
[Federal Register Volume 78, Number 230 (Friday, November 29, 2013)]
[Notices]
[Pages 71702-71704]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-28569]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70925; File No. SR-FICC-2013-10]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Establish the Minimum 
Financial Requirements for the Existing Membership Category of 
Registered Investment Company Netting Members in the Government 
Securities Division

November 22, 2013.
    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 November 12, 2013, the Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared 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 this rule filing is to amend the Rulebook (the 
``Rules'') of the Government Securities Division (the ``GSD'') of FICC 
to establish the minimum financial requirements for the existing 
membership category of Registered Investment Company Netting Members 
(``RICs'').\3\
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    \3\ Pursuant to the GSD Rules, the term ``Registered Investment 
Company Netting Member'' is an Investment Company (1) that is 
registered with the Commission, (2) admitted to membership in GSD's 
Netting System pursuant to the GSD Rules, and (3) whose membership 
in the Netting System has not been terminated.
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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 such statements.

[[Page 71703]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    (i) The purpose of this proposed rule change is to establish 
financial minimum requirements for RICs. Historically, the GSD has 
served the ``sell-side'' community (which primarily consists of 
entities such as banks and broker-dealers) and excluded RICs, which are 
key participants in the market served by the GSD. FICC believes the 
participation of this category as guaranteed service members will 
contribute to the safety, efficiency, and transparency of the market by 
allowing FICC to capture a greater part of the activity of its existing 
members and by introducing activity of current non-members to FICC. 
FICC also believes that RICs will benefit from the GSD netting service 
and the associated operational efficiencies of a central counterparty 
service. Currently, RICs are already a permitted category in the GSD 
Rules, however, the proposed rule change establishes their minimum 
financial requirements.\4\ Specifically, Rule 2A (``Initial Membership 
Requirements'') of the GSD Rules will provide that the minimum 
financial requirement for RICs will be $100 million in net asset value. 
The rules have also been revised to state that the GSD will make its 
services available to Persons \5\ in other categories as FICC may 
determine, subject to the approval of the Commission. This disclosure 
is also reflected in the Clearing Rules of the Mortgage-Backed 
Securities Division (``MBSD'').
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    \4\ The membership requirements for RICs will be the same as 
those proposed for the central counterparty service of the Mortgage-
Backed Securities Division.
    \5\ Pursuant to the GSD Rules, the term ``Person'' means a 
partnership, Corporation, limited liability corporation or other 
organization, entity, or individual.
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    Currently, GSD Rule 3, ``Ongoing Membership Requirements,'' permits 
GSD to assess a premium against a netting member whose Clearing Fund 
requirement exceeds its specified regulatory capital figure.\6\ This 
premium will now include RICs because they will be netting members.
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    \6\ By way of example, under the current GSD Rules, if a member 
has a Clearing Fund requirement of $11.4 million and excess net 
capital of $10 million, its ``ratio'' is 1.14 (or 114 percent), and 
the applicable collateral premium would be 114 percent of $1.4 
million (which is equal to the amount by which the member's Clearing 
Fund requirement exceeds its excess net capital), or $1,596,000. The 
current GSD Rules provide that FICC has the right to: (i) Apply a 
lesser collateral premium (including no premium) based on specific 
circumstances (such as a member being subject to an unexpected 
haircut or capital charge that does not fundamentally change its 
risk profile), and (ii) return all or a portion of the collateral 
premium amount if it believes that the member's risk profile does 
not require the maintenance of that amount.
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    The concept of a ``Tier One Netting Member'' and a ``Tier Two 
Netting Member'' was introduced to the GSD Rules by rule filing SR-
FICC-2010-09.\7\ Tier One Netting Members will be subject to potential 
loss mutualization, whereas Tier Two Netting Members will not be 
subject to loss mutualization due to a legal prohibition. Under the 
present rule filing, the registered investment company members will be 
Tier Two Netting Members because they are not permitted by law to 
mutualize loss.
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    \7\ Tier One Members include banks, dealers, futures commission 
merchants, government securities issuers and registered clearing 
agencies and Tier Two Members include RICs. See Securities Exchange 
Act Release No. 34-63986 (Feb. 28, 2011), 76 FR 12144 (Mar. 4, 
2011).
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    In rule filing SR-FICC-2010-09, FICC also introduced an amended 
loss allocation methodology whereby any loss allocation is first made 
against the retained earnings of FICC attributable to the GSD (after 
application of the defaulting member's Clearing Fund, funds-only 
settlement amounts and any other collateral on deposit with the GSD and 
any funds from any cross-margining or cross-guaranty agreements), in an 
amount up to 25 percent of FICC's retained earnings or such higher 
amount as may be approved by the Board of Directors of FICC. If a loss 
still remains, the GSD will divide the loss between the Tier One 
Netting Members and the Tier Two Netting Members. Tier One Netting 
Members will be allocated the loss applicable to them first by 
assessing the Clearing Fund deposit of each such member in the amount 
of up to $50,000, equally. If a loss remains, Tier One Netting Members 
will be assessed ratably, in accordance with the respective amounts of 
their Required Fund Deposits, based on the average daily amount of the 
member's Required Fund Deposit over the prior twelve months. Applicable 
Tier Two Netting Members will be assigned the Tier Two loss amount 
using a loss allocation methodology which does not provide for loss 
mutualization and is based on the activity that the Tier Two Netting 
Member conducted with the defaulting member.\8\ As stated above, the 
RICs will be treated as Tier Two Netting Members under the present 
proposal.\9\
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    \8\ Please refer to Rule 4 Section 7 for the rules which pertain 
to the satisfaction of any loss incurred by FICC as a result of the 
failure of a defaulting member to fulfill its obligations to FICC.
    \9\ The MBSD has the same loss allocation methodology.
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    It should be noted that RICs will not be permitted to utilize the 
GCF Repo[supreg] service.
    (ii) Statutory Basis.
    The present filing is consistent with the requirements of the 
Section 17A(b)(3)(F) of the Act, as amended, and the rules and 
regulations thereunder applicable to FICC because the proposed rule 
change (1) establishes a statutory category which is consistent with 
Rule 17A(b)(3)(B) of the Securities Exchange Act of 1934 and thus 
prohibits the unfair discrimination in the admission of RICs, (2) 
permits the participation of RICs, thereby providing these firms with 
the benefits of central counterparty service, and (3) allows FICC to 
capture a greater market share of the activity of its existing members 
and non-members thus promoting the prompt and accurate clearance and 
settlement of securities transactions.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Establishing minimum financial requirements for RICs and giving 
such entities the opportunity to join GSD is consistent with the Rule 
17A(b)(3)(B) of the Securities Exchange Act of 1934. This Rule requires 
clearing agencies to provide access to its services for certain 
enumerated statutory categories and RICs are reflected as one of the 
statutory categories. Furthermore, subject to the Commission's approval 
of this rule filing, RICs will be subject to the same initial 
membership requirements and ongoing membership requirements as other 
GSD members. As a result, 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 changes have not yet 
been solicited or received. FICC will notify the Commission of any 
written comments received by FICC.

D. Advance Notices Filed Pursuant to Section 806(e) of the Payment, 
Clearing and Settlement Supervision Act

    (a) Not applicable.
    (b) Not applicable.
    (c) Not applicable.
    (d) Not applicable.
    (e) Not applicable.

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

[[Page 71704]]

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-comment@sec.gov. Please include File 
Number SR-FICC-2013-10 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- 2013-10. 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 of submission. 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 Room Section 
located at 100 F Street NE., Washington, DC 20549-1090 on official 
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
such filing 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/2013/ficc/SR_FICC_2013_10.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-2013-10 and should be 
submitted on or before December 20, 2013.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-28569 Filed 11-27-13; 8:45 am]
BILLING CODE 8011-01-P


