[Federal Register Volume 78, Number 113 (Wednesday, June 12, 2013)]
[Notices]
[Pages 35334-35335]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-13889]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69709; File No. SR-FICC-2013-03]


Self-Regulatory Organizations; The Fixed Income Clearing 
Corporation; Order Granting Approval of a Proposed Rule Change To Amend 
Mortgage-Backed Securities Division Rules Relating To Allocation of an 
Indemnity Claim Made in Connection With the Use of the Federal 
Reserve's National Settlement Service

June 6, 2013.

I. Introduction

    On April 15, 2013, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-FICC-2013-03 pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on April 29, 2013.\3\ The Commission received no 
comment letters. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 69434 (April 23, 2013), 
78 FR 25121 (April 29, 2013).
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II. Description

    FICC's Government Securities Division (``GSD'') and Mortgage-Backed 
Securities Division (``MBSD'') each use the Board of Governors of the 
Federal Reserve's (``FRB'') National Settlement Service (``NSS'') for 
Funds-Only Settlement \4\ and Cash Settlement \5\ purposes, 
respectively. GSD's Rule 13 and MBSD's Rule 11 address the situation 
where the FRB makes an indemnity claim in connection with the use of 
the NSS service by FICC. Pursuant to the GSD and MBSD rules, if FICC 
receives an FRB indemnity claim, FICC will apportion the entire 
liability to the GSD netting members or MBSD clearing members, as 
applicable, for whom the settling bank was acting at the time.\6\ If 
such amounts are not sufficient to fully satisfy the FRB indemnity 
claim, each of the GSD and MBSD rules currently provide different 
directives as to how FICC should handle the remaining loss. The GSD 
rules state that FICC will treat the remaining loss as an ``Other 
Loss,'' as defined in GSD Rule 4, and allocate accordingly.\7\ In 
contrast, MBSD Rule 11, Section 5(o), states that FICC will allocate 
the remaining loss among all MBSD clearing members in proportion to 
their relative use of the MBSD services (based on fees).
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    \4\ ``Fund-Only Settlement Amount'' is defined under Rule 1 of 
GSD's Rulebook as the net dollar amount of a netting member's 
obligation, calculated pursuant to GSD's Rule 13, either to make a 
funds-only payment to GSD or to receive a funds-only payment from 
GSD. See GSD Rule 13 for the rules related to funds-only settlement.
    \5\ ``Cash Settlement'' is defined under Rule 1 of MBSD's 
Clearing Rules as the payment each business day by MBSD to a member 
or by a member to MBSD. See MBSD Rule 11 for the rules related to 
cash settlement.
    \6\ See GSD's Rule 13 Section 5(o) and MBSD Rule 11, Section 
5(o).
    \7\ Rule 4(f) of GSD's Rulebook.
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    The purpose of the rule change is to correct MBSD's Rule 11 in 
order to accurately reflect the correct manner in which FICC should 
allocate an indemnity claim made in connection with the use of the 
FRB's NSS. The MBSD provision in Rule 11 was drafted prior to the MBSD 
becoming a central counterparty and adopting a loss mutualization 
process similar to the GSD process. When FICC filed its rule change to 
provide guaranteed settlement

[[Page 35335]]

and central counterparty services,\8\ which among other things 
established the loss mutualization process, the MBSD NSS indemnity 
provision requiring the current loss allocation process was 
inadvertently overlooked and therefore not updated during FICC's 
efforts to harmonize the GSD and MBSD rules. Accordingly, the rule 
change corrects this oversight by revising MBSD Rule 11, Section 5(o), 
to reflect that all remaining losses from a FRB indemnity claim should 
be treated as an ``Other Loss'' as defined in MBSD Rule 4 and allocated 
accordingly.
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    \8\ Exchange Act Release No. 66550 (March 9, 2012), 77 FR 15155 
(March 14, 2012) [File No. SR-FICC-2008-01] (order approving amended 
proposed rule change to allow MBSD to provide guaranteed settlement 
and central counterparty services).
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III. Discussion

    Section 19(b)(2)(C) of the Act \9\ 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, among other things, that the rules of a clearing agency be 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions and to remove impediments to and perfect the 
mechanism of a national system for the prompt and accurate clearance 
and settlement of securities transactions.\10\ The Commission finds 
that FICC's rule change should facilitate the prompt and accurate 
clearance and settlement of securities transactions by correcting 
MBSD's rules to accurately reflect the loss allocation procedures in 
connection with NSS and to ensure that there is consistent treatment of 
such losses between the MBSD and GSD rules.
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    \9\ 15 U.S.C. 78s(b)(2)(C).
    \10\ 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 is consistent with the requirements of the Act, 
particularly with the requirements of Section 17A of the Act, and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-FICC-2013-03) be 
and hereby is approved.\12\
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-13889 Filed 6-11-13; 8:45 am]
BILLING CODE 8011-01-P