Document ID: SEC-2006-1386-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Fixed Income Clearing Corp.
Posted Date: 2006-10-26T04:00Z

[Federal Register: October 26, 2006 (Volume 71, Number 207)]
[Notices]               
[Page 62632-62634]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26oc06-77]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54622; File No. SR-FICC-2006-13]

 
Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to the Federal 
Reserve's National Settlement Service

October 18, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 11, 2006, Fixed 
Income Clearing Corporation (``FICC'') filed with the Securities and 
Exchange Commission (``Commission'') and on August 4, 2006, amended, 
the proposed rule change as described in Items I, II, and III below, 
which items have been prepared primarily 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 proposed rule change would amend 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'').\2\
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    \2\ 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 
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. FICC is proposing to have the MBSD process both the debits 
and credits of its cash settlement process through the NSS, as is 
the case for the GSD.
    For a description of NSS, refer to http://www.frbservices.org/Wholesale/natsettle.html
.

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[[Page 62633]]

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.\3\
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    \3\ The Commission has modified parts of these statements.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Currently, the MBSD cash settlement process, which is contained in 
Rule 8 of Article II of the MBSD's rules, works as follows. 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 clearing participant to FICC and all 
collections of cash settlement amounts by a clearing participant from 
FICC are done through depository institutions that are designated by 
MBSD participant 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.
    Under the proposal, the required payment mechanism for the 
satisfaction of cash settlement amounts would be the NSS. FICC would 
appoint The Depository Trust Company (``DTC'') as its settlement agent 
for purposes of interfacing with the NSS.\4\
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    \4\ DTC currently performs this service for the GSD and NSCC.
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    In order to satisfy their cash settlement obligations through the 
NSS process, each MBSD clearing participant would have to appoint a 
``cash settling bank.'' An MBSD clearing participant that qualifies may 
act as its own cash settling bank.
    The MBSD would establish a limited membership category for the 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 would 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 would need to apply to 
FICC. Such banks or trust companies would 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 would 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 participant and 
the cash settling bank it has selected would be required to execute an 
agreement whereby the participant would appoint the bank to act on its 
behalf for cash settlement purposes. The bank would 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 would be required to follow the procedures 
for cash settlement payment processing set forth in the proposed rule 
changes. This would include, 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 clearing 
participant(s) it represents on a timely basis and to participate in 
the NSS process. Cash settling banks would have the right to refuse to 
settle for a particular participant and would also be able to opt out 
of NSS for one business day if they were 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 clearing participant to fulfill its cash settlement 
would remain at all times with the 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 would 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 would eliminate the need for the initiation of wire transfers in 
satisfaction of MBSD settlement amounts, and FICC believes that it 
would therefore reduce the risk that the clearing participant that 
designated the bank would incur a late payment fine due to delay in 
wiring funds. The proposal would also reduce operational burden for the 
operations staff of FICC and of the participants.
    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 
would apportion the entirety of any such liability to the clearing 
participant or clearing participants for whom the cash settling bank to 
which the indemnity claim relates is acting. This allocation would be 
done in proportion to the amount of each participants' cash settlement 
amounts on the business day in question. If for any reason such 
allocation would not be sufficient to fully satisfy the Federal Reserve 
Bank's indemnity claim, then the remaining loss would be allocated 
among all 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 would be 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.
    FICC believes that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
because the proposed rule change would enhance the current operation of 
the MBSD's cash settlement payment process by promoting the timely 
processing of funds payments and credits. As such,

[[Page 62634]]

the proposed rule change would support the prompt and accurate 
clearance and settlement of securities transactions.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    FICC does not believe that the proposed rule change would 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

    Written comments relating to the proposed rule change have not yet 
been solicited or received. FICC will notify the Commission of any 
written comments received by FICC.

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

    Within 35 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 90 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 the 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 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 Number SR-FICC-2006-13 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 Number SR-FICC-2006-13. 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 the principal office of FICC and on 
FICC's Web site at http://www.ficc.com. 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-FICC-2006-13 and should be submitted on or before 
November 16, 2006.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-17913 Filed 10-25-06; 8:45 am]

BILLING CODE 8011-01-P