Document ID: SEC-2006-1569-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Fixed Income Clearing Corp.
Posted Date: 2006-12-06T05:00Z

[Federal Register: December 6, 2006 (Volume 71, Number 234)]
[Notices]               
[Page 70816-70817]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06de06-111]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54821; File No. SR-FICC-2006-13]

 
Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Relating to the 
Federal Reserve's National Settlement System

November 28, 2006.

I. Introduction

    On July 11, 2006, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') and 
on August 6, 2006 amended proposed rule change SR-FICC-2006-13 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 26, 2006.\2\ No comment letters were received. For 
the reasons discussed below, the Commission is 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. 54622, (October 18, 
2006), 71 FR 62632.
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II. Description

    The proposed rule change amends the rules of FICC's Mortgage-Backed 
Securities Division (``MBSD'') to require clearing participants to 
satisfy their cash settlement amounts ultimately through the Federal 
Reserve's National Settlement Service (``NSS'').\3\ The MBSD cash 
settlement process is set forth in Rule 8 of Article II of the MBSD's 
rules. On a daily basis, FICC computes a cash balance, which is either 
a debit amount or a credit amount, per participant account and nets the 
cash balances across aggregated accounts. Unlike at GSD where cash 
settlement occurs on a daily basis, at MBSD there are specific dates on 
which debits and credits are required to be made. Settlement dates at 
MBSD are based upon the settlement dates of the different classes of 
MBSD-eligible securities. There is a time deadline for the payment of 
debits to FICC as announced by the MBSD from time to time. All payments 
of cash settlement amounts by a MBSD clearing participant to FICC and 
all collections of cash settlement amounts by a MBSD clearing 
participant from FICC are done through depository institutions that are 
designated by MBSD participants and by FICC to act on their behalf with 
regard to such payments and collections. All payments are made by fund 
wires from one depository institution to the other.
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    \3\ For a description of NSS, refer to http://www.frbservices.org/Wholesale/natsettle.html
.

    The Commission previously approved a proposed rule change filed 
by FICC to make a similar amendment to the rules of its Government 
Securities Division (``GSD''). Securities Exchange Act Release No. 
52853 (November 29, 2005), 70 FR 72682 (December 6, 2005) [File No. 
SR-FICC-2005-14]. FICC's affiliates, The Depository Trust Company 
(``DTC'') and the National Securities Clearing Corporation 
(``NSCC'') also use NSS in their funds settlement processes. 
However, DTC and NSCC do not currently use NSS for the payment of 
credit. MBSD will process both the debits and credits of its cash 
settlement process through the NSS, as is the case for the GSD.
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    Under the proposed rule change, the required payment mechanism for 
the satisfaction of cash settlement amounts will be the NSS. FICC will 
appoint DTC as its settlement agent for purposes of interfacing with 
the NSS.\4\ In order to satisfy its cash settlement obligations through 
the NSS process, each MBSD clearing participant will appoint a ``cash 
settling bank.'' An MBSD clearing participant that qualifies may act as 
its own cash settling bank.
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    \4\ DTC currently performs this service for the GSD and NSCC.
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    The MBSD will establish a limited membership category for cash 
settling banks. Banks or trust companies that are DTC settling banks 
(as defined in DTC's rules and procedures), GSD funds-only settling 
bank members (as defined in the GSD's rules), or clearing participants 
with direct access to a Federal Reserve Bank and NSS will be eligible 
to become MBSD cash settling bank participants by executing the 
requisite membership agreements for this purpose. Banks or trust 
companies that do not fall into these categories and that desire to 
become MBSD cash settling bank participants will need to apply to FICC. 
Such banks or trust companies will also need to have direct access to a 
Federal Reserve Bank and the NSS as well as satisfy the financial 
responsibility standards and operational capability imposed by FICC 
from time to time. Initially, these applicants will be required to meet 
and to maintain a Tier 1 capital ratio of 6 percent.\5\
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    \5\ This is the same financial requirement for GSD funds-only 
settling banks that fall into a similar category. As with the GSD, 
FICC would retain the authority and discretion to change this 
financial criterion by providing advanced notice to the settling 
banks and the netting members through an important notice.
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    In addition to the membership agreement, each MBSD clearing 
participant and the cash settling bank it has selected will be required 
to execute an agreement whereby the participant will appoint the bank 
to act on its behalf for cash settlement purposes. The bank will also 
be required to execute any agreements that may be required by the 
Federal Reserve Bank for participation in the NSS for FICC's cash 
settlement process. The cash settling banks will be required to follow 
the procedures for cash settlement payment processing set forth in the 
proposed rule change. This includes, for example, providing FICC or its 
settlement agent with the requisite acknowledgement of the bank's 
intention to settle the cash settlement amounts of the MBSD clearing 
participants it represents on a timely basis and to participate in the 
NSS process. Cash settling banks will have the right to refuse to 
settle for a particular MBSD clearing participant and will also be able 
to opt out of NSS for one business day if they are experiencing 
extenuating circumstances.\6\ In such a situation, the clearing 
participant would be responsible for ensuring that its cash settlement 
debit was wired to the depository institution designated by FICC to 
receive such payments by the payment deadline. The proposed rule change 
makes clear that the obligation of a MBSD clearing participant to 
fulfill its cash settlement would remain at all times with the MBSD 
clearing participant.
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    \6\ These procedures are consistent with the GSD, NSCC, and DTC 
procedures in this respect.
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    As FICC's settlement agent, DTC will submit instructions to have 
the Federal Reserve Bank accounts of the cash settlement banks charged 
for the debit amounts and credited for the credit amounts. Utilization 
of NSS will eliminate the need for the initiation of wire transfers in 
satisfaction of MBSD settlement amounts, and FICC believes that it will 
therefore reduce the risk that the MBSD clearing participant that 
designated the bank would incur a late payment fine due to delay in 
wiring funds. The proposed rule change should also reduce operational 
burden for the operations staff of FICC and of the MBSD clearing 
participants.

[[Page 70817]]

    The NSS is governed by the Federal Reserve's Operating Circular No. 
12 (``Circular''). Under the Circular, DTC, as FICC's settlement agent, 
has certain responsibilities with respect to an indemnity claim made by 
a relevant Federal Reserve Bank as a result of the NSS process. FICC 
will apportion the entirety of any such liability to the MBSD clearing 
participant or clearing participants for whom the cash settling bank to 
which the indemnity claim relates is acting. This allocation will be 
done in proportion to the amount of each MBSD clearing participant's 
cash settlement amount on the business day in question. If for any 
reason such allocation is not sufficient to fully satisfy the Federal 
Reserve Bank's indemnity claim, then the remaining loss will be 
allocated among all MBSD clearing participants in proportion to their 
relative usage of the facilities of the MBSD based on fees for services 
during the period in which loss is incurred.
    The proposed rule change also amends the GSD's rules regarding the 
use of the NSS. An additional category for eligible funds-only settling 
banks is added to include MBSD cash settling banks. This means that an 
MBSD cash settling bank would be able to become a GSD funds-only 
settling bank by signing the requisite agreements.

III. Discussion

    The Commission previously approved a proposed rule change to FICC's 
GSD's rules to require funds-only settlement at GSD to be made through 
the NSS.\7\ In the order granting approval of the GSD proposal, the 
Commission found that the rule change was designed to promote the 
prompt and accurate clearance and settlement of securities transactions 
and to assure the safeguarding of securities in FICC's possession or 
control or for which FICC is responsible under Section 17A(b)(3)(F) of 
the Act because the rule was designed to improve the efficiency of 
GSD's funds-only settlement process without affecting the 
responsibility of GSD's members to make their funds-only settlement 
payments on time.
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    \7\ Securities Exchange Act Release No. 52853 (November 29, 
2005), 70 FR 72682 (December 6, 2005) [File No. SR-FICC-2005-14].
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    The proposed rule change to Article II, Rule 8 of FICC's MBSD's 
Rules is essentially the same as the previously approved proposed rule 
change to GSD Rule 13. The new provisions to MBSD Rule 8 regarding the 
NSS, the new limited membership category for ``cash settling banks,'' 
and the procedures for processing payments through NSS are virtually 
identical to the provisions that are currently in GSD Rule 13. 
Accordingly, for the same reason we approved GSD Rule 13 we are 
approving MBSD Rule 8. Namely, that the NSS offered by the Federal 
Reserve System is a reliable and proven service that should promote the 
efficiency of cash settlement at MBSD and that the changes to MBSD Rule 
8 with respect to membership financial requirements, transaction 
processing, and loss allocation are designed to prevent any risk of 
loss to MBSD or to its members. As a result, we find that the proposed 
rule change is designed to promote the prompt and accurate clearance 
and settlement of securities transactions under Section 17A(b)(3)(F) of 
the Act and should not affect FICC's obligation under Section 
17A(b)(3)(F) to assure the safeguarding of securities and funds in its 
possession or under its control or for which it is responsible.\8\
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    \8\ 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, 
that the proposed rule change (File No. SR-FICC-2006-13) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-20626 Filed 12-5-06; 8:45 am]

BILLING CODE 8011-01-P