[Federal Register: October 26, 2005 (Volume 70, Number 206)]
[Notices]
[Page 61859-61861]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26oc05-138]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52631; File No. SR-FICC-2005-14]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of a Proposed Rule Change Relating to the Federal
Reserve's National Settlement System
October 18, 2005.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on September 9, 2005, Fixed
Income Clearing Corporation (``FICC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change as
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 persons.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change would amend the rules of FICC's Government
Securities Division (``GSD'') to have funds-only settlement obligation
payment processing occur through the Federal Reserve's National
Settlement System (``NSS'').
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 such
statements.\2\
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\2\ The Commission has modified parts of these statements.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The purpose of the proposed rule change is to amend the rules of
GSD to require netting members to satisfy their funds-only settlement
amounts ultimately through the Federal Reserve's NSS.\3\ GSD's funds-
only settlement process is set forth in GSD Rule 13. On a daily basis,
FICC reports a funds-only settlement amount, which is either a debit
amount or a credit amount, to each netting member. Each netting member
that has a debit is required to satisfy its obligation by the
applicable deadline. Netting members with credits are subsequently paid
by FICC by the applicable deadline. All payments of funds-only
settlement amounts by a netting member to FICC and all collections of
funds-only settlement amounts by a netting member from FICC are done
through depository institutions that are designated by such netting
member and FICC to act on their behalves with regard to such payments
and collections. All payments are made by fund wires from one
depository institution to the other.
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\3\ This is consistent with the manner in which FICC's
affiliates, The Depository Trust Company (``DTC'') and the National
Securities Clearing Corporation (``NSCC''), handle their funds
settlement process. DTC and NSCC do not currently use NSS for the
processing of funds credits, whereas FICC is proposing to have the
GSD process both the debits and credits of its funds-only settlement
process through NSS.
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In 1997, the Commission approved an enhancement to GSCC's \4\
funds-only settlement payment processing (``1997 Filing'').\5\ This
enhancement gave members the option to participate in an auto-debit
arrangement that was to eliminate the need to send fund wires for the
satisfaction of funds-only settlement payments. Under the auto-deposit
arrangement, GSCC, the netting member, and the netting member's
depository institution would enter into a ``funds-only settlement
procedures agreement'' whereby the depository institution would pay or
collect funds-only settlement amounts on behalf of the netting member
and GSCC through accounts of the member at the depository institution.
As a result, the
[[Page 61860]]
need for fund wire payments would be eliminated.\6\
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\4\ The Government Securities Clearing Corporation (``GSCC'')
was the predecessor to GSD. GSCC became the GSD division of FICC
when GSCC and the Mortgage Backed Securities Clearing Corporation
were merged to create FICC in 2002.
\5\ Securities Exchange Act Release No. 39309 (November 7,
1997), 62 FR 61158 (November 14, 1997) [File No. SR-GSCC-97-06].
\6\ This was a voluntary arrangement that was never implemented
because until recently GSCC and then GSD continued to make manual
adjustments to the final funds-only settlement amounts of netting
members. These manual adjustments have recently largely been
eliminated.
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The proposed rule change will replace the auto-debit process of the
1997 Filing and will provide even further enhancements to the current
approach to payment processing than was envisioned by the 1997 Filing.
Under the proposed rule change, the required payment mechanism for the
satisfaction of funds-only settlement amounts will be the NSS. FICC
will appoint The Depository Trust Company (``DTC'') as its settlement
agent for purposes of interfacing with the NSS.\7\
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\7\ DTC currently performs this service for NSCC.
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In order to satisfy their funds-only settlement obligations through
the NSS process, netting members must appoint banks or trust companies
to act as their ``funds-only settling banks.'' A netting member that
qualifies may act as its own funds-only settling bank.
The GSD will establish a limited membership category for the funds-
only settling banks. Banks or trust companies that are DTC settling
banks, as defined in DTC's rules and procedures, or that are GSD
netting members with direct access to the Federal Reserve and the NSS
will be eligible to become GSD funds-only settling bank members by
executing the requisite membership agreement for this purpose. Other
banks or trust companies that desire to become funds-only settling bank
members must apply to FICC. They must also have direct access to a
Federal Reserve Bank and the NSS as well as satisfy the financial
responsibility standards imposed by FICC from time to time. Initially,
these applicants must meet and maintain a Tier 1 capital ratio of 6
percent.\8\
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\8\ This is the same financial requirement for NSCC settling
bank-only members. Under FICC's proposal, FICC would retain the
discretion to change this financial criterion by providing advanced
notice to the fund-only settling banks and the netting members
through important notice.
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In addition to the membership agreement, the funds-only settling
bank and the netting member must execute an agreement whereby the
member will appoint the bank to act on its behalf for funds-only
settlement purposes. The bank must also execute any agreements required
by the Federal Reserve Bank for participation in the NSS for FICC's
funds-only settlement process.
The funds-only settling banks will be required to follow the
procedures for funds-only settlement payment processing set forth in
FICC's proposed new rules. This will include, for example, providing
FICC or its settlement agent with the requisite acknowledgement of the
bank's intention to settle the funds-only settlement amounts of the
netting members it represents on a timely basis and participating in
the NSS process. Funds-only settling banks will have the right to
refuse to settle for a particular netting member and will also be able
to opt out of NSS for one business day if they are experiencing
extenuating circumstances.\9\ Under FICC's proposal, the netting member
shall be responsible for ensuring that its funds-only debit is wired to
the depository institution designated by FICC for this purpose by the
payment deadline. The proposed rule change makes clear that the
obligation of a netting member to fulfill its funds-only settlement
amount remains at all times with the netting member.
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\9\ These procedures are consistent with the NSCC and DTC
procedures in this respect.
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As FICC's settlement agent, DTC will submit instructions to have
the Federal Reserve Bank accounts of the funds-only settlement banks
charged for the debit amounts and credited for the credit amounts.
Utilization of NSS will eliminate the need for the initiation of wire
transfers in satisfaction of funds-only settlement amounts, and FICC
believes that it will therefore reduce the risk that the netting member
that designated the bank may incur a late payment fine due to delay in
wiring funds. The proposal will also reduce operational burden for the
operations staff of FICC.
The NSS is governed by the Federal Reserve's Operating Circular No.
12 (``Circular''). Under the Circular, DTC, as FICC's settlement agent,
has certain responsibilities with respect to an indemnity claim made by
a relevant Federal Reserve Bank as a result of the NSS process. FICC
will apportion the entirety of any such liability to the netting
members for whom the funds-only settling bank to which the indemnity
claim relates was acting. This allocation will be done in proportion to
the amount of such members' funds-only settlement amounts on the
business day in question. If for any reason such allocation is not
sufficient to fully satisfy the Federal Reserve Bank's indemnity claim,
the remaining loss shall be treated as an ``Other Loss'' as defined by
the GSD's Rule 4 and allocated accordingly.
The proposed rule change will not change the current GSD deadlines
regarding the payment and receipt of funds-only settlement amounts,
which are set forth in the GSD's rules.
FICC believes the proposed rule change is consistent with the
requirements of Section 17A of the Act, and the rules and regulations
thereunder because it will enhance the current operation of the GSD's
funds-only settlement payment process by promoting the timely
processing of funds payments and credits. As such, the proposed rule
change should support the prompt and accurate clearance and settlement
of securities transactions.
(B) Self-Regulatory Organization's Statement on Burden on Competition
FICC does not believe that the proposed rule change 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 change have not been
solicited or received.
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 the 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-2005-14 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary,
[[Page 61861]]
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-9303.
All submissions should refer to File Number SR-FICC-2005-14. 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 filing 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. 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-2005-14 and should be submitted on
or before November 16, 2005.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-5943 Filed 10-25-05; 8:45 am]
BILLING CODE 8010-01-P