

[Federal Register: August 28, 2007 (Volume 72, Number 166)]
[Notices]               
[Page 49339-49341]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28au07-154]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56303; File No. SR-FICC-2007-08]

 
Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Resume Interbank Clearing 
for the General Collateral Finance Repo Service

August 22, 2007.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 11, 2007, the 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 
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 resume interbank clearing for the General 
Collateral Finance (``GCF'') Repo service.

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

1. Background
    The GCF Repo service allows FICC Government Securities Division 
(``GSD'') dealer members to trade general collateral repos throughout 
the day with inter-dealer broker netting members (``brokers'') on a 
blind basis without requiring intraday, trade-for-trade settlement on a 
delivery-versus-payment (DVP) basis. Standardized, generic CUSIP 
numbers have been established exclusively for GCF Repo processing and 
are used to specify the acceptable type of underlying Fedwire book-
entry eligible collateral, which includes Treasuries, Agencies, and 
certain mortgage-backed securities.
    The GCF Repo service was developed as part of a collaborative 
effort among FICC's predecessor, the Government Securities Clearing 
Corporation (``GSCC''), its two clearing banks, The Bank of New York 
(``BNY'') and The Chase Manhattan Bank, now JP Morgan Chase Bank, 
National Association (``Chase''), and industry representatives.\3\ GSCC 
introduced the GCF Repo service on an intraclearing bank basis in 
1998.\4\ Under the intrabank service, dealer members could engage in 
GCF Repo transactions only with other dealers that clear at the same 
clearing bank.
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    \3\ BNY and Chase remain the two clearing banks approved by FICC 
to provide GCF Repo settlement services. In the future, other banks 
that FICC in its sole discretion determines to meet its operational 
requirements may be approved to provide GCF Repo settlement 
services.
    \4\ Securities Exchange Act Release No. 40623 (October 30, 
1998), 63 FR 59831 (November 5, 1998) (SR-GSCC-98-02).
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    In 1999, GSCC expanded the GCF Repo service to permit dealer 
members to engage in GCF Repo trading on an interclearing bank basis, 
which allowed dealers using different clearing banks to enter into GCF 
Repo transactions on a blind brokered basis.\5\ Because dealer members 
that participate in the GCF Repo service do not all clear at the same 
clearing bank, expanding the service to be interclearing bank 
necessitated the establishment of a mechanism to permit after-hours 
movements of securities between the two clearing banks because GSCC 
would probably have unbalanced net GCF securities and unbalanced net 
cash positions within each clearing bank. (In other words, it was 
probable that at the end of GCF Repo processing each business day, the 
dealers in one clearing bank would be net funds borrowers while the 
dealers at the other clearing bank would be net funds lenders.) To 
address this issue, GSCC and its clearing banks established a legal 
mechanism by which securities would ``move'' across the clearing banks 
without the use of the securities Fedwire.\6\ At the end of the day 
after the GCF Repo net results were produced, securities were pledged 
using a tri-party-like mechanism, and the interbank cash component was 
moved through Fedwire. In the morning, the pledges were unwound with 
the funds being returned to the net funds lenders and the securities 
being returned to the net funds borrowers.
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    \5\ Securities Exchange Act Release No. 41303 (April 16, 1999), 
64 FR 20346 (April 26, 1999) (SR-GSCC-99-01).
    \6\ Movements of cash did not present the same need because the 
cash Fedwire is open later than the securities Fedwire.
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    However, as use of the service increased, certain payment systems' 
risk issues from the interbank funds settlements arose. In 2003, FICC 
shifted the service back to intrabank status to enable it to study the 
risk issues presented and to devise a satisfactory solution to those 
issues in order that it could bring the service back to interbank 
status.\7\
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    \7\ Securities Exchange Act Release No. 48006 (June 10, 2003), 
68 FR 35745 (June 16, 2003) (SR-FICC-2003-04).
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2. Proposal
    FICC is now seeking to return the GCF Repo service to interbank 
status. The proposed rule change would address the

[[Page 49340]]

risk issues raised by the interbank funds movement by placing a 
security interest on a dealer's ``net free equity'' (``NFE'') at the 
clearing bank to collateralize its GCF Repo cash obligation to FICC on 
an intraday basis \8\ and by making changes with respect to the morning 
``unwind'' period. No changes are being proposed with respect to the 
after-hours movement of securities occurring the previous day, which 
was used when the interbank service was first introduced.
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    \8\ NFE is a methodology that clearing banks use to determine 
whether an account holder, such as a dealer, has sufficient 
collateral to enter a specific transaction. NFE allows the clearing 
bank to place a limit on its customers' activity by calculating a 
value on the customers' balances at the bank. Bank customers have 
the ability to monitor their NFE balance throughout the day.
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    Specifically, the interbank funds payment would not move during the 
GCF morning unwind process. In lieu of making funds payments, each 
interbank dealer (``Interbank Pledging Member'') at the GCF net funds 
borrower bank would grant to FICC a security interest in its NFE-
Related Collateral \9\ in an amount equal to its pro rated share of the 
total interbank funds debit (``Prorated Interbank Cash Amount''). 
FICC's lien on this collateral would be pari passu to any lien created 
by the dealer in favor of the relevant GCF clearing bank.
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    \9\ ``NFE-Related Collateral'' is the total amount of collateral 
that a dealer has at its clearing bank.
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    FICC would in turn grant to the other clearing bank that was due to 
receive the funds a security interest in the NFE-Related Collateral to 
support the debit in the FICC account. The debit in the FICC account 
(``Interbank Cash Amount Debit'') would occur because the dealers that 
are due to receive funds in the morning must receive those funds in 
return for their release of collateral. The clearing banks would agree 
to manage the collateral value of the NFE-Related Collateral as they do 
today.
    The debit in the FICC account at the clearing bank referred to in 
the previous paragraph would be satisfied during the end of day GCF 
settlement process. Specifically, that day's new activity would yield a 
new interbank funds amount that would move at end of day; however, this 
new interbank funds amount would be netted with the amount that would 
have been due in the morning, thus further reducing the interbank funds 
movement. The NFE security interest would be released when the 
interbank funds movement is made at end of day.
    As described above, on an intraday basis, FICC would have a 
security interest in the dealers' NFE-Related Collateral. In the 
unlikely event of an intraday GCF participant default, FICC would need 
to have the NFE-Related Collateral liquidated and have use of the 
proceeds. FICC would enter into an agreement with each of the clearing 
banks whereby each bank would agree to liquidate the NFE-Related 
Collateral both for itself as well as on behalf of FICC. FICC and each 
bank would agree to share pro rata in the liquidation proceeds.
    Due the fact that the liquidation of the NFE-Related Collateral 
might take longer than one day, GSD's typical collateral liquidation 
timeframe, to be completed due to the nature of the various assets that 
may be part of a particular dealer's NFE-Related Collateral, FICC would 
establish standby liquidity facilities or other financing arrangements 
with each of the clearing banks to be invoked as needed in the event of 
the default of an interbank pledging member.
    FICC is also proposing to impose a collateral premium (``GCF 
Premium Charge'') on the GCF portion of the Clearing Fund deposits of 
all GCF participants to further protect FICC in the event of an 
intraday default of a GCF participant. FICC would require GCF 
participants to submit a quarterly ``snapshot'' of their holdings by 
asset type to enable FICC Risk Management staff to determine the 
appropriate Clearing Fund premium. GCF participants that do not submit 
this required information by the deadlines established by FICC would be 
subject to a fine and an increased Clearing Fund premium.
    Because the NFE-Related Collateral is held at the clearing banks 
and because the clearing banks monitor the activity of their dealer 
customers, FICC would have the right, using its sole discretion, to 
cease to act for a member that is a GCF Repo participant in the event 
that a clearing bank ceases to extend credit to such member.
    The proposal results in the need for the following specific GSD 
rule changes.
    1. The new terms referred to above (GCF Premium Charge, Interbank 
Cash Amount Debit, Interbank Pledging Member, NFE-Related Collateral, 
and Prorated Interbank Cash Amount) would be added to Rule 1 
(Definitions). A new term, ``NFE-Related Account,'' which is referred 
to in the definition of ``NFE-Related Collateral,'' would also be 
added.
    2. Section 3 (Collateral Allocation) of Rule 20 (Special Provisions 
for GCF Repo Transactions), which governs the GCF Repo collateral 
allocation process, would be amended to reflect the new process that 
would occur on the morning of the unwind (to be referred to as the 
morning of ``Day 2'' in the Rules).
    3. Section 3 of Rule 20 would be further amended to provide for the 
following:
    (a) The granting of the security interest in the NFE-Related 
Collateral to FICC by the dealers;
    (b) The granting of authority for FICC to provide instructions to 
the clearing banks regarding the NFE-Related Collateral by the dealers;
    (c) The granting of the security interest in the NFE-Related 
Collateral to the clearing banks by FICC; and
    (d) FICC's right to enter into agreements with the clearing banks 
regarding the collateral management of the NFE-Related Collateral, the 
liquidation of the NFE-Related Collateral, and the standby liquidity 
facilities or other financing arrangements.
    4. Rule 4 (Clearing Fund, Watch List, and Loss Allocation) would be 
amended to provide for the Clearing Fund premium that would be imposed 
on GCF Repo participants. Rule 3 (Ongoing Membership Requirements) 
would be amended to include the quarterly NFE reporting requirement 
which, if not followed timely by the members, would result in fines and 
Clearing Fund premium consequences.
    5. Rules 21 (Restrictions on Access to Services) and 22 (Insolvency 
of a Member) would be amended to provide that FICC may, in its sole 
discretion, cease to act for a member in the event that the member's 
clearing bank has ceased to extend credit to the member.
    6. The schedule of GCF time frames would be amended to reflect 
technical changes.
3. Statutory Basis
    FICC believes that the proposed rule change is consistent with the 
requirements of section 17A of the Act \10\ and the rules and 
regulations thereunder applicable to FICC because it should allow GCF 
Repo participants to expand their use of the GCF Repo service to 
include repos done with dealers that clear at a different clearing bank 
in a manner that will support the prompt and accurate clearance and 
settlement of securities transactions.
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    \10\ 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 would have any 
impact or impose any burden on competition.

[[Page 49341]]

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    Written comments have not been solicited with respect to the 
proposed rule change, and none have been received. FICC will notify the 
Commission of any written comments it receives.

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, as amended, 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-2007-08 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-2007-08. 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, on official business days between the hours 
of 10 a.m. and 3 p.m. 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-2007-08 and should be 
submitted on or before September 18, 2007.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-16958 Filed 8-27-07; 8:45 am]

BILLING CODE 8010-01-P
