
[Federal Register: August 26, 2010 (Volume 75, Number 165)]
[Notices]               
[Page 52576-52578]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26au10-102]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62743; File No. SR-FICC-2010-05]

 
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 19, 2010.
    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 18, 2010, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change described in Items I and II below, which items 
have been prepared primarily by FICC.\3\ The Commission previously 
approved the proposal on a temporary basis.\4\ The Commission is 
publishing this notice and order to solicit comments on the proposed 
rule change from interested parties and to grant accelerated approval 
through February 18, 2011.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ FICC withdrew a substantively identical proposed rule change 
filed on August 4, 2010, that sought approval without requesting 
that the approval would be temporary.
    \4\ Securities Exchange Act Release No. 60510 (August 17, 2009), 
74 FR 42716 (August 24, 2009).
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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 requirements relating to inter-dealer broker (``IDB'') 
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.

[[Page 52577]]

(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 deposits of cash and 
eligible securities from its members to provide liquidity and 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. The GSD 
uses a Value-at-Risk (``VaR'') methodology to calculate clearing fund 
requirements.\5\ The clearing fund methodology used by GSD analyzes 
risk by reference to three factors: (1) End-of-day VaR charge assessing 
market volatility for observed open positions at end-of-day after 
giving effect to offsetting positions within the portfolio; (2) 
``margin requirement differential'' (``MRD'') to address intraday risk; 
and (3) ``coverage component'' (``CC'') to adjust the calculation if 
necessary to reach a given confidence level.\6\ 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.
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    \5\ 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 
confidence level.
    \6\ Under the GSD clearing fund procedures, CC is not calculated 
with respect to IDB repo transactions. The GSD has recently adjusted 
the CC charge with respect to certain IDB cash transactions.
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    IDBs function as intermediaries trading with multiple 
contraparties, allowing anonymity between trading parties, and 
providing liquidity for the market. IDBs handle large transactions and 
operate on small spreads. They 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 the GSD with each 
trade matched to the contraparty that will ultimately deliver or 
receive the securities. Although IDBs do not generally hold positions, 
they may incur positions at the GSD when their contraparties are not 
GSD members. Because these trades are matched by the IDB to a 
contraparty prior to submission to the GSD, FICC represents that 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 contraside.
    The clearing fund requirement applicable to IDB transactions 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 the GSD. Given the importance of IDB transactions 
in the government securities marketplace, undue and 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 the GSD or 
by delaying trade submission until later in the day. Accordingly, the 
GSD adjusted the calculation of the CC charge for IDB transactions in 
November 2008 and conducted a review of the current margin methodology 
as applied to IDB activity.
    As a result of this review, the GSD proposed and the Commission 
approved the use of a one-day liquidation assumption when calculating 
clearing fund requirements applicable to IDB activity.\7\ Since IDB 
trades are matched prior to submission, the GSD believes that the one-
day liquidation period as opposed to a three-day liquidation period is 
a more reasonable assumption in this context. The assumption of a 
three-day liquidation period will continue to apply to non-IDB 
activity.
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    \7\ See note 4.
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    The GSD will continue to monitor the IDB activity of its members 
and to 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 calculations using a one-day liquidation 
horizon and using a three-day liquidation horizon and with such other 
information that the Commission may request. FICC further notes its 
ability under GSD Rule 4 to impose special charges in response to 
market circumstances or other risk factors with respect to a particular 
member.
    FICC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \8\ and the rules and 
regulations thereunder because the proposed change will modify the 
calculation of clearing fund requirements for IDB positions so that the 
clearing fund requirements is correlated more closely with the level of 
risk associated with IDB positions.
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    \8\ 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 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).\9\ 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 to assure the safeguarding of securities 
and funds in the custody or control of the clearing agency or for which 
it is responsible. The Commission finds that the approval of FICC's 
rule change on a temporary basis through February 18, 2011 is 
consistent with this section because by allowing FICC to temporarily 
modify its rules regarding the calculation of clearing fund 
requirements for IDB positions to what it believes correlates more 
closely with the level of risk associated with such positions, FICC 
will be taking steps toward potentially improving the national 
clearance and settlement system while still actively monitoring its 
ability to fulfill its safeguarding obligations.
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    FICC has requested that the Commission approve the proposed rule 
prior to the thirtieth day after publication of the notice of the 
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 continue to attempt to 
correlate IDBs' clearing fund requirements with the level of risk 
associated with their positions.
    The Commission is approving the proposed rule filing on a temporary 
basis through February 18, 2011, so that FICC will have time to further 
evaluate the modified calculation of clearing fund requirements for IDB 
positions and to report its findings and conclusions to the Commission 
and so that the Commission will have time to evaluate FICC's findings 
and conclusions before a final determination is made regarding

[[Page 52578]]

adoption of any rule on a permanent basis.

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-2010-05 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-2010-05. 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 Web site 
viewing and printing 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://dtcc.com/downloads/legal/rule_
filings/2010/ficc/2010-05.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-2010-05 and should be submitted on or before 
September 16, 2010.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (File No. SR-FICC-2010-05) be 
and hereby is approved on an accelerated basis through February 18, 
2011.\11\
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    \10\ 15 U.S.C. 78s(b)(2).
    \11\ 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.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-21200 Filed 8-25-10; 8:45 am]
BILLING CODE 8010-01-P

