[Federal Register Volume 71, Number 248 (Wednesday, December 27, 2006)]
[Notices]
[Pages 77837-77838]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-22089]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54969; File No. SR-FICC-2006-15]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change To Modify its Rules To Diversify 
and Standardize Clearing Fund Collateral Requirements Across the 
Divisions To Improve Liquidity and Minimize Risk for Its Members

December 19, 2006.

I. Introduction

    On October 4, 2006, the Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-FICC-2006-15 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 
November 9, 2006.\2\ A correction and extension of the comment period 
was published in the Federal Register on November 22, 2006.\3\ No 
comment letters were received. For the reasons discussed below, the 
Commission is approving the proposed rule change as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 54682 (November 1, 
2006), 71 FR 65855.
    \3\ Securities Exchange Act Release No. 54682A (November 17, 
2006), 71 FR 67667. The correction addressed a typographical error 
in the original release.
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II. Description

    FICC seeks to modify the rules of both of the Government Securities 
Division (``GSD'') and the Mortgage-Backed Securities Division 
(``MBSD'') (collectively, ``Divisions'') to diversify and standardize 
Clearing Fund \4\ collateral requirements across the Divisions in order 
to improve liquidity and minimize risk for FICC and its members.
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    \4\ The GSD Rules refer to member collateral deposits as the 
``Clearing Fund'' while the MBSD rules refer to these deposits as 
the ``Participants Fund.'' The term ``Clearing Fund'' in this order 
will refer to both.
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    Presently, both GSD and MBSD members may satisfy their Clearing 
Fund requirements with cash deposits. Members may also satisfy a 
portion of their Clearing Fund requirements with an open account 
indebtedness fully secured by certain types of securities and/or 
letters of credit. FICC is modifying its rules to: (1) Expand the types 
of securities members may deposit to satisfy their Clearing Fund 
requirements (``Eligible Clearing Fund Securities''); (2) establish 
concentration limits with regard to members' use of Eligible Clearing 
Fund Securities; (3) create a correlating range of haircuts to be 
applied to the expanded types of Eligible Clearing Fund Securities; and 
(4) eliminate letters of credit as a generally acceptable form of 
collateral securing members' open account Clearing Fund indebtedness.

A. Revised Clearing Fund Components

(1) Cash
    Currently the rules of GSD require that the greater of $100,000 or 
ten percent of a member's Clearing Fund requirement with a maximum of 
$500,000 be made in the form of cash.\5\ The rules of MBSD currently do 
not contain a minimum cash requirement. For both Divisions, the 
proposed new cash collateral component will be the lesser of $5,000,000 
or ten percent of a

[[Page 77838]]

member's Clearing Fund requirement with a minimum of $100,000.
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    \5\ GSD Rule 4, Section 2(b)(ii).
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(2) Securities
    Currently each Division of FICC accepts different types of 
securities as Clearing Fund collateral. For example, GSD accepts Agency 
securities but not mortgage-backed securities, and MBSD accepts 
mortgage-backed securities but not Agency securities. In addition, 
there are currently no concentration limits placed on securities 
deposited as Clearing Fund collateral at either Division. In an effort 
to standardize the securities that are eligible as Clearing Fund 
collateral across the Divisions, FICC is modifying the rules of both 
Divisions by adding a definition, ``Eligible Clearing Fund Securities'' 
(for GSD) and ``Eligible Participants Fund Securities'' (for MBSD) to 
each Division's rules.\6\ As defined, Eligible Clearing Fund Securities 
and Eligible Participants Fund Securities will be unmatured bonds which 
are either an ``Eligible Clearing Fund Agency Security,'' an ``Eligible 
Clearing Fund Mortgage-Backed Security'' or an ``Eligible Clearing Fund 
Treasury Security.'' \7\ ``Eligible Clearing Fund Agency Security'' 
would be defined as a direct obligation of those U.S. agencies or 
government sponsored enterprises as FICC may designate from time to 
time that satisfies the criteria set forth in notices issued by FICC 
from time to time. ``Eligible Clearing Fund Mortgage-Backed Security'' 
would be defined as a mortgage-backed pass through obligation issued by 
those U.S. agencies or government sponsored enterprises as FICC may 
designate from time to time that satisfies the criteria set forth in 
notices issued by FICC from time to time. ``Eligible Clearing Fund 
Treasury Security'' would be defined as a direct obligation of the U.S. 
government that satisfies the criteria set forth in notices issued by 
FICC from time to time.
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    \6\ Initial eligibility criteria for each type of Eligible 
Clearing Fund Securities and Eligible Participants Fund Securities 
will be announced to members through an Important Notice prior to 
the effective date of this proposed rule change. Any future changes 
to the eligibility criteria will also be announced to members 
through Important Notices in advance of such changes becoming 
effective.
    \7\ In the MBSD Rules, these terms would be as follows: 
``Eligible Participants Fund Agency Security,'' ``Eligible 
Participants Fund Mortgage-Backed Security,'' and ``Eligible 
Participants Fund Treasury Security.''
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(3) Security Concentration Provisions
    FICC is also establishing security concentration limits for 
Clearing Fund deposits. A minimum of forty percent of a member's 
required Clearing Fund deposit will have to be in cash or Eligible 
Clearing Fund Treasury Securities. The remainder of a member's deposit 
can be secured by cash or the pledge of Eligible Clearing Fund 
Securities. However any deposits of Eligible Clearing Fund Agency 
Securities or Eligible Clearing Fund Mortgage-Backed Securities in 
excess of twenty-five percent of a member's required Clearing Fund 
deposit will be subject to an additional haircut equal to twice the 
percentage specified in the haircut schedule. Furthermore, no more than 
twenty percent of a member's required Clearing Fund deposit can be 
secured by pledged Eligible Clearing Fund Agency Securities of a single 
issuer. Lastly, no member will be permitted to post as Clearing Fund 
collateral Eligible Clearing Fund Agency Securities for which it is the 
issuer.\8\
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    \8\ However, a member will be permitted to pledge Eligible 
Clearing Fund Mortgage-Backed Securities for which it is the issuer 
subject to a haircut specified in the haircut schedule. Initially 
the haircut will be fourteen percent. If the member exceeded the 
twenty-five percent concentration limit, the haircut initially will 
be twenty-one percent.
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(4) Letters of Credit and Other Adequate Assurances
    The provisions in the Divisions' Rules that pertain to Letter of 
Credit Issuers are being modified to reflect that letters of credit are 
no longer a generally accepted form of Clearing Fund collateral.\9\ 
Effective April 1, 2007 (the regular expiration date of letters of 
credit), members that have letters of credit posted as collateral 
(other than members, if any, that have been required to post letters of 
credit for legal risk), will be required to replace the portion of the 
Clearing Fund collateralized by letters of credit with either cash or 
Eligible Clearing Fund Securities.
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    \9\ FICC has found that in practice letters of credit are not as 
liquid as cash and securities and therefore pose more risk to FICC 
and its members when pledged as Clearing Fund collateral. FICC is, 
however, reserving the right to require letters of credit from 
members in those instances where a particular member has been found, 
by FICC in its discretion, to present legal risk. GSD Rule 4, 
Section 2(o) and MBSD Rule 2, Section 4 of Article IV.
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(5) Implementation Timeframes
    The foregoing rule changes will become effective thirty days after 
an Important Notice is issued to members informing them that FICC's 
systems are ready to accommodate such changes. The corresponding 
changes to FICC's rules will be made at that time. On April 1, 2007, 
changes pertaining to letters of credit will be made to FICC's rules.
(6) Alternative Proportions of Eligible Collateral
    As is currently the case under FICC's rules, FICC continues to 
reserve the right to require different proportions of the Clearing Fund 
collateral components as necessary to address any heightened legal or 
insolvency risks presented by a member.\10\
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    \10\ GSD Rule 4, Section 2(o) and MBSD Rule 2, Section 4 of 
Article IV.
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III. Discussion

    Section 19(b) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\11\ 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.\12\ The Commission 
finds that FICC's rule change is consistent with these requirements 
because by revising its rules governing the acceptable forms of 
Clearing Fund collateral deposits to increase the liquidity of its 
Clearing Fund and to minimize risk to FICC and its members, the 
proposed rule change should better enable FICC to assure the 
safeguarding of securities and funds in its custody or control or for 
which it is responsible.\13\
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    \11\ 15 U.S.C. 78s(b).
    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(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,\14\ that the proposed rule change (File No. SR-FICC-2006-15) be 
and hereby is approved. 
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\15\
Florence E. Harmon,
Deputy Secretary.
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    \15\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E6-22089 Filed 12-26-06; 8:45 am]
BILLING CODE 8011-01-P