
[Federal Register: July 21, 2008 (Volume 73, Number 140)]
[Notices]
[Page 42386-42388]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21jy08-98]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58156; File No. SR-FICC-2007-05]


Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving Proposed Rule Change as Amended 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

July 15, 2008.

I. Introduction

    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
proposed rule change SR-FICC-2007-05 pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'').\1\ On April 22, 2008,
the Commission published notice of the proposed rule change to solicit
comments from interested parties.\2\ The Commission received no comment
letters in response to the proposed rule change. For the reasons
discussed below, the Commission is approving the proposed rule change,
as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 57666 (April 15, 2008),
73 FR 21675.

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[[Page 42387]]

II. Description

    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.\3\ FICC's proposed revisions to
its fine schedule are set forth in Exhibit 5 to its proposed rule
change.
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    \3\ 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].
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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\
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    \4\ The Clearing Agencies do not view the proposed rule changes
as fee reductions because they never intended to charge a common
member two or three times for a single violation that trips another
clearing agency's rules on the same matter.
    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
used by FICC. Supra note 3.
    \5\ For example, if a firm that 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.
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    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\
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    \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.
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(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\
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    \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 3.
    Where the member is a participant of DTC and also a member of
one or more of the other Clearing Agencies, the fine will 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.
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(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, 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 will 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.
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    \8\ 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 will 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.
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(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 will adopt the
deficiency and fine amounts of the NSCC fine schedules. As a result,
the first occasion will result in a fine rather than a warning letter
as under FICC's current fine schedule. Also, FICC will use a rolling
three-month period to determine the number of occasions rather than the
current 30-day rolling period. In addition, the fine schedules of GSD
and MBSD will be amended to provide that (i) if the number of occasions
within the rolling three-month period exceeds four, management will
obtain the Board's concurrence of the fine amount and (ii) a payment
late by more than one hour will 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 will 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.

[[Page 42388]]

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

    The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a registered clearing agency. In particular,
the Commission believes the proposal is consistent with the
requirements of section 17A(b)(3)(F),\13\ which, among other things,
requires that the rules of a clearing agency are designed to remove
impediments to and perfect the mechanisms of a national system for the
prompt and accurate clearance and settlement of securities transactions
and with the requirements of section 17A(b)(3)(H) \14\ which, among
other things, requires that the rules of a clearing agency provide a
fair procedure with respect to the disciplining of participants and the
denial of participation to any person seeking to be a participant. The
Commission finds that the proposed rule change, which restructures and
harmonizes FICC's fines with those of DTC and NSCC, is consistent with
those statutory obligations.
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ 15 U.S.C. 78q-1(b)(3)(H).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
in particular section 17A of the Act and the rules and regulations
thereunder. In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition and capital
formation.\15\
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    \15\ 15 U.S.C. 78c(f).
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    It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-FICC-2007-05), as amended,
be and hereby is approved.

    For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-16591 Filed 7-18-08; 8:45 am]

BILLING CODE 8010-01-P
