712 Federal Register / Vol. 69, No. 3 / Tuesday, January 6, 2004 / Notices 

6 17 CFR 200.30–3(a)(12).

1The amendment was technical in nature and did 

not require republication of the notice of filing.

2 15 U.S.C. 78s(b)(1).

3Securities Exchange Act Release No. 48796 

(November 17, 2003), 68 FR 65753.

4Securities Exchange Act Release No. 44301 (May 

11, 2001), 66 FR 28207 (May 22, 2001) [File No. SR–

GSCC–00–13].

5This amendment is also being proposed for the 

BCC cross-margining arrangement as discussed 

below.

consequences among EMCC’s 

participants. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Persons making written submissions 

should file six copies thereof with the 

Secretary, Securities and Exchange 

Commission, 450 5th Street NW, 

Washington, DC 20549–0069. 

Comments may also be submitted 

electronically at the following e-mail 

address: rule-comments@sec.gov. All 

comment letters should refer to File No. 

SR–EMCC–2003–07. This file number 

should be included on the subject line 

if e-mail is used. To help the 

Commission process and review 

comments more efficiently, comments 

should be sent in hardcopy or by e-mail 

but not by both methods. Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the rule filing that are 

filed with the Commission, and all 

written communications relating to the 

rule filing between the Commission and 

any person, other than those that may be 

withheld from the public in accordance 

with provisions of 5 U.S.C. 552, will be 

available for inspection and copying in 

the Commission’s Public Reference 

Room in Washington, DC. Copies of 

such filing will also be available for 

inspection and copying at EMCC’s 

principal office and on EMCC’s Web site 

at http://www.e-m-c-c.com/legal/

index.html. All submissions should 

refer to File No. SR–EMCC–2003–07 and 

should be submitted January 27, 2004. 

It is therefore ordered, pursuant to 

section 19(b)(2) of the Act, that the 

proposed rule change (File No. SR–

EMCC–2003–07) be, and hereby is, 

approved on an accelerated basis 

through June 30, 2004.

For the Commission by the Division 

of Market Regulation, pursuant to 

delegated authority.6

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. 04–219 Filed 1–5–04; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–49003; File No. SR–FICC–

2003–10] 

Self-Regulatory Organizations; Fixed 

Income Clearing Corporation; Order 

Approving Proposed Rule Change To 

Amend the Fixed Income Clearing 

Corporation’s Cross-Margining 

Agreements With the Chicago 

Mercantile Exchange, BrokerTec 

Clearing Company, and the Board of 

Trade Clearing Corporation and To 

Eliminate the Cross-Margining 

Agreement with the New York Clearing 

Corporation 

December 29, 2003. 

I. Introduction 

On October 6, 2003, the Fixed Income 

Clearing Corporation (‘‘FICC’’) filed 

with the Securities and Exchange 

Commission (‘‘Commission’’) and on 

December 11, 2003, amended 1 proposed 

rule change SR–FICC–2003–10 pursuant 

to Section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Act’’).2 Notice 

of the proposal was published in the 

Federal Register on November 21, 

2003.3 For the reasons discussed below, 

the Commission is approving the 

proposed rule change.

II. Description 

FICC is seeking to amend its crossmargining agreements with the Chicago 

Mercantile Exchange (‘‘CME’’), 

BrokerTec Clearing Company (‘‘BCC’’), 

and the Board of Trade Clearing 

Corporation (‘‘BOTCC’’) and to 

eliminate its cross-margining agreement 

with the New York Clearing Corporation 

(‘‘NYCC’’). 

1. New Cross-Margining Agreement With 

CME 

Through its Government Securities 

Division (‘‘GSD’’), FICC has a crossmargining arrangement with CME.4

FICC is proposing to terminate its 

existing cross-margining agreement with 

CME and to enter into a new crossmargining agreement with the CME 

(‘‘New FICC–CME Agreement’’) to 

reflect the fact that, as of January 2, 

2004, the CME will begin clearing 

certain Treasury and Agency futures 

contracts and options on such futures 

contracts that are traded on the Chicago 

Board of Trade (‘‘CBOT’’) and that are 

currently cleared by BOTCC. Under the 

New FICC–CME Agreement, the FICC 

products that will be eligible for crossmargining will be Treasury securities 

that fall into the GSD’s offset classes A 

through G and GCF Repo Treasury 

securities with equivalent remaining 

maturities and non-mortgage-backed 

Agency securities that fall into the 

GSD’s offset classes e and f and GCF 

Repo non-mortgage-backed Agency 

securities with equivalent remaining 

maturities. The CME products that will 

be eligible for cross-margining will be of 

two types: (i) The products currently 

eligible under the existing arrangement 

between FICC and CME which are 

Eurodollar futures contracts with ranges 

in maturity from 3 months to 10 years 

and options on such future contracts 

cleared by CME and (ii) the CBOT 

products which are Two-Year Treasury 

Note Futures contracts and options 

thereon, Five-Year Treasury Note 

Futures contracts and options thereon, 

Ten-Year Treasury Note Futures 

contracts and options thereon, ThirtyYear Treasury Bond Futures contracts 

and options thereon, Five-Year Agency 

Note Futures contracts and options 

thereon, and Ten-Year Agency Note 

Futures contracts and options thereon to 

be cleared by CME.

No significant changes are being 

proposed to the existing FICC–CME 

cross-margining arrangement other than 

the addition of the CBOT products and 

certain FICC products as discussed in 

more detail below. The key aspects of 

the cross-margining arrangement, most 

notably, the calculation of the crossmargining reduction and the loss 

sharing provisions in the event of a 

participant default are not being 

amended. 

2. Key Proposed Changes to the Existing 

Cross-Margining Agreement Between 

FICC and CME 

The addition of the CBOT products 

has necessitated new definitions for 

‘‘CBOT Eligible Products,’’ ‘‘CME 

Eligible Products,’’ and ‘‘FICC Eligible 

Products,’’ as well as Offset Class tables 

for these products in Appendix B of the 

agreement. 

Appendix B of the FICC–CME 

Agreement is also being amended to 

include FICC’s GCF Repo Treasury and 

non-mortgage-backed Agency products 

in the cross-margining arrangement.5 By 

the effective date of the New FICC–CME 

Agreement, FICC will be margining its 

GCF Repo Treasury and non-mortgageVerDate jul<14>2003 00:51 Jan 06, 2004 Jkt 203001 PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 E:\FR\FM\06JAN1.SGM 06JAN1
Federal Register / Vol. 69, No. 3 / Tuesday, January 6, 2004 / Notices 713

6Because of a previous inability to obtain timely 

data on the actual instruments posted in support of 

GCF Repo positions, the GSD has calculated 

affected members’ clearing fund requirements based 

upon the assumption that collateral providers have 

assigned to each generic CUSIP the most volatile 

(i.e., the longest maturity) collateral eligible. The 

GSD has been in the process of developing 

improvements to the current margining 

methodology. By the effective date of the proposed 

rule change, the GSD will be able to identify the 

specific CUSIP posted in calculating a member’s 

clearing fund requirement related to its Treasury 

and Agency GCF Repo activity.

7FICC has computed and tested disallowance 

factors that will be applicable to each potential pair 

of positions being offset.

8The new guaranty provisions with respect to the 

Maximization Payment Guaranty will be identical 

to the ones in the current cross-margining 

agreement between FICC and BCC. In order to 

protect the clearing organizations in the event that 

a court determines that any amount of a 

Maximization Reimbursement Obligation may not 

be recovered by the clearing organization that made 

a Maximization Payment pursuant to a 

Maximization Payment Guaranty, a provision has 

been added (Section 8C(c)) to the New FICC–CME 

Agreement to provide that the payee clearing 

organization will be expected to return that amount. 

This protective provision is also in the BCC crossmargining agreement.

9Cross-margining is available to any FICC GSD 

netting member (with the exception of inter-dealer 

broker netting members) that is, or that has an 

affiliate that is, a member of a Participating CO. The 

FICC member (and its affiliate, if applicable) sign 

an agreement under which it (or they) agree to be 

bound by the cross-margining agreement between 

FICC and the Participating CO and which allows 

FICC or the Participating CO to apply the member’s 

(or its affiliate’s) margin collateral to satisfy any 

obligation of FICC to the Participating CO (or vice 

versa) that results from a default of the member (or 

its affiliate). Ownership of 50 percent or more of the 

common stock of an entity indicates control of the 

entity for purposes of the definition of ‘‘affiliate.’’

backed Agency products based upon the 

specific underlying collateral, as 

opposed to the current system of 

margining these products based upon 

the longest maturity of eligible 

underlying collateral.6 Therefore, these 

GCF Repo products can now be 

included in the cross-margining 

arrangement because they will no longer 

be margined at a generic rate but rather 

at a specific rate based on the actual 

underlying Treasury and Agency 

collateral.

As is the case with the current 

agreement between FICC and CME, the 

parties provide in the New FICC–CME 

Agreement that they will agree from 

time to time in a separate writing on the 

disallowance factors that will be used in 

the cross-margining arrangement. The 

disallowance factors that will be used 

upon implementation of the new 

arrangement are the ones set forth as 

examples in Appendix B to the New 

FICC–CME Agreement. The 

disallowance factors between FICC 

eligible products and CME eligible 

products (i.e., Eurodollar products) have 

not changed. A new disallowance factor 

table has been added for crossmargining of FICC eligible Treasury and 

Agency products with CBOT Treasury 

and Agency eligible products.7

Appendix C of the current agreement, 

which sets forth the methodology for 

converting CME eligible products into 

Treasury cash equivalents for purposes 

of ultimately calculating the crossmargining reduction, has been made 

into Appendix C1, and a new Appendix 

C2, which contains the methodology for 

converting the CBOT eligible products 

into Treasury cash equivalents, has been 

added. This methodology is identical to 

the methodology contained in the 

BOTCC and BCC cross-margining 

agreements. 

The existing agreement between FICC 

and CME provides for a ‘‘Maximization 

Payment’’ which is a cross-guaranty 

provision that sets forth the mechanism 

for a clearing organization with a 

remaining surplus after all guaranty 

payments in relation to cross-margining 

have been made (‘‘Aggregate Net 

Surplus’’) to distribute funds to one or 

more cross-margining partners with 

remaining losses. The New FICC–CME 

Agreement will make it clear that: (i) 

The Maximization Payment is also a 

guaranty payment (albeit outside of 

cross-margining, arising out of the 

‘‘Maximization Payment Guaranty’’) and 

(ii) the defaulting member would have 

a reimbursement obligation with respect 

to such payment (‘‘Maximization 

Reimbursement Obligation’’). This 

means that should a clearing 

organization become obligated to pay 

the Maximization Payment, it may rely 

on the defaulting member’s collateral to 

do so.8

A provision has been added to the 

New FICC–CME Agreement to take into 

account that a regulator or other entity 

having supervisory authority over FICC 

or CME may for safety and soundness 

purposes direct the clearing 

organization not to liquidate a 

defaulting member or to partially 

liquidate such member. In order to 

prevent the affected clearing 

organization from being penalized 

under the agreement for failing to 

liquidate or partially liquidating the 

member in this type of situation, the last 

two paragraphs of Section 7(d) of the 

New FICC–CME Agreement will provide 

that the affected clearing organization 

would be deemed to have a crossmargin gain equal to the base amount of 

the guaranty (i.e., cross-margining 

reduction) or a pro rated amount of the 

base amount of the guaranty in a partial 

liquidation scenario. 

A sentence has been added to Section 

7(h) making clear that the clearing 

organizations have security interests in 

the ‘‘Aggregate Net Surplus,’’ a large 

component of which would be the 

collateral and proceeds of positions of a 

defaulting member, as security for any 

reimbursement obligation including any 

maximization reimbursement obligation 

that may arise on the part of a defaulting 

member.

Language has been added to the crossmargining participant agreements in 

Appendices D and E in order to further 

protect the clearing organizations by 

making clear that the clearing 

organizations have a security interest in 

the Aggregate Net Surplus and that a 

participant will have a reimbursement 

obligation in the event that a clearing 

organization becomes obligated to make 

a maximization payment. Participants in 

the current arrangement between FICC 

and CME and those in the arrangement 

between FICC and BOTCC to the extent 

they are not the same are being asked to 

reexecute the revised participant 

agreements in order to make them 

subject to the provisions of the New 

FICC–CME Agreement.9

3. Key Proposed Changes to FICC’s 

Cross-Margining of CBOT Products 

Because FICC is currently crossmargining its products with certain 

CBOT products pursuant to its 

agreement with BOTCC and because 

these CBOT products will be crossmargined pursuant to the proposed New 

FICC–CME Agreement, it is important to 

note the key differences between the 

cross-margining of the CBOT products 

under the existing arrangement with 

BOTCC and under the proposed new 

arrangement with the CME. 

The minimum margin factor under 

FICC’s cross-margining arrangement 

with BOTCC is 50 percent. FICC and 

CME have agreed to a minimum margin 

factor of 25 percent to apply to the 

cross-margining of CBOT products 

versus FICC products. This is the same 

minimum margin factor as is used in the 

current cross-margining arrangement 

with the CME with respect to the 

eligible Eurodollar products and is the 

same minimum margin factor used in 

the arrangement with BCC. 

The New FICC–CME Agreement 

provides for inter-offset class crossmargining whereas the BOTCC 

arrangement is limited to intra-offset 

class cross-margining. The new 

agreement is consistent with the 

approach in the existing arrangements 

between FICC and both CME and BCC. 

The current agreement between FICC 

and CME provides that in order to 

determine the gain or loss from the 

liquidation of the positions that were 

cross-margined resulting from a default 

714 Federal Register / Vol. 69, No. 3 / Tuesday, January 6, 2004 / Notices 

10Securities Exchange Act Release No. 45656 

(March 27, 2002), 67 FR 15646 (April 2, 2002) [File 

No. SR–GSCC–2002–01].

11The operational and contingency procedures 

contained in the FICC–BCC agreement provide that 

in the event FICC does not receive BCC’s file by the 

cut-off time, FICC will calculate the applicable 

cross-margining reductions assuming that BCC 

submitted a file with no positions available for 

cross-margining which may result in margin calls 

for the affected participants by both FICC and BCC. 

These margin calls would not be disruptive to 

members because the cross-margining reductions in 

the program with the BCC are not anticipated to be 

large amounts.

12FICC currently has a cross-margining 

agreement in place with BOTCC through which 

certain CBOT products are cross-margined with 

certain FICC products. Securities Exchange Act 

Release No. 45335 (January 25, 2002), 67 FR 4768 

(January 31, 2001) [File No. SR–GSCC–2001–03]. 

BOTCC recently announced that it will become the 

clearing corporation for Eurex. In the next few 

weeks, FICC will determine the status of its crossmargining arrangement with BOTCC and will 

submit a proposed rule change filing addressing 

changes to the existing agreement, if necessary.

13Securities Exchange Act Release No. 41766 

(August 19, 1999), 64 FR 46737 (August 26, 1999) 

[File No. SR–GSCC–98–04].

14 15 U.S.C. 78q–1(b)(3)(F).

15 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

of a member, only the proceeds from the 

side of the market that was offset 

pursuant to the agreement at the last 

margin cycle are considered. In the New 

FICC–CME Agreement, this approach 

will be extended to the CBOT products 

in order to provide consistency in the 

liquidation methods. 

4. Amendments 1, 2, and 3 to the FICC–

BCC Cross-Margining Agreement 

FICC is proposing to amend its crossmargining agreement with BCC with 

Amendment 3 to the agreement.10

Amendment 3 will (i) add FICC’s GCF 

Repo Treasury and non-mortgagebacked Agency products to the 

arrangement, (ii) add FICC’s nonmortgage-backed Agency offset classes e 

and f, and (iii) amend the contingency 

procedures between the clearing 

organizations (contained in Appendix I 

of the agreement) to provide that FICC 

will not wait past 12 a.m. Eastern time 

for the BCC cross-margining file in order 

to run its cross-margining system. With 

respect to (ii), FICC has determined that 

even though BCC does not currently 

clear non-mortgage-backed Agency 

futures, the parties can still crossmargin FICC’s Agency products against 

BCC’s Treasury products given that the 

agreement provides for inter-offset class 

cross-margining using the appropriate 

correlation factors. With respect to (iii), 

the operational procedures provide that 

FICC will wait until 3:00 a.m. Eastern 

time for the BCC file which is the same 

cut-off time for all of its other crossmargining partners. However, FICC has 

determined that the 3:00 a.m. Eastern 

time cut-off, which is significantly later 

than the GSD’s normal cross-margining 

processing time, should only be used for 

extreme situations where not including 

a particular file would be disruptive to 

members. Currently, this would not be 

anticipated to be the case for a BCC file 

because of BCC’s files relatively low 

historical impact.11 Therefore, FICC has 

determined that it would be more 

prudent from a risk management 

perspective to adopt a cut-off time of 

12:00 a.m. Eastern time for receipt of 

BCC files.

As part of this proposed rule change 

filing, FICC will include Amendments 1 

and 2 that were previously made with 

respect to its existing cross-margining 

agreement with BCC. The purpose of 

Amendment 1 was to update the list of 

products being cross-margined. The 

purposes of Amendment 2 were to 

remove references to the crossmargining agreement with NYCC from 

Appendix A in which the parties are 

required to list other outstanding crossmargining arrangements and to update 

the notice provision.

5. Amendments 1 and 2 to the FICC–

BOTCC Cross-Margining Agreement

As in the case of the BCC agreement, 

FICC will include as part of this 

proposed rule change filing 

Amendments 1 and 2 that were 

previously made with respect to its 

existing cross-margining arrangement 

with BOTCC.12 The purposes of 

Amendment 1 were to update the list of 

products being cross-margined, add an 

appendix setting forth operational 

contingency procedures, clarify 

procedures to be used if one clearing 

organization discovers a calculation 

error, correct cited Bankruptcy Code 

language, correct language in one of the 

participant agreements, and refine the 

timing of the effectiveness of changes to 

the cross-margining reduction. The 

purpose of Amendment 2 was to remove 

references to the cross-margining 

agreement with NYCC from Appendix 

A.

6. Removal of NYCC Cross-Margining 

Agreement From the GSD’s Rules 

FICC is removing its cross-margining 

agreement with NYCC13 from the GSD’s 

rules. That arrangement has been 

dormant for some time and the parties 

have agreed that should they determine 

to reinstitute cross-margining, they will 

enter into a new cross-margining 

agreement that will be similar to FICC’s 

other cross-margining agreements. At 

that time, FICC would file the 

appropriate proposed rule change with 

the Commission.

III. Discussion 

Section 17A(b)(3)(F) of the Act 

requires that the rules of a clearing 

agency be designed to facilitate the 

safeguarding of securities and funds 

which are in its custody or control or for 

which it is responsible and in general 

will protect investors and the public 

interest.14 The Commission finds that 

FICC’s proposed rule change is 

consistent with this requirement 

because it continues FICC’s crossmargining program which provides 

members with significant benefits, such 

as greater liquidity and more efficient 

use of collateral in a prudent manner, 

and enhances FICC’s overall risk 

management process.

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, that the 

proposed rule change (File No. SR–

FICC–2003–10) be and hereby is 

approved.

For the Commission by the Division 

of Market Regulation, pursuant to 

delegated authority.15

Jill M. Peterson, 

Assistant Secretary.

[FR Doc. 04–220 Filed 1–5–04; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–49009; File No. SR–ISE–

2003–39] 

Self-Regulatory Organizations; Notice 

of Filing and Order Granting 

Accelerated Approval of Proposed 

Rule Change by the International 

Securities Exchange, Inc., Relating to 

the Extension of a Linkage Fee Pilot 

Program 

December 30, 2003. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on December 

18, 2003, the International Securities 

Exchange, Inc. (‘‘Exchange’’ or ‘‘ISE’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change as described in