
[Federal Register Volume 78, Number 189 (Monday, September 30, 2013)]
[Notices]
[Pages 60002-60003]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-23682]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70484; File No. SR-FICC-2013-08]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change Concerning the Mortgage-Backed 
Securities Division's Notification of Settlement Process

September 24, 2013.

I. Introduction

    On August 9, 2013, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-FICC-2013-08 pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on August 23, 2013.\3\ The Commission received no 
comment letters. For the reasons discussed below, the Commission is 
approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 70232 (August 19, 2013), 
78 FR 52598 (August 23, 2013) (SR-FICC-2013-08).
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II. Description

A. Nature of the Proposed Rule Change

    FICC is making two changes to the notification of settlement 
(``NOS'') process currently utilized by FICC's mortgage-backed 
securities division (``MBSD''). First, FICC's rule change would 
shorten, from two days to one, the grace period during which members 
must reconcile NOS submissions. Second, the rule change would increase 
from $25 to $150 the penalty that members must pay each day if they 
fail to reconcile an NOS submission within this grace period.

B. The Notification of Settlement Process

    MBSD members settle certain trades between themselves, without 
using the MBSD as a central counterparty.\4\ The NOS process ensures 
that the MBSD is notified when these bilateral settlements occur.\5\ 
Under the NOS process, both counterparties to a bilaterally settled 
trade must provide the MBSD with an NOS submission stating that 
settlement has occurred and on what terms.\6\ If the trade details set 
forth in the counterparties' respective NOS submissions match, the MBSD 
updates each counterparty's purchase and sale report to reflect that 
the transaction has settled, and deletes the transaction from the 
counterparties' respective open commitment reports.\7\
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    \4\ Transactions may settle bilaterally (i.e., outside of the 
MBSD) for several reasons, including: (i) The transactions are 
ineligible for pool netting, (ii) the transactions involve a 
specified pool trade, or (iii) the parties elect to settle the trade 
bilaterally. The following types of transactions are all eligible 
for bilateral settlement: (i) Settlement-balance order, destined to-
be announced (``TBA'') transactions; (ii) trade-for-trade TBA 
transactions; and (iii) specified pool trades.
    \5\ The MBSD must be notified when trades settle bilaterally 
because the trades are protected by the MBSD's trade guarantee. As a 
result, the MBSD will continue to hold initial margin and collect 
mark-to-market margin for these trades until it is notified that the 
trades have settled. See generally MBSD Rulebook, Rule 4.
    \6\ MBSD Rulebook, Rule 10, Section 2.
    \7\ Id.
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    Members seeking to initiate the NOS process are required to provide 
the MBSD with an NOS submission on clearance day.\8\ The counterparties 
to these trades must reconcile the initiator's NOS submission within 
two days of its receipt by the MBSD. To reconcile an NOS submission, 
the counterparty must either provide the MBSD with an NOS submission 
that matches the one provided by the initiator, or send the MBSD a DK 
notice.\9\ Reconciliation can also occur when the initiator rescinds 
its NOS submission before its counterparty provides a matching NOS. 
Currently, if either the initiator or the counterparty fails to 
reconcile an NOS submission within two days of its receipt by the MBSD, 
that member is subject to a late fee of $25.00 per day. As noted, the 
rule change, as approved, will shorten this two-day grace period to one 
day, and raise the fine from $25 to $150 per day.
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    \8\ For purposes of the NOS process, clearance day is the day on 
which the seller delivers the securities to the buyer. Clearance day 
is generally on or after the contractual settlement day.
    \9\ A ``DK'' notice is a statement that the member ``does not 
know'' (i.e., denies the existence of) a transaction. MBSD Rulebook, 
Rule 1, p. 7.
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    According to the MBSD, the timely reconciliation of NOS submissions 
serves to minimize the risk that the MBSD might unnecessarily continue 
to hold and collect margin on a trade that has, unbeknownst to the 
MBSD, settled bilaterally. FICC contends that the timely reconciliation 
of NOS submissions is also important because, in the event of a 
member's insolvency, FICC must quickly and accurately determine which 
of the insolvent member's positions need to be liquidated.

III. Discussion

    Section 19(b)(2)(C) of the Act \10\ directs the Commission to 
approve a self-regulatory organization's proposed rule change if the 
Commission finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such organization. Section 17A(b)(3)(F) of the Act \11\ 
requires, among other things, that the rules of a clearing agency 
registered with the Commission be designed to (i) Assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency, or for which it is responsible, (ii) 
foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions; and (iii) protect 
investors and the public interest.
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    \10\ 15 U.S.C. 78s(b)(2)(C).
    \11\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission concludes that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act,\12\ for several 
reasons. First, the proposed rule change helps protect the securities 
and funds in FICC's control, not only by encouraging members' timely 
compliance with the MBSD's risk management protocols, but also by 
enabling the MBSD to identify and begin liquidating an insolvent 
member's open trades more quickly. The latter could help the MBSD and 
its members avoid unnecessary losses in the event the MBSD must 
liquidate an insolvent member's open positions during a period of 
market disruption, when prices may be falling rapidly. Second, the 
proposed rule change fosters cooperation and coordination among those 
engaged in the settlement of securities transactions by encouraging 
members to provide the MBSD with reconciliation information more 
rapidly. Finally, the proposed change protects investors and the public 
interest by enhancing the MBSD's ability to manage an insolvent 
member's open positions, which should mitigate the risk that a member's 
insolvency could trigger instability in the broader financial system.
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    \12\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission concludes that the 
proposal is consistent with the requirements of the Act, particularly 
the requirements of Section 17A of the Act,\13\ and the rules and 
regulations thereunder.
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    \13\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (File No. SR-

[[Page 60003]]

FICC-2013-08) be and hereby is approved.\15\
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    \14\ 15 U.S.C. 78s(b)(2).
    \15\ 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.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-23682 Filed 9-27-13; 8:45 am]
BILLING CODE 8011-01-P


