[Federal Register Volume 78, Number 5 (Tuesday, January 8, 2013)]
[Notices]
[Pages 1278-1280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-00122]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68555; File No. SR-FICC-2012-07]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change Relating to Enhancements That the 
Mortgage-Backed Securities Division Intends To Implement to its 
Services and Certain Other Clarifications and Corrections to Its Rules

 January 2, 2013.

I. Introduction

    On November 6, 2012, the Fixed Income Clearing Corporation 
(``FICC'' or the ``Corporation'') filed with the Securities and 
Exchange Commission (``Commission'') proposed rule change SR-FICC-2012-
07 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19ba-4 thereunder.\2\ The proposed rule change 
was published for comment in the Federal Register on November 21, 
2012.\3\ No comments letters were received on the proposed rule change. 
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. 68245 (November 15, 
2012), 77 FR 69913 (November 21, 2012).
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II. Description

    The proposed rule change relates to certain enhancements that the 
Mortgage-Backed Securities Division (``MBSD'') of FICC intends to 
implement to its services. In addition, FICC proposes to make certain 
corrections and clarifications to the MBSD Rules. As noted below, some 
of the proposed changes do not require revisions to the MBSD Rules.

1. Expansion of Pool Netting To Include Pool Instructs From the 
Previous Settlement Months

    MBSD proposed to further extend pool netting benefits to its 
members by capturing Pool Instructs \4\ submitted for allocations made 
after the traded pool's settlement month has passed. The proposed 
changes allow more activity into the pool net which results in fewer 
settlements.
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    \4\ A Pool Instruct is an input used by a member to submit pool 
details directly into the Real-Time Trade Matching [supreg] 
(``RTTM[supreg]'') system for bilateral matching and assignment to a 
corresponding open TBA position as a prerequisite to the pool 
netting process.
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    Currently, MBSD's pool netting process only nets Pool Instructs for 
the current delivery date if their corresponding contractual settlement 
dates (``CSD'') are also in the current month.\5\ For example, with 
respect to a delivery date of August 14, 2012, MBSD's pool netting 
process would only net Pool Instructs having a CSD ranging from August 
1, 2012 through August 14, 2012 and having a delivery date of August 
14, 2012. As such, only Pool Instructs having a CSD in the current 
month will be included in pool netting.
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    \5\ See MBSD Rule 8 Section 3.
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    The proposed new process will net Pool Instructs from previous 
settlement months that are submitted for delivery dates in the current 
month. For example, if we assume that today is August 13, 2012, and a 
member submits multiple Pool Instructs all having a CSD equal to July 
12, 2012 and a delivery date equal to August 14, 2012, on the evening 
of August 13th, these Pool Instructs would be netted against each other 
to arrive at a single pool net settlement position for the July 12, 
2012 CSD and August 14th delivery date.
    The proposed changes do not require revisions to the text of the 
MBSD Rules.

2. Notification of Settlement for Specified Pool Trades

    A Notification of Settlement (``NOS'') is an instruction submitted 
to the Corporation by a purchasing or selling clearing member which 
reflects the settlement of a Settlement Balance Order Trade, Trade-for-
Trade Transaction or Specified Pool Trade (``SPT'').\6\ MBSD is 
proposing to change the manner in which NOS processing occurs for SPTs 
so that it follows similar processing rules as those applied to NOS for 
Settlement Balance Order Trades and Trade-for-Trade Transactions.
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    \6\ See MBSD Rule 1, Definitions.
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    Currently, MBSD Rule 10 Section 2 states that the trade details for 
a NOS submitted by both parties of a SPT must fully match in order for 
the clearance of the SPTs to be reflected on the member's Purchase and 
Sale Report \7\ or both parties must submit a cancellation of the 
transaction in order for the transaction to be deleted from each 
party's respective Open Commitment Report.\8\
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    \7\ ``Purchase and Sale Report'' is defined as the report 
furnished by the Corporation reflecting a member's Compared Trades 
in Eligible Securities.'' See MBSD Rule 1, Definitions.
    \8\ ``Open Commitment Report'' is defined as the report 
furnished by the Corporation to members reflecting such member's 
open commitments in the Clearing System. See MBSD Rule 1, 
Definitions.
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    MBSD proposed to enhance the NOS for SPTs by no longer requiring 
the current face value submitted on each

[[Page 1279]]

member's NOS to exactly match the current face value of the SPT. 
Instead, members will have the ability to submit and match multiple NOS 
to reduce the SPT current face until it is fully settled. For example, 
if a SPT has a current face value of $125MM and the pool number of the 
trade has a factor of 0.975, FICC will accept either (a) one piece of 
NOS for $125,000,000 or (b) three pieces of NOS for $48,750,000, 
$48,750,000 and $27,500,000. The current face values equal an original 
face settlement value of $50,000,000, $50,000,000 and $28,205,128.
    In addition to the above, MBSD will apply a tolerance of +/- $1 
when matching buy and sell NOS for SPT trades to account for 
differences in rounding conventions used by members to convert original 
face to current face on their NOS.
    The proposed changes will make NOS for SPTs similar to NOS for 
Settlement Balance Order Trades and Trade-for-Trade Transactions 
whereby matching is permitted within a tolerance and multiple NOS may 
be submitted and matched separately until the trade is fully settled.
    The proposed changes require revisions to the text of the MBSD 
Rules.

3. Comparison of Dummy Pool Number to Valid Pool Number

    FICC supports the submission of a defined generic or ``dummy'' pool 
number on NOS instead of a valid pool number. A dummy pool is a 
standard convention used by members when the actual pool number is not 
readily available to some members. Currently, the pool number is a 
matching criterion on NOS. Consequently, if one member submits a dummy 
pool number and the other enters a valid pool number the NOS will not 
compare even though all of the other matching criteria are the same. In 
an effort to address this, FICC is proposing to change its processing 
in order to allow matching of NOS when all mandatory terms compare and 
one member submits a dummy pool number and the other member submits a 
valid pool.
    The proposed changes do not require revisions to the text of the 
MBSD Rules.

4. Automatically Marking Certain Open TBA Trades as Fully Settled

    Mortgage-backed securities trades settle with an industry-accepted 
variance of 0.01% (i.e., $100 per $1MM). When FICC applies NOS to open 
trades, it does so using the upper limit of the variance to ensure that 
trades are not marked as fully settled until all NOS have been received 
and processed by FICC. However, because trades may settle using any 
value within the variance, FICC's processing may leave residual trade 
amounts open on its books for trades that have actually been fully 
settled. To address this, FICC is proposing to automatically generate 
internal NOS which will mark the residual trade as fully settled. The 
FICC generated NOS will occur on the last business day of each month, 
in every instance where a member has a To-Be-Announced (``TBA'') trade 
with an open par that falls below an established threshold. The 
threshold is initially contemplated to be $1000 par, however, this may 
be modified following member feedback. All changes to the threshold 
will be provided in advance to members via Important Notice.
    The proposed changes require revisions to the text of the MBSD 
Rules.

5. Corrections and Clarification to the MBSD Rules

    The MBSD Rules define the term ``Fully Compared'' as ``* * * trade 
input submitted by a Broker matches trade input submitted by each 
Dealer on whose behalf the Broker is acting the Net Position Match 
Mode.'' \9\ The phrase ``in accordance with'' was inadvertently deleted 
from this definition when it was revised in connection with Amendment 
No. 1 to SR-FICC-2008-01.\10\ FICC proposes to restore this phrase so 
that the definition states the following: ``* * * trade input submitted 
by a Broker matches trade input submitted by each Dealer on whose 
behalf the Broker is acting in accordance with the Net Position Match 
Mode.''
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    \9\ See MBSD Rule 1, Definitions.
    \10\ Securities Exchange Act Release No. 66550 (March 9, 2012); 
77 FR 15155 (March 14, 2012).
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    In the second to last paragraph of MBSD Rule 2A Section 1, there is 
a sentence which states that the Corporation will determine whether the 
applicants in ``categories (g and i)'' of the referenced Section will 
be designated as tier one or tier two members. FICC proposes to correct 
the typographical error in the cross-reference so that it instead 
references ``categories (g) and (i).''
Implementation
    FICC proposes to implement the proposed changes relating to the 
MBSD enhancements during the second quarter of 2013 pending rule filing 
approval from the Securities and Exchange Commission. The proposed 
changes relating to the clarifications and corrections of the 
referenced rules will be effective immediately upon receipt of rule 
filing approval.

III. Discussion

    Section 19(b)(2)(C) of the Act \11\ 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 \12\ 
requires, among other things, that the rules of the clearing agency are 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions.
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    \11\ 15 U.S.C. 78s(b)(2)(C).
    \12\ 15 U.S.C. 78q-1(b)(3)(F).
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    The proposed changes to FICC's Rules are consistent with promoting 
the prompt and accurate clearance and settlement of securities 
transactions in the following ways: (1) The expansion of the pool 
netting system extends the netting benefits to clearing members by 
capturing allocations made after the traded pools current settlement 
month, (2) the change in NOS processing for SPTs creates efficiency 
through the standardization of NOS processing for TBA trades, (3) 
automatically marking certain TBA trades as fully settled improves the 
monitoring and reporting of trade settlement status and (4) allowing 
the comparison of dummy Pool number to valid pool number provides for 
timelier matching of NOS. Each of these enhancements creates a more 
efficient netting system which promotes the prompt and accurate 
clearance and settlement for securities transactions. Furthermore, the 
clarifications and corrections to the MBSD Rules ensure that the Rules 
are accurate. As a result, the proposed rule change is consistent with 
the requirements of Section 17A(b)(3)(F) of the Act.\13\
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    \13\ 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 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \14\ and the 
rules and regulations thereunder.
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    \14\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change, as amended, (File No. SR-FICC-
2012-07) be, and hereby is, approved.\16\
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).


[[Page 1280]]


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    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00122 Filed 1-7-13; 8:45 am]
BILLING CODE 8011-01-P