73 FR 78 pgs. 21675-21677 - Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Restructure the Rules of the Government Securities Division and the Mortgage-Backed Securities Division Relating to Fines and To Harmonize Them With Similar Rules of Its Affiliates and To Restructure the Watch List
Type: NOTICEVolume: 73Number: 78Pages: 21675 - 21677
Docket number: [Release No. 34-57666; File No. SR-FICC-2007-05]
FR document: [FR Doc. E8-8599 Filed 4-21-08; 8:45 am]
Agency: Securities and Exchange Commission
Official PDF Version: PDF Version
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57666; File No. SR-FICC-2007-05]
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Restructure the Rules of the Government Securities Division and the Mortgage-Backed Securities Division Relating to Fines and To Harmonize Them With Similar Rules of Its Affiliates and To Restructure the Watch List
April 15, 2008.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 ("Act"),1notice is hereby given that on April 30, 2007, the Fixed Income Clearing Corporation ("FICC") filed with the Securities and Exchange Commission ("Commission") and on May 18, 2007, December 10, 2007, and January 31, 2008, amended 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, as amended, from interested parties.
Footnotes:
1 15 U.S.C. 78s(b)(1).
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
FICC is seeking to (i) restructure the Government Securities Division ("GSD") and the Mortgage-Backed Securities Division ("MBSD") rules related to fines, clearing fund consequences imposed on members for rule violations, and certain aspects of the watch list and (ii) harmonize its rules with similar rules of FICC's clearing agency affiliates, The Depository Trust Company ("DTC") and the National Securities Clearing Corporation ("NSCC"). DTC and NSCC have filed similar proposed rule changes.2FICC's proposed revisions to its fine schedule are set forth in Exhibit 5 to its proposed rule change.
Footnotes:
2 Securities Exchange Act Release No. 57665 (April 15, 2008) [SR-DTC-2007-05]. Securities Exchange Act Release No. 57667 (April 15, 2008) [SR-NSCC-2007-07].
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
Footnotes:
3 The Commission has modified the text of the summaries prepared by FICC.
(A) Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Fines
(a) Fines Scheduled for Failure To Submit Financial and Other Information
Members of the GSD and MBSD are assessed fines for failure to submit required financial, regulatory, and other information within the time frames set forth in FICC's rules. Often a member that is fined is a common member of FICC and DTC, FICC and NSCC, or FICC, DTC, and NSCC (collectively, the "Clearing Agencies"), which would cause the member to incur multiple penalties for the same offense.4FICC is proposing that when a common member of the Clearing Agencies is late in providing the same information to more than one Clearing Agency, the fine amount will be divided equally among the Clearing Agencies.5
Footnotes:
4 DTC does not currently maintain a fine in this regard. However, DTC has filed aproposal to adopt a fine schedule similar to the one used by FICC. Supra note 2.
5 For example, if a firm is a member of FICC and NSCC, did not submit its annual audited financial statements within the required time frame, and this was the firm's first failure to meet the deadline, the $200 fine will be split equally between FICC and NSCC.
Where the member is a participant of DTC and also a member of one or more of the other Clearing Agencies, the fine would be collected by DTC and allocated equally among the other Clearing Agencies, as appropriate. If the member is not a DTC participant, but is a common member of NSCC and FICC, NSCC will collect the fine and allocate the appropriate portion to FICC.
In addition, FICC proposes changes to the notes to this section of the fine schedule to make clear that (i) the method by which the reporting requirements will be published and (ii) the determination of the fine amount after the fourth or more occasion of an offense within a twelve-month rolling period will be made by FICC management with the concurrence of the Board or the Credit and Market Risk Management Committee.6
Footnotes:
6 Under the rules of GSD and MBSD, the terms "Board" or "Board of Directors" mean the Board of Directors of FICC or a committee thereof acting under delegated authority ("Board"). In this situation, the Board would have to concur with the fine.
(b) General Continuance Standards
Both GSD and MBSD currently impose a fine of $1,000 on a member that fails to notify FICC within two business days of the member's learning of its non-compliance with the general continuance standards for membership or of its becoming subject to a statutory disqualification. Both GSD and MBSD currently impose a $5,000 fine if a member fails to notify FICC of a "material change" to its business. A material change currently includes events such as a merger or acquisition involving the member, a change in corporate form, a name change, a material change in ownership, control, or management, and participation as a defendant in litigation which could reasonably be anticipated to have a direct negative impact on the member's financial condition or ability to conduct its business.
With respect to both GSD and MBSD, FICC is proposing to amend its rules to reflect that when a common member of the Clearing Agencies is late in providing the same information to more than one Clearing Agency, the fine amount will be divided equally among the Clearing Agencies.7
Footnotes:
7 DTC does not currently maintain a fine in this regard. However, DTC has filed a proposal to adopt a fine schedule similar to the one NSCC is proposing to adopt. Supra note 2.
(c) Fine Schedule for Late Clearing/Participants Fund Deficiency Payments
GSD and MBSD Netting and Clearing members are also subject to fines for late payments of clearing fund and participants fund deficiency calls. In order to harmonize its fine schedule with NSCC's, FICC is proposing to adopt the fine amounts utilized by NSCC for this purpose and to adopt other provisions set forth in the notes to NSCC's fine schedule. As proposed, the first occasion lateness would generate a warning letter to the firm for all deficiency amounts.8If the number of occasions of late Clearing Fund deficiency call payments within a three-month rolling period exceeds four, FICC will obtain the Board's concurrence for the fine amount. Furthermore, a late payment of more than one hour will result in a fine equal to the amount applicable to the next highest occasion for the specific deficiency amount.9If a member is late for more than one hour and it is the member's fourth occasion in the rolling period, FICC will obtain the Board's concurrence for the fine amount.
Footnotes:
8 Where the member is a participant of DTC and also a member of one or more of the other Clearing Agencies, the fine would be collected by DTC and allocated equally among the other Clearing Agencies, as appropriate. If the member is not a DTC participant, but is a common member of NSCC and FICC, NSCC will collect the fine and allocate the appropriate portion to FICC.
GSD and MBSD currently impose a fine for a first occasion lateness for its highest deficiency amount.
9 For example, if a firm's deficiency amount is under $1,000,000, it is the firm's second occurrence of late satisfaction of a deficiency call in the rolling three-month period, and the firm is late by more than one hour, the firm would be fined $200 ( i.e., the fine for a third occasion) instead of $100 ( i.e., the fine for a second occasion) pursuant to the proposed fine schedule.
(d) Fine Schedule for Late Settlement Payments
The GSD and MBSD currently fine members for late payment of settlement obligations. FICC is proposing the following to harmonize its fine schedule with those of NSCC. The GSD and MBSD would adopt the deficiency and fine amounts of the NSCC fine schedules. As a result, the first occasion would result in a fine rather than a warning letter as under FICC's current fine schedule. Also, FICC would use a rolling three-month period to determine the number of occasions rather than the current 30 days' rolling period. In addition, the fine schedules of GSD and MBSD would be amended to provide that (i) if the number of occasions within the rolling three-month period exceeds four, management would obtain the Board's concurrence of the fine amount and (ii) a payment late by more than one hour would result in a fine equal to the amount applicable for the next highest occasion for the specific deficiency amount. If a member is late for more than one hour and it is the member's fourth occasion in the rolling period, management would obtain the Board's concurrence of the fine amount.
2. Placement on the Watch List and Prohibition Against Return of Excess Clearing Fund as Consequences for Rules Violations
The rules of both GSD and MBSD contain provisions requiring a member to be placed on the watch list and, in certain instances, prohibiting the return of excess clearing fund collateral as consequences for certain rules violations or certain member actions. For example, the FICC rules require that a member be placed on the watch list and prohibited from receiving the return of excess clearing fund collateral for failure to timely submit a required financial report or other information to FICC. FICC is proposing the deletion of all these provisions because the placement of a member on the watch list and the prohibiting of the return of a member's excess of clearing fund collateral should result from management's monitoring of the member and should not automatically occur because of rules violations.10
Footnotes:
10 FICC currently has and would retain the right to deny the return of excess clearing fund collateral in instances where it is concerned about a particular member's financial or operational capability.
3. Consequences for Being on the Watch List
Currently, the GSD rules contain a very specific amount by which the clearing fund requirement of a netting member that is placed on the watch list may be increased.11The MBSD and NSCC rules contain provisions that are more general in this regard.12FICC believes the GSD rules are unnecessarily specific in this regard and should be amended to more closely reflect the MBSD and NSCC rules.
Footnotes:
11 The GSD rules currently state that GSD "may require a Netting Member that has been placed on the Watch List, to make and maintain a deposit to the Clearing Fund over and above the amount determined in accordance with Section 2 of Rule 4 (which additional deposit shall constitute a portion of the Netting Member's Required Fund Deposit) of up to 200 percent of its highest single Business Day's Required Fund Deposit during the most recent 20 Business Days, or such higher amount as the Board may deem necessary * * *."
12 For example, MBSD rules state that MBSD "may require a Participant that has been placed on the Watch List to make and maintain a deposit to the Participants Fund over and above the amount determined * * *."
FICC believes that the proposed rule change is consistent with the requirements of Section 17A of the Act13and the rules and regulations thereunder applicable to FICC because it should assure the safeguarding of securities and funds in FICC's custody or control or for which it is responsible by assisting FICC and its members in interpreting and understanding the rules with regard to fines, clearing fund consequences for rule violations, and certain aspects of the watch list.
Footnotes:
13 15 U.S.C. 78q-1.
(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 have not been solicited with respect to the proposed rule change, and none have been received. FICC will notify the Commission of any written comments it receives.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within thirty-five days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to ninety days of such date 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 such 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, as amended, 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-2007-05 on the subject line.
Paper Comments
• Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-FICC-2007-05. 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 inspection and copying 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 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/2007/ficc/2007-05.pdf , http://www.dtcc.com/downloads/legal/rule_filings/2007/ficc/2007-05-amendment.pdf , http://www.dtcc.com/downloads/legal/rule_filings/2007/ficc/2007-05-amendment-2.pdf , and http://www.dtcc.com/downloads/legal/rule_filings/2007/ficc/2007-05-amendment3.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-2007-05 and should be submitted on or before May 13, 2008.
For the Commission by the Division of Trading and Markets, pursuant to delegated authority.14
Footnotes:
14 17 CFR 200.30-3(a)(12).
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-8599 Filed 4-21-08; 8:45 am]
BILLING CODE 8010-01-P