Document ID: SEC-2012-1800-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2012-11-07T05:00Z

[Federal Register Volume 77, Number 216 (Wednesday, November 7, 2012)]
[Notices]
[Pages 66897-66898]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-27213]

[[Page 66897]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68133; File No. SR-FICC-2012-08]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Changes 
To Clarify a Stated Policy With Regard to Existing Provisions of the 
Loss Allocation Rules of the Government Securities Division and the 
Mortgage-Backed Securities Division

 November 1, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 19, 2012, the 
Fixed Income Clearing Corporation (``FICC'') filed with the Securities 
and Exchange Commission (``Commission'') the proposed rule changes 
described in Items I, II, and III below, which Items have been prepared 
primarily by FICC. FICC filed the proposal pursuant to Section 
19(b)(3)(A)(i) of the Act \2\ and Rule 19b-4(f)(1) \3\ thereunder so 
that the proposal was effective upon filing with the Commission. The 
Commission is publishing this notice to solicit comments on the 
proposed rule changes from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78s(b)(3)(A)(i).
    \3\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule changes serve to clarify FICC's stated policy 
with regard to existing provisions of the Rules of the Government 
Securities Division (``GSD'') and the Mortgage-Backed Securities 
Division (``MBSD'') (each, a ``Division'') concerning loss allocation. 
The proposed rule changes will similarly clarify FICC's stated policy 
regarding MBSD's Rules governing indemnification.

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 changes and 
discussed any comments it received on the proposed rule changes. 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 these statements.\4\
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    \4\ 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 will clarify FICC's stated policy with 
regard to existing provisions of GSD's and MBSD's Rules concerning loss 
allocation. The proposed rule changes will similarly clarify FICC's 
stated policy with regard to MBSD's existing indemnification rules. The 
policies described below are consistent with the responses that FICC 
has provided to firms that have raised questions about the Divisions' 
loss-allocation and indemnification provisions.
    The question has arisen as to whether a Tier One Member \5\ of a 
Division may cap its potential loss allocation liability with respect 
to losses caused by another Member of the Division. FICC wishes to make 
clear that the answer to this question is yes; a Tier One Member may, 
under the Rules of each Division, cap its liability from losses 
allocated to it by appropriately terminating its membership in the 
applicable Division and withdrawing as a Member as described below.\6\
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    \5\ The question does not arise with respect to Tier Two Members 
because Tier Two Members are not subject to loss mutualization.
    \6\ The cap applies per Division. Accordingly, a Member that 
participates in both Divisions could potentially be subject to loss 
allocation obligations in both Divisions if the defaulting Member 
that caused the loss which gave rise to the allocation was also a 
Member of both Divisions. Each Division operates within its own set 
of Rules and Members.
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    FICC's loss-allocation provisions are contained in Rule 4, Section 
7 of the respective Rules of each Division. Section 7 provides that any 
loss or liability incurred by FICC as a result of a default by a Member 
or the failure of a Member to fulfill its obligations to FICC under the 
applicable Rules of each Division is satisfied pursuant to the payments 
and allocation methods described in that Section. There are two 
potential losses that FICC may allocate to its Members: Remaining 
Losses and Other Losses. Section 7(g)(ii) provides that a Member of 
either Division may withdraw from FICC and have its liability from an 
allocation based on any Other Loss be limited to the amount of its 
Required Fund Deposit for the Business Day on which FICC notified the 
Member of such allocation. Section 7(g)(ii), however, is silent as to 
whether a Member may withdraw and cap its liability from Remaining 
Losses.
    FICC wishes to make clear its stated policy that a Member may 
withdraw from either Division and cap its liability from Remaining 
Losses with respect to that Division. FICC recognizes that it cannot 
impose unlimited liability on its Members. Many of its Members are 
depository institutions that are barred by federal law from being 
exposed to unlimited third-party liabilities.\7\ In 2005, FICC obtained 
a ruling from the Office of the Comptroller of the Currency (``OCC'') 
in which OCC observed that a substantially similar provision in an 
older version of the GSD Rules did not expose Members to unlimited 
third-party liabilities, and that Members would be permitted to 
withdraw from FICC prior to the imposition of such liabilities.\8\ 
While the GSD rules then in effect are different from the GSD and MBSD 
Rules now in effect, FICC believes that the spirit of the 2005 rules 
was substantially similar to that of the current GSD and MBSD Rules. 
FICC also recognizes that its Members, as part of their due diligence 
in evaluating their risks as clearing organization participants, need 
to be able to identify and quantify risks, such as potential loss 
allocation obligations.
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    \7\ See 12 CFR 7.1017.
    \8\ See http://www.occ.gov/static/interpretations-and-precedents/Feb05/int1014.pdf.
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    Therefore, FICC is clarifying its stated policy that, under its 
loss-allocation provisions, FICC will permit a Tier One Member of 
either Division to withdraw its membership pursuant to the procedure 
outlined in the Division's Rules, and thereby cap the Member's 
liability with respect to Remaining Losses and Other Losses at the 
amount of its Required Fund Deposit, as measured in accordance with the 
applicable Division's Rules (the cap would apply after allocation of 
the $50,000 described in Section 7(c) of GSD Rule 4 and Section 7(d) of 
MBSD Rule 4). This limitation applies with respect to a single event of 
insolvency or default.\9\ This clarification is being made to Section 7 
of GSD Rule 4 and Section 7 of MBSD Rule 4.
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    \9\ The withdrawing Member may become subject to loss allocation 
obligations that arise due to subsequent Member defaults to the 
extent that the Member continues to maintain positions on the books 
of the applicable Division. See GSD Rule 3, Section 13 and MBSD Rule 
3, Section 14.
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    An additional question has arisen as to whether the indemnification 
obligation contained in the last sentence of MBSD Rule 3, Section 15 is 
also subject to the cap on liability discussed above with respect to 
Remaining Losses and Other Losses. FICC wishes to make clear that the 
answer to this question is also yes; the assessment authority in the

[[Page 66898]]

last sentence of MBSD Rule 3, Section 15 (where the loss cannot be 
attributed to an identifiable Member or Members) is subject to the same 
cap. Thus, a Member may withdraw from MBSD per the procedure outlined 
in the Division's Rules and thereby cap its liability at the amount of 
its Required Fund Deposit on the Business Day on which FICC notified 
the Member of the assessment. This clarification is being made to MBSD 
Rule 3, Section 15.
    FICC believes the proposed rule changes are consistent with Section 
17A of the Act \10\ and the rules and regulations thereunder applicable 
to FICC because they will provide FICC Members with clarity regarding 
FICC's loss-allocation rules, which will allow Members to gauge their 
risks more accurately.
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    \10\ 15 U.S.C. 78q-1.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FICC does not believe the proposed rule changes 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 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

    The foregoing proposed rule changes have become effective pursuant 
to Section 19(b)(3)(A)(i) of the Act \11\ and Rule 19b-4(f)(1) \12\ 
thereunder because they constitute a stated policy with respect to the 
meaning, administration or enforcement of FICC's existing rules. At any 
time within 60 days of the filing of the proposed rule changes, the 
Commission summarily may temporarily suspend such rule changes if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.\13\
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    \11\ 15 U.S.C. 78s(b)(3)(A)(i).
    \12\ 17 CFR 240.19b-4(f)(1).
    \13\ 15 U.S.C. 78s(b)(3)(C).
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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 email to rule-comments@sec.gov. Please include 
File Number SR-FICC-2012-08 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-2012-08. 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 of submission. 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 Web site 
viewing and printing in the Commission's Public Reference Section, 100 
F Street NE., Washington, DC 20549, on official business days between 
the hours of 10:00 a.m. and 3:00 p.m. Copies of such filings will also 
be available for inspection and copying at FICC's principal office and 
on FICC's Web site at http://www.dtcc.com/downloads/legal/rule_filings/2012/ficc/FICC_SR_2012_08.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-2012-08 
and should be submitted on or before November 28, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-27213 Filed 11-6-12; 8:45 am]
BILLING CODE 8011-01-P