[Federal Register Volume 70, Number 139 (Thursday, July 21, 2005)]
[Notices]
[Pages 42122-42123]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3871]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52043; File Nos. SR-DTC-2005-04, SR-FICC-2005-10, and 
SR-NSCC-2005-05]


Self-Regulatory Organizations; The Depository Trust Company, 
Fixed Income Clearing Corporation, and National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Changes To Establish a 
Fine for Members Failing To Conduct Connectivity Testing

July 15, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 13, 2005, The 
Depository Trust Company (``DTC''), on May 3, 2005, the Fixed Income 
Clearing Corporation (``FICC''), and on May 4, 2005, the National 
Securities Clearing Corporation (``NSCC'') filed with the Securities 
and Exchange Commission (``Commission'') the proposed rule changes 
described in Items I, II, and III below, which items have been prepared 
primarily by DTC, FICC, and NSCC. On June 7, 2005, NSCC amended its 
proposed rule change.\2\ The Commission is publishing this notice to 
solicit comments on the proposed rule changes from interested parties.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ The NSCC amendment proposes to amend NSCC Rule 48, Section 
1, to increase the maximum disciplinary fine for a single offense 
from $10,000 to $20,000.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    DTC, FICC, and NSCC are seeking to establish a fine for members who 
fail to conduct connectivity testing for business continuity purposes.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, DTC, FICC, and NSCC included 
statements concerning the purpose of and basis for the proposed rule 
changes and discussed any comments they received on the proposed rule 
changes. The text of these statements may be examined at the places 
specified in Item IV below. DTC, FICC, and NSCC have prepared 
summaries, set forth in sections (A), (B), and (C) below, of the most 
significant aspects of such statements.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by DTC, FICC, and NSCC.
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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 these filings is to modify the rules of DTC, FICC, 
and NSCC to provide that DTC, FICC, and NSCC may impose a fine on any 
member that is required to conduct connectivity testing for business 
continuity purposes and fails to do so.
    In the aftermath of September 11, 2001, and in conjunction with a 
financial industry white paper, DTC, FICC, and NSCC require 
connectivity testing for critical (``Top Tier'') members.\4\ The 
criteria used by DTC, FICC, and NSCC to identify their respective Top 
Tier members were revenues, clearing fund contributions, settlement 
amounts, and trading volumes. Connectivity testing for the Top Tier 
members was initiated on January 1, 2004. Due to the critical 
importance of being able to assess whether a Top Tier member has 
sufficient operational capabilities, DTC, FICC, and NSCC have 
determined that they need the ability to fine any Top Tier member that 
does not test.\5\
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    \4\ The Federal Reserve, Office of the Comptroller of the 
Currency, and the Commission issued ``Interagency Paper on Sound 
Practices to Strengthen the Resilience of the U.S. Financial 
System.'' [68 FR 17809 (April 11, 2003)]. This document provided 
guidelines that required core clearing and settlement organizations, 
such as DTC, FICC, and NSCC, and others in the financial industry to 
manage business continuity capabilities. DTC, FICC, and NSCC 
developed their testing of Top Tier firms based on the guidelines 
outlined in the white paper.
    \5\ Pursuant to DTC Rule 2, ``Participants and Pledgees,'' 
participants must furnish, upon DTC's request, information 
sufficient to demonstrate operational capability. In addition, DTC 
Rule 21, ``Disciplinary Sanctions,'' allows DTC to impose fines on 
participants for any error, delay or other conduct detrimental to 
the operations of DTC.
    Pursuant to GSD Rule 3, ``Responsibility, Operational 
Capability, and Other Membership Standards of Comparison-Only 
Members and Netting Members,'' the GSD may require members to 
fulfill operational testing requirements as the GSD may at any time 
deem necessary. Pursuant to MBSD Rule 1, Section 3 of Article III, 
all MBSD applicants and members agree to fulfill operational testing 
requirements and related reporting requirements that may be imposed 
to ensure the continuing operational capability of the applicant.
    Pursuant to NSCC Rule 15, ``Financial Responsibility and 
Operational Capability,'' members must furnish to NSCC adequate 
assurances of their financial responsibility and operational 
capability as NSCC may at any time deem necessary. In addition, NSCC 
Rule 48, ``Disciplinary Procedures'', allows NSCC to impose a fine 
on participants for any error, delay, or other conduct that is 
determined to be detrimental to the operations of NSCC.
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    Currently, each member of DTC, FICC, and NSCC that is designated as 
Top Tier is advised of this status and is provided with information on 
the testing requirements. Under DTC, FICC, and NSCC's current 
procedures, if testing is not completed by a Top Tier member by the end 
of June, a reminder notice is sent to the member. Thereafter, another 
reminder notice is sent in October and, if necessary, again in 
December.
    The reminder notice sent in December would advise that if testing 
is not completed by December 31, a fine of $10,000 will be imposed. 
These fines would be collected from members in January of the following 
year. The Membership and Risk Management Committee would be notified of 
all members that were fined for failing to complete connectivity 
testing.
    In the event that any member fails to complete connectivity testing 
for two successive years, the fine that would be imposed at that time 
would be $20,000. Failure to complete testing for more than two 
successive years would result

[[Page 42123]]

in disciplinary action, including potential termination of membership.
    DTC, FICC, and NSCC believe that the proposed rule changes are 
consistent with the requirements of Section 17A of the Act \6\ and the 
rules and regulations thereunder because the implementation of the 
proposals should help DTC, FICC, and NSCC to enforce compliance with 
their connectivity testing rules for business continuity purposes and 
as a result should better enable them to ensure the safeguarding of 
securities and funds which are in their custody or control.
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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

    DTC, FICC, and NSCC do not believe that the proposed rule changes 
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

    DTC, FICC, and NSCC have not solicited or received any written 
comments on these proposals. DTC, FICC, and NSCC will notify the 
Commission of any written comments they receive.

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 
changes are 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-DTC-2005-04, SR-FICC-2005-10, and SR-NSCC-2005-05 on the 
subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-DTC-2005-04, SR-
FICC-2005-10, and SR-NSCC-2005-05. These file numbers 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 changes that are filed with the 
Commission, and all written communications relating to the proposed 
rule changes 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, 100 F Street, NE, Washington, DC 
20549. Copies of such filings also will be available for inspection and 
copying at the principal offices of DTC, FICC, and NSCC and on DTC's 
Web site at http://www.dtc.org, and on FICC's Web site at http://www.ficc.com, and on NSCC's Web site at http://www.nscc.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-DTC-2005-04, SR-
FICC-2005-10, and SR-NSCC-2005-05 and should be submitted on or before 
August 5, 2005.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
J. Lynn Taylor,
Assistant Secretary.
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    \7\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E5-3871 Filed 7-20-05; 8:45 am]
BILLING CODE 8010-01-P