[Federal Register Volume 71, Number 45 (Wednesday, March 8, 2006)]
[Notices]
[Pages 11694-11696]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-3272]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53396; File No. SR-FICC-2005-17]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to Assumption of 
Blind Brokered Fails by Its Government Securities Division

March 2, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 30, 2005, the 
Fixed Income Clearing Corporation (``FICC'') filed with the Securities 
and Exchange Commission (``Commission'') a proposed rule change and on 
November 28, 2005 amended the proposed rule change that is 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\ 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

    The proposed rule change would clarify the practice of the 
Government Securities Division (``GSD'') of FICC of assuming certain 
blind brokered repurchase transaction (``repo'') fails and of obtaining 
financing in connection with such assumption.

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),

[[Page 11695]]

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 purpose of the proposed rule change is to clarify the practice 
of the GSD of FICC of assuming certain blind brokered repo fails and of 
obtaining financing as necessary in connection with such assumption. 
The settlement of the start leg of a same-day starting repo has always 
been and continues to be processed outside of the GSD. In the evening 
of the day of a same-day starting brokered repo, FICC will assume 
responsibility from the broker for settlement of such start leg if the 
repo dealer has not delivered securities to the broker to start the 
repo (i.e., the start leg has failed). This may involve the receipt of 
securities from the repo dealer for redelivery to the reverse repo 
dealer or the settlement of the start leg may be effected by netting or 
pairoff of the settlement obligations arising from the start leg 
against the settlement obligations arising from the close leg of the 
same or another repo.
    FICC will also assume a blind brokered repo fail that arises in the 
close leg of a blind brokered repo transaction. For example, if the 
start leg of the transaction settles outside of FICC in the normal 
course but one side of the close leg does not compare (for any reason 
that would cause a trade to not compare such as erroneous trade data 
submitted by one or both of the parties), the broker will wind up with 
a net settlement position rather than netting flat. If that transaction 
fails to settle, FICC will assume the broker's fail.
    FICC assumes the fails in these instances in order to decrease 
risk.\3\ By assuming the fail, FICC removes the broker, which acts as 
an intermediary and which expects to net out of every transaction and 
not have a settlement position, from the settlement process. FICC is 
proposing to add a provision to its rules to expressly provide for this 
practice and therefore to make its rules consistent with its current 
and longstanding practice.\4\
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    \3\ FICC has engaged in the practice of assuming broker fails 
since the inception of its blind brokered repo service.
    \4\ The specific rule being added is Rule 19, Section 5, 
``Assumption of Blind Brokered Fails.''
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    In the assumption of such broker fails, the need for financing 
might arise. For example, such as if the repo dealer delivered 
securities at the close of the securities Fedwire and if the broker was 
unable to deliver them to the reverse repo dealer. The GSD's rules 
already contain a provision, Section 8 of Rule 12, that addresses the 
GSD's need to obtain financing in general. This provision contemplates 
the need for financing in order to allow the GSD to facilitate 
securities settlement generally. It is important to note that such 
financing is part of the GSD's normal course of business, and the GSD's 
ability to obtain such financing is necessary for it to be able to 
complete securities settlement. Section 8 of Rule 12 provides that if 
FICC deems it appropriate to obtain financing to provide its securities 
settlement services, FICC may create security interests in eligible 
netting securities delivered by a netting member in order to obtain 
such financing. The provision requires that members not take any action 
to adversely affect this process. The provision also states that such 
security interests may be created to obtain financing in an amount 
greater than the obligation of a member to FICC relating to such 
eligible netting securities. Thus, clearing fund securities may be used 
to collateralize such financing. Also, Section III.C of the GSD's fee 
structure provides the formula that the GSD will use to charge members 
for the cost of any financing obtained by the GSD.
    FICC wishes to interpret Section 8 of Rule 12 and Section III.C. to 
apply to financing that might arise because of FICC's assumption of 
blind brokered fails. FICC does not believe that actual changes to the 
rules are necessary for this clarification.
    FICC believes that the proposed change is consistent with Section 
17A of the Act \5\ and the rules and regulations thereunder applicable 
to FICC because it clarifies FICC's rules for consistency with current 
practice and provides an interpretation of an existing rule.
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    \5\ 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-2005-17 in the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-FICC-2005-17. 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, 100 F Street, 
NE., Washington, DC 20549. Copies of such filings also will be 
available for inspection and

[[Page 11696]]

copying at the principal office of FICC and on FICC's Web site, http://www.ficc.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-
FICC-2005-17 and should be submitted on or before March 29, 2006.

    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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Nancy M. Morris,
Secretary.
[FR Doc. E6-3272 Filed 3-7-06; 8:45 am]
BILLING CODE 8010-01-P