Document ID: SEC-2007-0468-0001
Agency: sec
Document Type: Notice
Title: Members) that would require members to provide FICC with: (a) Reports from their independent auditors on internal controls (proposed Rule 3, Section 2(b)(ii)) and (b) a copy of the letter granting an extension of time by a regulatory authority to a member with respect to the submission of a report (proposed Rule 3, Section 2(h), para. 2).   (iii) Annual Audited Financial Statements: FICC proposes
Posted Date: 2007-03-29T04:00Z

[Federal Register: March 29, 2007 (Volume 72, Number 60)]
[Notices]               
[Page 14839-14841]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29mr07-127]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55515; File No. SR-FICC-2006-19]

 
Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to Membership, 
Definitions, and the Electronic Pool Notification Service

March 22, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 13, 2006, the 
Fixed Income Clearing Corporation (``FICC'') 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 
substantially by FICC. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The purpose of this filing is to restructure FICC's Government 
Securities Division's (``GSD'') membership standards and membership 
requirements by conforming them to current practice and to harmonize 
them with similar rules of FICC's clearing agency affiliate, the 
National Securities Clearing Corporation (``NSCC''). In addition, this 
rule filing would update various definitions and make technical changes 
to GSD and to FICC's Mortgage-Backed Securities Divison's (``MBSD'') 
Electronic Pool Notification (``EPN'') rules.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FICC 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. FICC 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. Membership Rules
    FICC proposes to revise its rules concerning membership types, the 
membership application process, and the ongoing requirements of GSD 
members into a format that FICC believes will make such rules easier to 
locate and understand by applicants and members. To accomplish this, 
FICC would amend current Rule 2 (proposed to be titled ``Members''), 
move much of the content of current Rule 2 into a new Rule 2A 
(``Initial Membership Requirements''), and revise Rule 3 (proposed to 
be titled ``Ongoing Membership Requirements''). Other rules and 
provisions would be modified to make technical corrections where 
necessary and to be harmonized with analogous NSCC rules.
    a. Membership Types: FICC's current Rule 2 (``Comparison-Only and 
Netting Members'') sets forth the types of GSD members, eligibility 
requirements, application procedures, and member reporting 
requirements. FICC proposes to revise Rule 2 to establish each GSD 
membership type: Comparison-Only Members, Netting Members, Sponsoring 
Members, Sponsored Members, and Funds-Only Settling Bank Members. 
Substantially all other provisions contained in the current Rule 2 will 
be moved to either proposed Rule 2A or proposed Rule 3.
    One exception to this is that FICC is proposing to delete current 
Rule 2, Section 4 (``Financial Reports by Netting Applicants). FICC 
states that the rationale for such proposed deletion is that FICC 
already advises during the application process applicants of the 
required financial reports depending on the category of membership 
applied for and the applicant entity type. In addition, FICC would set 
forth in proposed Rule 3 the financial reports that must be submitted 
by members to FICC on an ongoing basis.
    FICC is also proposing to delete Section 1(f) of Rule 2, which 
provides that applicants that have been approved for membership must 
execute and deliver to FICC a membership agreement. This provision is 
redundant with existing Rule 2, Section 3, which would appear in 
proposed Rule 2A, Section 7.
    b. Consolidation of Membership Standards and Requirements: The 
membership qualifications, financial standards, and operational 
requirements for each member type are currently set forth in Rule 2 
(``Comparison-Only and Netting Members''), Rule 3 (``Financial 
Responsibility, Operational Capability and Other Membership Standards 
of Comparison-Only and Netting Members''), and Rule 4 (``Clearing Fund, 
Watch List and Loss Allocation''). To consolidate this information, 
FICC proposes to create a new Rule 2A (``Initial Membership 
Requirements'') that would establish the initial membership eligibility 
requirements for all member types and would set forth the process of 
membership application and evaluation. In addition, FICC proposes to 
restructure Rule 3 (``Ongoing Membership Requirements'') to contain all 
current GSD rule provisions regarding the continuing requirements of 
members.
    The restructuring would encompass three substantive changes:
    (i) Immediate Placement on the Watch List: FICC proposes to delete 
current Rule 3, Section 1(d)(iii) that automatically disqualifies an 
applicant from becoming member if the applicant is subject to any 
action or condition, the existence of which would require the applicant 
to be placed on FICC's Watch List if it were already a member. FICC 
believes that eliminating such provision will not diminish FICC's 
ability to deny membership to an unworthy applicant because FICC would 
still retain under other sections of its rules the discretion to deny 
membership based on the applicant's underlying financial, operational, 
or character issues. Moreover, FICC's credit risk matrix enables FICC 
to place such applicant directly on FICC's watch list for closer 
monitoring.
    (ii) Additional Reporting Requirements: FICC proposes to add new 
language to proposed Rule 3, Section 2 (``Reports by Netting

[[Page 14840]]

Members'') that would require members to provide FICC with: (a) Reports 
from their independent auditors on internal controls (proposed Rule 3, 
Section 2(b)(ii)) and (b) a copy of the letter granting an extension of 
time by a regulatory authority to a member with respect to the 
submission of a report (proposed Rule 3, Section 2(h), para. 2).
    (iii) Annual Audited Financial Statements: FICC proposes to remove 
the current requirement in Rule 2, Section 4(a) that audited annual 
financial statements submitted by netting members be ``without 
qualification.'' FICC believes that a qualification in an annual 
audited financial statement should not warrant automatic denial of 
membership because a qualification may not always be material. In 
addition, the event that triggered a qualification may have been 
corrected by the applicant or member by the time the applicant or 
member submits its financial statement for review by FICC. Going 
forward, FICC would analyze qualifications in GSD netting member 
financial statements on a case-by-case basis.
    Other conforming and non-substantive changes have been made within 
the rules to accommodate this restructuring and to update cross 
references where applicable.
2. Non-Substantive Changes and Technical Corrections
    (i) Definition of ``Person'': FICC proposes to amend the current 
definition of Person contained in GSD Rule 1 (``Definitions'') to 
indicate that the term will be used throughout the rules to mean a 
partnership, corporation, limited liability corporation, or other 
organization, entity, or individual.
    (ii) Definition of ``Eligible Security'': FICC proposes to amend 
the definition of Eligible Security to make clear that any security of 
an issuer that is on the Office of Foreign Assets and Control's 
(``OFAC'') Specially Designated Nationals list or a security from a 
country that is subject to OFAC sanctions may not be an eligible 
security at GSD.
    In addition, FICC is proposing to make the same change to the 
definition of Eligible Security in MBSD's Clearing and EPN rules.
    (iii) Definition of ``Bond Market Association'': The Bond Market 
Association is now known as the Securities Industry and Financial 
Markets Association. GSD proposes to remove the definition of and 
references to The Bond Market Association from its rules and replace it 
with a definition for and references to The Securities Industry and 
Financial Markets Association.
    (iv) Governing Law Provision: FICC is proposing to clarify the 
Governing Law provision contained in GSD's and MBSD's Clearing and EPN 
rules to state that the respective rules of GSD and MBSD Clearing and 
EPN are subject to New York law as applicable to contracts executed and 
performed in New York.
    (v) Insurance Company Netting Member Eligibility Requirements: FICC 
proposes to remove from GSD's rules the eligibility requirements for 
Insurance Company Netting Members because GSD does not currently have 
any such members. FICC will, however, retain the definition of 
Insurance Company Netting Member in its rules in the event that such an 
entity applies for membership in the future. Appropriate eligibility 
requirements would be reviewed at that time and added to the rules.
    FICC believes that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations promulgated 
thereunder applicable to FICC. FICC states that its rules are intended 
to protect FICC and its members from undue risk while providing access 
to FICC services and that the proposed rule change will assist FICC and 
its members in interpreting and understanding the rules with regard to 
applicant and ongoing membership standards and requirements. In 
addition, FICC believes that conforming the rules to actual practice 
will assist FICC in assuring the safeguarding of funds and securities 
in FICC's control or for which FICC is responsible.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FICC does not believe that the proposed rule change will have any 
impact or impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    FICC has not solicited or received written comments relating to the 
proposed rule change. FICC will notify the Commission of any written 
comments it receives.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the self-regulatory organization consents, 
the Commission will:
    (A) By order approve such proposed rule change or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is 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 rule-comments@sec.gov. Please include 

File No. SR-FICC-2006-19 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 No. SR-FICC-2006-19. 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, 
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 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, 100 F Street, NE., 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at FICC's principal office and on FICC's Web 
site at http://ficc.com/gov/gov.docs.jsp?NS-query=#rf. 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

[[Page 14841]]

submission should refer to File No. SR-FICC-2006-19 and should be 
submitted on or before April 19, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\2\
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    \2\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-5752 Filed 3-28-07; 8:45 am]

BILLING CODE 8010-01-P