[Federal Register Volume 71, Number 190 (Monday, October 2, 2006)]
[Notices]
[Pages 58025-58026]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-16109]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54487; File No. SR-FICC-2005-17]


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

 September 22, 2006.

I. Introduction

    On September 30, 2005, the Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') and on November 28, 2005, amended proposed rule change 
SR-FICC-2005-17 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 March 8, 2006.\2\ On August 15, 2006, FICC filed an 
amendment to the proposed rule change.\3\ 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. 53396 (March 2, 2006), 
71 FR 11694.
    \3\ The August 15, 2006, amendment, as noted below, is not 
substantive and did not require republication of notice.
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II. Description

    The purpose of the proposed rule change is to clarify the practice 
of the Government Securities Division (``GSD'') of FICC of assuming 
certain blind brokered repo fails and of obtaining financing as 
necessary in connection with such assumptions. 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 the 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 FICC's receipt of securities from the 
repo dealer for redelivery to the reverse repo dealer or FICC's netting 
or pairing off of the settlement obligation arising from the start leg 
against the settlement obligation 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 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 the erroneous submission of 
trade data), the broker will have a net settlement position at FICC 
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 
to itself and to its members.\4\ 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.\5\ FICC is therefore adding a provision to its 
Rules to expressly provide for its practice of assuming blind broker 
repo fails and therefore to make its Rules consistent with its current 
and longstanding practice.\6\
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    \4\ FICC has engaged in the practice of assuming broker fails 
since the inception of its blind brokered repo service.
    \5\ FICC filed its August 15, 2006, amendment to the proposed 
rule change to make explicit its policy that in all cases where FICC 
assumes a fail from a broker, the counterparty remains responsible 
for its obligations with respect to the transaction.
    \6\ Specifically, new Section 5, ``Assumption of Blind Brokered 
Fails,'' is being added to GSD Rule 19.
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    In the assumption of such broker fails, the need for financing 
might arise, such as in the situation where the repo dealer delivers 
securities near the close of the securities Fedwire and the broker is 
unable to redeliver 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

[[Page 58026]]

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 also be used to collateralize such financing. Also, 
Section III.C of the GSD's fee structure provides the formula that the 
GSD uses to charge members for the cost of any financing obtained by 
GSD.
    FICC interprets 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 this rule 
is necessary for this clarification.

III. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of transactions and 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.\7\ The Commission finds 
that FICC's proposed rule change is consistent with this requirement 
because the change, which is designed to clarify FICC's practice of 
assuming failed blind brokered repo transactions, will facilitate the 
settlement of blind brokered repo fails and as such will facilitate the 
prompt and accurate clearance and settlement of these transactions. By 
facilitating the settlement of these fails, FICC will also reduce 
settlement risk, which will better enable it to assure the safeguarding 
of securities and funds which are in FICC's custody or control or for 
which it is responsible.
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    \7\ 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, as amended, 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,\8\ that the proposed rule change, as amended, (File No. SR-FICC-
2005-17) be and hereby is approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    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).

Nancy M. Morris,
Secretary.
[FR Doc. E6-16109 Filed 9-29-06; 8:45 am]
BILLING CODE 8010-01-P