
[Federal Register Volume 76, Number 211 (Tuesday, November 1, 2011)]
[Notices]
[Pages 67519-67520]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-28206]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65632; File No. SR-FICC-2011-08]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Expand the Applicability of 
the Fails Charge to Agency Debt Securities Transactions

October 26, 2011.
    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 October 20, 2011, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II 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 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The purpose of the proposed rule change is to expand the 
applicability of the fails charge to Agency debt securities 
transactions.

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\
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    \3\ The Commission has modified the text of the summaries 
prepared by FICC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The Treasury Markets Practices Group (the ``TMPG''), a group of 
market participants active in the Treasury securities market sponsored 
by the Federal Reserve Bank of New York (the ``FRBNY''), has been 
addressing the persistent settlement fails in Agency debt securities 
transactions that have arisen, in part, due to low interest rates.
    To encourage market participants to resolve fails promptly, the 
TMPG recommends expanding the applicability of the fails charge (which 
currently applies to Treasury securities transactions) to Agency debt 
with the objective of reducing the incidence of delivery failures and 
supporting liquidity in this market.
    The TMPG had previously recommended a charge for fails on Treasury 
securities, which the Government Securities Division (the ``GSD'') 
implemented pursuant to rule filing 2009-03.\4\ At that time, the TMPG 
recommendation did not extend to Agency securities and, therefore, the 
GSD's 2009 rule filing did not cover Agency debt. However, the TMPG 
recently has expanded its recommendation to cover certain Agency 
securities and, therefore, the GSD is proposing to apply the existing 
fails charge regime to Agency debt transactions as recommended by the 
TMPG. Specifically, transactions in debentures issued by Fannie Mae, 
Freddie Mac, and the Federal Home Loan Banks now will be subject to 
this charge. The proposed fails charge for Agencies will be the same as 
that currently in place for Treasuries and is equal to the greater of: 
(a) 0 percent and (b) 3 percent per annum minus the federal funds 
target rate. The charge will accrue each calendar day a fail is 
outstanding.
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    \4\ See Securities Exchange Act Release No. 34-59802 (April 20, 
2009), 74 FR 19248 (April 28, 2009).
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    The following examples illustrate the manner in which the proposed 
fails charge will apply:

    Example 1:  A settlement obligation fails and the next calendar 
date is a valid FICC business date. The GSD calculates the TMPG fail 
charge from the date the fail occurs to the next valid FICC business 
date. As the next valid business date is the next calendar date, the 
member's credit/debit resulting from the TMPG fail charge is 
assessed for one day.
    Example 2:  A settlement obligation fails and the next calendar 
date is a holiday occurring on a Tuesday, Wednesday or Thursday. The 
GSD calculates the TMPG fail charge from the date the fail occurs to 
the next valid FICC business date. The TMPG fail charge is assessed 
for two days; the day the fail occurs and the date of the holiday.
    Example 3:  A settlement obligation fails on Friday and the 
following Monday is not a holiday. The GSD calculates the TMPG fail 
charge from the date the fail occurs to the next valid FICC business 
date. The TMPG fail charge is assessed for three days; Friday, 
Saturday and Sunday.

    FICC's Board of Directors (or appropriate Committee thereof) will 
retain the right to revoke application of the proposed charges if 
industry events or practices warrant such revocation.
    The expansion of the fails charge trading practice to the Agency 
debt market would require that Rule 11 (Netting System), Section 14 
(Fails Charge) of the GSD rulebook be amended to make such rule 
applicable to debentures issued by any of Fannie Mae, Freddie Mac or 
the Federal Home Loan Banks. The current GSD rule states that the fails 
charge shall be the product of the (i) Funds associated with a failed 
position and (ii) 3 percent per annum minus the target fed funds rate 
that is effective at 5 p.m. EST on the business day prior to the 
originally scheduled settlement date, capped at 3 percent per annum. 
FICC is proposing to restate the formula to make it clearer by amending 
section (ii) of the formula to read ``the greater of (a) 0 percent or 
(b) 3 percent per annum minus the target fed funds rate * * *.'' This 
change is not meant to affect the result of the formula in any way but 
rather is a more precise way of stating the formula.
    The proposed rule change makes clear that FICC will not guaranty 
fails charge proceeds in the event of a default (i.e., if a defaulting 
member does not pay its fail charge, members due to receive fails 
charge proceeds will have those proceeds reduced pro-rata by the 
defaulting member's unpaid amount).
Timing of Implementation
    The fails charges will apply to transactions in Agency debentures 
entered into on or after February 1, 2012, as well as to transactions 
that were entered into, but remain unsettled as of, February 1, 2012. 
For transactions entered into prior to, and unsettled as of, February 
1, 2012, the fails charge will begin accruing on the later of February 
1, 2012, or the contractual settlement date.
    FICC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act \5\ and the rules and 
regulations thereunder applicable to FICC because it would facilitate 
the prompt and

[[Page 67520]]

accurate clearance and settlement of securities transactions by 
discouraging persistent fails in the marketplace. The proposed rule 
change is not inconsistent with the existing rules of FICC, including 
any other rules proposed to be amended.
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    \5\ 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 would 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 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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) As the 
Commission may designate 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 or disapprove the 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 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 email to rule-comments@sec.gov. Please include 
File Number SR-FICC-2011-08 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-2011-08. This 
file number should be included on the subject line if email 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 will also 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/2011/ficc/2011-08.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-2011-08 
and should be submitted on or before November 22, 2011.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2011-28206 Filed 10-31-11; 8:45 am]
BILLING CODE 8011-01-P


