5624 Federal Register / Vol. 69, No. 24 / Thursday, February 5, 2004 / Notices 

7 15 U.S.C. 78s(b)(3)(A)(iii).

8 17 CFR 240.19b–4(f)(4).

9 17 CFR 200.30–3(a)(12).

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

2Securities Exchange Act Release No. 48689 

(October 24, 2003), 68 FR 61844.

3The following categories of GSD members will 

receive ratings: Category 1 and 2 Dealer Netting 

Members, Category 1 and 2 Inter-Dealer Broker 

Netting Members, and Bank Netting Members. At 

MBSD, Comparison and Clearing System 

Participants that are either banks or broker-dealers 

will be rated. Domestic broker-dealers and domestic 

banks are the only member types to which the 

Matrix will be applicable because (i) they represent 

the majority of the members of FICC and (ii) their 

financial reports contain information that lends 

them to the Matrix approach.

4FICC’s approach to the analysis of members is 

based on a thorough quantitative analysis. A brokerdealer member’s rating on the Matrix will be based 

on factors including size (i.e., total excess net 

capital), capital, leverage, liquidity, and 

profitability. Banks will be reviewed based on size, 

capital, asset quality, earnings, and liquidity.

5Members will also be evaluated based on their 

compliance with certain ‘‘parameter breaks’’ which 

will be determined based on applicable monthly 

and/or quarterly exception reports generated by 

credit risk staff. A member may be placed on the 

‘‘watch list’’ for parameter breaks in areas such as 

excess net capital, excess liquid capital, aggregate 

indebtedness, leverage ratio, or other financial 

requirements.

6The MBSD’s rules do not currently provide for 

surveillance status, but the MBSD has the right 

under certain circumstances to require additional 

financial reports and increased participants fund 

contribution.

7Credit risk staff will monitor these members by 

reviewing similar criteria as the criteria used for 

members included in the Matrix. FICC will file a 

proposed rule change should it decide to use a more 

applicable Matrix process to evaluate these 

members.

solicited or received. FICC will notify 

the Commission of any written 

comments received by FICC. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

The foregoing rule change has become 

effective upon filing pursuant to section 

19(b)(3)(A)(iii) of the Act 7 and Rule 

19b–4(f)(4) 8 thereunder because the 

proposed rule does not significantly 

affect the respective rights or obligations 

of the clearing agency or persons using 

the service and does not adversely affect 

the safeguarding of securities or funds 

in the custody or control of the clearing 

agency or for which it is responsible. At 

any time within sixty days of the filing 

of such rule change, the Commission 

may summarily abrogate such rule 

change if it appears to the Commission 

that such action is necessary or 

appropriate in the public interest, for 

the protection of investors, or otherwise 

in furtherance of the purposes of the 

Act.

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 Fifth Street, NW., 

Washington, DC 20549–0609. 

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–FICC–2004–02. This file number 

should be included on the subject line 

if e-mail is used. To help the 

Commission process and review your 

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 proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

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

available for inspection and copying in 

the Commission’s Public Reference 

Section, 450 Fifth Street, NW., 

Washington, DC 20549–0609. Copies of 

such filing also will be available for 

inspection and copying at the principal 

office of FICC and on FICC’s Web site 

at www.ficc.com.

All submissions should refer to File 

No. SR–FICC–2004–02 and should be 

submitted by February 26, 2004.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.9

J. Lynn Taylor, 

Assistant Secretary.

[FR Doc. 04–2360 Filed 2–4–04; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–49158; File No. SR–FICC–

2003–03] 

Self-Regulatory Organizations; Fixed 

Income Clearing Corporation; Order 

Approving Proposed Rule Change To 

Amend the Criteria Used To Place 

Members on Surveillance Status 

January 30, 2004. 

I. Introduction 

On March 20, 2003, the Fixed Income 

Clearing Corporation (‘‘FICC’’) filed 

with the Securities and Exchange 

Commission (‘‘Commission’’) and on 

June 3 and 18, 2003, amended the 

proposed rule change SR–FICC–2003–

03 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 

October 30, 2003.2 No comment letters 

were received. For the reasons 

discussed below, the Commission is 

approving the proposed rule change.

II. Description 

Under the current rules of both the 

Government Securities Division 

(‘‘GSD’’) and the Mortgage-Backed 

Securities Division (‘‘MBSD’’) of FICC, 

management has the ability to place a 

member in a surveillance status class 

depending on whether the member 

satisfies one or more of the enumerated 

financial and operational criteria in the 

specific class. Once placed on 

surveillance status, FICC closely 

monitors the member’s condition. The 

current criteria for placing members on 

surveillance status are broadly written 

and capture many FICC members that 

pose minimal financial or operational 

risk to FICC. This creates administrative 

burdens for FICC staff, who must more 

closely monitor these members that 

pose minimal risk, that is not necessary 

to protect FICC. 

To remedy this problem, FICC has 

developed new criteria for placing 

members on surveillance. Specifically, 

all domestic broker-dealers and banks 3

that are GSD netting members and/or 

MBSD clearing members will be 

assigned a rating that is generated by 

entering financial data of the member 

into a matrix (‘‘Matrix’’) developed by 

credit risk staff.4 Those members with a 

‘‘weak’’ rating (deemed to pose a 

relatively higher degree of risk to FICC) 

will be placed on an internal ‘‘watch 

list’’ and will be monitored more closely 

by credit risk staff.5 The consequences 

of being put on the ‘‘watch list’’ will be 

the same as is currently the case with 

surveillance status in the GSD’s rules 

and will include possibly requiring the 

member on ‘‘watch list’’ status to submit 

additional financial reports and data 

and/or make additional clearing or 

participants fund deposits.6

All other categories of netting and 

clearing members, including non-U.S. 

netting members and comparison-only 

members, will not be included in the 

Matrix process because these members 

possess characteristics that prevent use 

of the Matrix to effectively evaluate 

their risk to FICC. However, these 

members will be monitored by credit 

risk staff using financial criteria deemed 

relevant by FICC.7 Based on this 

Federal Register / Vol. 69, No. 24 / Thursday, February 5, 2004 / Notices 5625

8The GSD currently monitors the comparison 

rates of members. Currently, low comparison rates 

can result in a member being placed on Class 1 

surveillance status. Under the rule change, low 

comparison rates may result in a GSD member 

being placed on the ‘‘watch list.’’ Both the GSD and 

the MBSD may monitor for other operational factors 

in the future such as failing to timely submit trade 

data on a frequent basis.

9 15 U.S.C. 78q–1(b)(3)(F).

10 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4. 

3See letter from Michael Simon, Senior Vice 

President and General Counsel, ISE, to Nancy 

Sanow, Assistant Director, Division of Market 

Regulation (‘‘Division’’), Commission, dated 

January 3, 2002. 

4See letter from Michael Simon, Senior Vice 

President and General Counsel, ISE, to Nancy 

Sanow, Assistant Director, Division, Commission, 

dated June 25, 2002. 

5See letter from Michael Simon, Senior Vice 

President and General Counsel, ISE, to Nancy 

Sanow, Assistant Director, Division, Commission, 

dated January 5, 2004. Amendment No. 3 replaced 

the initial filing and Amendment Nos. 1 and 2 

entirely. The changes proposed in Amendment No. 

3 are incorporated in this notice.

monitoring, such Members may also be 

placed on the ‘‘watch list’’ if they 

experience a financial change that 

presents risk to FICC. Some examples 

include failure to meet minimum 

financial requirements or experiencing a 

significant decrease in equity (for GSD 

members) or net asset value (for MBSD 

members). Members placed on the 

‘‘watch list’’ in this way will also be 

monitored more closely by credit risk 

staff.

The GSD will continue, in accordance 

with its current procedures, to place 

GSD netting members on the ‘‘watch 

list’’ for failure to comply with 

operational standards and 

requirements.8 MBSD expects to 

implement a similar provision, as 

outlined in these rule changes, soon.

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.9 The 

Commission finds that FICC’s proposed 

rule change is consistent with this 

requirement because it will improve 

FICC’s member surveillance process 

which will better enable FICC to 

safeguard the securities and funds 

which are in its custody or control or for 

which it is responsible.

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–2003–03) be and hereby is 

approved.

For the Commission by the Division of 

Market Regulation, pursuant to delegated 

authority.10

Jill M. Peterson, 

Assistant Secretary.

[FR Doc. 04–2456 Filed 2–4–04; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–49141; File No. SR–ISE–

2001–22] 

Self-Regulatory Organizations; Notice 

of Filing of Proposed Rule Change and 

Amendment Nos. 1, 2, and 3 Thereto 

by the International Securities 

Exchange, Inc., To Establish a 

Solicited Order Mechanism 

January 28, 2004. 

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 July 26, 

2001, the International Securities 

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

filed with the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change as described in 

Items I, II, and III below, which Items 

have been prepared by the Exchange. 

On January 4, 2002, ISE filed 

Amendment No. 1 to the proposed rule 

change.3 On June 26, 2002, ISE filed 

Amendment No. 2 to the proposed rule 

change.4 On January 6, 2004, ISE filed 

Amendment No. 3 to the proposed rule 

change.5 The Commission is publishing 

this notice to solicit comments on the 

proposed rule change, as amended, from 

interested persons.

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The ISE is proposing to amend its 

rules regarding solicited orders to 

establish a Solicited Order Mechanism 

for matching a member’s unsolicited 

agency orders with orders the member 

solicits from other broker-dealers. The 

text of the proposed rule change, as 

amended, is set forth below. Brackets 

indicate material to be deleted. Italics

indicate material to be added. 

Rule 716. Block and Solicited Trades

* * * * *

(e) Solicited Order Mechanism. The 

Solicited Order Mechanism is a process 

by which an Electronic Access Member 

can attempt to execute orders of 500 or 

more contracts it represents as agent 

(the ‘‘Agency Order’’) against contra 

orders that it solicited. Each order 

entered into the Solicited Order 

Mechanism shall be designated as allor-none.

(1) Upon entry of both orders into the 

Solicited Order Mechanism at a 

proposed execution price, a broadcast 

message will be sent to Crowd 

Participants, which will be given an 

opportunity to enter Responses with the 

prices and sizes at which they would be 

willing to participate in the execution of 

the Agency Order.

(2) At the end of the period given 

Crowd Participants to enter Responses, 

the Agency Order will be automatically 

executed in full or cancelled.

(i) If at the time of execution there is 

insufficient size to execute the entire 

Agency Order at an improved price (or 

prices), the Agency Order will be 

executed against the solicited order at 

the proposed execution price so long as, 

at the time of execution: (A) the 

execution price is equal to or better than 

the best bid or offer on the ISE, and (B) 

there are no Public Customer orders on 

the Exchange that are priced equal to 

the proposed execution price. If there 

are Public Customer orders on the 

Exchange on the opposite side of the 

Agency Order at the proposed execution 

price and there is sufficient size to 

execute the entire size of the Agency 

Order, the Agency Order will be 

executed against the bid or offer, and 

the solicited order will be cancelled. The 

aggregate size of all orders, quotes and 

Responses at the bid or offer will be 

used to determine whether the entire 

Agency Order can be executed. Both the 

solicited order and Agency Order will be 

cancelled if an execution would take 

place at a price that is inferior to the 

best bid or offer on the ISE, or if there 

is a Public Customer on the book at the 

proposed execution price but there is 

insufficient size on the Exchange to 

execute the entire Agency Order.

(ii) If at the time of execution there is 

sufficient size to execute the entire 

Agency Order at an improved price (or 

prices), the Agency Order will be 

executed at the improved price(s), 

subject to the condition in (i)(A), and 

the solicited order will be cancelled. The 

aggregate size of all orders, quotes and 

Responses at each price will be used to 

determine whether the entire Agency 

Order can be executed at an improved 

price (or prices).

(iii) When executing the Agency Order 

against the bid or offer in accordance 

with paragraph (i) above, or at an 

improved price in accordance with