Federal Register / Vol. 71, No. 183 / Thursday, September 21, 2006 / Notices 55239 

13 17 CFR 200.30–3(a)(12). 

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

2Securities Exchange Act Release No. 53671 

(April 18, 2006), 71 FR 21060. 

3 Jim Nardone, Schonfeld Securities, LLC 

(‘‘Schonfeld’’) (May 5, 2006); Richard Gill, Senior 

Vice President, and Donald Galante, Senior Vice 

President, Man Securities Inc. (‘‘Man’’) (May 15, 

2006); L. Thomas Patterson, Chief Executive Officer, 

and Kathleen M. Toner, Chief Regulatory Officer, 

LaBranche & Co. Inc. (‘‘LaBranche’’) (May 18, 2006); 

Peter Chepucavage, International Association of 

Small Broker-Dealers and Advisers (‘‘IASBDA’’) 

(May 19, 2006); Greggory A. Teeter, Howrey LLC, 

representing Wilson-Davis & Co., Inc. (‘‘WilsonDavis’’), Alpine Securities Corporation (‘‘Alpine’’), 

and IASBDA (June 1, 2006); Cheryl T. Lambert, 

Managing Director, Risk Management, The 

Depository Trust and Clearing Corporation 

(‘‘DTCC’’) (July 28, 2006); and Peter Chepucavage, 

IASBDA (August 9, 2006). 

Schonfeld, Wilson-Davis, Alpine, and LaBranche 

are members of NSCC. Man is a member of FICC. 

IASBDA is an organization created for the purpose 

of protecting the interests of small and midsize 

broker-dealers and micro-cap issuers. 

4The Commission has modified the text of the 

summaries prepared by FICC and NSCC. 

5Securities Exchange Act Release No. 45647 

(March 26, 2002), 67 FR 15438 (April 1, 2002) [File 

No. SR–GSCC–2001–15]. ‘‘Excess regulatory 

capital’’ for purposes of GSD’s collateral premium 

included excess net capital, excess liquid capital, or 

excess adjusted capital. 

6 If FICC imposes this premium on a netting 

member, then it shall be considered included as 

part of the netting member’s ‘‘required fund 

deposit’’ as defined in the GSD’s rules. 

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 

Room. Copies of such filing also will be 

available for inspection and copying at 

the principal office of the CBOE. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–CBOE–2006–77 and should 

be submitted on or before October 12, 

2006. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.13

J. Lynn Taylor, 

Assistant Secretary. 

[FR Doc. 06–7843 Filed 9–20–06; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–54457; File Nos. SR–FICC–

2006–03 and SR–NSCC–2006–03] 

Self-Regulatory Organizations; Fixed 

Income Clearing Corporation and 

National Securities Clearing 

Corporation; Notice of Filing and Order 

Granting Accelerated Approval of 

Proposed Rule Changes to Institute a 

Clearing Fund Premium Based Upon a 

Member’s Clearing Fund Requirement 

to Excess Regulatory Capital Ratio 

September 15, 2006. 

On February 22, 2006, the Fixed 

Income Clearing Corporation (‘‘FICC’’) 

and the National Securities Clearing 

Corporation (‘‘NSCC’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) proposed rule changes 

SR–FICC–2006–03 and SR–NSCC–

2006–03 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 

April 24, 2006.2 Seven comment letters 

were received.3 FICC and NSCC 

amended the proposed rule changes on 

July 28, 2006, to address certain 

concerns raised by the commenters and 

others. 

The Commission is publishing this 

notice and order to solicit comments 

from interested persons and to grant 

accelerated approval of the proposals. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Changes 

FICC and NSCC are each seeking to 

institute a clearing fund premium based 

on a member’s clearing fund 

requirement to excess regulatory capital 

ratio. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Changes 

In their filings with the Commission, 

FICC and NSCC included statements 

concerning the purpose of and basis for 

the proposed rule changes and 

discussed any comments they received 

on the proposed rule changes. The text 

of these statements may be examined at 

the places specified in Item VI below. 

FICC and NSCC have prepared 

summaries, set forth in sections (A), (B), 

and (C) below, of the most significant 

aspects of these statements.4

(A) Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Changes 

FICC and NSCC are each seeking to 

institute a clearing fund premium based 

on a member’s clearing fund 

requirement to excess regulatory capital 

ratio. 

1. FICC Clearing Fund Premium 

The degree to which the collateral 

requirement of a clearing agency 

member compares to the member’s 

excess regulatory capital is an important 

indicator of the potential risk that the 

member presents to a clearing agency. In 

2002, the Government Securities 

Clearing Corporation (‘‘GSCC’’), the 

predecessor to the Government 

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

received Commission approval to 

impose a collateral premium on netting 

members whose clearing fund 

requirements exceed their excess 

regulatory capital.5 Specifically, the 

GSD implemented a 25 percent 

collateral premium when a member’s 

ratio of clearing fund requirement to its 

excess regulatory capital is greater than 

1.0. The 25 percent premium is applied 

to the amount by which the member’s 

clearing fund requirement exceeds the 

member’s excess regulatory capital. 

In order to more effectively manage 

the risk posed by a GSD member whose 

activity causes it to have a clearing fund 

requirement that is greater than its 

excess regulatory capital, FICC now 

proposes to strengthen the abovementioned risk management tool by 

applying a clearing fund premium that 

is based on a member’s ratio of clearing 

fund requirement to excess regulatory 

capital in place of the current flat 

premium of 25 percent.6 The premium 

would be determined by multiplying the 

amount by which a member’s clearing 

fund requirement exceeds its excess 

regulatory capital by the member’s ratio 

of required clearing fund to excess 

regulatory capital expressed as a 

percent. This formula would allow the 

premium to increase or decrease in 

proportion to changes in the ratio and 

should allow for risk management that 

is measured in proportion to the risk 

presented. For example, if a member has 

a clearing fund requirement of $11.4 

million and excess net capital of $10 

million, its clearing fund requirement 

would exceed its excess net capital by 

$1.4 million, its ratio of clearing fund 

requirement to excess net capital is 1.14 

(or 114 percent), and the applicable 

collateral premium would be 114 

percent of $1.4 million or $1,596,000. If 

the same member had a clearing fund 

requirement of $20 million, its clearing 

fund requirement would exceed its 

excess net capital by $10 million, its 

ratio of clearing fund requirement to 

excess net capital would be 2.0 (or 200 

percent), and the applicable collateral 

premium would be 200 percent of $10 

million or $20 million. 


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55240 Federal Register / Vol. 71, No. 183 / Thursday, September 21, 2006 / Notices 

7This premium would not apply to The Canadian 

Depository for Securities Limited (‘‘CDS’’) clearing 

fund requirement that is computed pursuant to 

Appendix 1 of NSCC’s rules. 

8 15 U.S.C. 78q–1. 

9Supra note 3. 

10 Id. 

Currently, FICC’s collateral premium 

applies to members whose excess 

regulatory capital is measured as excess 

net capital, excess liquid capital, or 

excess adjusted net capital. The 

proposed rule change would also 

include excess equity capital as 

regulatory excess capital so that the 

premium can be applied to bank and 

trust company netting members whose 

capital is measured as equity capital. 

The proposed rule change would also 

make an additional change to Rule 4 

(Clearing Fund, Watch List and Loss 

Allocation), Section 3 (Watch List) to 

remove a provision that allows FICC to 

require a netting member to adjust its 

trading activity so that its excess 

regulatory capital ratio decreases to a 

satisfactory level. While this provision 

was appropriate under the fixed 25 

percent premium, it would no longer be 

appropriate under the new ratio-based 

clearing fund premium because the new 

premium formula would impose a 

variable premium based on activity that 

would require members to either adjust 

their trading activity or be subject to the 

higher premium. 

2. NSCC Clearing Fund Premium 

NSCC is proposing to impose a 

clearing fund premium on Rule 2 

(Members) broker/dealer and bank 

members whose clearing fund 

requirement exceeds their regulatory 

excess capital. NSCC’s proposed excess 

regulatory capital premium would apply 

to members whose regulatory excess 

capital is measured as excess net capital 

or excess equity capital. The excess 

regulatory capital premium would be 

triggered when a member’s ratio of 

clearing fund requirement to excess 

regulatory capital is greater than 1.0 and 

would be determined using the same 

formula as that proposed by FICC. The 

new premium would be added to 

NSCC’s clearing fund formula in 

Procedure XV (Clearing Fund Formula 

and Other Matters). 7

3. FICC and NSCC Clearing Fund 

Premiums 

As a matter of practice, when a FICC 

or NSCC member’s clearing fund 

requirement to excess regulatory capital 

ratio is between .50 and 1.0, a warning 

notification would be issued to put the 

member on notice that a collateral 

premium will be required if the ratio 

reaches an amount greater than 1.0. 

When a member’s ratio exceeds 1.0, it 

would be notified on the business day 

that a collateral premium has been 

calculated and is to be collected. 

FICC and NSCC reserve the right to: 

(i) Apply a lesser collateral premium 

(including no premium) based on 

specific circumstances (such as a 

member being subject to an unexpected 

haircut or capital charge that does not 

fundamentally change its risk profile) 

and (ii) return all or a portion of the 

premium amount if it believes that the 

member’s risk profile does not require 

the maintenance of that amount. 

FICC and NSCC believe that the 

proposed rule changes are consistent 

with the requirements of Section 17A of 

the Act 8 and the rules and regulations 

thereunder applicable to FICC and 

NSCC because they should help FICC 

and NSCC assure the safeguarding of 

securities and funds which are in their 

custody or control or for which they are 

responsible by allowing FICC and NSCC 

to more effectively manage risk 

presented by certain members. 

(B) Self-Regulatory Organization’s 

Statement on Burden on Competition 

FICC and NSCC do not believe that 

the proposed rule changes would 

impose any burden on competition. 

(C) Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Changes Received From 

Members, Participants, or Others 

Written comments relating to the 

proposed rule changes have been 

received and addressed by FICC and 

NSCC. 

III. Comments 

The Commission received seven 

comment letters to the proposed rule 

changes. Schonfeld, Wilson-Davis, 

Alpine, LaBranche, Man, and IASBDA 

wrote letters opposing the proposed rule 

changes.9 DTCC submitted a letter 

responding to those letters.10

All of the commenters in opposition 

to the proposed rule changes argued that 

the imposition of the clearing fund 

premium would place a 

disproportionate burden on smaller 

broker-dealers because they are 

generally less capitalized than the larger 

broker-dealers and are not in a position 

to meet higher capital requirements that 

could result from the proposed rule 

changes. FICC and NSCC responded that 

the premium calculation is based on a 

ratio that is applied to all members 

equally and is meant to reflect the risk 

a member introduces to the clearing 

agencies. 

All of the commenters opposing the 

proposed rule changes argued that the 

proposed rule changes would have an 

anticompetitive effect and/or place an 

undue burden on competition in that 

smaller broker-dealers would be unable 

to meet the higher clearing fund 

obligations and would be forced out of 

business which could result in less 

competition among broker-dealers. One 

result of the clearing fund premium 

would be that small issuers and 

emerging companies would not have 

such smaller broker-dealers to assist in 

capital formation. 

FICC and NSCC responded that there 

are over 6000 broker-dealers registered 

with the Commission. FICC has 61 

broker-dealer members in its GSD and 

NSCC has approximately 221 full 

service broker-dealer members. Such 

figures, according to FICC and NSCC 

indicate that the competition among 

broker-dealers is healthy. FICC and 

NSCC also responded that the proposed 

rule changes would not be barriers to 

entry to the brokerage business and that 

the Act does not provide broker-dealers 

with a right to be a direct member of a 

registered clearing agency. FICC and 

NSCC noted that a firm that is 

potentially affected by the proposed rule 

changes could (1) Retain or raise 

additional capital relative to the 

business it clears through the clearing 

agency, (2) limit the business it clears 

through the clearing agency so that the 

risk to which the clearing agency and its 

members is exposed based upon such 

business is proportionate to the firm’s 

excess net capital, or (3) seek another 

firm through which to clear its business. 

LaBranche and Schonfeld suggested 

that a general fund similar to the SIPC 

or FDIC models could be created to 

mitigate risks in the clearing system. 

FICC and NSCC responded that the 

clearing fund, like the SIPC or FDIC 

models, exists as a means to mutualize 

the risk that any given member presents 

as a result of its business should the 

member fail and the clearing agency be 

required to close the member out and 

assume the risk of loss on those 

operations. FICC and NSCC argued that 

the commenters seeking a general fund 

like SIPC or the FDIC model are seeking 

an entity other than themselves to bear 

the risk of their businesses by shifting 

the credit risk from the member to FICC 

or NSCC and the memberships at large. 

Howrey and Man argue that the 

current risk management tools used by 

FICC and NSCC are adequate. Man 

states that the FICC minimum net worth 

requirement of $50,000,000 and the 

minimum net excess capital 

requirement of $10,000,000 have 

provided adequate protection to FICC as 


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Federal Register / Vol. 71, No. 183 / Thursday, September 21, 2006 / Notices 55241 

11The adjusted clearing fund requirement is 

referred to in the amendment as the ‘‘Excess Capital 

Premium Calculation Amount.’’ It is defined by the 

amendment as the calculation of the member’s 

Required Fund Deposit, which excludes 

consideration of the Average Offset Margin Amount 

and the Average Offset Repo Volatility Amount. 

Excluding these look back components, known as 

the Average Post Offset Margin Amount (‘‘POMA’’) 

and the Average Repo POMA (and defined in the 

GSD’s Rules as the Average Offset Margin Amount 

and the Average Offset Repo Volatility Amount, 

respectively), from the calculation of the proposed 

premium is expected to provide relief from the 

Excess Capital Premium to members whose current 

portfolios would have a lower clearing fund 

requirement than their clearing fund requirement 

with the look back would suggest. 

12As defined by the amendment, ‘‘Excess Capital 

Differential’’ means the amount by which a netting 

member’s Excess Capital Premium Calculation 

Amount exceeds its excess capital. 

13FICC management will look to see whether the 

premium results from unusual or non-recurring 

circumstances where management believes it would 

not be appropriate to assess the premium. Examples 

of such circumstances are a member’s late 

submission of trade data for comparison that would 

have otherwise reduced the margined position if 

timely submission had occurred or an unexpected 

haircut or capital charge that does not 

fundamentally change a member’s risk profile. FICC 

has stated that these examples are intended to serve 

as guidelines and are intended to be illustrative but 

not limiting in nature as to when the premium will 

not be imposed. 

14NSCC has identified the following guidelines or 

circumstances, which NSCC has stated are intended 

to be illustrative but not limiting in nature as to 

when the premium will not be imposed: (1) Where 

the premium results from charges applied with 

respect to municipal securities trades settling in 

CNS where the member has offsetting compared 

trades settling on a trade-for trade basis through 

DTC and (2) where management has determined 

that the premium results from an unusual or nonrecurring circumstance where management believes 

it would not be appropriate to assess the premium. 

Examples of such circumstances are a member’s late 

submission of trade data for comparison or trade 

recording that would have otherwise reduced the 

margined position if timely submission had 

occurred or an unexpected haircut or capital charge 

that does not fundamentally change a member’s risk 

profile. 

related to counterparty risk. FICC 

responded that net worth requirements 

on their own, as illustrated by the Refco 

Securities LLC (‘‘Refco’’) case, do not 

protect against counterparty risk, 

particularly in an environment where 

trading activity is not linked to capital 

levels. In addition, FICC noted that the 

net worth requirement does not address 

the nature of the business that the 

member brings to FICC and its members. 

Howrey points out that NSCC has the 

ability to collect additional clearing 

fund deposits pursuant to its rules 

should it deem it necessary. The lack of 

explanation or clarification by NSCC on 

how the current deposit requirement is 

calculated reveals a pattern of arbitrary 

amounts being imposed on clearing 

firms. This arbitrary amount, argued 

Howrey, would then be added to the 

arbitrary amount which would be 

calculated by the proposed rule change. 

NSCC responded that it concurs that 

Rule 15 (Financial Responsibility and 

Operational Capability) could perhaps 

be used as a basis on which to charge 

an occasional clearing fund premium to 

cover the perceived systemic risk sought 

to be addressed by the proposed rule 

change. However, FICC and NSCC’s 

management and user representative 

boards have chosen to address the 

charge systemically and include the 

premium as a stated additional charge 

in an effort to be clear to members about 

the types of activity and risks they are 

trying to address. 

Man asserted that FICC’s ability to 

grant exceptions based upon subjective 

judgments in undefined circumstances, 

however well intentioned, will 

undermine the confidence in the margin 

process. Thus, members should know 

what rules for granting exceptions will 

be applied. FICC and NSCC responded 

that such discretion would only be used 

to reduce or eliminate the premium, not 

to raise it, and that the situations where 

such discretion would be used are likely 

to be very fact and circumstances 

driven. Thus, it would be contrary to the 

principle and purpose of discretion to 

require that NSCC and FICC adopt in 

advance of the event, detailed criteria, 

circumstances, and procedures for 

exercising such discretion. However, as 

discussed further below, FICC and 

NSCC amended their proposed rule 

changes to alleviate this concern and 

others expressed by the commenters. 

IV. FICC and NSCC Amendments 

To address certain concerns expressed 

in the comment letters and by others, 

FICC and NSCC amended the proposed 

rule changes as set forth below. 

1. FICC 

FICC has amended its proposed rule 

change to exclude from the premium 

calculation the look back provisions of 

the GSD clearing fund formula’s 

Receive/Deliver and Repo Volatility 

components (‘‘Excess Capital Premium 

Calculation Amount’’) 11 with respect to 

the computation of the clearing fund 

requirement used in both the numerator 

of the ratio and in the Excess Capital 

Differential.12

FICC has also amended its proposed 

rule change to clarify that it may at its 

discretion: (i) Collect an amount less 

than the Excess Capital Premium 

(including no premium) and (ii) return 

all or a portion of the Excess Capital 

Premium if it believes that the 

imposition or maintenance of the Excess 

Capital Premium is not necessary or 

appropriate.13

In order to allow members time to 

effect any necessary operational or 

systems changes, FICC’s proposed rule 

change will become effective on the first 

Monday following the 29th day after 

which the Commission issues an order 

granting approval of the change. 

2. NSCC 

NSCC amended its proposed rule 

change to clarify that the Excess Capital 

Premium will be determined by 

multiplying: (a) The amount by which a 

member’s base clearing fund 

requirement (that is the amount 

determined prior to the imposition of 

the Excess Capital Premium) exceeds 

the member’s excess regulatory capital 

by (b) the member’s ratio, expressed as 

a percent. The calculation of the base 

clearing fund requirement for purposes 

of determining both the ratio and the 

Excess Capital Premium will not take 

into account either (i) Market-maker 

domination charges or (ii) special 

charges, as determined pursuant to 

Procedure XV, that are imposed on a 

member as part of its base requirement. 

This adjusted clearing fund amount (i.e., 

calculated clearing fund amount minus 

any market-maker domination or other 

special charges) used for purposes of 

calculating the Excess Capital Premium 

would be called the ‘‘Calculated 

Amount.’’ These charges are not 

included in the clearing fund premium 

calculation because NSCC recognizes 

that these types of charges already 

provide an additional reserve in the 

base clearing fund requirement against 

the risk of that position. 

NSCC has also amended its proposed 

rule change to clarify that it may at its 

discretion: (i) Collect an amount less 

than the Excess Capital Premium 

(including no premium) and (ii) return 

all or a portion of the Excess Capital 

Premium if it believes that the 

imposition or maintenance of the Excess 

Capital Premium is not necessary or 

appropriate.14

In order to allow member’s time to 

effect any necessary operational or 

systems changes, NSCC’s proposed rule 

change will become effective on the first 

Monday following the 29th day after 

which the Commission issues an order 

granting approval of the proposed rule 

change. 

V. Date of Effectiveness of the Proposed 

Rule Change and Timing for 

Commission Action 

After carefully considering the 

proposed rule changes as amended and 

all of the written comments received, 

the Commission finds that the proposed 

rule changes are consistent with the 


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55242 Federal Register / Vol. 71, No. 183 / Thursday, September 21, 2006 / Notices 

15 15 U.S.C. 78q-1(b)(3)(F). 16A highly leveraged member is identified as one 

whose regulatory and excess capital are 

substantially less than it’s clearing fund 

requirements. 17 15 U.S.C. 78q-1(b)(3)(F). 18 15 U.S.C. 78q-1(b)(3)(I). 

requirements of the Act and the rules 

and regulations thereunder and 

particularly with the requirements of 

Section 17A(b)(3)(F).15 Section 

17A(b)(3)(F) requires that the rules of a 

clearing agency be designed to assure 

the safeguarding of securities and funds 

which are in the custody or control of 

the clearing agency or for which it is 

responsible. The Commission believes 

that the approval of FICC and NSCC’s 

rule changes is consistent with this 

section because it should help FICC and 

NSCC to assure the safeguarding of 

securities and funds which are in their 

custody or control or for which they are 

responsible by allowing FICC and NSCC 

to more effectively manage risk 

presented by highly leveraged 

members 16 and thus avoid potential 

losses to FICC and to NSCC and their 

members. 

When a member presents transactions 

for clearance and settlement through 

FICC or NSCC in an amount that is not 

supported by its excess regulatory 

capital, should the member fail, FICC, 

NSCC, or both if the member is a 

member of both FICC and NSCC would 

have to close out the failing member’s 

open positions and assume the risk of 

loss. If the failing member’s clearing 

fund deposit is insufficient to cover any 

such loss, the loss would be borne by 

FICC and/or NSCC and ultimately could 

be borne by the other members of the 

clearing agency(ies) from their collective 

clearing fund deposits. 

All of the commenters in opposition 

to the proposed rule changes argued that 

the imposition of a clearing fund 

premium would place a 

disproportionate burden on smaller 

broker-dealers because they are 

generally less capitalized than the larger 

broker-dealers and not in a position to 

meet higher capital requirements that 

could result from the proposed rule 

changes. FICC and NSCC responded that 

the premium calculation is based on a 

ratio that is applied to all members 

equally and is meant to reflect the risk 

a member introduces to the clearing 

agencies. Section 17A(b)(3)(F)17

provides that the rules of a clearing 

agency shall not permit unfair 

discrimination among participants in 

the use of the clearing agency. Because 

the premium calculation is applied to 

all members equally based on a ratio of 

each member’s required clearing fund to 

its excess net capital, the Commission is 

not persuaded by the commenters’

arguments. It should be noted that the 

proposed rule changes were prompted 

in part by the bankruptcy and winddown of Refco, which was not a small 

broker-dealer. 

All of the commenters opposing the 

proposed rule changes argued that the 

proposed rule changes would have 

anticompetitive effect and/or place an 

undue burden on competition in that 

smaller broker-dealers would be unable 

to meet the higher clearing fund 

obligations and would be forced out of 

business, and that that could result in 

less competition among broker-dealers. 

FICC and NSCC responded that the 

proposed rule changes are not barriers 

to entry to the brokerage business and 

that the Act does not provide brokerdealers with a right to be a direct 

member of a registered clearing agency. 

FICC and NSCC noted that a firm that 

is potentially affected by the proposed 

rule changes could (1) Retain or raise 

additional capital relative to the 

business it clears through the clearing 

agency, (2) limit the business it clears 

through the clearing agency so that the 

risk to which the clearing agency and its 

other members is exposed based upon 

such business is proportionate to the 

firm’s excess regulatory capital, or (3) 

seek another firm through which to 

clear its business. 

The Commission is not persuaded by 

the commenters’ claims that the 

proposed rule changes are 

anticompetitive and/or will result in an 

undue burden on competition. While it 

is possible that the proposed rule 

changes will force some members of 

FICC and NSCC to discontinue their 

direct membership in FICC and/or 

NSCC, the Act does not provide brokerdealers with the right to be direct 

members in a clearing agency. Affected 

firms have a choice to raise excess 

regulatory capital or to limit their 

trading activities so that the risk to 

which the clearing agency and its other 

members is exposed is proportionate to 

the firm’s excess regulatory capital. The 

Commission finds that the proposed 

rule changes should not impose any 

burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act in accordance 

with Section 17A(b)(3)(I).18

FICC and NSCC have requested that 

the Commission approve the proposed 

rule changes prior to the thirtieth day 

after publication of the notice of the 

amendment to the filing. The 

Commission finds good cause for 

approving the proposed rule changes 

prior to the thirtieth day after the 

publication of notice because 

implementation of the proposed rule 

changes will allow FICC and NSCC to 

activate the systems which are 

necessary to implement the proposed 

rule changes which are integral to 

assuring the safeguarding of securities 

and funds which are in their custody or 

control or for which they are 

responsible. Additionally, the 

Commission notes that FICC and 

NSCC’s amendments were in large part 

in response to comments it received. 

VI. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

changes are consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml) or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Numbers SR–FICC–2006–03 and SR–

NSCC–2006–03 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Numbers SR–FICC–2006–03 and SR–

NSCC–2006–03. These file numbers 

should be included on the subject line 

if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

changes that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule changes 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, 100 F Street, NE., Washington, 

DC 20549. Copies of such filings also 

will be available for inspection and 

copying at the principal offices of FICC 

and NSCC and on FICC’s Web site at 

http://www.ficc.com/gov/ 

gov.docs.jsp?NS-query and on NSCC’s 

Web site at http:// 


jlentini on PROD1PC65 with NOTICES
Federal Register / Vol. 71, No. 183 / Thursday, September 21, 2006 / Notices 55243 

19 15 U.S.C. 78s(b)(2). 

20 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3 In Amendment No. 1, NASD clarifies that (1) 

The effective date of the proposed rule change will 

be the date upon which The NASDAQ Stock Market 

LLC (‘‘Nasdaq Exchange’’) operates as an exchange 

for non-Nasdaq exchange listed securities, which 

the Nasdaq Exchange anticipates will be in 

November 2006; (2) the NASD’s Market Regulation 

Committee will perform substantially the same 

functions as performed by the Nasdaq’s Quality of 

Markets Committee; and (3) the proposed rule 

change reflects NASD’s continued participation in 

the Intermarket Trading System (‘‘ITS’’) Plan. 

4See Securities Exchange Act Release No. 54084 

(June 30, 2006), 71 FR 38935 (July 10, 2006) (File 

No. SR–NASD–2005–087). 

5The Commission approved the Nasdaq 

Exchange application on January 13, 2006. See 

Securities Exchange Act Release No. 53128 (Jan. 13, 

2006), 71 FR 3550 (Jan. 23, 2006) (File No. 10–131). 

See also Securities Exchange Act Release No. 54085 

(June 30, 2006), 71 FR 38910 (July 10, 2006), which 

modified the conditions set forth in the Nasdaq 

Exchange Approval Order to allow the Nasdaq 

Exchange to operate as a national securities 

exchange solely with respect to Nasdaq-listed 

securities. 

6See Amendment No. 1. 

7See id. 

www.nscc.com/legal/. All comments 

received will be posted without change; 

the Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Numbers SR–FICC–

2006–03 and SR–NSCC–2006–03 and 

should be submitted on or before 

October 12, 2006. 

It is therefore ordered, pursuant to 

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

proposed rule changes (File Nos. SR–

FICC–2006–03 and SR–NSCC–2006–03) 

be and hereby are approved on an 

accelerated basis. 

For the Commission by the Division of 

Market Regulation, pursuant to delegated 

authority.20

J. Lynn Taylor, 

Assistant Secretary. 

[FR Doc. 06–7844 Filed 9–20–06; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–54451; File No. SR–NASD–

2006–104] 

Self-Regulatory Organizations; 

National Association of Securities 

Dealers, Inc.; Notice of Filing of 

Proposed Rule Change To Reflect 

Nasdaq’s Complete Separation From 

NASD Upon the NASDAQ Stock Market 

LLC’s Operation as a National 

Securities Exchange for Non-Nasdaq 

Exchange-Listed Securities 

September 15, 2006. 

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 

September 5, 2006, the National 

Association of Securities Dealers, Inc. 

(‘‘NASD’’) 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 NASD. On 

September 14, 2006, NASD submitted 

Amendment No. 1 to the proposed rule 

change.3 The Commission is publishing 

this notice to solicit comments on the 

proposed rule change from interested 

persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

NASD is proposing to: (1) Delete The 

Nasdaq Stock Market Inc.’s (‘‘Nasdaq’’) 

By-Laws and amend the Plan of 

Allocation and Delegation of Functions 

by NASD to Subsidiaries (‘‘Delegation 

Plan’’), NASD By-Laws, NASD 

Regulation, Inc. By-Laws, NASD 

Dispute Resolution, Inc. By-Laws, and 

NASD rules to reflect Nasdaq’s 

separation from NASD upon the 

operation of the Nasdaq Exchange as a 

national securities exchange for nonNasdaq exchange-listed securities; (2) 

amend NASD rules relating to quoting 

and trading otherwise than on an 

exchange in non-Nasdaq exchangelisted securities to reflect changes in the 

services provided by NASD in this 

regard; and (3) expand the scope of the 

NASD/Nasdaq Trade Reporting Facility 

rules to include trade reporting in nonNasdaq exchange-listed securities. 

The text of the proposed rule is 

available on the NASD Web Site 

(http://www.nasd.com), on the 

Commission’s Web Site at (http:// 

www.sec.gov), at the NASD Office of 

Secretary and at the Commission’s 

Public Reference Room. All NASD rules 

that do not have rule text changes 

specified remain unchanged and 

effective for all NASD members. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

NASD included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. NASD has prepared 

summaries, set forth in Sections A, B, 

and C below, of the most significant 

aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

On June 30, 2006, the Commission 

approved proposed rule change SR–

NASD–2005–087, which, among other 

things, amended NASD’s Delegation 

Plan, By-Laws, and NASD rules to 

reflect the Nasdaq Exchange’s operation 

as a national securities exchange for 

purposes of Nasdaq-listed securities.4

Specifically, to facilitate an orderly 

transition and minimize any potential 

disruption to the marketplace, for a 

transitional period that commenced on 

August 1, 2006, the Nasdaq Exchange 

has been operating as an exchange for 

purposes of Nasdaq-listed securities 

only, while Nasdaq continues to 

perform its current obligations under 

the NASD’s Delegation Plan with 

respect to non-Nasdaq exchange-listed 

securities.5 Pursuant to SR–NASD–

2005–087 and under the Delegation 

Plan, Nasdaq, as a subsidiary of NASD, 

continues to perform during this 

transitional period only those functions 

relating to over-the-counter (‘‘OTC’’) 

quoting, trading, and execution of nonNasdaq exchange-listed securities. As 

such, Nasdaq no longer performs 

functions relating to Nasdaq-listed 

securities pursuant to delegated 

authority from NASD. 

The proposed rule change described 

herein provides amendments to NASD 

rules to reflect Nasdaq’s complete 

separation from NASD upon the 

operation of the Nasdaq Exchange as a 

national securities exchange for 

purposes of non-Nasdaq exchange-listed 

securities in addition to Nasdaq-listed 

securities. In addition, the proposed 

rule change amends the current NASD 

rules for quoting and trading otherwise 

than on an exchange in non-Nasdaq 

exchange-listed securities to reflect the 

manner in which NASD would be 

satisfying its regulatory obligations 

under the Act and the rules thereunder 

on a temporary basis until the 

Alternative Display Facility (‘‘ADF’’) is 

able to satisfy those obligations. Further, 

this proposed rule change reflects 

NASD’s continued participation in the 

ITS Plan.6 This is one of the conditions 

that must be met before Nasdaq can 

operate as an exchange for non-Nasdaq 

exchange-listed securities.7 Finally, the 

proposed rule change expands the scope 

of the NASD/Nasdaq Trade Reporting 


jlentini on PROD1PC65 with NOTICES