
[Federal Register: April 22, 2008 (Volume 73, Number 78)]
[Notices]               
[Page 21675-21677]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22ap08-84]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57666; File No. SR-FICC-2007-05]

 
Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Restructure the Rules of 
the Government Securities Division and the Mortgage-Backed Securities 
Division Relating to Fines and To Harmonize Them With Similar Rules of 
Its Affiliates and To Restructure the Watch List

April 15, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 30, 2007, the Fixed 
Income Clearing Corporation (``FICC'') filed with the Securities and 
Exchange Commission (``Commission'') and on May 18, 2007, December 10, 
2007, and January 31, 2008, amended 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, as amended, from interested parties.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FICC is seeking to (i) restructure the Government Securities 
Division (``GSD'') and the Mortgage-Backed Securities Division 
(``MBSD'') rules related to fines, clearing fund consequences imposed 
on members for rule violations, and certain aspects of the watch list 
and (ii) harmonize its rules with similar rules of FICC's clearing 
agency affiliates, The Depository Trust Company (``DTC'') and the 
National Securities Clearing Corporation (``NSCC''). DTC and NSCC have 
filed similar proposed rule changes.\2\ FICC's proposed revisions to 
its fine schedule are set forth in Exhibit 5 to its proposed rule 
change.
---------------------------------------------------------------------------

    \2\ Securities Exchange Act Release No. 57665 (April 15, 2008) 
[SR-DTC-2007-05]. Securities Exchange Act Release No. 57667 (April 
15, 2008) [SR-NSCC-2007-07].
---------------------------------------------------------------------------

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

[[Page 21676]]

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.\3\
---------------------------------------------------------------------------

    \3\ The Commission has modified the text of the summaries 
prepared by FICC.
---------------------------------------------------------------------------

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Fines
(a) Fines Scheduled for Failure To Submit Financial and Other 
Information
    Members of the GSD and MBSD are assessed fines for failure to 
submit required financial, regulatory, and other information within the 
time frames set forth in FICC's rules. Often a member that is fined is 
a common member of FICC and DTC, FICC and NSCC, or FICC, DTC, and NSCC 
(collectively, the ``Clearing Agencies''), which would cause the member 
to incur multiple penalties for the same offense.\4\ FICC is proposing 
that when a common member of the Clearing Agencies is late in providing 
the same information to more than one Clearing Agency, the fine amount 
will be divided equally among the Clearing Agencies.\5\
---------------------------------------------------------------------------

    \4\ DTC does not currently maintain a fine in this regard. 
However, DTC has filed aproposal to adopt a fine schedule similar to 
the one used by FICC. Supra note 2.
    \5\ For example, if a firm is a member of FICC and NSCC, did not 
submit its annual audited financial statements within the required 
time frame, and this was the firm's first failure to meet the 
deadline, the $200 fine will be split equally between FICC and NSCC.
    Where the member is a participant of DTC and also a member of 
one or more of the other Clearing Agencies, the fine would be 
collected by DTC and allocated equally among the other Clearing 
Agencies, as appropriate. If the member is not a DTC participant, 
but is a common member of NSCC and FICC, NSCC will collect the fine 
and allocate the appropriate portion to FICC.
---------------------------------------------------------------------------

    In addition, FICC proposes changes to the notes to this section of 
the fine schedule to make clear that (i) the method by which the 
reporting requirements will be published and (ii) the determination of 
the fine amount after the fourth or more occasion of an offense within 
a twelve-month rolling period will be made by FICC management with the 
concurrence of the Board or the Credit and Market Risk Management 
Committee.\6\
---------------------------------------------------------------------------

    \6\ Under the rules of GSD and MBSD, the terms ``Board'' or 
``Board of Directors'' mean the Board of Directors of FICC or a 
committee thereof acting under delegated authority (``Board''). In 
this situation, the Board would have to concur with the fine.
---------------------------------------------------------------------------

(b) General Continuance Standards
    Both GSD and MBSD currently impose a fine of $1,000 on a member 
that fails to notify FICC within two business days of the member's 
learning of its non-compliance with the general continuance standards 
for membership or of its becoming subject to a statutory 
disqualification. Both GSD and MBSD currently impose a $5,000 fine if a 
member fails to notify FICC of a ``material change'' to its business. A 
material change currently includes events such as a merger or 
acquisition involving the member, a change in corporate form, a name 
change, a material change in ownership, control, or management, and 
participation as a defendant in litigation which could reasonably be 
anticipated to have a direct negative impact on the member's financial 
condition or ability to conduct its business.
    With respect to both GSD and MBSD, FICC is proposing to amend its 
rules to reflect that when a common member of the Clearing Agencies is 
late in providing the same information to more than one Clearing 
Agency, the fine amount will be divided equally among the Clearing 
Agencies.\7\
---------------------------------------------------------------------------

    \7\ DTC does not currently maintain a fine in this regard. 
However, DTC has filed a proposal to adopt a fine schedule similar 
to the one NSCC is proposing to adopt. Supra note 2.
---------------------------------------------------------------------------

(c) Fine Schedule for Late Clearing/Participants Fund Deficiency 
Payments
    GSD and MBSD Netting and Clearing members are also subject to fines 
for late payments of clearing fund and participants fund deficiency 
calls. In order to harmonize its fine schedule with NSCC's, FICC is 
proposing to adopt the fine amounts utilized by NSCC for this purpose 
and to adopt other provisions set forth in the notes to NSCC's fine 
schedule. As proposed, the first occasion lateness would generate a 
warning letter to the firm for all deficiency amounts.\8\ If the number 
of occasions of late Clearing Fund deficiency call payments within a 
three-month rolling period exceeds four, FICC will obtain the Board's 
concurrence for the fine amount. Furthermore, a late payment of more 
than one hour will result in a fine equal to the amount applicable to 
the next highest occasion for the specific deficiency amount.\9\ If a 
member is late for more than one hour and it is the member's fourth 
occasion in the rolling period, FICC will obtain the Board's 
concurrence for the fine amount.
---------------------------------------------------------------------------

    \8\ Where the member is a participant of DTC and also a member 
of one or more of the other Clearing Agencies, the fine would be 
collected by DTC and allocated equally among the other Clearing 
Agencies, as appropriate. If the member is not a DTC participant, 
but is a common member of NSCC and FICC, NSCC will collect the fine 
and allocate the appropriate portion to FICC.
    GSD and MBSD currently impose a fine for a first occasion 
lateness for its highest deficiency amount.
    \9\ For example, if a firm's deficiency amount is under 
$1,000,000, it is the firm's second occurrence of late satisfaction 
of a deficiency call in the rolling three-month period, and the firm 
is late by more than one hour, the firm would be fined $200 (i.e., 
the fine for a third occasion) instead of $100 (i.e., the fine for a 
second occasion) pursuant to the proposed fine schedule.
---------------------------------------------------------------------------

(d) Fine Schedule for Late Settlement Payments
    The GSD and MBSD currently fine members for late payment of 
settlement obligations. FICC is proposing the following to harmonize 
its fine schedule with those of NSCC. The GSD and MBSD would adopt the 
deficiency and fine amounts of the NSCC fine schedules. As a result, 
the first occasion would result in a fine rather than a warning letter 
as under FICC's current fine schedule. Also, FICC would use a rolling 
three-month period to determine the number of occasions rather than the 
current 30 days' rolling period. In addition, the fine schedules of GSD 
and MBSD would be amended to provide that (i) if the number of 
occasions within the rolling three-month period exceeds four, 
management would obtain the Board's concurrence of the fine amount and 
(ii) a payment late by more than one hour would result in a fine equal 
to the amount applicable for the next highest occasion for the specific 
deficiency amount. If a member is late for more than one hour and it is 
the member's fourth occasion in the rolling period, management would 
obtain the Board's concurrence of the fine amount.
2. Placement on the Watch List and Prohibition Against Return of Excess 
Clearing Fund as Consequences for Rules Violations
    The rules of both GSD and MBSD contain provisions requiring a 
member to be placed on the watch list and, in certain instances, 
prohibiting the return of excess clearing fund collateral as 
consequences for certain rules violations or certain member actions. 
For example, the FICC rules require that a member be placed on the 
watch list and prohibited from receiving the return of excess clearing 
fund collateral for failure to timely submit a required financial 
report or other information to FICC. FICC is proposing the deletion of 
all these provisions because the placement of a member on the watch 
list and the prohibiting of the return of a member's excess of clearing 
fund

[[Page 21677]]

collateral should result from management's monitoring of the member and 
should not automatically occur because of rules violations.\10\
---------------------------------------------------------------------------

    \10\ FICC currently has and would retain the right to deny the 
return of excess clearing fund collateral in instances where it is 
concerned about a particular member's financial or operational 
capability.
---------------------------------------------------------------------------

3. Consequences for Being on the Watch List
    Currently, the GSD rules contain a very specific amount by which 
the clearing fund requirement of a netting member that is placed on the 
watch list may be increased.\11\ The MBSD and NSCC rules contain 
provisions that are more general in this regard.\12\ FICC believes the 
GSD rules are unnecessarily specific in this regard and should be 
amended to more closely reflect the MBSD and NSCC rules.
---------------------------------------------------------------------------

    \11\ The GSD rules currently state that GSD ``may require a 
Netting Member that has been placed on the Watch List, to make and 
maintain a deposit to the Clearing Fund over and above the amount 
determined in accordance with Section 2 of Rule 4 (which additional 
deposit shall constitute a portion of the Netting Member's Required 
Fund Deposit) of up to 200 percent of its highest single Business 
Day's Required Fund Deposit during the most recent 20 Business Days, 
or such higher amount as the Board may deem necessary * * *.''
    \12\ For example, MBSD rules state that MBSD ``may require a 
Participant that has been placed on the Watch List to make and 
maintain a deposit to the Participants Fund over and above the 
amount determined * * *.''
---------------------------------------------------------------------------

    FICC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \13\ and the rules and 
regulations thereunder applicable to FICC because it should assure the 
safeguarding of securities and funds in FICC's custody or control or 
for which it is responsible by assisting FICC and its members in 
interpreting and understanding the rules with regard to fines, clearing 
fund consequences for rule violations, and certain aspects of the watch 
list.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

(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 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-2007-05 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-2007-05. 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.dtcc.com/downloads/legal/rule_filings/2007/
ficc/2007-05.pdf, http://www.dtcc.com/downloads/legal/rule_filings/
2007/ficc/2007-05-amendment.pdf, http://www.dtcc.com/downloads/legal/
rule_filings/2007/ficc/2007-05-amendment-2.pdf, and http://
www.dtcc.com/downloads/legal/rule_filings/2007/ficc/2007-05-
amendment3.pdf. 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-2007-05 and should be submitted on or before May 13, 2008.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-8599 Filed 4-21-08; 8:45 am]

BILLING CODE 8010-01-P
