[Federal Register Volume 70, Number 149 (Thursday, August 4, 2005)]
[Notices]
[Page 44959]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4152]



[[Page 44959]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52157; File No. SR-FICC-2005-11]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change To Institute a Netting Process for 
Fail Deliver and Fail Receive Obligations for Netting Members in Its 
Government Securities Division

July 28, 2005.

I. Introduction

    On May 19, 2005, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-FICC-2005-11 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 June 24, 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. 51865 (June 17, 2005), 
70 FR 36679.
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II. Description

    The rules of FICC's Government Securities Division (``GSD'') 
provide that FICC may, in its sole discretion, net a netting member's 
fail deliver and fail receive obligations with the member's current 
settlement obligations. FICC is amending the GSD's rules to institute 
this fail netting process on a daily basis.
    Since the implementation of the GSD's netting system (by FICC's 
predecessor, the Government Securities Clearing Corporation), 
outstanding fails have been processed separately from new trading 
activity. Demand by members for the netting of fails was initially low 
due to the fact that many members could not properly account for netted 
fails in their proprietary systems. In addition, demand for netting of 
fails remained low until the summer of 2003 when the market experienced 
significant fails in the Treasury 10-year note due May 2013.
    In recent years, FICC has been integrally involved in assisting the 
industry in addressing significant fail situations. On several 
occasions, FICC intervened by supporting special netting of members' 
fails with members' current settlement activity. While this procedure 
helped alleviate the number of open fails and associated settlement 
issues and risks, it was only an intermediate step in resolving the 
need for the more regular fail processing proposed herein. Moreover, 
the industry's continued experience with fails has caused a heightened 
demand on the part of members for the GSD to institute such a routine 
process.
    Pursuant to the proposed rule change, the GSD will implement a 
methodology whereby outstanding member fail obligations will routinely 
be netted with current settlement activity. This process will provide 
reduced risk exposure to members because it will facilitate settlement 
by allowing members to close open fails on their books on a daily 
basis, as well as reduce the number of outstanding clearance 
obligations at FICC.
    FICC does not anticipate an undue burden on members as a result of 
this proposal. The GSD has issued an Important Notice \3\ to all 
members seeking feedback on the proposed change, and to date, the 
substance of any feedback received has been positive.
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    \3\ Important Notice GOV028.05 (March 10, 2005).
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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.\4\ The Commission finds that FICC's 
proposed rule change is consistent with this requirement because it 
will enable FICC to reduce the risks posed by large numbers of open 
fail positions.
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    \4\ 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,\5\ that the proposed rule change (File No. SR-FICC-2005-11) be and 
hereby is approved.
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    \5\ 15 U.S.C. 78s(b)(2).

    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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4152 Filed 8-3-05; 8:45 am]
BILLING CODE 8010-01-P