Document ID: SEC-2005-0152-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Fixed Income Clearing Corp.
Posted Date: 2005-10-26T04:00Z

[Federal Register: October 26, 2005 (Volume 70, Number 206)]
[Notices]               
[Page 61859-61861]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26oc05-138]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52631; File No. SR-FICC-2005-14]

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

October 18, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 9, 2005, 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 
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 Government 
Securities Division (``GSD'') to have funds-only settlement obligation 
payment processing occur through the Federal Reserve's National 
Settlement System (``NSS'').

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.\2\
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    \2\ 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

    The purpose of the proposed rule change is to amend the rules of 
GSD to require netting members to satisfy their funds-only settlement 
amounts ultimately through the Federal Reserve's NSS.\3\ GSD's funds-
only settlement process is set forth in GSD Rule 13. On a daily basis, 
FICC reports a funds-only settlement amount, which is either a debit 
amount or a credit amount, to each netting member. Each netting member 
that has a debit is required to satisfy its obligation by the 
applicable deadline. Netting members with credits are subsequently paid 
by FICC by the applicable deadline. All payments of funds-only 
settlement amounts by a netting member to FICC and all collections of 
funds-only settlement amounts by a netting member from FICC are done 
through depository institutions that are designated by such netting 
member and FICC to act on their behalves 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\ This is consistent with the manner in which FICC's 
affiliates, The Depository Trust Company (``DTC'') and the National 
Securities Clearing Corporation (``NSCC''), handle their funds 
settlement process. DTC and NSCC do not currently use NSS for the 
processing of funds credits, whereas FICC is proposing to have the 
GSD process both the debits and credits of its funds-only settlement 
process through NSS.
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    In 1997, the Commission approved an enhancement to GSCC's \4\ 
funds-only settlement payment processing (``1997 Filing'').\5\ This 
enhancement gave members the option to participate in an auto-debit 
arrangement that was to eliminate the need to send fund wires for the 
satisfaction of funds-only settlement payments. Under the auto-deposit 
arrangement, GSCC, the netting member, and the netting member's 
depository institution would enter into a ``funds-only settlement 
procedures agreement'' whereby the depository institution would pay or 
collect funds-only settlement amounts on behalf of the netting member 
and GSCC through accounts of the member at the depository institution. 
As a result, the

[[Page 61860]]

need for fund wire payments would be eliminated.\6\
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    \4\ The Government Securities Clearing Corporation (``GSCC'') 
was the predecessor to GSD. GSCC became the GSD division of FICC 
when GSCC and the Mortgage Backed Securities Clearing Corporation 
were merged to create FICC in 2002.
    \5\ Securities Exchange Act Release No. 39309 (November 7, 
1997), 62 FR 61158 (November 14, 1997) [File No. SR-GSCC-97-06].
    \6\ This was a voluntary arrangement that was never implemented 
because until recently GSCC and then GSD continued to make manual 
adjustments to the final funds-only settlement amounts of netting 
members. These manual adjustments have recently largely been 
eliminated.
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    The proposed rule change will replace the auto-debit process of the 
1997 Filing and will provide even further enhancements to the current 
approach to payment processing than was envisioned by the 1997 Filing. 
Under the proposed rule change, the required payment mechanism for the 
satisfaction of funds-only settlement amounts will be the NSS. FICC 
will appoint The Depository Trust Company (``DTC'') as its settlement 
agent for purposes of interfacing with the NSS.\7\
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    \7\ DTC currently performs this service for NSCC.
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    In order to satisfy their funds-only settlement obligations through 
the NSS process, netting members must appoint banks or trust companies 
to act as their ``funds-only settling banks.'' A netting member that 
qualifies may act as its own funds-only settling bank.
    The GSD will establish a limited membership category for the funds-
only settling banks. Banks or trust companies that are DTC settling 
banks, as defined in DTC's rules and procedures, or that are GSD 
netting members with direct access to the Federal Reserve and the NSS 
will be eligible to become GSD funds-only settling bank members by 
executing the requisite membership agreement for this purpose. Other 
banks or trust companies that desire to become funds-only settling bank 
members must apply to FICC. They must also have direct access to a 
Federal Reserve Bank and the NSS as well as satisfy the financial 
responsibility standards imposed by FICC from time to time. Initially, 
these applicants must meet and maintain a Tier 1 capital ratio of 6 
percent.\8\
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    \8\ This is the same financial requirement for NSCC settling 
bank-only members. Under FICC's proposal, FICC would retain the 
discretion to change this financial criterion by providing advanced 
notice to the fund-only settling banks and the netting members 
through important notice.
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    In addition to the membership agreement, the funds-only settling 
bank and the netting member must execute an agreement whereby the 
member will appoint the bank to act on its behalf for funds-only 
settlement purposes. The bank must also execute any agreements required 
by the Federal Reserve Bank for participation in the NSS for FICC's 
funds-only settlement process.
    The funds-only settling banks will be required to follow the 
procedures for funds-only settlement payment processing set forth in 
FICC's proposed new rules. This will include, for example, providing 
FICC or its settlement agent with the requisite acknowledgement of the 
bank's intention to settle the funds-only settlement amounts of the 
netting members it represents on a timely basis and participating in 
the NSS process. Funds-only settling banks will have the right to 
refuse to settle for a particular netting member and will also be able 
to opt out of NSS for one business day if they are experiencing 
extenuating circumstances.\9\ Under FICC's proposal, the netting member 
shall be responsible for ensuring that its funds-only debit is wired to 
the depository institution designated by FICC for this purpose by the 
payment deadline. The proposed rule change makes clear that the 
obligation of a netting member to fulfill its funds-only settlement 
amount remains at all times with the netting member.
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    \9\ These procedures are consistent with the 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 funds-only 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 funds-only settlement amounts, and FICC 
believes that it will therefore reduce the risk that the netting member 
that designated the bank may incur a late payment fine due to delay in 
wiring funds. The proposal will also reduce operational burden for the 
operations staff of FICC.
    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 netting 
members for whom the funds-only settling bank to which the indemnity 
claim relates was acting. This allocation will be done in proportion to 
the amount of such members' funds-only settlement amounts 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, 
the remaining loss shall be treated as an ``Other Loss'' as defined by 
the GSD's Rule 4 and allocated accordingly.
    The proposed rule change will not change the current GSD deadlines 
regarding the payment and receipt of funds-only settlement amounts, 
which are set forth in the GSD's rules.
    FICC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act, and the rules and regulations 
thereunder because it will enhance the current operation of the GSD's 
funds-only settlement payment process by promoting the timely 
processing of funds payments and credits. As such, the proposed rule 
change should 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 been 
solicited or received.

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 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-2005-14 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary,

[[Page 61861]]

Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-9303.
    All submissions should refer to File Number SR-FICC-2005-14. 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-2005-14 and should be submitted on 
or before November 16, 2005.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-5943 Filed 10-25-05; 8:45 am]

BILLING CODE 8010-01-P