[Federal Register: March 29, 2005 (Volume 70, Number 59)]
[Notices]
[Page 15959-15960]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29mr05-113]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51412; File No. SR-FICC-2004-13]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving Proposed Rule Change To Amend the Rules of the
Mortgage-Backed Securities Division To Impose Fines on Members for
Violations of Minimum Financial Standards and To Modify the Penalty
Assessment Process for Failures of Members To Submit Requisite
Financial Reports on a Timely Basis
March 23, 2005.
I. Introduction
On June 24, 2004, the Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'') and
on February 2, 2005, amended proposed rule change SR-FICC-2004-13
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 16, 2005.\2\ No comment letters were received. For
the reasons discussed below, the Commission is approving the proposed
rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 51146 (February 7,
2005), 70 FR 7984.
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II. Description
FICC is seeking to amend the rules of its Mortgage-Backed
Securities Division (``MBSD'') to impose fines on members for
violations of minimum financial standards and to modify the penalty
assessment process for failures of members to submit requisite
financial reports on a timely basis.
1. Violations of Minimum Financial Standards
The rules of the MBSD require clearing members to meet and maintain
certain minimum financial standards at all times. While the majority of
MBSD members consistently satisfy their minimum financial requirements,
occasionally members breach these requirements and create undue risk
for FICC and its members.
Currently, the MBSD rules do not impose specific margin
consequences for falling out of compliance with minimum financial
requirements but allow the Membership and Risk Management Committee in
its discretion to impose conditions which can include an increase in
the participant's minimum required deposits to the Participants Fund.
[[Page 15960]]
Under the proposed rule change, a violation of a minimum financial
requirement by an MBSD clearing participant will result in the
imposition on such member of a margin premium equal to the greater of
(a) 25 percent of the member's unadjusted \3\ Participants Fund
requirement or (b) $1,000,000 which will begin on the day the
participant fell below its minimum financial requirement and will
continue for ninety calendar days after the later of (i) the member's
return to compliance with its applicable minimum financial standards or
(ii) FICC's discovery of the violation.\4\ In addition, such violation
will result in (1) a report of the violation to the FICC Membership and
Risk Management Committee at its next regularly scheduled meeting or
sooner if deemed appropriate by FICC staff and (2) the placement of
such member on FICC's watch list subjecting it to frequent and thorough
monitoring. None of these consequences will preclude FICC from imposing
any other margin consequences permitted by the MBSD rules.
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\3\ ``Unadjusted'' means the standard calculation before any
additional assessments.
\4\ The required clearing fund deposit premium that will be
assessed for violation of applicable minimum financial standards
will be effective beginning on the day of the violation but will
begin to be assessed on the date FICC becomes aware of the
violation.
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2. Failure To Submit Requisite Financial Reports on a Timely Basis
Certain members that are required to provide monthly or quarterly
financial data to FICC at times have violated MBSD's membership
requirements by not providing such financial data in a timely manner.
In such instances, management contacts the offending member and follows
up with a letter.
Failure to receive required information in a timely manner hinders
FICC's ability to appropriately assess the financial condition of such
members and as a result creates risk to FICC. To encourage timely
submission of required financial data, FICC has established a mechanism
to fine delinquent participants.\5\ FICC is now proposing two
additional measures to enforce timely filing of financial information.
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\5\ Securites Exchange Act Release No. 49947 [June 30, 2004), 69
FR 41316 (File No. SR-FICC-2003-01].
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First, FICC will subject delinquent participants to a more
stringent Participants Fund requirement. Specifically, FICC will now
automatically impose a margin premium equal to the greater of (1) 25
percent of the member's unadjusted Participants Fund requirement or (2)
$1,000,000. The margin premium will be applied until appropriate
financial data is submitted to FICC and reviewed for compliance
purposes. In addition, delinquent members will be precluded from taking
back any excess Participants Fund collateral to which they might
ordinarily be entitled.
Second, participants that fail to submit requisite financial
reports on a timely basis will also automatically be placed on FICC's
watch list and subject to frequent and thorough monitoring.
III. Discussion
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency be designed to facilitate the safeguarding of
securities and funds which are in its custody or control or for which
it is responsible.\6\ The Commission finds that FICC's proposed rule
change is consistent with this requirement because it assures the
safeguarding of such securities and funds by incentivizing participants
to maintain their minimum financial standards and to submit their
required financial reports on a timely basis. As a result, FICC's
ability to monitor its participants and to maintain a financially sound
participant base should be enhanced.
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\6\ 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 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-2004-13) be and hereby
is approved.
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).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-1381 Filed 3-28-05; 8:45 am]
BILLING CODE 8010-01-P