[Federal Register: August 8, 2007 (Volume 72, Number 152)]
[Notices]
[Page 44599-44600]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08au07-116]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56182; File No. SR-FICC-2006-19]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Granting Approval of Proposed Rule Change Relating to Membership,
Definitions, and the Electronic Pool Notification Service
August 1, 2007.
I. Introduction
On December 13, 2006, the Fixed Income Clearing Corporation
(``FICC'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change pursuant to section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder \2\ to restructure FICC's Government Securities Division's
(``GSD'') membership standards and membership requirements, update
various definitions, and make technical changes to GSD's rules and to
FICC's Mortgage-Backed Securities Division's (``MBSD'') Electronic Pool
Notification (``EPN'') rules. The proposed rule change was published
for comment in the Federal Register on March 29, 2007.\3\ No comment
letters were received on the proposal. This order approves the
proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 55515 (Mar. 22, 2006),
72 FR 14839.
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II. Description of the Proposal
A. Membership Rules
FICC is revising its rules concerning membership types, the
membership application process, and the ongoing requirements of GSD
members into a format that FICC believes will make such rules easier to
locate and to understand by applicants and members. To accomplish this,
FICC is amending current Rule 2 (retitled ``Members''), is moving much
of the content of current Rule 2 into a new Rule 2A (``Initial
Membership Requirements''), and is revising Rule 3 (retitled ``Ongoing
Membership Requirements''). Other rules and provisions are being
modified to make technical corrections where necessary and to be in
harmony with analogous rules of FICC's affiliated clearing agency, the
National Securities Clearing Corporation (``NSCC'').
1. Membership Types
FICC's current Rule 2 (``Comparison-Only and Netting Members'')
sets forth the types of GSD memberships, eligibility requirements,
application procedures, and member reporting requirements. FICC is
revising Rule 2 to establish each GSD membership type: Comparison-Only
Members, Netting Members, Sponsoring Members, Sponsored Members, and
Funds-Only Settling Bank Members. Substantially all other provisions
contained in the current Rule 2 are being moved to either new Rule 2A
or revised Rule 3.
One exception to this is that FICC is deleting current Rule 2,
Section 4 (``Financial Reports by Netting Applicants). FICC states that
the rationale for such deletion is that FICC already advises applicants
during the application process of the required financial reports
depending on the category of membership for which is being applied and
on the applicant entity type. In addition, FICC is setting forth in
revised Rule 3 the financial reports that must be submitted by members
to FICC on an ongoing basis.
FICC is also deleting section 1(f) of Rule 2, which provides that
applicants that have been approved for membership must execute and
deliver to FICC a membership agreement. This provision is redundant
with existing Rule 2, Section 3, which will now appear in new Rule 2A,
Section 7.
2. Consolidation of Membership Standards and Requirements
Prior to this rule change, the membership qualifications, financial
standards, and operational requirements for each membership type were
set forth in Rule 2 (``Comparison-Only and Netting Members''), Rule 3
(``Financial Responsibility, Operational Capability and Other
Membership Standards of Comparison-Only and Netting Members''), and
Rule 4 (``Clearing Fund, Watch List and Loss Allocation''). To
consolidate this information, FICC is creating a new Rule 2A (``Initial
Membership Requirements'') that will establish the initial membership
eligibility requirements for all membership types and will set forth
the process of membership application and evaluation. In addition, FICC
is restructuring Rule 3 (``Ongoing Membership Requirements'') to
contain all current GSD rule provisions regarding the continuing
requirements of members.
The restructuring will encompass three substantive changes:
(a) Immediate Placement on the Watch List. FICC is deleting current
Rule 3, Section 1(d)(iii) that automatically disqualifies an applicant
from becoming a member if the applicant is subject to any action or
condition, the existence of which would require the applicant to be
placed on FICC's Watch List if it were already a member. FICC believes
that eliminating such provision will not diminish FICC's ability to
deny membership to an unworthy applicant because FICC will still retain
under other sections of its rules the discretion to deny membership
based on the applicant's underlying financial, operational, or
character issues. Moreover, FICC's credit risk matrix enables FICC to
place such applicant directly on FICC's watch list for closer
monitoring.
(b) Additional Reporting Requirements. FICC is adding new language
to proposed Rule 3, Section 2 (``Reports by Netting Members'') that
will require members to provide FICC with (i) reports from their
independent auditors on internal controls [in revised Rule 3, Section
2(b)(ii)] and (ii) a copy of any letter granting an extension of time
by a regulatory authority to a member with respect to the submission of
a report [in revised Rule 3, Section 2(h), para. 2].
(c) Annual Audited Financial Statements. FICC is removing the
current requirement in Rule 2, Section 4(a) that audited annual
financial statements submitted by netting members be ``without
qualification.'' FICC believes that a qualification in an annual
audited financial statement should not warrant automatic denial of
membership because a qualification may not always be material. In
addition, the event that triggered a qualification may have been
corrected by the applicant or member by the time the applicant or
member submits its financial statement for review by FICC. Going
forward, FICC will analyze qualifications in GSD netting member
financial statements on a case-by-case basis.
Other conforming and non-substantive changes are being made within
the rules to accommodate this restructuring and to update cross-
references where applicable.
[[Page 44600]]
B. Non-Substantive Changes and Technical Corrections
1. Definition of ``Person''
FICC is amending the current definition of Person contained in GSD
Rule 1 (``Definitions'') to indicate that the term will be used
throughout the rules to mean a partnership, corporation, limited
liability corporation, or other organization, entity, or individual.
2. Definition of ``Eligible Security''
FICC is amending the definition of Eligible Security to make clear
that any security of an issuer that is on the Office of Foreign Assets
and Control's (``OFAC'') Specially Designated Nationals list or a
security from a country that is subject to OFAC sanctions may not be an
eligible security at GSD. FICC is making the same change to the
definition of Eligible Security in MBSD's Clearing and EPN rules.
3. Definition of ``Bond Market Association''
The Bond Market Association is now known as the Securities Industry
and Financial Markets Association. GSD is removing the definition of
and references to The Bond Market Association from its rules and is
replacing it with a definition for and references to The Securities
Industry and Financial Markets Association.
4. Governing Law Provision
FICC is clarifying the Governing Law provision contained in GSD's
and MBSD's Clearing and EPN rules to state that the Clearing and EPN
rules of GSD and MBSD are subject to New York law as applicable to
contracts executed and performed in New York.
5. Insurance Company Netting Member Eligibility Requirements
FICC is removing from GSD's rules the eligibility requirements for
Insurance Company Netting Members because GSD does not currently have
any such members. FICC will, however, retain the definition of
Insurance Company Netting Member in its rules in the event that such an
entity applies for membership in the future. Appropriate eligibility
requirements would be reviewed at that time and proposed as additions
to the rules.
III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a registered clearing agency. In particular,
the Commission believes the proposal is consistent with the
requirements of section 17A(b)(3)(F),\4\ which, among other things,
requires the rules of a clearing agency be designed to assure the
safeguarding of securities and funds that are in the custody or control
of the clearing agency or for which it is responsible. In addition to
making the rules more logically structured, more consistent with the
rules of FICC's clearing agency affiliate, and less redundant, the
proposal should improve FICC's ability to responsibly administer its
membership application process by providing FICC with a more flexible
and risk-based approach to review applications for membership. Although
FICC is eliminating certain factors that would previously have resulted
in the automatic disqualification of an applicant, FICC has retained
explicit rights to deny membership to an unworthy applicant based upon
FICC's qualitative review, based in part on new required documentation,
of an applicant's underlying financial, operational, or character
issues. Accordingly, the proposed rule change is consistent with FICC's
obligation to assure ability to safeguard securities and funds in its
possession or control or for which it is responsible.
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\4\ 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
proposal is consistent with the requirements of the Act and in
particular with the requirements of section 17A of the Act \5\ and the
rules and regulations thereunder.
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\5\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\6\ that the proposed rule change (File No. SR-FICC-2006-19) be,
and hereby is, approved.\7\
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\6\ 15 U.S.C. 78s(b)(2).
\7\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-15371 Filed 8-7-07; 8:45 am]
BILLING CODE 8010-01-P