[Federal Register Volume 70, Number 59 (Tuesday, March 29, 2005)]
[Notices]
[Pages 15959-15960]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1381]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51412; File No. SR-FICC-2004-13]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving 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

 March 23, 2005.

I. Introduction

    On June 24, 2004, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') and 
on February 2, 2005, amended proposed rule change SR-FICC-2004-13 
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 February 16, 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. 51146 (February 7, 
2005), 70 FR 7984.
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II. Description

    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.

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 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 in 
the participant's minimum required deposits to the Participants Fund.

[[Page 15960]]

    Under the proposed rule change, a violation of a minimum financial 
requirement by an MBSD clearing participant will 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 which will begin on the day the 
participant fell below its minimum financial requirement and will 
continue for ninety calendar days after the later of (i) the member's 
return to compliance with its applicable minimum financial standards or 
(ii) FICC's discovery of the violation.\4\ In addition, such violation 
will 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 staff and (2) the placement of 
such member on FICC's watch list subjecting it to frequent and thorough 
monitoring. None of these consequences will 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 providing such financial data in a timely manner. 
In such instances, management contacts the offending member and follows 
up with a letter.
    Failure to receive required information in a timely manner hinders 
FICC's ability to appropriately assess the financial condition of such 
members and as a result creates risk to FICC. 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\ Securites Exchange Act Release No. 49947 [June 30, 2004), 69 
FR 41316 (File No. SR-FICC-2003-01].
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    First, FICC will subject delinquent participants to a more 
stringent Participants Fund requirement. Specifically, FICC will now 
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 will be applied until appropriate 
financial data is submitted to FICC and reviewed for compliance 
purposes. In addition, delinquent members will 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 will also automatically be placed on FICC's 
watch list and subject to frequent and thorough monitoring.

III. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to facilitate the safeguarding of 
securities and funds which are 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 it assures the 
safeguarding of such securities and funds by incentivizing 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 monitor its participants and to maintain a financially sound 
participant base should be enhanced.
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    \6\ 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-2004-13) be and hereby 
is approved.

    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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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-1381 Filed 3-28-05; 8:45 am]
BILLING CODE 8010-01-P