[Federal Register Volume 70, Number 11 (Tuesday, January 18, 2005)]
[Notices]
[Pages 2911-2914]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-160]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51018; File No. SR-FICC-2004-14]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of a Proposed Rule Change Relating to Membership
Requirements
January 11, 2005.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on July 14, 2004, the Fixed
Income Clearing Corporation (``FICC'') filed with the Securities and
Exchange Commission (``Commission'') proposed rule change SR-FICC-2004-
14. On July 15, July 30, August 20, and November 10, 2004, FICC filed
amendments 1, 2, 3, and 4 respectively. On January 3, 2005, FICC filed
amendment 5 and withdrew amendments 1, 2, 3, and 4. The proposed rule
change, as amended, is 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
FICC proposes to amend the rules of its Government Securities
Division (``GSD'') and Mortgage-Backed Securities Division (``MBSD'')
regarding membership requirements for non-U.S. applicants and members.
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 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
1. Annual Audited Financial Statements
Currently, GSD requires non-U.S. members and applicants to submit
financial statements prepared in accordance with U.S. generally
accepted accounting principles (``U.S. GAAP'') ``whenever necessary and
feasible.'' MBSD requires non-U.S. members and applicants to submit
financial statements prepared in accordance with U.S. GAAP. Both
divisions review such financial statements as part of their credit risk
management program.
FICC proposes to amend these requirements uniformly across both
divisions to enable non-U.S. members and applicants to submit financial
statements that are prepared according to any other generally accepted
accounting methodology (``non-U.S. GAAP'').
In order to lessen the risk associated with accepting financial
statements prepared in accordance with non-U.S. GAAP, FICC would
increase the existing minimum financial requirements of each applicant
and member based on which non-U.S. GAAP was used to prepare the audited
financial statement in the following manner:
(a) For applicants and members whose financial statements are
prepared in accordance with International Financial Reporting
Standards (``IFRS''), the Companies Act of 1985 (``U.K. GAAP''), or
Canadian GAAP, the minimum financial requirements would be one and
one-half times the applicable requirements.
(b) For applicants and members whose financial statements are
prepared in accordance with a European Union country GAAP (``EU
GAAP'') other than U.K. GAAP, the minimum financial requirements
would be five times the applicable requirements.
(c) For applicants and members whose financial statements are
prepared in accordance with any other type of GAAP, the minimum
financial requirements would be seven times the applicable
requirements.\3\
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\3\ In order to determine the appropriate premiums, FICC's risk
management staff compiled all the U.S. GAAP and non-U.S. GAAP equity
capital figures of financial institutions that filed SEC Form 20-F
or 40-F for their 2002 and/or 2003 fiscal year ends to identify the
largest absolute differences between U.S. GAAP and non-U.S. GAAPs.
The staff found that approximately 50% was the largest difference
when the U.S. GAAP figures were compared to IFRS, U.K. GAAP, and
Canadian GAAP. The largest difference was approximately 528% when
the U.S. GAAP figures were compared to EU country GAAP figures.
Finally, approximately 400% was the largest difference when the U.S.
GAAP figures were compared to all other non-U.S. GAAPs. (FICC staff
determined that it would be prudent to apply a premium of seven
times the existing requirement.) FICC staff will assess these
premiums annually and will report to Commission staff on its
findings.
[[Page 2912]]
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For example, currently under the GSD's rules, the minimum financial
requirement for a bank netting member is equity capital of US$100
million. This will continue to be the requirement for all such members
(both U.S. and non-U.S. members), whose financial statements are
prepared in accordance with U.S. GAAP. If such a member's financial
statements were prepared in accordance with IFRS, U.K. GAAP, or
Canadian GAAP, the member's minimum financial requirement would be
US$150 million. If such a member's financial statements were prepared
in accordance with an EU country GAAP other than U.K. GAAP, the
member's minimum financial requirement would be US$500 million. If a
member's financial statements were prepared in accordance with any
other type of GAAP, the member's minimum financial requirement would be
US$700 million.
FICC would retain the requirement that annual audited financial
statements submitted by members and applicants be certified without
qualification. The proposed rule change would make clear that annual
audited financial statements must be prepared in accordance with
generally accepted accounting principles. In addition, all information
submitted to FICC would have to be in English or would have to be a
fair and accurate English translation if the information had been
translated into English. Additionally, in order to accommodate this
change for members other than banks, the proposed rule change provides
that specific references to the term U.S. regulatory capital should be
deemed to refer to the general term of ``regulatory capital.''
The proposed rule changes would be applied to current members as
well as applicants.
2. Material Regulatory Filings
As part of its credit risk management, FICC requires applicants and
members to submit interim financial data. In the case of U.S. bank and
broker-dealer members, the GSD and the MBSD are able to obtain this
financial information through regulatory reports. Non-U.S. MBSD members
are required to submit unaudited monthly financial statements to MBSD.
Non-U.S. GSD netting members are required to submit certain quarterly
financial information to GSD. The GSD rules also currently require non-
U.S. members and applicants to also submit all ``material regulatory
filings'' that the entity makes with its primary regulator in its home
jurisdiction. However, FICC cannot specifically identify all such
material regulatory filings for non-U.S. members and applicants with
confidence.
In order to enhance FICC's credit risk monitoring program, the
proposed rule change, which would be adopted uniformly across both FICC
divisions, would require non-U.S. members (other than those organized
or established in the U.K. and regulated by the FSA) to provide
specific monthly or quarterly financial data, as applicable, directly
to FICC. FICC will provide the non-U.S. members with a form requesting
specific financial data related to capital, assets, liabilities,
revenue, pertinent ratios, and various capital requirements, as
applicable.\4\ Each non-U.S. member will be required to complete the
form, have it signed by the entity's chief financial officer, chief
executive officer, or similar high-ranking official, and return it to
FICC by a prescribed deadline.
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\4\ The proposed rule changes would replace the current
financial documents required by the FICC membership agreements.
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Broker-dealers and banks that are organized or established in the
U.K. and regulated by the Financial Services Authority (``FSA'') will
be required to submit certain regulatory monthly or quarterly reports,
as applicable, that are filed with the FSA.\5\ Because FICC will be
able to obtain the necessary financial data from these reports, these
U.K. firms will not be required to complete and submit FICC's financial
reporting form as are other non-U.S. members. The proposed rule change
will provide that failure to submit the financial form or the U.K.
regulatory reports, as applicable, to FICC within the timeframes
required by FICC will subject a member to the same consequences,
including a fine, as is currently provided for in FICC's rules.
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\5\ Although FICC currently has no U.K. members, FICC is
familiar with the regulatory reports filed by banks and broker-
dealers that are organized or established in the U.K. and regulated
by the FSA.
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FICC recognizes that certain regulatory filings provide warnings of
possible concerns regarding a member's compliance with regulatory
standards and its financial status. For example, under FICC's current
rules, GSD's and MBSD's U.S. broker-dealer members are required to
submit to FICC SEC Rule 17a-11 reports. GSD's netting members, MBSD's
U.S. non-broker-dealer members, and all non-U.S. members must submit to
FICC, concurrently with their submission to their relevant regulator,
copies of regulatory notifications required to be made when a member's
capital levels or other financial requirements fall below prescribed
levels.\6\ The proposed rule change would expand this to require
members to submit to FICC any regulatory notifications required to be
made when it does not comply with its financial reporting and
responsibility standards set by its home country regulator and when it
becomes subject to a disciplinary action by its home country regulator.
In addition, the proposed rule change would make the late submission of
any such filing subject to a fine and other related consequences that
have been recently approved by or are pending with the Commission.\7\
This proposed rule change would require that such filings be submitted
to FICC in English or be in a fair and accurate English translation if
they have been translated into English.
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\6\ Securities Exchange Act Release Nos. 49947 (June 30, 2004),
69 FR 41316 (July 8, 2004) [File No. SR-FICC-2003-01] and 49156
(Jan. 30, 2004), 69 FR 5881 (Feb. 6, 2004) [File No. SR-MBSCC-2001-
06].
\7\ Securities Exchange Act. Release No. 50659 (Nov. 15, 2004),
69 FR 67767 (Nov. 19, 2004) [File No. FICC-SR-2004-11] and FICC-SR-
2004-13 (currently pending with the Commission).
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Finally, the proposed rule change would require MBSD non-U.S.
regulated applicants to certify that they are in compliance with the
financial reporting and responsibility standards of their home country.
This requirement was recently added to GSD's rules.\8\
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\8\ Securities Exchange Act Release No. 34-50617 (Nov. 1, 2004),
69 FR 64796 (Nov. 8, 2004) [File No. SR-FICC-2004-01].
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3. Legal Risk
FICC believes that members that are incorporated outside of the
U.S. present FICC with increased legal risk in the event they become
insolvent as compared to members incorporated within the U.S.\9\
Notwithstanding the protections for clearing agencies contained in the
U.S. federal laws \10\ and the New York Banking Law (which is
applicable to GSD foreign netting members with New York state-licensed
branches and agencies), there is a risk that a U.S. court could
determine not to apply New York law to the adjudication of FICC's
rights against an insolvent non-U.S. member.\11\ In such event, the
[[Page 2913]]
foregoing protections may not be available to FICC.
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\9\ At this time, GSD will continue to only permit non-U.S.
banks operating out of U.S. branches or agencies to be Foreign
Netting Members.
\10\ E.g., the Federal Deposit Insurance Corporation Improvement
Act of 1991 and the U.S. Bankruptcy Code.
\11\ This particular matter is currently being adjudicated in a
case that will be argued before the Second Circuit involving a
Serbian governmental agency that has brought a U.S. Bankruptcy Code
Section 304 proceeding seeking to have the disposition of the assets
of certain Yugoslavian banks with New York state-licensed agencies
be considered under home country law. See Agency for Deposit Ins.,
Rehab., Bankr. & Liquidation of Banks v. Superintendent of Banks,
Case No. 03-CV-9320 (JSR), Case No. 03-CV-9321 (JSR), 2004 U.S.
Dist. LEXIS 10848 (S.D.N.Y. June 2004).
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In order to mitigate this risk, FICC has required, and will
continue to require, non-U.S. GSD netting and MBSD clearing applicants
to submit non-U.S. legal opinions drafted by outside counsel from the
jurisdiction in which the member is incorporated and/or primarily
conducts its business. FICC will continue to make a case-by-case
determination, based on its analysis of the legal opinion, as to the
legal risks presented by the home country laws of such applicants. In
doing so, FICC will retain U.S. outside counsel to review the opinions
and to advise FICC of any risks presented. The proposed rule filing
makes clear that, based on the review of the legal opinion, FICC will
determine what, if any, protective measures will be required to
mitigate any legal risks. Protective action may, for example, take the
form of requiring the member to post additional collateral and/or
requiring a member to post a certain percentage of its collateral
requirement in a certain form (such as letters of credit).
FICC recognizes that some of its non-U.S. netting and clearing
members have been members for some time. In order to protect itself
against any adverse changes in home country law that may have arisen
since the members submitted their legal opinions and in order to
determine whether any positive developments in home country law would
support eliminating or relaxing the collateral premiums currently
imposed on certain members,\12\ FICC is proposing to require all of its
current non-U.S. members (except those members whose opinions have been
issued within the past 18 months) to submit a current legal opinion
from outside non-U.S. counsel addressing the non-U.S. legal issues or
to provide a letter on their outside counsel's letterhead stating that
no material changes have occurred in home country law since the date of
the original legal opinions. FICC would require its current members to
submit these updated legal opinions (or letters) within three months of
the approval of this filing by the Commission. FICC would then review
with the assistance of its outside counsel all such revised legal
opinions (and those original legal opinions that counsel indicates
remain current) and determine whether protective measures need to be
taken or whether the current increased collateral requirements should
continue, be relaxed, or be eliminated.
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\12\ GSD currently has three non-U.S. netting members that are
subject to increased clearing fund requirements due to past
determinations of the heightened legal risk presented by the
insolvency laws of their home jurisdictions. These members are
currently posting 100 percent of their clearing fund requirement in
the form of one or more letters of credit and an additional 30
percent in the form of cash and securities.
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The proposed rule change would also require all non-U.S. members to
provide an annual update of their non-U.S. legal opinion or to provide
a letter from their outside counsel stating that no material issues
have arisen since the issuance of the opinion or the last update. FICC
may impose such additional requirements on such members as described
above based on review of such updated legal opinions.
4. Additional Changes
Upon reviewing its membership rules for non-U.S. members, FICC has
determined that certain rules applicable to both U.S. and non-U.S.
applicants and members need to be updated. Specifically, the proposed
rule change would delete all references to certifications by the chief
executive officer, chief financial officer, or other that accompany
financial statements, financial data, or regulatory reports. These
certifications do not appear to be standard documentation, and FICC
historically has not received such certifications. If a need to request
a certification with respect to a particular member or applicant
arises, FICC would have the authority to request it pursuant to the
general authority that it has in both division's rules to seek
additional information.
In addition, in a prior proposed rule change approved by the
Commission, FICC amended its rules intending to give FICC the option to
request that financial figures be submitted in U.S. dollar
equivalents.\13\ This proposed rule change deletes this option from
FICC's rules as FICC performs these calculations itself, intends to
continue doing so, and believes that the pending language has the
potential for confusion.
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\13\ FICC 2004-01, supra note 8. This proposed filing (i.e.,
FICC-2004-14) proposes to delete the reference to U.S. dollar
equivalents completely.
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In addition, the proposed rule change would amend the number of
recent routine regulatory reports that a U.S. GSD netting or MBSD
clearing applicant is required to submit to FICC to the number of such
reports that the entity has filed during the preceding 12 months or a
lesser period if the applicant has been in business or has been
registered or licensed for a lesser period. For example, a GSD U.S.
broker-dealer applicant that is a monthly FOCUS filer would need to
submit copies of all of its FOCUS reports filed during the preceding 12
months. With respect to 17a-11 reports, where the current rules do not
specify the necessary time period, the proposed rule change requires
U.S. broker-dealer applicants to submit all 17a-11 reports filed during
the preceding 24 months.
FICC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act \14\ and the rules and
regulations thereunder because it will enhance FICC's assessment and
surveillance of applicants and members and therefore help assure the
safeguarding of securities and funds which are in its custody or
control.
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\14\ 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
FICC has received comments on the proposed rule change orally and
in writing from the Institute of International Banks, representing the
GSD non-U.S. members and from one non-U.S. MBSD participant. All such
comments have been forwarded to the Commission.
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.
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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-2004-14 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-2004-14. 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, 450 Fifth Street, NW., Washington, DC 20549. Copies
of such filing also will be available for inspection and copying at
FICC's principal office and on FICC's Web site at http://ficc.com/gov/gov.docs.jsp?NS-query=#rf. 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-2004-14 and should be submitted on or before February 8, 2005.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-160 Filed 1-14-05; 8:45 am]
BILLING CODE 8010-01-P