
[Federal Register Volume 74, Number 80 (Tuesday, April 28, 2009)]
[Notices]
[Pages 19248-19249]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-9557]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59802; File No. SR-FICC-2009-03]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change To Impose a Charge on 
Members With a Fail-to-Deliver in Treasury Securities

April 20, 2009.

I. Introduction

    On February 25, 2009, The Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-FICC-2009-03 pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ 
Notice of the proposal was published in the Federal Register on March 
19, 2009.\2\ The Commission received two comment letters.\3\ For the 
reasons discussed below, the Commission is granting approval of the 
proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 59569 (March 12, 2009), 
74 FR 11797.
    \3\ Letters from Leslie Rosenthal, Rosenthal Collins Group, 
L.L.C. (March 31, 2009) and Murray Pozmanter, Managing Director, 
FICC (April 3, 2009).
---------------------------------------------------------------------------

II. Description

    The Treasury Markets Practices Group (``TMPG''), a group of market 
participants that is active in the treasury securities market and is 
sponsored by the Federal Reserve Bank of New York (``FRBNY''), has been 
devising ways to address the persistent settlement fails in treasury 
securities transactions that have arisen, according to the TMPG, due to 
the recent market turbulence and low short-term interest rates. In 
order to encourage market participants to resolve fails promptly, the 
TMPG has proposed for adoption a ``best practice'' that would call for 
the market-wide assessment of a charge on fail-to-deliver positions. As 
part of the implementation of this ``best practice,'' the TMPG has 
asked the Government Securities Division (``GSD'') of FICC to impose a 
charge on failed positions involving treasury securities within FICC.
    The charge FICC is adopting will be equal to the product of net 
money due on the failed position and three (3) percent per annum minus 
the Target Fed funds target rate that is effective at 5 p.m. Eastern 
Standard Time on the business day prior to the originally scheduled 
settlement date and will be capped at three (3) percent per annum. The 
charge will be applied daily and will be a debit on a member's GSD 
monthly bill for a fail-to deliver position and a credit on a member's 
GSD monthly bill for fail-to-receive position.
    The following example illustrates the manner in which the proposed 
fails charge would apply.
    Member A fails to deliver today on a $50 million position on which 
he is owed $50.1 million. The Target Fed funds rate yesterday at 5 p.m. 
was one (1) percent. The fails charge will be the product of two (2) 
percent per annum applied to the funds amount of $50.1 million, thus 
equaling a charge of $2,783.33 for that day. The bill of the member 
failing to deliver will reflect a debit of $2,783.33.
    In the event that FICC is the failing party because, for example, 
it received securities too close to the close of the Fedwire for 
redelivery, the fail charge will be distributed pro rata to the netting 
members based upon usage of the GSD's services, which is the same 
methodology that is used when FICC incurs finance charges.\4\
---------------------------------------------------------------------------

    \4\ FICC Rules, Section 6 of Rule 12.
---------------------------------------------------------------------------

    The rule change provides that the Credit and Market Risk Management 
Committee of FICC's Board of Directors will retain the right to revoke 
application of the charge if industry events or practices warrant such 
revocation.

III. Comment Letters

    The Commission received two letters, one from a registered broker-
dealer raising concerns about the ``unintended consequences'' of the 
proposed rule change and the other from FICC responding to the 
commenter's letter.\5\ The broker-dealer, a member of FICC, raised 
concerns that the pervasive fails situation that FICC intends to remedy 
with the rule change no longer exists because the market corrected 
itself when fails became an issue, and therefore the instances of fails 
can be held to a minimum if the industry commits to follow best 
practices. Further, this broker contends that the rule may potentially 
increase counterparty risk because firms would shift from clearing 
through FICC to clearing through individual counterparties, where fails 
are more easily controlled, in an effort to avoid the fails penalty. 
The unintended consequences of the rule change, the commenter asserted, 
may be detrimental to the global market by reducing market liquidity 
caused by the reduction in the supply of securities, by eroding 
investor confidence, by decreasing securities available for lending, 
and by

[[Page 19249]]

introducing the potential to game the system due to wider spreads 
between bid and offer prices, resulting in allowing someone to take 
advantage of those inadvertently caught in a fail situation.
---------------------------------------------------------------------------

    \5\ Supra note 3.
---------------------------------------------------------------------------

    In response to these concerns, FICC noted that FICC's delivery 
allocation process, a process that matches buy obligations to sell 
obligations and is applicable to all members, is necessary to ensure 
that the clearing corporation remains flat. Accordingly, FICC contends, 
the fails charge would not have any unique impact on the commenter's 
firm. With regards to the concern that the fails charge may result in 
firms shifting their business away from FICC in order to avoid a fails 
charge, FICC agrees that applying the fails charge as proposed by the 
rule would result in adverse consequences if the rest of the industry 
does not adopt it. However, FICC argues, FICC would cease applying the 
charge if the Credit and Market Risk Management Committee of FICC's 
Board of Directors determines that industry events or practices warrant 
such a revocation. Finally, FICC rejected the commenters assertions 
regarding the proposed rule change's effect on market liquidity and 
providing new opportunities for firms to ``game'' the system as 
``highly speculative.'' Even if these adverse effects developed, FICC 
argues that it would be able to respond by eliminating the fails charge 
or taking other appropriate action.

IV. Discussion

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions, assure 
the safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible, to 
foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions, to remove 
impediments to and perfect the mechanism of a national system for the 
prompt and accurate clearance and settlement of securities 
transactions, and, in general, to protect investors and the public 
interest.\6\ The Commission believes the rule change is consistent with 
Act because the fails-to-deliver charge should discourage firms from 
creating and maintaining persistent fails-to-deliver in treasury 
securities, which if permitted to subsist, may adversely affect FICC's 
ability to safeguard securities or funds in FICC's control or for which 
it is responsible and to promptly and accurately clear and settle 
securities transactions. In the event that the rule change does not 
have the intended affect or produces other undesirable consequences, 
FICC has the ability to eliminate the rule or take other appropriate 
action to address any ensuing problems.\7\
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78q(b)(3)(F).
    \7\ Elimination or modification of the fails-to-deliver charge 
would require FICC to file a proposed rule change pursuant to 
Section 19(b) of the Act.
---------------------------------------------------------------------------

    Accordingly, for the reasons stated above the Commission believes 
that the rule change is consistent with FICC's obligation under Section 
17A of the Act.

V. 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 with the requirements of Section 17A of the Act and the 
rules and regulations thereunder.\8\
---------------------------------------------------------------------------

    \8\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-FICC-2008-03) be and hereby 
is approved.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-9557 Filed 4-27-09; 8:45 am]
BILLING CODE 8010-01-P


