
[Federal Register Volume 76, Number 240 (Wednesday, December 14, 2011)]
[Notices]
[Pages 77861-77862]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-31997]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65910; File No. SR-FICC-2011-08]


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

 December 8, 2011.

I. Introduction

    On October 20, 2011, the Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change SR-FICC-2011-08 pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ 
The proposed rule change was published for comment in the Federal 
Register on November 1, 2011.\2\ No comment letters were received on 
the proposal. This order approves the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 34-65632 (October 26, 
2011), 76 FR 67519 (November 1, 2011).
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II. Description

    The purpose of this rule change is to expand the applicability of 
the fails charge to Agency debt securities transactions. 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 recommended 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 after Commission approval.\3\ 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 or (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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    \3\ 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 requires 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 fed funds target 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.

[[Page 77862]]

III. Discussion

    Section 17A(b)(3)(F) of the Act \4\ requires, among other things, 
that the rules of a clearing agency be designed to promote the prompt 
and accurate clearance and settlement of security transactions and to 
generally protect investors and the public interest. Because the 
proposed rule discourages persistent fails in the marketplace by 
expanding the application of the fails charge to Agency debt securities 
transactions, the proposed rule change promotes the prompt and accurate 
clearance and settlement of security transactions and generally 
protects investors and the public interest and therefore is consistent 
with the requirements of Section 17A(b)(3)(F) of the Act.
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    \4\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \5\ and the 
rules and regulations thereunder.
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    \5\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\6\ that the proposed rule change (File No. SR-FICC-2011-08) be, 
and hereby is, approved.\7\
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    \6\ 15 U.S.C. 78s(b)(2).
    \7\ 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.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-31997 Filed 12-13-11; 8:45 am]
BILLING CODE 8011-01-P


