[Federal Register Volume 69, Number 223 (Friday, November 19, 2004)]
[Notices]
[Pages 67767-67768]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-25705]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50659; File No. SR-FICC-2004-11]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change To Amend the Rules of 
the Government Securities Division To Modify the Penalty Assessment 
Process for Violations of Minimum Financial Standards and for Failures 
of Members To Submit Requisite Financial Reports on a Timely Basis

November 15, 2004.

I. Introduction

    On May 17, 2004, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') and 
on August 4, 2004, amended proposed rule change File No. SR-FICC-2004-
11 pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ Notice of the proposed rule change was published in the 
Federal Register on October 4, 2004.\2\ No comment letters were 
received. For the reasons discussed below, the Commission is now 
granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 50457 (September 27, 
2004), 69 FR 59283.
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II. Description

    The proposed rule change amends the rules of its Government 
Securities Division (``GSD'') by modifying the penalty assessment 
process for violations of minimum financial standards and for failure 
to submit requisite financial reports on a timely basis.

(A) Violations of Minimum Financial Standards

    The rules of the GSD require netting members and clearing members 
to meet and maintain certain minimum financial standards at all times. 
While the majority of GSD members consistently satisfy their minimum 
financial requirements, occasionally members do breach these 
requirements and create undue risk for FICC and its GSD members. FICC 
has decided that a more uniform system of enforcing minimum financial 
requirements within the GSD would enhance the ability of FICC to 
minimize risk to itself and its members in a fair and effective manner.
    Currently, the GSD Rules provide clearing fund consequences for the 
various categories of netting members that fall out of compliance with 
minimum financial requirements  as follows:
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    \3\ Each consequence remains effective for a period beginning on 
the date on which the member fell below such level and continuing 
until the ninetieth calendar day after the date on which such member 
returned to compliance with the applicable standard. If the 
consequence consists of a reclassification and the member does not 
return to compliance with its original minimum financial 
requirements within 90 calendar days of falling out of compliance, 
then the reclassification becomes permanent.
    \4\ Treating a bank or other non-Inter-Dealer Broker Category 1 
Member as a Category 2 non-Inter-Dealer Broker Member for clearing 
fund purposes results in a higher clearing fund requirement for such 
a member because higher margin rates are imposed on non-Inter-Dealer 
Broker Category 2 Dealer Members than are imposed on banks and non-
Inter-Dealer Broker Category 1 Members.

------------------------------------------------------------------------
                                      Current clearing fund consequence
    Netting membership category      for falling below minimum financial
                                                standard \3\
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Bank Member.......................  Treated as a Category 2 Dealer.\4\
Category 1 Dealer Member..........  Treated as a Category 2 Dealer.
Category 2 Dealer Netting Member..  Impose Required Fund Deposit equal
                                     to 150 percent of the normal
                                     calculation of Required Fund
                                     Deposit.
Category 1 Futures Commission       Treated as a Category 2 Futures
 Merchant Member.                    Commission Merchant.
Category 2 Futures Commission       Impose Required Fund Deposit equal
 Merchant Member.                    to 150 percent of the normal
                                     calculation of Required Fund
                                     Deposit.

[[Page 67768]]

 
Category 1 Inter-Dealer Broker      Treated as a Category 1 Dealer as
 Member.                             far as Required Fund Deposit
                                     exceeds $5 million.
Category 2 Inter-Dealer Broker      Treated as a Category 1 Inter-Dealer
 Member.                             Broker, if it qualifies as such, or
                                     if it does not so qualify, impose
                                     Required Fund Deposit equal to 150
                                     percent of the normal calculation
                                     of the Required Fund Deposit.
Government Securities Issuer        Treated as a Category 2 Dealer.
 Member.
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    Under the proposed rule change, a violation of a minimum financial 
requirement by a member \5\ of the GSD would result in the imposition 
on such member of a margin premium equal to the greater of (a) 25 
percent of the member's unadjusted \6\ clearing fund requirement or (b) 
$1,000,000, to continue for ninety calendar days after the later to 
occur of (i) the member's return to compliance with applicable minimum 
financial standards or (ii) FICC's discovery of the applicable 
violation. This increase would not apply to Category 1 Dealer Netting 
Members, Category 1 Futures Commission Merchant Netting Members or 
Category 2 Inter-Dealer Broker Netting Members, where such members 
would continue to be reclassified as a different category netting 
member.\7\ In addition, such violation would result in (a) a report of 
the violation to the FICC Membership and Risk Management Committee at 
its next regularly scheduled meeting or sooner if deemed appropriate by 
FICC and (b) the placement of such member on FICC's ``watch list'' 
subjecting it to more frequent and thorough monitoring. None of these 
consequences would preclude FICC from imposing any other margin 
consequences permitted by GSD's Rules.
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    \5\ The proposed rule change only applies to GSD members that 
have minimum financial requirements (i.e., GSD netting members).
    \6\ ``Unadjusted'' means the standard calculation before any 
additional assessments.
    \7\ If GSD Category 1 Dealer Netting Members, GSD Category 1 
Futures Commission Merchant Netting Members and GSD Category 2 
Inter-Dealer Broker Netting Members do not meet the membership 
qualifications applicable to the new category of netting member, 
then they will be subject to the increased margin premium specified 
above.
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(B) Failure To Submit Requisite Financial Reports on a Timely Basis

    Certain members that are required to provide monthly or quarterly 
financial data to FICC at times have violated GSD's membership 
requirements by not timely providing such financial data. In such 
instances, management contacts each offending member and follows up 
with a letter.
    Failure to timely receive required information creates risk to FICC 
and hinders FICC's ability to appropriately assess the financial 
condition of such members. To encourage timely submission of required 
financial data, FICC has established a mechanism to fine delinquent 
members.\8\ FICC has proposed two additional measures to enforce timely 
filing of financial information.
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    \8\ Securities Exchange Act Release No. 49947 (June 30, 2004), 
69 FR 41316 [File No. SR-FICC-2003-01].
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    First, FICC will subject delinquent members to a more stringent 
clearing fund requirement. Specifically, FICC will automatically impose 
a margin premium equal to the greater of (a) 25 percent of the member's 
unadjusted clearing fund requirement or (b) $1,000,000. The margin 
premium will be applied until the appropriate financial data is 
submitted to FICC and is reviewed for compliance purposes. In addition, 
delinquent members will be precluded from taking back any excess 
clearing fund collateral to which they might ordinarily be entitled.
    Second, members that fail to submit requisite financial reports on 
a timely basis will also automatically be placed on FICC's ``watch 
list'' and subject to more frequent and thorough monitoring.

III. Discussion

    Section 17A(b)(3)(F) of the Act requires among other things that 
the rules of a clearing agency be designed to assure the safeguarding 
of securities and funds 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 by encouraging members to 
maintain their minimum financial standards and to submit their required 
financial reports on a timely basis, FICC's ability to maintain a 
financially sound membership base should be enhanced.
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    \9\ 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 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,\10\ that the proposed rule change (File No. SR-FICC-2004-11) be 
and hereby is approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-25705 Filed 11-18-04; 8:45 am]
BILLING CODE 8010-01-M