[Federal Register Volume 73, Number 128 (Wednesday, July 2, 2008)]
[Notices]
[Pages 38013-38014]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-14975]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58025; File No. SR-FICC-2008-02]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change To Require Demand Processing for 
Blind-Brokered Repo Trades

June 25, 2008.

I. Introduction

    On April 9, 2008, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-FICC-2008-02 pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'').\1\ On May 14, 2008, the 
Commission published notice of the proposed rule change to solicit 
comments from interested parties.\2\ The Commission received no comment 
letters in response to the proposed rule change as filed. For the 
reasons discussed below, the Commission is approving the proposed rule 
change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 57802 (May 8, 2008), 73 
FR 27873.
---------------------------------------------------------------------------

II. Description

1. Background

    In 2001, the Government Securities Clearing Corporation (``GSCC''), 
the GSD's predecessor, redesigned its comparison rules and procedures 
soon after the introduction of the real-time trade matching system. At 
that time, GSCC also moved the timing of its settlement guaranty from 
the point of netting to the point of comparison, which was much earlier 
in the day. In designing these changes, GSCC's goal was to provide 
straight through processing by providing for easy identification and 
resolution of uncompared trades intraday in order to achieve 100 
percent comparison. These changes reduced risk by ensuring that more 
transactions were compared and guaranteed by the clearing corporation 
earlier in the day so that intraday credit exposure to counterparties 
was minimized.
    As part of the redesign of the GSCC comparison rules, GSCC 
introduced Demand Comparison, which was a new type of comparison that 
was created to provide members with flexibility and control over the 
comparison process for trades executed via intermediaries.\3\ Demand 
Comparison strikes a balance between ``bilateral comparison'' (the 
traditional form of comparison), where each member is required to 
submit trade data to the clearing agency in order for the clearing 
agency to compare the trade, and ``locked-in comparison,'' where the 
trade is submitted as a compared trade to the clearing agency by one 
side or by one intermediary.\4\
---------------------------------------------------------------------------

    \3\ Securities Exchange Act Release No. 44946 (October 17, 
2001), 66 FR 53816 [File No. SR-GSCC-2001-01].
    \4\ A Treasury auction take-down trade is a typical example of a 
trade submitted for Locked-In Comparison.
---------------------------------------------------------------------------

    Demand Comparison entails submission of trade data by approved 
intermediaries (e.g., brokers) called ``Demand Trade Sources.'' FICC 
deems a trade submitted for Demand Comparison to be compared upon 
FICC's receipt of the trade data from the Demand Trade Source. However, 
if a

[[Page 38014]]

dealer ``does not know'' a trade submitted on its behalf by a Demand 
Trade Source, the dealer is able to submit a DK (i.e., ``don't know'') 
to the GSD. The receipt of a DK by FICC causes the demand comparison 
trade to no longer be deemed compared. In order to effect comparison 
for a demand comparison trade that has been DKed, the DK must be 
removed. If the member that sent the DK determines that it did so 
erroneously, the member is able to remove the DK so that the trade is 
compared.\5\ Modification of a DKed trade by the Demand Trade Source 
also removes the DK so that the trade is compared.\6\ The removal of 
the DK and modification of a DKed trade are subject to the prescribed 
timeframes for Demand DK processing.
---------------------------------------------------------------------------

    \5\ Under this proposal to require Demand Comparison processing 
of blind-brokered repo trades, the cut-off time for removing DKs 
will be 8 p.m. New York time.
    \6\ Under this proposal to require Demand Comparison processing 
of blind-brokered repo trades, the cut-off time for modifications by 
Demand Trade Sources will be 8 p.m. New York time.
---------------------------------------------------------------------------

2. Proposal

    FICC's current proposal is to mandate Demand Comparison for all 
blind-brokered repo trades that are submitted by 4 p.m. New York time. 
The GSD's members acting as inter-dealer brokers for repos will be 
designated as approved Demand Trade Sources. Members on whose behalf 
the brokers submit trades will not need to separately authorize the 
brokers as their Demand Trade Sources for GSD's purposes because GSD's 
rules will do so. After approval of the rule change, counterparties to 
blind-brokered repo trades will still need to submit their trade data 
as they do currently. Dealers will need to monitor the broker 
submissions against them in order to submit DKs where necessary to 
block any further processing of the submission. In order to provide the 
dealer counterparties with adequate time by which to submit their DKs, 
especially for trades submitted close to the 4 p.m. deadline, GSD will 
create a 30 minute DK window following the 4 p.m. Demand Comparison 
submission deadline (until 4:30 p.m.) during which time the dealer 
counterparties can DK previously received demand trades; however, 
dealer counterparties will be able to submit DKs at any time during the 
Demand Comparison submission processing timeframe. Under Demand 
Comparison processing, a dealer counterparty that does not submit a DK 
with respect to a blind-brokered repo trade submitted against it will 
be responsible for that trade. Blind-brokered repo trades submitted 
after the 4 p.m. deadline will be treated as trades submitted for 
``bilateral comparison'' requiring two-sided submission and matching 
for comparison to occur.
    FICC believes that requiring Demand Comparison for blind-brokered 
repo trades as described above will reduce risk by promoting earlier 
comparison and a higher rate of comparison. Demand Comparison trade 
entry will also encourage members to reconcile differences on a timely 
basis.
    FICC plans to implement the proposed changes four months after 
submission of this filing to the Commission (i.e., early August), 
subject to approval by the Commission, in order to provide members with 
the opportunity to make any necessary system changes.

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. 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 securities transactions.\7\ The Commission 
believes that FICC's proposed rule change is consistent with this 
Section because it should facilitate the prompt and accurate clearance 
and settlement of securities by enabling earlier comparison and a 
higher rate of comparison of blind-brokered repo transactions.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

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. In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition and capital 
formation.\8\
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-FICC-2008-02) be and hereby 
is approved.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-14975 Filed 7-1-08; 8:45 am]
BILLING CODE 8010-01-P