Document ID: SEC-2006-1622-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Fixed Income Clearing Corp.
Posted Date: 2006-12-14T05:00Z

[Federal Register: December 14, 2006 (Volume 71, Number 240)]
[Notices]               
[Page 75283-75284]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14de06-112]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54879; File No. SR-FICC-2006-12]

 
Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving a Proposed Rule Change Relating to Financial 
Responsibility, Operational Capability, Insolvency, and Ceasing To Act

December 6, 2006.
    On June 15, 2006 the Fixed Income Clearing Corporation (``FICC'') 
filed a proposed rule change with the Securities and Exchange 
Commission (``Commission'') pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and on September 22, 
2006, amended the proposed rule change. Notice of the proposal was 
published in the Federal Register on October 4, 2006.\2\ No comment 
letters were received. For the reasons discussed below, the Commission 
is approving the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 54570 (Oct. 4, 2006), 71 
FR 60591.
---------------------------------------------------------------------------

I. Description

    The rule change will amend FICC's Government Securities Division's 
(``GSD'') and Mortgage Backed Securities Division's (``MBSD'') rules 
relating to members' or applicants' financial responsibility, 
operational capability, and insolvency and to FICC ceasing to act for 
members.

A. Cease To Act and Insolvency Rules

    FICC will amend GSD's rules governing when FICC will cease to act 
for a member in a noninsolvency situation, GSD Rule 21, and in an 
insolvency situation, GSD Rule 22. Such changes will conform GSD's 
rules to the rules of FICC's clearing agency affiliate, the National 
Securities Clearing Corporation (``NSCC'').
    GSD Rule 21, which addressed noninsolvency situations, will be 
renamed ``Restriction on Access to Services'' and will be similar to 
NSCC Rule 46. While revised Rule 21 is triggered by essentially the 
same criteria that are contained in the old GSD rule,\3\ the revised 
rule expands the remedies that FICC could exercise beyond only 
``ceasing to act'' or ``ceasing to accept data'' on behalf of the 
member. Specifically, FICC, after notifying and providing an 
opportunity to request a hearing to the member, will be able to 
suspend, prohibit, or limit a member's access to one or more of FICC's 
services.
---------------------------------------------------------------------------

    \3\ Such triggers include the member failing to perform its 
obligations to FICC and FICC's determination that the member is in 
or is approaching financial difficulty.
---------------------------------------------------------------------------

    GSD Rule 22, which addresses insolvency situations, remains 
essentially in its old form except that its close-out provisions are 
amended and are being moved to new Rule 22A.
    New Rule 22A sets forth the procedures that FICC will follow when 
it ceases to act for a member pursuant to either Rule 21 or Rule 22. 
Under new Rule 22A, FICC will initiate the close-out process with 
respect to a member for which it has ceased to act for any reason 
permitted by its rules.\4\ In addition, the term Cut-Off Time for 
noninsolvency situations will be added to Rule 22A.\5\ Although this 
term is similar to the Time of Insolvency term used in old Rule 22, a 
key difference between the terms is that members will be notified in 
advance of the Cut-Off Time.
---------------------------------------------------------------------------

    \4\ Currently, the close-out process applies only when FICC 
deems a member insolvent.
    \5\ As used in Rule 22A, the term Cut Off Time means the time 
that is specified in advance by FICC in a notice to members to be 
the time when FICC is deemed to have ceased to act for a member.
---------------------------------------------------------------------------

    The rule change also makes technical changes to conform existing 
references to Rules 21 and 22 throughout GSD's rules to these 
revisions.\6\
---------------------------------------------------------------------------

    \6\ Technical, conforming changes are being made to Rules 1, 3A, 
4, 6A, 14 and new Rule 22A.
---------------------------------------------------------------------------

B. General Continuance Standards

    FICC will add new language to Section 5 of GSD Rule 3 and a new 
Section 18, Article III, Rule 1 to MBSD's rules, which will be similar 
to NSCC Rule 15, that enables FICC when it deems necessary or advisable 
to assure itself of a member's or an applicant's financial 
responsibility and operational capability. To assure itself, FICC may, 
but is not limited to: restrict or modify the member's use of any or 
all of FICC's services; require additional reporting by the member of 
its financial or operational condition; increase the member's clearing 
fund collateral; alter the proportions of cash, eligible netting

[[Page 75284]]

securities, and letters of credit contributing to the member's required 
clearing fund deposits; and prohibit the member from withdrawing excess 
clearing fund deposits.\7\
---------------------------------------------------------------------------

    \7\ These proposed actions are similar to those that FICC has 
proposed to undertake with respect to a member undergoing a wind-
down in a rule filing pending with the Commission. SR-FICC-2006-05.
---------------------------------------------------------------------------

    Because the proposed rule change gives FICC the general authority 
to require additional clearing fund collateral when FICC is seeking 
additional assurances from a member or applicant, the provisions in 
GSD's Rule 4 that require the posting of additional collateral for 
specific circumstances are being deleted.

C. Technical Amendments

    FICC will make several technical amendments to GSD's and MBSD's 
rules. The terms ``Board'' and ``Board of Directors'' will be redefined 
to include a committee of FICC's Board of Directors that is acting 
under delegated authority of the Board. Accordingly, references to 
specific board committees throughout both divisions' rules will be 
replaced simply by the term ``Board,'' which will include any such 
board committees.

II. Discussion

    Section 17A(b)(3)(F) of the Act \8\ requires that the rules of a 
clearing agency assure the safeguarding of securities and funds that 
are in the custody or control of the clearing agency or for which it is 
responsible. The Commission finds that the proposed rule change is 
consistent with this obligation because it should enhance FICC's 
ability to identify members that present greater financial and 
operational risk and expands the remedies available to FICC to protect 
itself when dealing with such members. As a result, the proposed rule 
change should improve FICC's capacity to safeguard securities and funds 
in its custody or control or for which it is responsible.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

III. 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 \9\ and the 
rules and regulations thereunder.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-FICC-2006-12) be, and hereby 
is, approved.\10\
---------------------------------------------------------------------------

    \10\ 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).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E6-21234 Filed 12-13-06; 8:45 am]

BILLING CODE 8011-01-P