee of such ``person.'' The term ``Person'' will mean a 
partnership, corporation, or other organization, entity or individual.

III. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible.\8\ The Commission finds that FICC's 
proposed rule change is consistent with this requirement because it 
will help FICC monitor its members' compliance with membership 
standards. This should better enable FICC to act quickly to protect 
itself and its members and as a result will better enable FICC to 
safeguard the securities and funds in its custody or control or for 
which it is responsible. The Commission also finds that FICC's proposed 
rule change is consistent with this requirement because while it will 
make an action of statutory disqualification only a criteria to be 
considered in membership matters and not an automatic bar, FICC has 
designed the proposed rule change in a manner that will not compromise 
its membership review process.
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    \8\ 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, 
that the proposed rule change (File No. SR-FICC-2005-02) be and hereby 
is approved.

    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. E5-1102 Filed 3-14-05; 8:45 am]
BILLING CODE 8010-01-P