
[Federal Register: August 24, 2009 (Volume 74, Number 162)]
[Notices]               
[Page 42716-42717]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24au09-116]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60510; File No. SR-FICC-2009-08]

 
Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval on a Temporary 
Basis of Proposed Rule Change To Modify the Rules of the Government 
Securities Division Regarding the Calculation of Clearing Fund Deposits 
Relating to Inter-Dealer Broker Positions

August 17, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on August 10, 2009, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change 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 parties and is granting accelerated approval of the 
proposal through August 20, 2010.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The proposed rule change seeks to modify the rules of FICC's 
Government Securities Division (``GSD'') regarding the calculation of 
clearing fund deposits relating to inter-dealer broker positions.

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.\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

    The GSD maintains a clearing fund comprised of member deposits of 
cash and eligible securities to provide liquidity and to enable FICC to 
satisfy any losses that might otherwise be incurred as a result of a 
member's default and the subsequent close-out of its positions. GSD 
uses a Value-at-Risk (``VaR'') methodology to calculate clearing fund 
requirements.\4\ The clearing fund methodology used by GSD analyzes 
risk by reference to three factors: (i) End-of-day VaR charge to assess 
market volatility for observed open positions at the end-of-day after 
giving effect to offsetting positions within the portfolio; (ii) margin 
requirement differential (``MRD'') to address intraday risk; and (iii) 
coverage component (``CC'') to adjust the calculation if necessary to 
reach a given confidence level. The margin calculation is predicated 
upon an assumption that the open positions of a defaulting member would 
be liquidated at the end of a three-day period.
---------------------------------------------------------------------------

    \4\ VaR is defined as the maximum amount of money that may be 
lost on a given portfolio over a given period of time within a given 
level of confidence.
---------------------------------------------------------------------------

    Inter-dealer brokers (``IDBs'') function as intermediaries trading 
with multiple counterparties and with respect to government securities 
trades, provide anonymity and liquidity for trading partners. IDBs 
operate on small spreads, handle large transactions, and perform a 
critical function in the government securities market in the absence of 
a centralized trading exchange.
    IDBs submit affirmed trades from their systems to GSD, each trade 
already matched to the counterparty that will ultimately deliver or 
receive the securities. Although IDBs generally do not maintain 
positions, they may have positions versus GSD when their counterparties 
are not GSD members. Because these trades are matched by the IDB to a 
counterparty prior to submission to the GSD, the risk to FICC in the 
case of an IDB's default is different from that presented when a dealer 
member submits a trade that may not have been already matched to a 
counterparty.
    The clearing fund requirement applicable to IDBs has increased 
significantly because of recent market volatility to the point where 
FICC believes it is disproportionate to the risk that IDB activity 
presents to GSD. Given the importance of IDB transactions in the 
government securities marketplace, unsustainable margin requirements on 
GSD IDB activity may be harmful and may introduce systemic risk in the 
event members are motivated to avoid imposition of disproportionate 
changes by netting outside of GSD or by delaying trade submission until 
later in the day.\5\
---------------------------------------------------------------------------

    \5\ Accordingly, GSD invoked its emergency power to adjust CC to 
IDB transactions in November 2008 and conducted a review of the 
current margin methodology as applied to IDB activity. As a result, 
CC currently is not calculated with respect to inter-dealer broker 
repo transactions, and GSD has recently adjusted the CC charge with 
respect to certain cash IDB transactions on a temporary basis.
---------------------------------------------------------------------------

    To alleviate this situation, FICC is proposing to use a one-day 
liquidation assumption when calculating margin applicable to IDB 
activity.\6\ The assumption of a three-day liquidation period will 
continue to apply to non-IDB activity. Since IDB trades are matched 
prior to submission, FICC believes that the one-day liquidation period 
is a reasonable assumption. FICC will continue to monitor the IDB 
activity of its members and will periodically reassess whether the one-
day liquidation period provides adequate coverage. In this regard, FICC 
will provide the Commission with data to allow the Commission to track 
the magnitudes and behaviors of the VaR for a one-day liquidation 
horizon and for a three-day liquidation horizon, and with such other 
information that the Commission may request. FICC further notes its 
ability to impose special charges in response to market circumstances 
or other risk factors with respect to a particular member.
---------------------------------------------------------------------------

    \6\ Margin calculated for all other activity is based on a 
three-day liquidation horizon.
---------------------------------------------------------------------------

    FICC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \7\ and the rules and 
regulations thereunder because the proposed change will modify the 
calculation of clearing fund deposits of IDB positions so that the 
clearing fund contribution is

[[Page 42717]]

correlated more closely with the level of risk associated with IDB 
positions.
---------------------------------------------------------------------------

    \7\ 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 relating to the proposed rule change have not yet 
been solicited or received. FICC will notify the Commission of any 
written comments received by FICC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder and particularly with the requirements of Section 
17A(b)(3)(F).\8\ Section 17A(b)(3)(F) requires that the rules of a 
clearing agency remove impediments to and perfect the mechanism of a 
national system for the prompt and accurate clearance and settlement of 
securities transactions and protect investors and the public interest. 
The Commission finds that the approval of FICC's rule change is 
consistent with this section because it will allow FICC to modify its 
rules regarding the calculation of clearing fund deposits on inter-
dealer broker positions to correlate more closely those deposits with 
the level of risk associated with such positions.
---------------------------------------------------------------------------

    \8\ U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    FICC has requested that the Commission approve the proposed rule 
prior to the thirtieth day after publication of the notice of the 
amended filing. The Commission finds good cause for approving the 
proposed rule change prior to the thirtieth day after the publication 
of notice because such approval will allow FICC to better correlate 
inter-dealer broker clearing fund deposits with the level of risk 
associated with their positions immediately.
    The Commission is approving the proposed rule filing on a temporary 
basis through August 20, 2010, so that FICC will have time to evaluate 
the modified calculation of clearing fund deposits on inter-dealer 
broker positions and to report its findings to the Commission before 
the Commission decides on permanent approval.

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. 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-2009-08 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FICC-2009-08. 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 filings 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/2009/
ficc/2009-08.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-2009-08 and should be submitted on or before September 14, 2009.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (File No. SR-FICC-2009-08) be and 
hereby is approved on an accelerated basis through August 20, 2010.\10\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(2).
    \10\ 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).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E9-20197 Filed 8-21-09; 8:45 am]

BILLING CODE 8010-01-P
