Document ID: SEC-2005-0328-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Fixed Income Clearing Corp.
Posted Date: 2005-12-06T05:00Z

[Federal Register: December 6, 2005 (Volume 70, Number 233)]
[Notices]               
[Page 72682-72684]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06de05-72]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52853; File No. SR-FICC-2005-14]

 
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 29, 2005.

I. Introduction

    On September 9, 2005, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-FICC-2005-14 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, 2005.\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. 52631, (October 18, 
2005), 70 FR 61859.
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II. Description

    The proposed rule change amends the rules of FICC's Government 
Securities Division (``GSD'') so that funds-only settlement obligation 
payment processing occurs through the Federal Reserve's National 
Settlement System (``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 netting 
members to FICC and all collections of funds-only settlement amounts by 
netting members from FICC are done through depository institutions that 
are designated by netting members and FICC to act for them 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 currently use NSS for the 
processing of funds debits and not for funds credits whereas FICC 
will use NSS both for the funds debits and funds credits of GSD's 
funds-only settlement process.
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    In 1997, the Commission approved an enhancement to GSCC's \4\ 
funds-only settlement payment processing (``1997 Filing'').\5\ That 
enhancement gave members the option to participate in an auto-debit 
arrangement. 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 need to send 
fund wires for the satisfaction of funds-only settlement 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].5
    \6\ This voluntary arrangement auto-debit 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. Recently, these manual adjustments have largely been 
eliminated.
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    The rule change replaces the auto-debit process of the 1997 Filing 
and

[[Page 72683]]

provides more enhancements to the current approach to payment 
processing than was envisioned by the 1997 Filing. Under this 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, each netting members must appoint a bank or trust 
company to act as their ``funds-only settling bank.'' A netting member 
that qualifies may act as its own funds-only settling bank.
    The GSD is establishing 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 will have to apply to FICC. In order to qualify as a funds-only 
settling bank, they will have to 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 program, FICC will retain the 
discretion to change this financial criterion by providing advanced 
notice to the fund-only settling banks and the netting members 
through Important Notices.
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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 new rules governing the NSS settlement process. These 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 
program, 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 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 members 
charged for the debit amounts and credited for the credit amounts. 
Because utilization of NSS will eliminate the need for the initiation 
of wire transfers to satisfy funds-only settlement amounts, FICC 
believes that it will reduce the risk that netting members will incur 
late payment fines due to delays 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.

III. Discussion

    Section 17A(b)(3)(F) of the Act provides that the rules of a 
clearing agency should be designed to promote the prompt and accurate 
clearance and settlement of securities transactions.\10\ Funds-only 
settlement is the payment made to or by FICC's netting members by or to 
FICC in settlement of their government securities transactions.\11\ 
Accordingly, a rule that is designed to improve the efficiency of 
funds-only settlement should also promote the prompt and accurate 
clearance and settlement of securities transactions.
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    \10\ 15 U.S.C. 78q-l(b)(3)(F).
    \11\ FICC's Rule 1 (Definitions) defines the term Funds-Only 
Settlement Amount as the net dollar amount of a netting member's 
obligation, calculated pursuant to FICC Rule 13 (Funds-Only 
Settlement), either to make a funds-only payment to FICC or to 
receive a funds-only payment from FICC.
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    The proposed rule change should improve the efficiency of the 
funds-only settlement process for both FICC and its netting members by 
establishing a more automated and more centralized payment system for 
funds-only settlement. The NSS offered by the Federal Reserve System is 
a reliable and proven service that is used by, among others, other 
clearing agencies registered with the Commission. Although the proposed 
rule change will impose new requirements on FICC's netting members to 
appoint funds-only settling bank members to act on their behalf and to 
share in any losses incurred with respect to an indemnity claim made by 
a Federal Reserve Bank, the proposed rule change should ultimately 
improve the efficiency of funds-only settlement processing for FICC's 
netting members as well as for FICC.\12\
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    \12\ FICC's netting members have received notice of the proposed 
rule change and the related requirements and have not commented on 
them to the Commission.
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    Each netting member will be required to use the NSS to make funds-
only settlement payments in accordance with the procedures set forth in 
the changes to Rule 13. However, the netting member's obligation to 
make its funds-only settlement payment to FICC on time remains 
unchanged. If the netting member's funds-only settlement agent is 
unable to or chooses not to make a payment through the NSS, the netting 
member will be required to wire the payment to FICC's depository 
institution by the payment deadline. Accordingly, because the proposed 
rule change is designed to improve the efficiency of funds-only 
settlement payments without affecting netting members' ultimate 
responsibility for their funds-only settlement payments, the Commission 
finds that the proposed rule change is also consistent with FICC's 
obligation under Section 17A(b)(3)(F) to assure the safeguarding of 
securities and funds in its possession or control or for which it is 
responsible.\13\
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    \13\ 15 U.S.C. 78q-l(b)(3)(F).

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[[Page 72684]]

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-2005-14) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\14\
Jonathan G. Katz,
Secretary.
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    \14\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E5-6888 Filed 12-5-05; 8:45 am]

BILLING CODE 8010-01-P