Document ID: SEC-2012-1917-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2012-11-21T05:00Z

[Federal Register Volume 77, Number 225 (Wednesday, November 21, 2012)]
[Notices]
[Pages 69913-69915]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-28263]

[[Page 69913]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68245; File No. SR-FICC-2012-07]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to Enhancements That 
the Mortgage-Backed Securities Division Intends To Implement to Its 
Services and Certain Other Clarifications and Corrections to Its Rules

November 15, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on November 6, 2012, the Fixed Income Clearing Corporation (``FICC'' or 
the ``Corporation'') 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 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).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of Terms of Substance of 
the Proposed Rule Change

    The proposed rule changes to the Rules of the Mortgage-Backed 
Securities Division (``MBSD'') of FICC relate to enhancements that MBSD 
intends to implement to its services and certain other clarifications 
and corrections to its Rules. As noted below, some of the proposed 
changes do not require revisions to the MBSD Rules.

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 the text of the summaries 
prepared by FICC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The proposed rule changes relate to certain enhancements that MBSD 
intends to implement to its services. In addition, FICC proposes to 
make certain corrections and clarifications to the MBSD Rules. The 
proposed changes are described below.
1. Expansion of Pool Netting To Include Pool Instructs From the 
Previous Settlement Months
    MBSD proposes to further extend pool netting benefits to its 
members by capturing Pool Instructs \4\ submitted for allocations made 
after the traded pool's settlement month has passed. The proposed 
changes allow more activity into the pool net which results in fewer 
settlements.
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    \4\ A Pool Instruct is an input used by a member to submit pool 
details directly into the Real-Time Trade Matching [supreg] 
(``RTTM[supreg]'') system for bilateral matching and assignment to a 
corresponding open TBA position as a prerequisite to the pool 
netting process.
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    Currently, MBSD's pool netting process only nets Pool Instructs for 
the current delivery date if their corresponding contractual settlement 
dates (``CSD'') are also in the current month.\5\ For example, with 
respect to a delivery date of August 14, 2012, MBSD's pool netting 
process would only net Pool Instructs having a CSD ranging from August 
1, 2012 through August 14, 2012 and having a delivery date of August 
14, 2012. As such, only Pool Instructs having a CSD in the current 
month will be included in pool netting.
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    \5\ See MBSD Rule 8 Section 3.
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    The proposed new process will net Pool Instructs from previous 
settlement months that are submitted for delivery dates in the current 
month. For example, if we assume that today is August 13, 2012, and a 
member submits multiple Pool Instructs all having a CSD equal to July 
12, 2012 and a delivery date equal to August 14, 2012, on the evening 
of August 13th, these Pool Instructs would be netted against each other 
to arrive at a single pool net settlement position for the July 12, 
2012 CSD and August 14th delivery date.
    The proposed changes do not require revisions to the text of the 
MBSD Rules.
2. Notification of Settlement for Specified Pool Trades
    A Notification of Settlement (``NOS'') is an instruction submitted 
to the Corporation by a purchasing or selling clearing member which 
reflects the settlement of a Settlement Balance Order Trade, Trade-for-
Trade Transaction or Specified Pool Trade (``SPT'').\6\ MBSD is 
proposing to change the manner in which NOS processing occurs for SPTs 
so that it follows similar processing rules as those applied to NOS for 
Settlement Balance Order Trades and Trade-for-Trade Transactions.
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    \6\ See MBSD Rule 1, Definitions.
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    Currently, MBSD Rule 10 Section 2 states that the trade details for 
a NOS submitted by both parties of a SPT must fully match in order for 
the clearance of the SPTs to be reflected on the member's Purchase and 
Sale Report \7\ or both parties must submit a cancellation of the 
transaction in order for the transaction to be deleted from each 
party's respective Open Commitment Report.\8\
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    \7\ ``Purchase and Sale Report'' is defined as the report 
furnished by the Corporation reflecting a member's Compared Trades 
in Eligible Securities.'' See MBSD Rule 1, Definitions.
    \8\ ``Open Commitment Report'' is defined as the report 
furnished by the Corporation to members reflecting such member's 
open commitments in the Clearing System. See MBSD Rule 1, 
Definitions.
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    MBSD proposes to enhance the NOS for SPTs by no longer requiring 
the current face value submitted on each member's NOS to exactly match 
the current face value of the SPT. Instead, members will have the 
ability to submit and match multiple NOS to reduce the SPT current face 
until it is fully settled. For example, if a SPT has a current face 
value of $125MM and the pool number of the trade has a factor of 0.975, 
FICC will accept either (a) one piece of NOS for $125,000,000 or (b) 
three pieces of NOS for $48,750,000, $48,750,000 and $27,500,000. The 
current face values equal an original face settlement value of 
$50,000,000, $50,000,000 and $28,205,128.
    In addition to the above, MBSD will apply a tolerance of  $1 when matching buy and sell NOS for SPT trades to account for 
differences in rounding conventions used by members to convert original 
face to current face on their NOS.
    The proposed changes will make NOS for SPTs similar to NOS for 
Settlement Balance Order Trades and Trade-for-Trade Transactions 
whereby matching is permitted within a tolerance and multiple NOS may 
be submitted and matched separately until the trade is fully settled.
    The proposed changes require revisions to the text of the MBSD 
Rules.
3. Comparison of Dummy Pool Number to Valid Pool Number
    FICC supports the submission of a defined generic or ``dummy'' pool

[[Page 69914]]

number on NOS instead of a valid pool number. A dummy pool is a 
standard convention used by members when the actual pool number is not 
readily available to some members. Currently, the pool number is a 
matching criterion on NOS. Consequently, if one member submits a dummy 
pool number and the other enters a valid pool number the NOS will not 
compare even though all of the other matching criteria are the same. In 
an effort to address this, FICC is proposing to change its processing 
in order to allow matching of NOS when all mandatory terms compare and 
one member submits a dummy pool number and the other member submits a 
valid pool.
    The proposed changes do not require revisions to the text of the 
MBSD Rules.
4. Automatically Marking Certain Open TBA Trades as Fully Settled
    Mortgage-backed securities trades settle with an industry-accepted 
variance of 0.01% (i.e., $100 per $1MM). When FICC applies NOS to open 
trades, it does so using the upper limit of the variance to ensure that 
trades are not marked as fully settled until all NOS have been received 
and processed by FICC. However, because trades may settle using any 
value within the variance, FICC's processing may leave residual trade 
amounts open on its books for trades that have actually been fully 
settled. To address this, FICC is proposing to automatically generate 
internal NOS which will mark the residual trade as fully settled. The 
FICC generated NOS will occur on the last business day of each month, 
in every instance where a member has a To-Be-Announced (``TBA'') trade 
with an open par that falls below an established threshold. The 
threshold is initially contemplated to be $1000 par, however, this may 
be modified following member feedback. All changes to the threshold 
will be provided in advance to members via Important Notice.
    The proposed changes require revisions to the text of the MBSD 
Rules.
5. Corrections and Clarification to the MBSD Rules
    The MBSD Rules define the term ``Fully Compared'' as ``* * *trade 
input submitted by a Broker matches trade input submitted by each 
Dealer on whose behalf the Broker is acting the Net Position Match 
Mode.'' \9\ The phrase ``in accordance with'' was inadvertently deleted 
from this definition when it was revised in connection with Amendment 
No. 1 to SR-FICC-2008-01.\10\ FICC proposes to restore this phrase so 
that the definition states the following: ``* * * trade input submitted 
by a Broker matches trade input submitted by each Dealer on whose 
behalf the Broker is acting in accordance with the Net Position Match 
Mode.''
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    \9\ See MBSD Rule 1, Definitions.
    \10\ Securities Exchange Act Release No. 34-66550 (March 9, 
2012); 77 FR 15155 (March 14, 2012).
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    In the second to last paragraph of MBSD Rule 2A Section 1, there is 
a sentence which states that the Corporation will determine whether the 
applicants in ``categories (g and i)'' of the referenced Section will 
be designated as tier one or tier two members. FICC proposes to correct 
the typographical error in the cross-reference so that it instead 
references ``categories (g) and (i).''
Implementation
    FICC proposes to implement the proposed changes relating to the 
MBSD enhancements during the first quarter of 2013 pending rule filing 
approval from the Securities and Exchange Commission (the 
``Commission''). The proposed changes relating to the clarifications 
and corrections of the referenced rules will be effective immediately 
upon receipt of rule filing approval.
    FICC believes that the proposed rule changes are consistent with 
Section 17A of the Act, and the rules and regulations thereunder, 
because (1) the expansion of the pool netting system extends the 
netting benefits to clearing members by capturing allocations made 
after the traded pools current settlement month, (2) the change in NOS 
processing for SPTs creates efficiency through the standardization of 
NOS processing for TBA trades, (3) automatically marking certain TBA 
trades as fully settled improves the monitoring and reporting of trade 
settlement status and (4) allowing the comparison of dummy Pool number 
to valid pool number provides for timelier matching of NOS. Each of 
these enhancements creates a more efficient netting system which 
promotes the prompt and accurate clearance and settlement for 
securities transactions. Furthermore, the clarifications and 
corrections to the MBSD Rules ensure that the Rules are accurate.

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

    FICC does not believe that the proposed rule change will 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 changes have not 
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 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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 or disapprove 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 email to rule-comments@sec.gov. Please include 
File Number SR-FICC-2012-07 on the subject line.

Paper Comments:

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FICC-2012-07. This file 
number should be included on the subject line if email 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

[[Page 69915]]

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 Web site viewing and 
printing in the Commission's Public Reference Section, 100 F Street 
NE., Washington, DC 20549-1090, on official business days between the 
hours of 10:00 a.m. and 3:00 p.m. Copies of such filing will also be 
available for inspection and copying at the principal office of FICC 
and on FICC's Web site at http://www.dtcc.com/downloads/legal/rule_filings/2012/ficc/SR_FICC_2012_07.pdf. 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-2012-07 in the caption above and 
should be submitted on or before December 12, 2012.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-28263 Filed 11-20-12; 8:45 am]
BILLING CODE 8011-01-P