[Federal Register: September 22, 2004 (Volume 69, Number 183)]
[Notices]
[Page 56810-56811]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22se04-102]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50389; File No. SR-FICC-2003-06]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Granting Approval of a Proposed Rule Change Relating to the
Assessment of Funds-Only Settlement Obligations
September 15, 2004.
I. Introduction
On July 11, 2003, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'')
proposed rule change SR-FICC-2003-06 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 February 23, 2004.\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. 49242 (February 12,
2004), 69 FR 8251.
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II. Description
The proposed rule change for the most part eliminates the complex
manual adjustments currently made by FICC's Operations Department with
regard to the forward margin debit obligations and credit entitlements
of repo broker members of the Government Securities Division (``GSD'')
of FICC.\3\ When GSD initially implemented its blind-brokered
repurchase agreement (``repo'') service, it operated a system whereby
the majority of members submitted trade data in a single batch file at
the end of each day. The batch file submission process made it
virtually impossible for repo brokers, that expect to net out of their
position as middlemen in brokered repos, to timely determine the
existence of trades on which they had positions, contact the
appropriate counterparties, and correct trade details. As a result, any
erroneous submissions on the part of a dealer counterparty resulted in
a forward margin assessment to the repo broker. Realizing that a repo
broker should always be flat from a net-settlement position
perspective, FICC granted repo brokers relief from the forward
margining process by providing a look through to the dealer
counterparties for purposes of assessing forward margin obligations.\4\
However, the look through involves a manual adjustment process that
requires complex calculations inconsistent with FICC's overall
management policy.\5\
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\3\ Forward margin is a component of a netting member's daily
funds-only settlement obligation. Forward margin is a mark-to-market
payment on forward-settling positions. It is passed through in the
form of cash from the debit side to the credit side. The amounts are
reversed on the following day with interest collected from the
credit side and paid through to the debit side.
\4\ FICC, in a prior rule filing, amended its rules to allow
management to look through brokered repo transactions in order that
repo brokers were not left with debit or credit obligations caused
by erroneous submissions on behalf of the dealers. Securities
Exchange Act Release No. 38603 (May 9, 1997), 62 FR 27088 (May 16,
1997) (File No. SR-GSCC-96-12). In accordance with FICC's risk
strategy at the time, the risk management process worked most
effectively if a repo broker was netted out of its positions as a
middleman. However, with the advent of real time trade matching and
the ready ability of brokers to rectify dealer submission errors,
GSD believes that risk management initiatives are better served by
using the parameters outlined in this filing.
\5\ On each business day, the Operations Division routinely
adjusts the overall funds-only settlement obligation of a repo
broker that has a forward margin debit or credit. If the repo broker
has an overall credit forward margin, GSD will reduce its aggregate
funds-only credit obligation or increase its aggregate funds-only
debit entitlement by an amount equal to the forward margin credit.
Conversely, if the repo broker is in an overall debit forward margin
position, GSD will reduce its aggregate funds-only debit obligation
or increase its funds-only credit entitlement by an amount equal to
the debit; however, it then will apply that amount to the uncompared
dealer (the dealer who failed to submit or submitted erroneously).
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FICC has determined that it will no longer provide a look through
to relieve repo brokers from forward margin obligations. Subsequent to
the events of September 11, 2001, FICC decided to eliminate all
operations functions that require complex manual adjustment or input as
a way to reduce risk in all operations processes. In addition, almost
all repo broker activity is now submitted to FICC on an interactive,
real-time basis that allows brokers to readily rectify any outstanding
data submission errors during the day. For these reasons, FICC is
proposing to modify the forward margin adjustment process to require
the repo brokers to satisfy their forward margin obligations including
both paying forward margin debits and receiving forward margin credits.
Going forward, FICC will apply the following parameters with
respect to the forward margin obligations of repo brokers. Debits and
credits up to a predetermined dollar amount cap will be automatically
collected or paid as applicable by the repo brokers as is the case for
all other netting members.\6\ Debits and credits in excess of the cap
will be subject to hybrid processing, whereby the dollar amount up to
the cap will always be collected or paid in its entirety by the broker,
amounts over the cap (``excess debits'' or ``excess credits'') will be
financed by GSD at the discretion of FICC.
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\6\ The FICC Membership and Risk Management Committee will
determine, based on historical data and risk considerations, what
the debit and credit cap will be for forward margin debits and
credits. The Committee has approved an initial cap of $2 million.
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The following is an example of hybrid processing for a broker with
an excess debit. First, the Operations Department will request that the
affected repo broker pay the excess debit to FICC. In the event that
the repo broker is unable to pay the excess debit, the Operations
Department, in consultation with the Credit Risk Department, will
determine whether it is appropriate for FICC to finance the excess
debit. If FICC finances the excess debit, the broker will be charged a
financing fee, representing the interest amount that FICC will be
charged by the clearing bank, and the member will be subject to an
administrative fee.\7\ GSD will collect the calculated interest amount
from the repo broker on the subsequent business day. GSD will also
reserve the right in certain situations to assess the forward margin
amounts in excess of the dollar amount cap by looking through to the
dealer, as is done by the current manual process.\8\ All extensions of
financing by
[[Page 56811]]
FICC will be secured by the clearing fund deposit of the repo broker.
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\7\ This fee will be designed to cover FICC's cost of arranging
financing and will be filed before implementation.
\8\ FICC will continue to look through to the dealer
counterparty for purposes of assessing forward margin obligations in
cases of a systemic outage where any non-submission by one
counterparty versus a repo broker exceeds $1 billion.
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In applying the hybrid processing to excess credits, the Operations
Department in consultation with the Credit Risk Department will
determine whether it is appropriate to pass through the excess credit
to the repo broker. To the extent that GSD does not pass through to the
broker all or a portion of its calculated excess credit, GSD will
calculate an interest amount tied to the rate of interest earned by GSD
on its overnight cash investment on such unpaid excess credit and will
pay this interest amount to the repo broker on the subsequent business
day. The proposed rule change will require some manual adjustments when
the hybrid approach is used, but these instances will occur
infrequently and will not rise to the complexity of the current
process.
III. Discussion
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of a clearing agency be designed to promote the prompt and
accurate clearance and settlement of securities transactions.\9\ FICC's
look-through rule was established to eliminate the forward margin
debits and credits of repo broker members of GSD when their dealer
counterparties failed to timely submit trade data or submitted
incorrect data. The transition to real time trade submission from end
of day batch trade submission has significantly reduced the likelihood
that repo brokers will be assessed forward margin and in FICC's view
has rendered the look-through rule and its attendant manual adjustments
unnecessary. Under the proposed rule change, forward margin will be
collected from repo brokers or financed by GSD, but FICC will retain
the right to look-through to the dealer counterparties when necessary.
Accordingly, by significantly reducing the amount of manual processing
with regard to forward margin debit obligations and credit entitlements
without affecting FICC's ability to collect forward margin, the
proposed rule change should help FICC to devote more resources to
promoting the prompt and accurate clearance and settlement of
securities transactions.
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\9\ 15 U.S.C. 78q-1(b)(3)(F).
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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 with the requirements of section 17A of the Act and the
rules and regulations thereunder applicable.
It is therefore ordered, pursuant to section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-FICC-2003-06) be and hereby
is approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-2296 Filed 9-21-04; 8:45 am]
BILLING CODE 8010-01-P