[Federal Register Volume 73, Number 140 (Monday, July 21, 2008)]
[Notices]
[Pages 42386-42388]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-16591]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58156; File No. SR-FICC-2007-05]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change as Amended To Restructure the 
Rules of the Government Securities Division and the Mortgage-Backed 
Securities Division Relating to Fines and To Harmonize Them With 
Similar Rules of Its Affiliates and To Restructure the Watch List

July 15, 2008.

I. Introduction

    On April 30, 2007, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') and 
on May 18, 2007, December 10, 2007, and January 31, 2008, amended 
proposed rule change SR-FICC-2007-05 pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'').\1\ On April 22, 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. 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. 57666 (April 15, 2008), 
73 FR 21675.

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[[Page 42387]]

II. Description

    FICC is seeking to (i) restructure the Government Securities 
Division (``GSD'') and the Mortgage-Backed Securities Division 
(``MBSD'') rules related to fines, clearing fund consequences imposed 
on members for rule violations, and certain aspects of the watch list 
and (ii) harmonize its rules with similar rules of FICC's clearing 
agency affiliates, The Depository Trust Company (``DTC'') and the 
National Securities Clearing Corporation (``NSCC''). DTC and NSCC have 
filed similar proposed rule changes.\3\ FICC's proposed revisions to 
its fine schedule are set forth in Exhibit 5 to its proposed rule 
change.
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    \3\ Securities Exchange Act Release No. 57665 (April 15, 2008) 
[SR-DTC-2007-05]. Securities Exchange Act Release No. 57667 (April 
15, 2008) [SR-NSCC-2007-07].
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1. Fines

(a) Fines Scheduled for Failure to Submit Financial and Other 
Information
    Members of the GSD and MBSD are assessed fines for failure to 
submit required financial, regulatory, and other information within the 
time frames set forth in FICC's rules. Often a member that is fined is 
a common member of FICC and DTC, FICC and NSCC, or FICC, DTC, and NSCC, 
(collectively, the ``Clearing Agencies'') which would cause the member 
to incur multiple penalties for the same offense.\4\ FICC is proposing 
that when a common member of the Clearing Agencies is late in providing 
the same information to more than one Clearing Agency, the fine amount 
will be divided equally among the Clearing Agencies.\5\
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    \4\ The Clearing Agencies do not view the proposed rule changes 
as fee reductions because they never intended to charge a common 
member two or three times for a single violation that trips another 
clearing agency's rules on the same matter.
    DTC does not currently maintain a fine in this regard. However, 
DTC has filed a proposal to adopt a fine schedule similar to the one 
used by FICC. Supra note 3.
    \5\ For example, if a firm that is a member of FICC and NSCC, 
did not submit its annual audited financial statements within the 
required time frame, and this was the firm's first failure to meet 
the deadline, the $200 fine will be split equally between FICC and 
NSCC.
    Where the member is a participant of DTC and also a member of 
one or more of the other Clearing Agencies, the fine would be 
collected by DTC and allocated equally among the other Clearing 
Agencies, as appropriate. If the member is not a DTC participant, 
but is a common member of NSCC and FICC, NSCC will collect the fine 
and allocate the appropriate portion to FICC.
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    In addition, FICC proposes changes to the notes to this section of 
the fine schedule to make clear that (i) the method by which the 
reporting requirements will be published and (ii) the determination of 
the fine amount after the fourth or more occasion of an offense within 
a twelve-month rolling period will be made by FICC management with the 
concurrence of the Board or the Credit and Market Risk Management 
Committee.\6\
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    \6\ Under the rules of GSD and MBSD, the terms ``Board'' or 
``Board of Directors'' mean the Board of Directors of FICC or a 
committee thereof acting under delegated authority (``Board''). In 
this situation, the Board would have to concur with the fine.
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(b) General Continuance Standards
    Both GSD and MBSD currently impose a fine of $1,000 on a member 
that fails to notify FICC within two business days of the member's 
learning of its non-compliance with the general continuance standards 
for membership or of its becoming subject to a statutory 
disqualification. Both GSD and MBSD currently impose a $5,000 fine if a 
member fails to notify FICC of a ``material change'' to its business. A 
material change currently includes events such as a merger or 
acquisition involving the member, a change in corporate form, a name 
change, a material change in ownership, control, or management, and 
participation as a defendant in litigation which could reasonably be 
anticipated to have a direct negative impact on the member's financial 
condition or ability to conduct its business.
    With respect to both GSD and MBSD, FICC is proposing to amend its 
rules to reflect that when a common member of the Clearing Agencies is 
late in providing the same information to more than one Clearing 
Agency, the fine amount will be divided equally among the Clearing 
Agencies.\7\
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    \7\ DTC does not currently maintain a fine in this regard. 
However, DTC has filed a proposal to adopt a fine schedule similar 
to the one NSCC is proposing to adopt. Supra note 3.
    Where the member is a participant of DTC and also a member of 
one or more of the other Clearing Agencies, the fine will be 
collected by DTC and allocated equally among the other Clearing 
Agencies, as appropriate. If the member is not a DTC participant, 
but is a common member of NSCC and FICC, NSCC will collect the fine 
and allocate the appropriate portion to FICC.
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(c) Fine Schedule for Late Clearing/Participants Fund Deficiency 
Payments
    GSD and MBSD Netting and Clearing members are also subject to fines 
for late payments of clearing fund and participants fund deficiency 
calls. In order to harmonize its fine schedule with NSCC, FICC is 
proposing to adopt the fine amounts utilized by NSCC for this purpose 
and to adopt other provisions set forth in the notes to NSCC's fine 
schedule. As proposed, the first occasion lateness will generate a 
warning letter to the firm for all deficiency amounts.\8\ If the number 
of occasions of late Clearing Fund deficiency call payments within a 
three-month rolling period exceeds four, FICC will obtain the Board's 
concurrence for the fine amount. Furthermore, a late payment of more 
than one hour will result in a fine equal to the amount applicable to 
the next highest occasion for the specific deficiency amount.\9\ If a 
member is late for more than one hour and it is the member's fourth 
occasion in the rolling period, FICC will obtain the Board's 
concurrence for the fine amount.
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    \8\ GSD and MBSD currently impose a fine for a first occasion 
lateness for its highest deficiency amount.
    \9\ For example, if a firm's deficiency amount is under 
$1,000,000, it is the firm's second occurrence of late satisfaction 
of a deficiency call in the rolling three-month period, and the firm 
is late by more than one hour, the firm will be fined $200 (i.e., 
the fine for a third occasion) instead of $100 (i.e., the fine for a 
second occasion) pursuant to the proposed fine schedule.
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(d) Fine Schedule for Late Settlement Payments
    The GSD and MBSD currently fine members for late payment of 
settlement obligations. FICC is proposing the following to harmonize 
its fine schedule with those of NSCC. The GSD and MBSD will adopt the 
deficiency and fine amounts of the NSCC fine schedules. As a result, 
the first occasion will result in a fine rather than a warning letter 
as under FICC's current fine schedule. Also, FICC will use a rolling 
three-month period to determine the number of occasions rather than the 
current 30-day rolling period. In addition, the fine schedules of GSD 
and MBSD will be amended to provide that (i) if the number of occasions 
within the rolling three-month period exceeds four, management will 
obtain the Board's concurrence of the fine amount and (ii) a payment 
late by more than one hour will result in a fine equal to the amount 
applicable for the next highest occasion for the specific deficiency 
amount. If a member is late for more than one hour and it is the 
member's fourth occasion in the rolling period, management will obtain 
the Board's concurrence of the fine amount.

2. Placement on the Watch List and Prohibition Against Return of Excess 
Clearing Fund as Consequences for Rules Violations

    The rules of both GSD and MBSD contain provisions requiring a 
member to be placed on the watch list and, in certain instances, 
prohibiting the return of excess clearing fund collateral as 
consequences for certain rules violations or certain member actions.

[[Page 42388]]

For example, the FICC rules require that a member be placed on the 
watch list and prohibited from receiving the return of excess clearing 
fund collateral for failure to timely submit a required financial 
report or other information to FICC. FICC is proposing the deletion of 
all these provisions because the placement of a member on the watch 
list and the prohibiting of the return of a member's excess of clearing 
fund collateral should result from management's monitoring of the 
member and should not automatically occur because of rules 
violations.\10\
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    \10\ FICC currently has and would retain the right to deny the 
return of excess clearing fund collateral in instances where it is 
concerned about a particular member's financial or operational 
capability.
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3. Consequences for Being on the Watch List

    Currently, the GSD rules contain a very specific amount by which 
the clearing fund requirement of a netting member that is placed on the 
watch list may be increased.\11\ The MBSD and NSCC rules contain 
provisions that are more general in this regard.\12\ FICC believes the 
GSD rules are unnecessarily specific in this regard and should be 
amended to more closely reflect the MBSD and NSCC rules.
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    \11\ The GSD rules currently state that GSD ``may require a 
Netting Member that has been placed on the Watch List, to make and 
maintain a deposit to the Clearing Fund over and above the amount 
determined in accordance with section 2 of Rule 4 (which additional 
deposit shall constitute a portion of the Netting Member's Required 
Fund Deposit) of up to 200 percent of its highest single Business 
Day's Required Fund Deposit during the most recent 20 Business Days, 
or such higher amount as the Board may deem necessary * * *.''
    \12\ For example, MBSD rules state that MBSD ``may require a 
Participant that has been placed on the Watch List to make and 
maintain a deposit to the Participants Fund over and above the 
amount determined * * *.''
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a registered clearing agency. In particular, 
the Commission believes the proposal is consistent with the 
requirements of section 17A(b)(3)(F),\13\ which, among other things, 
requires that the rules of a clearing agency are designed to remove 
impediments to and perfect the mechanisms of a national system for the 
prompt and accurate clearance and settlement of securities transactions 
and with the requirements of section 17A(b)(3)(H) \14\ which, among 
other things, requires that the rules of a clearing agency provide a 
fair procedure with respect to the disciplining of participants and the 
denial of participation to any person seeking to be a participant. The 
Commission finds that the proposed rule change, which restructures and 
harmonizes FICC's fines with those of DTC and NSCC, is consistent with 
those statutory obligations.
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ 15 U.S.C. 78q-1(b)(3)(H).
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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. In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition and capital 
formation.\15\
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    \15\ 15 U.S.C. 78c(f).
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    It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-FICC-2007-05), as amended, 
be and hereby is approved.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-16591 Filed 7-18-08; 8:45 am]
BILLING CODE 8010-01-P