Document ID: SEC-2006-0526-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Fixed Income Clearing Corp. and National Securities Clearing Corp.
Posted Date: 2006-04-24T04:00Z

[Federal Register: April 24, 2006 (Volume 71, Number 78)]
[Notices]               
[Page 21060-21062]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24ap06-106]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53671; File Nos. SR-FICC-2006-03 and SR-NSCC-2006-03]

 
Self-Regulatory Organizations; Fixed Income Clearing Corporation 
and National Securities Clearing Corporation; Notice of Filing of 
Proposed Rule Changes To Institute a Clearing Fund Premium Based Upon a 
Member's Clearing Fund Requirement To Excess Regulatory Capital Ratio

April 18, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on February 22, 2006, the 
Fixed Income Clearing Corporation (``FICC'') and the National 
Securities Clearing Corporation (``NSCC'') filed with the Securities 
and Exchange Commission (``Commission'') the proposed rule changes 
described in Items I, II, and III below, which items have been 
primarily prepared by FICC and NSCC. The Commission is publishing this 
notice to solicit comments on the proposed rule changes from interested 
parties.
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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 Changes

    FICC and NSCC are seeking to institute a clearing fund premium on 
their members based on a member's clearing fund requirement to excess 
regulatory capital ratio.

[[Page 21061]]

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    In its filing with the Commission, FICC and NSCC included 
statements concerning the purpose of and basis for the proposed rule 
changes and discussed any comments they received on the proposed rule 
changes. The text of these statements may be examined at the places 
specified in Item IV below. FICC and NSCC have prepared summaries, set 
forth in sections (A), (B), and (C) below, of the most significant 
aspects of these statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by FICC and NSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

1. FICC Clearing Fund Premium
    The degree to which the collateral requirement of a clearing agency 
member compares to the member's excess regulatory capital is an 
important indicator of the potential risk that the member presents to 
the clearing agency. In 2002, the Government Securities Clearing 
Corporation (``GSCC''), the predecessor to the Government Securities 
Division (``GSD'') of FICC, received Commission approval to impose a 
collateral premium on netting members whose clearing fund requirement 
exceeds their excess regulatory capital.\3\ Specifically, the GSD 
currently imposes a 25 percent collateral premium when a member's ratio 
of clearing fund requirement to excess net capital, excess liquid 
capital, excess regulatory capital, or excess adjusted capital is 
greater than 1.0. The 25 percent premium is applied to the amount by 
which the member's clearing fund requirement exceeds the member's 
excess regulatory capital.
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    \3\ Securities Exchange Act Release No. 45647 (March 26, 2002), 
67 FR 15438 (April 1, 2002) [File No. SR-GSCC-2001-15]. ``Excess 
regulatory capital'' for purposes of GSD's collateral premium 
included excess net capital, excess liquid capital, or excess 
adjusted capital.
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    In order to more effectively manage the risk posed by a GSD member 
whose activity causes it to have a clearing fund requirement that is 
greater than its excess regulatory capital, FICC now proposes to 
strengthen the above-mentioned risk management tool by applying a 
clearing fund premium that is equal to the member's ratio of clearing 
fund requirement to excess regulatory capital in place of the current 
flat premium of 25 percent.\4\ The premium would be determined by 
multiplying: (a) The amount by which a member's clearing fund 
requirement exceeds its capital by (b) the member's ratio of clearing 
fund to excess regulatory capital expressed as a percent. This formula 
would allow the premium to increase or decrease in proportion to 
changes in the ratio and should allow for risk management that is 
measured in proportion to the risk presented. For example, if a member 
has a clearing fund requirement of $11.4 million and excess net capital 
of $10 million, its ratio is 1.14 (or 114 percent), and the applicable 
collateral premium would be 114 percent of $1.4 million (i.e., the 
amount by which the member's clearing fund requirement exceeds its 
excess net capital) or $1,596,000. If the same member had a clearing 
fund requirement of $20 million, its ratio would be 2.0 (or 200 
percent), and the applicable collateral premium would be 200 percent of 
$10 million or $20 million.
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    \4\ If FICC imposes this premium on a Netting Member, then it 
shall be considered included as part of the netting member's 
``required fund deposit'' as defined in the GSD's rules.
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    Currently, the collateral premium applies to members whose excess 
regulatory capital is measured as excess net capital, excess liquid 
capital, or excess adjusted net capital. The proposed rule change seeks 
to also include excess equity capital as regulatory excess capital so 
that the premium can be applied to bank and trust company netting 
members whose capital is measured as equity capital.
    The proposed rule change also seeks an additional change to Rule 4 
(Clearing Fund, Watch List and Loss Allocation), Section 3 (Watch List) 
to remove a provision which states that FICC may require a netting 
member to adjust its trading activity so that its excess regulatory 
capital ratio decreases to a satisfactory level. This provision was 
appropriate under the fixed 25 percent premium but no longer would be 
appropriate because the proposed rule change would impose a variable 
premium based on activity which would require members to adjust their 
trading activity or be subject to the higher premium.
 2. NSCC Clearing Fund Premium
    NSCC is proposing to impose a clearing fund premium on Rule 2 
(Members) broker/dealer and bank members whose clearing fund 
requirement exceeds their regulatory excess capital. NSCC's proposed 
excess regulatory capital premium would apply to members whose 
regulatory excess capital is measured as excess net capital or excess 
equity capital. The excess regulatory capital premium would be 
triggered when a member's ratio of clearing fund requirement to excess 
regulatory capital is greater than 1.0 and would be determined using 
the same formula as that proposed by FICC. The new premium would be 
added to NSCC's clearing fund formula in Procedure XV (Clearing Fund 
Formula and Other Matters).\5\
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    \5\ This premium would not apply to the Canadian Depository for 
Securities Limited (``CDS'') clearing fund requirement that is 
computed pursuant to Appendix 1 of NSCC's rules.
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    As a matter of practice, when a FICC or NSCC member's clearing fund 
requirement to excess regulatory capital ratio is between .50 and 1.0, 
a warning notification will be issued which will put the member on 
notice that a collateral premium will be required if the ratio reaches 
an amount greater than 1.0. When a member's ratio exceeds 1.0, it will 
be notified on that business day that a collateral premium has been 
calculated and will be collected.
    FICC and NSCC will reserve the right to: (i) Apply a lesser 
collateral premium (including no premium) based on specific 
circumstances (such as a member being subject to an unexpected haircut 
or capital charge that does not fundamentally change its risk profile) 
and (ii) return all or a portion of the premium amount if it believes 
that the member's risk profile does not require the maintenance of that 
amount.
    FICC and NSCC believe that the proposed rule changes are consistent 
with the requirements of Section 17A of the Act \6\ and the rules and 
regulations thereunder applicable to FICC and NSCC because they should 
help FICC and NSCC assure the safeguarding of securities and funds 
which are in their custody or control or for which they are responsible 
by allowing FICC and NSCC to more effectively manage risk presented by 
certain members.
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    \6\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    FICC and NSCC do not believe that the proposed rule changes would 
impose any burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Changes Received From Members, Participants or Others

    Written comments were not and are not intended to be solicited with 
respect to the proposed rule changes, and none have been received.

[[Page 21062]]

III. Date of Effectiveness of the Proposed Rule Changes 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 such proposed rule changes or
    (B) institute proceedings to determine whether the proposed rule 
changes 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 
changes are 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 Numbers SR-FICC-2006-03 and SR-NSCC-2006-03 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 Numbers SR-FICC-2006-03 and 
SR-NSCC-2006-03. These file numbers 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 
changes that are filed with the Commission, and all written 
communications relating to the proposed rule changes 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 filings also will be available for inspection and copying at the 
principal offices of FICC and NSCC and on FICC's Web site at http://www.ficc.com/gov/gov.docs.jsp?NS-query
 and on NSCC's Web site at http:/

/http://www.nscc.com/legal/ 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 Numbers 
SR-FICC-2006-03 and SR-NSCC-2006-03 and should be submitted on or 
before May 15, 2006.
    For the Commission by the Division of Market Regulation, pursuant 
to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).

Nancy M. Morris,
Secretary.
 [FR Doc. E6-6066 Filed 4-21-06; 8:45 am]

BILLING CODE 8010-01-P