[Federal Register Volume 69, Number 191 (Monday, October 4, 2004)]
[Notices]
[Pages 59283-59285]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2465]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50457; File No. SR-FICC-2004-11]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of a Proposed Rule Change To Amend the Rules of the
Government Securities Division To Modify the Penalty Assessment Process
for Violations of Minimum Financial Standards and for Failures of
Members To Submit Requisite Financial Reports on a Timely Basis
September 27, 2004.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\, notice is hereby given that on May 17, 2004, the Fixed
Income Clearing Corporation (``FICC'') filed with the Securities and
Exchange Commission (``Commission'') and on July 8, 2004, amended 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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FICC is seeking to amend the rules of its Government Securities
Division (``GSD'') to modify the penalty assessment process for
violations of minimum financial standards and for failures to submit
requisite financial reports on a timely basis.
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.\2\
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\2\ 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
The proposed rule change would amend the rules of the GSD by
modifying the penalty assessment process for violations of minimum
financial standards and failure to submit requisite financial reports
on a timely basis.
(1) Violations of Minimum Financial Standards
The rules of the GSD require netting members and clearing members
to meet and maintain certain minimum financial standards at all times.
While the majority of GSD members consistently satisfy their minimum
financial requirements, occasionally members do breach these
requirements and create undue risk for FICC and its GSD members. FICC
has decided that a more uniform system of enforcing minimum financial
requirements within the GSD would enhance the ability of FICC to
minimize risk to itself and its members in a fair and effective manner.
Currently, the GSD Rules provide clearing fund consequences for the
various categories of netting members that fall out of compliance with
minimum financial requirements as follows:
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Current clearing fund
Netting membership category consequence for falling below
minimum financial standard \3\
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Bank Member............................ Treated as a Category 2 Dealer
\4\
Category 1 Dealer Member............... Treated as a Category 2 Dealer
Category 2 Dealer Netting Member....... Impose Required Fund Deposit
equal to 150 percent of the
normal calculation of Required
Fund Deposit.
Category 1 Futures Commission Merchant Treated as a Category 2 Futures
Member. Commission Merchant.
Category 2 Futures Commission Merchant Impose Required Fund Deposit
Member. equal to 150 percent of the
normal calculation of Required
Fund Deposit.
Category 1 Inter-Dealer Broker Member.. Treated as a Category 1 Dealer
as far as Required Fund
Deposit exceeds $5 million.
Category 2 Inter-Dealer Broker Member.. Treated as a Category 1 Inter-
Dealer Broker, if it qualifies
as such, or if it does not so
qualify, impose Required Fund
Deposit equal to 150 percent
of the normal calculation of
the Required Fund Deposit.
[[Page 59284]]
Government Securities Issuer Member.... Treated as a Category 2 Dealer.
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\3\ Each consequence remains effective for a period beginning on the
date on which the member fell below such level and continuing until
the 90th calendar day after the date on which such member returned to
compliance with the applicable standard. If the consequence consists
of a reclassification and the member does not return to compliance
with its original minimum financial requirement within 90 calendar
days of falling out of compliance, then the reclassification becomes
permanent.
\4\ Treating a bank or other non-Inter-Dealer Broker Category 1 Member
as a Category 2 non-Inter-Dealer Broker Member for clearing fund
purposes results in a higher clearing fund requirement for such a
member because higher margin rates are imposed on on-Inter-Dealer
Broker Category 2 Dealer Members than are imposed on banks and non-
Inter-Dealer Broker Category 1 Members.
Under the proposed rule change, a violation of a minimum financial
requirement by a member \5\ of the GSD would result in the imposition
on such member of a margin premium equal to the greater of (a) 25
percent of the member's unadjusted \6\ clearing fund requirement or (b)
$1,000,000, to continue for ninety calendar days after the later to
occur of (i) the member's return to compliance with applicable minimum
financial standards or (ii) FICC's discovery of the applicable
violation. This increase would not apply to Category 1 Dealer Netting
Members, Category 1 Futures Commission Merchant Netting Members or
Category 2 Inter-Dealer Broker Netting Members, where such members
would continue to be reclassified as a different category netting
member.\7\ In addition, such violation would 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 and (2) the placement of such member on FICC's ``watch list''
subjecting it to more frequent and thorough monitoring. None of these
consequences would preclude FICC from imposing any other margin
consequences permitted by GSD's Rules.
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\5\ The proposed rule change only applies to GSD members that
have minimum financial requirements (i.e., GSD netting members).
\6\ ``Unadjusted'' means the standard calculation before any
additional assessments.
\7\ If GSD Category 1 Dealer Netting Members, GSD Category 1
Futures Commission Merchant Netting Members and GSD Category 2
Inter-Dealer Broker Netting Members do not meet the membership
qualifications applicable to the new category of netting member,
then they will be subject to the increased margin premium specified
in clause (1) above.
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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 GSD's membership
requirements by not timely providing such financial data. In such
instances, management contacts each offending member and follows up
with a letter.
Failure to timely receive required information creates risk to FICC
and as a result hinders FICC's ability to appropriately assess the
financial condition of such members. To encourage timely submission of
required financial data, FICC has established a mechanism to fine
delinquent members.\8\ FICC is now proposing two additional measures to
enforce timely filing of financial information.
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\8\ Securities Exchange Act Release No. 49947 (June 30, 2004),
69 FR 41316 [File No. SR-FICC-2003-01].
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First, FICC proposes to subject delinquent members to a more
stringent clearing fund requirement. Specifically, under the proposed
rule filing FICC would automatically impose a margin premium equal to
the greater of (1) 25 percent of the member's unadjusted clearing fund
requirement or (2) $1,000,000. The margin premium would be applied
until appropriate financial data is submitted to FICC and is reviewed
for compliance purposes. In addition, delinquent members would be
precluded from taking back any excess clearing fund collateral to which
they might ordinarily be entitled.
Second, members that fail to submit requisite financial reports on
a timely basis would also automatically be placed on FICC's ``watch
list'' and subject to more frequent and thorough monitoring.
FICC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act \9\ and the rules and
regulations thereunder applicable to FICC because it assures the
safeguarding of securities and funds which are in the custody or
control of FICC by encouraging members to maintain their minimum
financial standards and to submit their required financial reports on a
timely basis. As a result, FICC's ability to maintain a financially
sound membership base should be enhanced.
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\9\ 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 [email protected]. Please include
File Number SR-FICC-2004-11 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-FICC-2004-11. This
file
[[Page 59285]]
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, 450 Fifth Street,
NW., 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/gov/gov.docs.jsp?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-2004-11 and should be
submitted on or before October 22, 2004.
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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-2465 Filed 10-1-04; 8:45 am]
BILLING CODE 8010-01-P