[Federal Register: November 9, 2006 (Volume 71, Number 217)]
[Notices]
[Page 65855-65857]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09no06-145]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54682; File No. SR-FICC-2006-15]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Modify its Rules To
Diversify and Standardize Clearing Fund Collateral Requirements Across
the Divisions To Improve Liquidity and Minimize Risk for its Members
November 1, 2006.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on October 4, 2006, the Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change described in Items I, II, and III below, which
items have been prepared primarily by FICC. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested parties.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change seeks to modify the rules of both of the
Government Securities Division (``GSD'') and the Mortgage-Backed
Securities Division (``MBSD'')
[[Page 65856]]
(collectively, the ``Divisions'') of FICC to diversify and standardize
Clearing Fund \3\ collateral requirements across the Divisions in order
to improve liquidity and minimize risk for FICC and its members.\4\
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\3\ The GSD Rules refer to member collateral deposits as the
``Clearing Fund'' while the MBSD rules refer to these deposits as
the ``Participants Fund.'' The term ``Clearing Fund'' in this rule
filing will refer to both.
\4\ This rule filing also proposes to make a minor technical
change to Rule 4 of the GSD rules. Section 2 of Rule 4 has been
relettered to accommodate changes made in an earlier FICC rule
filing, SR-FICC-2006-12.
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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 change and
discussed any comments it received on the proposed rule change. 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.\5\
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\5\ 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
Presently, both GSD and MBSD members may satisfy their Clearing
Fund requirement with cash deposits. Members may also satisfy a portion
of their deposits with an open account indebtedness fully secured by
certain types of securities and/or letters of credit. FICC proposes to
modify its rules as detailed below to: (1) expand the types of
securities which members may deposit to satisfy their Clearing Fund
requirement (``Eligible Clearing Fund Securities'') to secure their
open account indebtedness; (2) establish concentration requirements
with regard to members' use of Eligible Clearing Fund Securities; (3)
create a correlating range of haircuts to be applied to the expanded
types of Eligible Clearing Fund Securities; and (4) eliminate letters
of credit as a generally acceptable form of collateral securing
members' open account Clearing Fund indebtedness.
1. Revised Clearing Fund Components
(a) Cash. Currently the rules of GSD require that the greater of
$100,000 or ten percent of a member's Clearing Fund requirement with a
maximum of $500,000 be made in the form of cash.\6\ The rules of MBSD
currently do not contain a minimum cash requirement. For both
Divisions, the proposed new cash collateral component will be the
lesser of $500,000 or ten percent of a member's Clearing Fund
requirement with a minimum of $100,000.
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\6\ GSD Rule 4, Section 2(b)(ii).
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(b) Securities. Currently each Division of FICC accepts different
types of securities as Clearing Fund collateral. For example, GSD
accepts Agency securities but not mortgage-backed securities, and MBSD
accepts mortgage-backed securities but not Agency securities. In
addition, there are currently no concentration requirements placed on
the securities deposited at either Division. In an effort to
standardize the securities which are eligible as Clearing Fund
collateral across the Divisions, FICC proposes to modify the rules of
both Divisions by adding a definition to each Division's rules for
``Eligible Clearing Fund Securities'' (with respect to GSD) and
``Eligible Participants Fund Securities'' (with respect to MBSD). As
defined, these securities will be unmatured bonds which are either an
``Eligible Clearing Fund Agency Security,'' an ``Eligible Clearing Fund
Mortgage-Backed Security'' or an ``Eligible Clearing Fund Treasury
Security.'' \7\ ``Eligible Clearing Fund Agency Security'' would be
defined as a direct obligation of those U.S. agencies or government
sponsored enterprises as FICC may designate from time to time that
satisfies the criteria set forth in notices issued by FICC from time to
time. ``Eligible Clearing Fund Mortgage-Backed Security'' would be
defined as a mortgage-backed pass through obligation issued by those
U.S. agencies or government sponsored enterprises as FICC may designate
from time to time that satisfies the criteria set forth in notices
issued by FICC from time to time. ``Eligible Clearing Fund Treasury
Security'' would be defined as a direct obligation of the U.S.
government that satisfies the criteria set forth in notices issued by
FICC from time to time.
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\7\ In the MBSD Rules, these terms would be as follows:
``Eligible Participants Fund Agency Security,'' ``Eligible
Participants Fund Mortgage-Backed Security,'' and ``Eligible
Participants Fund Treasury Security.''
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Initial eligibility criteria for each type of Eligible Clearing
Fund/Participant Fund Security will be announced to members through an
Important Notice prior to the effective date of this proposed rule
change. Any future changes to the eligibility criteria will also be
announced to members through Important Notices in advance of such
changes becoming effective.
(c) Security Concentration Provisions. FICC also proposes to
establish security concentration provisions for Clearing Fund deposits.
As proposed, a minimum of forty percent of a member's required Clearing
Fund deposit would have to be made in cash and Eligible Clearing Fund
Treasury Securities. The remainder of a member's deposit could be
secured by cash and the pledge of Eligible Clearing Fund Securities in
any combination of Eligible Clearing Fund Treasury Securities, Eligible
Clearing Fund Agency Securities, and/or Eligible Clearing Fund
Mortgage-Backed Securities. However (1) any deposits of Eligible
Clearing Fund Agency Securities or Eligible Clearing Fund Mortgage-
Backed Securities, respectively, in excess of twenty-five percent of a
member's required Clearing Fund deposit would be subject to an
additional haircut equal to twice the percentage specified in the
haircut schedule. Furthermore, no more than twenty percent of a
member's required Clearing Fund deposit could be secured by pledged
Eligible Clearing Fund Agency Securities of a single issuer. Lastly, no
member would be permitted to post as Clearing Fund collateral Eligible
Clearing Fund Agency Securities for which it is the issuer.\8\
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\8\ However, a member would be permitted to pledge Eligible
Clearing Fund Mortgage-Backed Securities for which it is the issuer
subject to a haircut. The haircut would be fourteen percent as an
initial matter. If the member exceeded the twenty-five percent
concentration limit, the haircut would be twenty-one percent.
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(d) Letters of Credit and Other Adequate Assurances. The current
provisions within FICC's Rules that pertain to Letter of Credit Issuers
will be modified to reflect that letters of credit would no longer be
accepted by FICC as a form of Clearing Fund collateral.\9\ Effective
April 1, 2007 (which is the regular expiration date of letters of
credit), members that have letters of credit posted as collateral
(other than members, if any, that have been required to post letters of
credit for legal risk), would be required to replace the portion of the
Clearing Fund collateralized by letters of credit with either cash or
Eligible Clearing Fund Securities.
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\9\ FICC has found that in practice letters of credit are not as
liquid as cash and securities and therefore pose more risk to FICC
and its members when pledged as Clearing Fund collateral. FICC will,
however, reserve the right to require letters of credit from members
in those instances where a particular member has been found, by FICC
in its discretion, to present legal risk.
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(e) Implementation Timeframes. The foregoing rule changes would
become
[[Page 65857]]
effective thirty days after an Important Notice is issued to members
informing them that FICC's systems are ready to accommodate such
changes. The corresponding changes to FICC's rules would be made at
that time.
(f) Alternative Proportions of Eligible Collateral. As is currently
the case under FICC's rules, FICC will continue to reserve the right to
require different proportions of the Clearing Fund collateral
components as necessary to address any heightened legal or insolvency
risks presented by a member.\10\
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\10\ GSD Rule 4, Section 2(o), MBSD Rule 2, Section 4 of Article
IV.
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FICC believes the proposed rule change is consistent with the
requirements of Section 17A of the Act \11\ and the rules and
regulations thereunder because it will enable FICC to standardize
acceptable forms of collateral across both of its Divisions, which
should lead to an increase of liquidity and a decrease of risk to FICC
and its members. As such, FICC believes it will better enable FICC to
safeguard the securities or funds in its possession or control or for
which it is responsible.
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\11\ 15 U.S.C. 78q-1.
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B. Self-Regulatory Organization's Statement on Burden on Competition
FICC does not believe that the proposed rule change will 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 change have not yet
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
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 change or
(B) Institute proceedings to determine whether the proposed rule
change 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
change is 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 Number SR-FICC-2006-15 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 Number SR-FICC-2006-15. This
file number 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 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 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 office of FICC
and on FICC's Web site at http://www.ficc.com/gov/notices/GOV115.06.htm?NS-query.
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-2006-15 and should be submitted on or before November 30, 2006.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\12\
Nancy M. Morris,
Secretary.
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\12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E6-18948 Filed 11-8-06; 8:45 am]
BILLING CODE 8011-01-P