Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of a Proposed Rule Change Relating to Membership Requirements, 2911-2914 [E5-160]

Download as PDF Federal Register / Vol. 70, No. 11 / Tuesday, January 18, 2005 / Notices meaning, administration, or enforcement of an existing rule. At any time within 60 days of the filing of such proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 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 (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–CBOE–2005–03 on the subject line. available publicly. All submissions should refer to File Number SR–CBOE– 2005–03 and should be submitted on or before February 8, 2005. 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.2 For the Commission, by the Division of Market Regulation, pursuant to delegated authority.10 Jill M. Peterson, Assistant Secretary. [FR Doc. E5–150 Filed 1–14–05; 8:45 am] A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–51018; File No. SR–FICC– 2004–14] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of a Proposed Rule Change Relating to Membership Requirements January 11, 2005. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 notice is hereby given that on July 14, 2004, the Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission Paper Comments (‘‘Commission’’) proposed rule change • Send paper comments in triplicate SR–FICC–2004–14. On July 15, July 30, to Jonathan G. Katz, Secretary, August 20, and November 10, 2004, Securities and Exchange Commission, FICC filed amendments 1, 2, 3, and 4 450 Fifth Street, NW., Washington, DC respectively. On January 3, 2005, FICC 20549–0609. filed amendment 5 and withdrew All submissions should refer to File amendments 1, 2, 3, and 4. The Number SR–CBOE–2005–03. This file proposed rule change, as amended, is number should be included on the subject line if e-mail is used. To help the described in Items I, II, and III below, which Items have been prepared Commission process and review your primarily by FICC. The Commission is comments more efficiently, please use only one method. The Commission will publishing this notice to solicit post all comments on the Commission’s comments on the proposed rule change from interested persons. Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the I. Self-Regulatory Organization’s submission, all subsequent Statement of the Terms of Substance of amendments, all written statements the Proposed Rule Change with respect to the proposed rule FICC proposes to amend the rules of change that are filed with the its Government Securities Division Commission, and all written (‘‘GSD’’) and Mortgage-Backed communications relating to the Securities Division (‘‘MBSD’’) regarding proposed rule change between the membership requirements for non-U.S. Commission and any person, other than applicants and members. those that may be withheld from the II. Self-Regulatory Organization’s public in accordance with the Statement of the Purpose of, and provisions of 5 U.S.C. 552, will be Statutory Basis for, the Proposed Rule available for inspection and copying in Change the Commission’s Public Reference Section, 450 Fifth Street, NW., In its filing with the Commission, Washington, DC 20549. Copies of such FICC included statements concerning filing also will be available for the purpose of and basis for the inspection and copying at the principal proposed rule change and discussed any office of the CBOE. All comments comments it received on the proposed received will be posted without change; rule change. The text of these statements the Commission does not edit personal may be examined at the places specified identifying information from 10 17 CFR 200.30–3(a)(12). submissions. You should submit only 1 15 U.S.C. 78s(b)(1). information that you wish to make VerDate jul<14>2003 11:51 Jan 14, 2005 Jkt 205001 2911 PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 1. Annual Audited Financial Statements Currently, GSD requires non-U.S. members and applicants to submit financial statements prepared in accordance with U.S. generally accepted accounting principles (‘‘U.S. GAAP’’) ‘‘whenever necessary and feasible.’’ MBSD requires non-U.S. members and applicants to submit financial statements prepared in accordance with U.S. GAAP. Both divisions review such financial statements as part of their credit risk management program. FICC proposes to amend these requirements uniformly across both divisions to enable non-U.S. members and applicants to submit financial statements that are prepared according to any other generally accepted accounting methodology (‘‘non-U.S. GAAP’’). In order to lessen the risk associated with accepting financial statements prepared in accordance with non-U.S. GAAP, FICC would increase the existing minimum financial requirements of each applicant and member based on which non-U.S. GAAP was used to prepare the audited financial statement in the following manner: (a) For applicants and members whose financial statements are prepared in accordance with International Financial Reporting Standards (‘‘IFRS’’), the Companies Act of 1985 (‘‘U.K. GAAP’’), or Canadian GAAP, the minimum financial requirements would be one and one-half times the applicable requirements. (b) For applicants and members whose financial statements are prepared in accordance with a European Union country GAAP (‘‘EU GAAP’’) other than U.K. GAAP, the minimum financial requirements would be five times the applicable requirements. (c) For applicants and members whose financial statements are prepared in accordance with any other type of GAAP, the minimum financial requirements would be seven times the applicable requirements.3 2 The Commission has modified the text of the summaries prepared by FICC. 3 In order to determine the appropriate premiums, FICC’s risk management staff compiled all the U.S. GAAP and non-U.S. GAAP equity capital figures of financial institutions that filed SEC Form 20–F or 40–F for their 2002 and/or 2003 fiscal year ends to identify the largest absolute differences between U.S. GAAP and non-U.S. GAAPs. The staff found that approximately 50% was the largest difference when the U.S. GAAP figures were compared to IFRS, U.K. GAAP, and Canadian GAAP. The largest E:\FR\FM\18JAN1.SGM Continued 18JAN1 2912 Federal Register / Vol. 70, No. 11 / Tuesday, January 18, 2005 / Notices For example, currently under the GSD’s rules, the minimum financial requirement for a bank netting member is equity capital of US$100 million. This will continue to be the requirement for all such members (both U.S. and nonU.S. members), whose financial statements are prepared in accordance with U.S. GAAP. If such a member’s financial statements were prepared in accordance with IFRS, U.K. GAAP, or Canadian GAAP, the member’s minimum financial requirement would be US$150 million. If such a member’s financial statements were prepared in accordance with an EU country GAAP other than U.K. GAAP, the member’s minimum financial requirement would be US$500 million. If a member’s financial statements were prepared in accordance with any other type of GAAP, the member’s minimum financial requirement would be US$700 million. FICC would retain the requirement that annual audited financial statements submitted by members and applicants be certified without qualification. The proposed rule change would make clear that annual audited financial statements must be prepared in accordance with generally accepted accounting principles. In addition, all information submitted to FICC would have to be in English or would have to be a fair and accurate English translation if the information had been translated into English. Additionally, in order to accommodate this change for members other than banks, the proposed rule change provides that specific references to the term U.S. regulatory capital should be deemed to refer to the general term of ‘‘regulatory capital.’’ The proposed rule changes would be applied to current members as well as applicants. 2. Material Regulatory Filings As part of its credit risk management, FICC requires applicants and members to submit interim financial data. In the case of U.S. bank and broker-dealer members, the GSD and the MBSD are able to obtain this financial information through regulatory reports. Non-U.S. MBSD members are required to submit unaudited monthly financial statements to MBSD. Non-U.S. GSD netting members are required to submit certain difference was approximately 528% when the U.S. GAAP figures were compared to EU country GAAP figures. Finally, approximately 400% was the largest difference when the U.S. GAAP figures were compared to all other non-U.S. GAAPs. (FICC staff determined that it would be prudent to apply a premium of seven times the existing requirement.) FICC staff will assess these premiums annually and will report to Commission staff on its findings. VerDate jul<14>2003 11:51 Jan 14, 2005 Jkt 205001 quarterly financial information to GSD. The GSD rules also currently require non-U.S. members and applicants to also submit all ‘‘material regulatory filings’’ that the entity makes with its primary regulator in its home jurisdiction. However, FICC cannot specifically identify all such material regulatory filings for non-U.S. members and applicants with confidence. In order to enhance FICC’s credit risk monitoring program, the proposed rule change, which would be adopted uniformly across both FICC divisions, would require non-U.S. members (other than those organized or established in the U.K. and regulated by the FSA) to provide specific monthly or quarterly financial data, as applicable, directly to FICC. FICC will provide the non-U.S. members with a form requesting specific financial data related to capital, assets, liabilities, revenue, pertinent ratios, and various capital requirements, as applicable.4 Each non-U.S. member will be required to complete the form, have it signed by the entity’s chief financial officer, chief executive officer, or similar high-ranking official, and return it to FICC by a prescribed deadline. Broker-dealers and banks that are organized or established in the U.K. and regulated by the Financial Services Authority (‘‘FSA’’) will be required to submit certain regulatory monthly or quarterly reports, as applicable, that are filed with the FSA.5 Because FICC will be able to obtain the necessary financial data from these reports, these U.K. firms will not be required to complete and submit FICC’s financial reporting form as are other non-U.S. members. The proposed rule change will provide that failure to submit the financial form or the U.K. regulatory reports, as applicable, to FICC within the timeframes required by FICC will subject a member to the same consequences, including a fine, as is currently provided for in FICC’s rules. FICC recognizes that certain regulatory filings provide warnings of possible concerns regarding a member’s compliance with regulatory standards and its financial status. For example, under FICC’s current rules, GSD’s and MBSD’s U.S. broker-dealer members are required to submit to FICC SEC Rule 17a–11 reports. GSD’s netting members, MBSD’s U.S. non-broker-dealer members, and all non-U.S. members must submit to FICC, concurrently with 4 The proposed rule changes would replace the current financial documents required by the FICC membership agreements. 5 Although FICC currently has no U.K. members, FICC is familiar with the regulatory reports filed by banks and broker-dealers that are organized or established in the U.K. and regulated by the FSA. PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 their submission to their relevant regulator, copies of regulatory notifications required to be made when a member’s capital levels or other financial requirements fall below prescribed levels.6 The proposed rule change would expand this to require members to submit to FICC any regulatory notifications required to be made when it does not comply with its financial reporting and responsibility standards set by its home country regulator and when it becomes subject to a disciplinary action by its home country regulator. In addition, the proposed rule change would make the late submission of any such filing subject to a fine and other related consequences that have been recently approved by or are pending with the Commission.7 This proposed rule change would require that such filings be submitted to FICC in English or be in a fair and accurate English translation if they have been translated into English. Finally, the proposed rule change would require MBSD non-U.S. regulated applicants to certify that they are in compliance with the financial reporting and responsibility standards of their home country. This requirement was recently added to GSD’s rules.8 3. Legal Risk FICC believes that members that are incorporated outside of the U.S. present FICC with increased legal risk in the event they become insolvent as compared to members incorporated within the U.S.9 Notwithstanding the protections for clearing agencies contained in the U.S. federal laws 10 and the New York Banking Law (which is applicable to GSD foreign netting members with New York state-licensed branches and agencies), there is a risk that a U.S. court could determine not to apply New York law to the adjudication of FICC’s rights against an insolvent non-U.S. member.11 In such event, the 6 Securities Exchange Act Release Nos. 49947 (June 30, 2004), 69 FR 41316 (July 8, 2004) [File No. SR–FICC–2003–01] and 49156 (Jan. 30, 2004), 69 FR 5881 (Feb. 6, 2004) [File No. SR–MBSCC–2001–06]. 7 Securities Exchange Act. Release No. 50659 (Nov. 15, 2004), 69 FR 67767 (Nov. 19, 2004) [File No. FICC–SR–2004–11] and FICC–SR–2004–13 (currently pending with the Commission). 8 Securities Exchange Act Release No. 34–50617 (Nov. 1, 2004), 69 FR 64796 (Nov. 8, 2004) [File No. SR–FICC–2004–01]. 9 At this time, GSD will continue to only permit non-U.S. banks operating out of U.S. branches or agencies to be Foreign Netting Members. 10 E.g., the Federal Deposit Insurance Corporation Improvement Act of 1991 and the U.S. Bankruptcy Code. 11 This particular matter is currently being adjudicated in a case that will be argued before the Second Circuit involving a Serbian governmental E:\FR\FM\18JAN1.SGM 18JAN1 Federal Register / Vol. 70, No. 11 / Tuesday, January 18, 2005 / Notices foregoing protections may not be available to FICC. In order to mitigate this risk, FICC has required, and will continue to require, non-U.S. GSD netting and MBSD clearing applicants to submit non-U.S. legal opinions drafted by outside counsel from the jurisdiction in which the member is incorporated and/or primarily conducts its business. FICC will continue to make a case-by-case determination, based on its analysis of the legal opinion, as to the legal risks presented by the home country laws of such applicants. In doing so, FICC will retain U.S. outside counsel to review the opinions and to advise FICC of any risks presented. The proposed rule filing makes clear that, based on the review of the legal opinion, FICC will determine what, if any, protective measures will be required to mitigate any legal risks. Protective action may, for example, take the form of requiring the member to post additional collateral and/or requiring a member to post a certain percentage of its collateral requirement in a certain form (such as letters of credit). FICC recognizes that some of its nonU.S. netting and clearing members have been members for some time. In order to protect itself against any adverse changes in home country law that may have arisen since the members submitted their legal opinions and in order to determine whether any positive developments in home country law would support eliminating or relaxing the collateral premiums currently imposed on certain members,12 FICC is proposing to require all of its current non-U.S. members (except those members whose opinions have been issued within the past 18 months) to submit a current legal opinion from outside non-U.S. counsel addressing the non-U.S. legal issues or to provide a letter on their outside counsel’s letterhead stating that no material changes have occurred in home country law since the date of the original legal opinions. FICC would require its current members to submit these updated legal agency that has brought a U.S. Bankruptcy Code Section 304 proceeding seeking to have the disposition of the assets of certain Yugoslavian banks with New York state-licensed agencies be considered under home country law. See Agency for Deposit Ins., Rehab., Bankr. & Liquidation of Banks v. Superintendent of Banks, Case No. 03–CV– 9320 (JSR), Case No. 03–CV–9321 (JSR), 2004 U.S. Dist. LEXIS 10848 (S.D.N.Y. June 2004). 12 GSD currently has three non-U.S. netting members that are subject to increased clearing fund requirements due to past determinations of the heightened legal risk presented by the insolvency laws of their home jurisdictions. These members are currently posting 100 percent of their clearing fund requirement in the form of one or more letters of credit and an additional 30 percent in the form of cash and securities. VerDate jul<14>2003 11:51 Jan 14, 2005 Jkt 205001 2913 opinions (or letters) within three months of the approval of this filing by the Commission. FICC would then review with the assistance of its outside counsel all such revised legal opinions (and those original legal opinions that counsel indicates remain current) and determine whether protective measures need to be taken or whether the current increased collateral requirements should continue, be relaxed, or be eliminated. The proposed rule change would also require all non-U.S. members to provide an annual update of their non-U.S. legal opinion or to provide a letter from their outside counsel stating that no material issues have arisen since the issuance of the opinion or the last update. FICC may impose such additional requirements on such members as described above based on review of such updated legal opinions. applicant has been in business or has been registered or licensed for a lesser period. For example, a GSD U.S. brokerdealer applicant that is a monthly FOCUS filer would need to submit copies of all of its FOCUS reports filed during the preceding 12 months. With respect to 17a–11 reports, where the current rules do not specify the necessary time period, the proposed rule change requires U.S. broker-dealer applicants to submit all 17a–11 reports filed during the preceding 24 months. FICC believes that the proposed rule change is consistent with the requirements of Section 17A of the Act 14 and the rules and regulations thereunder because it will enhance FICC’s assessment and surveillance of applicants and members and therefore help assure the safeguarding of securities and funds which are in its custody or control. 4. Additional Changes Upon reviewing its membership rules for non-U.S. members, FICC has determined that certain rules applicable to both U.S. and non-U.S. applicants and members need to be updated. Specifically, the proposed rule change would delete all references to certifications by the chief executive officer, chief financial officer, or other that accompany financial statements, financial data, or regulatory reports. These certifications do not appear to be standard documentation, and FICC historically has not received such certifications. If a need to request a certification with respect to a particular member or applicant arises, FICC would have the authority to request it pursuant to the general authority that it has in both division’s rules to seek additional information. In addition, in a prior proposed rule change approved by the Commission, FICC amended its rules intending to give FICC the option to request that financial figures be submitted in U.S. dollar equivalents.13 This proposed rule change deletes this option from FICC’s rules as FICC performs these calculations itself, intends to continue doing so, and believes that the pending language has the potential for confusion. In addition, the proposed rule change would amend the number of recent routine regulatory reports that a U.S. GSD netting or MBSD clearing applicant is required to submit to FICC to the number of such reports that the entity has filed during the preceding 12 months or a lesser period if the 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. 13 FICC 2004–01, supra note 8. This proposed filing (i.e., FICC–2004–14) proposes to delete the reference to U.S. dollar equivalents completely. PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others FICC has received comments on the proposed rule change orally and in writing from the Institute of International Banks, representing the GSD non-U.S. members and from one non-U.S. MBSD participant. All such comments have been forwarded to the Commission. 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, 14 15 E:\FR\FM\18JAN1.SGM U.S.C. 78q–1. 18JAN1 2914 Federal Register / Vol. 70, No. 11 / Tuesday, January 18, 2005 / Notices 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 (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–FICC–2004–14 on the subject line. SECURITIES AND EXCHANGE COMMISSION [Release No. 34–51021; File No. SR–FICC– 2004–09] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change Relating to Changes to Membership Requirements January 11, 2005. On April 14, 2004, the Fixed Income Clearing Corporation (‘‘FICC’’) filed Paper Comments with the Securities and Exchange Commission (‘‘Commission’’), a • Send paper comments in triplicate proposed rule change pursuant to to Jonathan G. Katz, Secretary, Section 19(b)(1) of the Securities Securities and Exchange Commission, Exchange Act of 1934 (‘‘Act’’) 1 (File No. 450 Fifth Street, NW., Washington, DC SR–FICC–2004–09) and on November 20549–0609. All submissions should 16, 2004, and January 3, 2005,2 refer to File Number SR–FICC–2004–14. amended the proposed rule change. This file number should be included on Notice of the proposal was published in the subject line if e-mail is used. To help the Federal Register on November 30, the Commission process and review 2004.3 No comment letters were your comments more efficiently, please received. For the reasons discussed use only one method. The Commission below, the Commission is approving the will post all comments on the proposed rule change. Commission’s Internet Web site (https:// www.sec.gov/rules/sro.shtml). Copies of I. Description the submission, all subsequent FICC’s Government Securities amendments, all written statements Division (‘‘GSD’’) and Mortgage Backed with respect to the proposed rule Securities Division (‘‘MBSD’’) rules will change that are filed with the be changed in the following areas: Commission, and all written A. Annual Audited Financial communications relating to the Statements proposed rule change between the Commission and any person, other than Prior to this rule change, GSD’s rules those that may be withheld from the required U.S. applicants for GSD public in accordance with the membership to submit annual audited provisions of 5 U.S.C. 552, will be financial statements for the preceding available for inspection and copying in year and non-U.S. applicants to submit the Commission’s Public Reference annual audited financial statements for Section, 450 Fifth Street, NW., the preceding three years. MBSD’s rules Washington, DC 20549. Copies of such used to require U.S. and non-U.S. filing also will be available for membership applicants to submit inspection and copying at FICC’s annual audited financial statements for principal office and on FICC’s Web site the preceding year. at https://ficc.com/gov/gov.docs.jsp?NSUnder the rule change, FICC will query=#rf. All comments received will amend both divisions’ rules to require be posted without change; the GSD netting applicants and MBSD Commission does not edit personal clearing applicants to submit two years identifying information from of annual audited financial statements. submissions. You should submit only However, if an applicant or member has information that you wish to make not been in business for two years (i.e., available publicly. All submissions a newly-formed applicant or member 4), should refer to File Number SR–FICC– FICC will permit such applicant or 2004–14 and should be submitted on or 1 15 U.S.C. 78s(b)(1). before February 8, 2005. For the Commission by the Division of Market Regulation, pursuant to delegated authority.15 Jill M. Peterson, Assistant Secretary. [FR Doc. E5–160 Filed 1–14–05; 8:45 am] BILLING CODE 8010–01–P 15 17 4 A newly formed applicant includes a company with no business history or a company formed as a result of a corporate transaction such as a merger. CFR 200.30–3(a)(12). VerDate jul<14>2003 11:51 Jan 14, 2005 2 Although the proposed rule change was amended after it was noticed for comment in the Federal Register, republication of the notice is not necessary because the post-notice amendment made only a technical change to the proposed rule change. 3 Securities Exchange Act Release No. 50718 (Nov. 22, 2004), 69 FR 69653. Jkt 205001 PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 member to submit annual audited financial statements for a lesser period and/or annual audited financial statements of a predecessor firm in the case of an applicant or member formed by a corporate transaction. If audited financial statements cannot be obtained, newly-formed applicants will be permitted to submit unaudited pro forma financial statements. If FICC accepts pro forma or consolidated financial statements, the following shall apply: 1. If an applicant is newly formed and does not have annual audited financial statements, the applicant shall be required to submit pro forma financial statements and, if it has filed any regulatory reports, such regulatory reports.5 FICC will verify the applicant’s capital base by reviewing evidence from a third party as to the applicant’s capital at the time of application.6 2. If an applicant is newly formed as a result of a merger (or similar corporate transaction), the applicant shall be required to submit pro forma financial statements, the most recent annual audited financial statement of its predecessor firm if such statement is available, and if it has filed regulatory reports, such regulatory reports. 3. If the applicant does not have its own audited financial statements but is consolidated in its parent’s audited financial statements and it has filed its own regulatory reports, the applicant shall be required to submit such regulatory reports in addition to the consolidated financial statements. FICC believes the proposed rule change permitting less than two years of annual audited financial statements or unaudited pro forma financial statements is necessary and appropriate in order to accommodate entities that are newly-formed and those that are created as a result of a merger of existing entities or other similar corporate transaction. First, firms that are newlyformed do not have audited financials and in some instances can only provide pro forma financial statements. Second, the GSD’s rules already contemplate the admission of entities with little or no business history, which often are of equal or even greater credit quality than more established entities. For example, 5 Unregulated and non-U.S. entities will be required to produce specific information that FICC needs in order to develop a risk profile to evaluate creditworthiness. This information will be requested in a form provided to the firms by FICC and signed by a senior officer of the firm. This form, which was the subject of a proposed rule filing, SR– FICC–2004–14, replaced the requirement for the submission of regulatory reports by non-U.S. entities. Securities Exchange Act Release No. 51018 (Jan. 11, 2005). 6 For example, FICC may request a bank statement to verify that cash has been deposited, thereby verifying that the applicant meets FICC’s minimum capital requirement. E:\FR\FM\18JAN1.SGM 18JAN1

Agencies

[Federal Register Volume 70, Number 11 (Tuesday, January 18, 2005)]
[Notices]
[Pages 2911-2914]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-160]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51018; File No. SR-FICC-2004-14]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to Membership 
Requirements

January 11, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 14, 2004, the Fixed 
Income Clearing Corporation (``FICC'') filed with the Securities and 
Exchange Commission (``Commission'') proposed rule change SR-FICC-2004-
14. On July 15, July 30, August 20, and November 10, 2004, FICC filed 
amendments 1, 2, 3, and 4 respectively. On January 3, 2005, FICC filed 
amendment 5 and withdrew amendments 1, 2, 3, and 4. The proposed rule 
change, as amended, is described in Items I, II, and III 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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FICC proposes to amend the rules of its Government Securities 
Division (``GSD'') and Mortgage-Backed Securities Division (``MBSD'') 
regarding membership requirements for non-U.S. applicants and members.

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.\2\
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    \2\ 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

1. Annual Audited Financial Statements
    Currently, GSD requires non-U.S. members and applicants to submit 
financial statements prepared in accordance with U.S. generally 
accepted accounting principles (``U.S. GAAP'') ``whenever necessary and 
feasible.'' MBSD requires non-U.S. members and applicants to submit 
financial statements prepared in accordance with U.S. GAAP. Both 
divisions review such financial statements as part of their credit risk 
management program.
    FICC proposes to amend these requirements uniformly across both 
divisions to enable non-U.S. members and applicants to submit financial 
statements that are prepared according to any other generally accepted 
accounting methodology (``non-U.S. GAAP'').
    In order to lessen the risk associated with accepting financial 
statements prepared in accordance with non-U.S. GAAP, FICC would 
increase the existing minimum financial requirements of each applicant 
and member based on which non-U.S. GAAP was used to prepare the audited 
financial statement in the following manner:

    (a) For applicants and members whose financial statements are 
prepared in accordance with International Financial Reporting 
Standards (``IFRS''), the Companies Act of 1985 (``U.K. GAAP''), or 
Canadian GAAP, the minimum financial requirements would be one and 
one-half times the applicable requirements.
    (b) For applicants and members whose financial statements are 
prepared in accordance with a European Union country GAAP (``EU 
GAAP'') other than U.K. GAAP, the minimum financial requirements 
would be five times the applicable requirements.
    (c) For applicants and members whose financial statements are 
prepared in accordance with any other type of GAAP, the minimum 
financial requirements would be seven times the applicable 
requirements.\3\
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    \3\ In order to determine the appropriate premiums, FICC's risk 
management staff compiled all the U.S. GAAP and non-U.S. GAAP equity 
capital figures of financial institutions that filed SEC Form 20-F 
or 40-F for their 2002 and/or 2003 fiscal year ends to identify the 
largest absolute differences between U.S. GAAP and non-U.S. GAAPs. 
The staff found that approximately 50% was the largest difference 
when the U.S. GAAP figures were compared to IFRS, U.K. GAAP, and 
Canadian GAAP. The largest difference was approximately 528% when 
the U.S. GAAP figures were compared to EU country GAAP figures. 
Finally, approximately 400% was the largest difference when the U.S. 
GAAP figures were compared to all other non-U.S. GAAPs. (FICC staff 
determined that it would be prudent to apply a premium of seven 
times the existing requirement.) FICC staff will assess these 
premiums annually and will report to Commission staff on its 
findings.


[[Page 2912]]


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    For example, currently under the GSD's rules, the minimum financial 
requirement for a bank netting member is equity capital of US$100 
million. This will continue to be the requirement for all such members 
(both U.S. and non-U.S. members), whose financial statements are 
prepared in accordance with U.S. GAAP. If such a member's financial 
statements were prepared in accordance with IFRS, U.K. GAAP, or 
Canadian GAAP, the member's minimum financial requirement would be 
US$150 million. If such a member's financial statements were prepared 
in accordance with an EU country GAAP other than U.K. GAAP, the 
member's minimum financial requirement would be US$500 million. If a 
member's financial statements were prepared in accordance with any 
other type of GAAP, the member's minimum financial requirement would be 
US$700 million.
    FICC would retain the requirement that annual audited financial 
statements submitted by members and applicants be certified without 
qualification. The proposed rule change would make clear that annual 
audited financial statements must be prepared in accordance with 
generally accepted accounting principles. In addition, all information 
submitted to FICC would have to be in English or would have to be a 
fair and accurate English translation if the information had been 
translated into English. Additionally, in order to accommodate this 
change for members other than banks, the proposed rule change provides 
that specific references to the term U.S. regulatory capital should be 
deemed to refer to the general term of ``regulatory capital.''
    The proposed rule changes would be applied to current members as 
well as applicants.
2. Material Regulatory Filings
    As part of its credit risk management, FICC requires applicants and 
members to submit interim financial data. In the case of U.S. bank and 
broker-dealer members, the GSD and the MBSD are able to obtain this 
financial information through regulatory reports. Non-U.S. MBSD members 
are required to submit unaudited monthly financial statements to MBSD. 
Non-U.S. GSD netting members are required to submit certain quarterly 
financial information to GSD. The GSD rules also currently require non-
U.S. members and applicants to also submit all ``material regulatory 
filings'' that the entity makes with its primary regulator in its home 
jurisdiction. However, FICC cannot specifically identify all such 
material regulatory filings for non-U.S. members and applicants with 
confidence.
    In order to enhance FICC's credit risk monitoring program, the 
proposed rule change, which would be adopted uniformly across both FICC 
divisions, would require non-U.S. members (other than those organized 
or established in the U.K. and regulated by the FSA) to provide 
specific monthly or quarterly financial data, as applicable, directly 
to FICC. FICC will provide the non-U.S. members with a form requesting 
specific financial data related to capital, assets, liabilities, 
revenue, pertinent ratios, and various capital requirements, as 
applicable.\4\ Each non-U.S. member will be required to complete the 
form, have it signed by the entity's chief financial officer, chief 
executive officer, or similar high-ranking official, and return it to 
FICC by a prescribed deadline.
---------------------------------------------------------------------------

    \4\ The proposed rule changes would replace the current 
financial documents required by the FICC membership agreements.
---------------------------------------------------------------------------

    Broker-dealers and banks that are organized or established in the 
U.K. and regulated by the Financial Services Authority (``FSA'') will 
be required to submit certain regulatory monthly or quarterly reports, 
as applicable, that are filed with the FSA.\5\ Because FICC will be 
able to obtain the necessary financial data from these reports, these 
U.K. firms will not be required to complete and submit FICC's financial 
reporting form as are other non-U.S. members. The proposed rule change 
will provide that failure to submit the financial form or the U.K. 
regulatory reports, as applicable, to FICC within the timeframes 
required by FICC will subject a member to the same consequences, 
including a fine, as is currently provided for in FICC's rules.
---------------------------------------------------------------------------

    \5\ Although FICC currently has no U.K. members, FICC is 
familiar with the regulatory reports filed by banks and broker-
dealers that are organized or established in the U.K. and regulated 
by the FSA.
---------------------------------------------------------------------------

    FICC recognizes that certain regulatory filings provide warnings of 
possible concerns regarding a member's compliance with regulatory 
standards and its financial status. For example, under FICC's current 
rules, GSD's and MBSD's U.S. broker-dealer members are required to 
submit to FICC SEC Rule 17a-11 reports. GSD's netting members, MBSD's 
U.S. non-broker-dealer members, and all non-U.S. members must submit to 
FICC, concurrently with their submission to their relevant regulator, 
copies of regulatory notifications required to be made when a member's 
capital levels or other financial requirements fall below prescribed 
levels.\6\ The proposed rule change would expand this to require 
members to submit to FICC any regulatory notifications required to be 
made when it does not comply with its financial reporting and 
responsibility standards set by its home country regulator and when it 
becomes subject to a disciplinary action by its home country regulator. 
In addition, the proposed rule change would make the late submission of 
any such filing subject to a fine and other related consequences that 
have been recently approved by or are pending with the Commission.\7\ 
This proposed rule change would require that such filings be submitted 
to FICC in English or be in a fair and accurate English translation if 
they have been translated into English.
---------------------------------------------------------------------------

    \6\ Securities Exchange Act Release Nos. 49947 (June 30, 2004), 
69 FR 41316 (July 8, 2004) [File No. SR-FICC-2003-01] and 49156 
(Jan. 30, 2004), 69 FR 5881 (Feb. 6, 2004) [File No. SR-MBSCC-2001-
06].
    \7\ Securities Exchange Act. Release No. 50659 (Nov. 15, 2004), 
69 FR 67767 (Nov. 19, 2004) [File No. FICC-SR-2004-11] and FICC-SR-
2004-13 (currently pending with the Commission).
---------------------------------------------------------------------------

    Finally, the proposed rule change would require MBSD non-U.S. 
regulated applicants to certify that they are in compliance with the 
financial reporting and responsibility standards of their home country. 
This requirement was recently added to GSD's rules.\8\
---------------------------------------------------------------------------

    \8\ Securities Exchange Act Release No. 34-50617 (Nov. 1, 2004), 
69 FR 64796 (Nov. 8, 2004) [File No. SR-FICC-2004-01].
---------------------------------------------------------------------------

3. Legal Risk
    FICC believes that members that are incorporated outside of the 
U.S. present FICC with increased legal risk in the event they become 
insolvent as compared to members incorporated within the U.S.\9\ 
Notwithstanding the protections for clearing agencies contained in the 
U.S. federal laws \10\ and the New York Banking Law (which is 
applicable to GSD foreign netting members with New York state-licensed 
branches and agencies), there is a risk that a U.S. court could 
determine not to apply New York law to the adjudication of FICC's 
rights against an insolvent non-U.S. member.\11\ In such event, the

[[Page 2913]]

foregoing protections may not be available to FICC.
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    \9\ At this time, GSD will continue to only permit non-U.S. 
banks operating out of U.S. branches or agencies to be Foreign 
Netting Members.
    \10\ E.g., the Federal Deposit Insurance Corporation Improvement 
Act of 1991 and the U.S. Bankruptcy Code.
    \11\ This particular matter is currently being adjudicated in a 
case that will be argued before the Second Circuit involving a 
Serbian governmental agency that has brought a U.S. Bankruptcy Code 
Section 304 proceeding seeking to have the disposition of the assets 
of certain Yugoslavian banks with New York state-licensed agencies 
be considered under home country law. See Agency for Deposit Ins., 
Rehab., Bankr. & Liquidation of Banks v. Superintendent of Banks, 
Case No. 03-CV-9320 (JSR), Case No. 03-CV-9321 (JSR), 2004 U.S. 
Dist. LEXIS 10848 (S.D.N.Y. June 2004).
---------------------------------------------------------------------------

    In order to mitigate this risk, FICC has required, and will 
continue to require, non-U.S. GSD netting and MBSD clearing applicants 
to submit non-U.S. legal opinions drafted by outside counsel from the 
jurisdiction in which the member is incorporated and/or primarily 
conducts its business. FICC will continue to make a case-by-case 
determination, based on its analysis of the legal opinion, as to the 
legal risks presented by the home country laws of such applicants. In 
doing so, FICC will retain U.S. outside counsel to review the opinions 
and to advise FICC of any risks presented. The proposed rule filing 
makes clear that, based on the review of the legal opinion, FICC will 
determine what, if any, protective measures will be required to 
mitigate any legal risks. Protective action may, for example, take the 
form of requiring the member to post additional collateral and/or 
requiring a member to post a certain percentage of its collateral 
requirement in a certain form (such as letters of credit).
    FICC recognizes that some of its non-U.S. netting and clearing 
members have been members for some time. In order to protect itself 
against any adverse changes in home country law that may have arisen 
since the members submitted their legal opinions and in order to 
determine whether any positive developments in home country law would 
support eliminating or relaxing the collateral premiums currently 
imposed on certain members,\12\ FICC is proposing to require all of its 
current non-U.S. members (except those members whose opinions have been 
issued within the past 18 months) to submit a current legal opinion 
from outside non-U.S. counsel addressing the non-U.S. legal issues or 
to provide a letter on their outside counsel's letterhead stating that 
no material changes have occurred in home country law since the date of 
the original legal opinions. FICC would require its current members to 
submit these updated legal opinions (or letters) within three months of 
the approval of this filing by the Commission. FICC would then review 
with the assistance of its outside counsel all such revised legal 
opinions (and those original legal opinions that counsel indicates 
remain current) and determine whether protective measures need to be 
taken or whether the current increased collateral requirements should 
continue, be relaxed, or be eliminated.
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    \12\ GSD currently has three non-U.S. netting members that are 
subject to increased clearing fund requirements due to past 
determinations of the heightened legal risk presented by the 
insolvency laws of their home jurisdictions. These members are 
currently posting 100 percent of their clearing fund requirement in 
the form of one or more letters of credit and an additional 30 
percent in the form of cash and securities.
---------------------------------------------------------------------------

    The proposed rule change would also require all non-U.S. members to 
provide an annual update of their non-U.S. legal opinion or to provide 
a letter from their outside counsel stating that no material issues 
have arisen since the issuance of the opinion or the last update. FICC 
may impose such additional requirements on such members as described 
above based on review of such updated legal opinions.
4. Additional Changes
    Upon reviewing its membership rules for non-U.S. members, FICC has 
determined that certain rules applicable to both U.S. and non-U.S. 
applicants and members need to be updated. Specifically, the proposed 
rule change would delete all references to certifications by the chief 
executive officer, chief financial officer, or other that accompany 
financial statements, financial data, or regulatory reports. These 
certifications do not appear to be standard documentation, and FICC 
historically has not received such certifications. If a need to request 
a certification with respect to a particular member or applicant 
arises, FICC would have the authority to request it pursuant to the 
general authority that it has in both division's rules to seek 
additional information.
    In addition, in a prior proposed rule change approved by the 
Commission, FICC amended its rules intending to give FICC the option to 
request that financial figures be submitted in U.S. dollar 
equivalents.\13\ This proposed rule change deletes this option from 
FICC's rules as FICC performs these calculations itself, intends to 
continue doing so, and believes that the pending language has the 
potential for confusion.
---------------------------------------------------------------------------

    \13\ FICC 2004-01, supra note 8. This proposed filing (i.e., 
FICC-2004-14) proposes to delete the reference to U.S. dollar 
equivalents completely.
---------------------------------------------------------------------------

    In addition, the proposed rule change would amend the number of 
recent routine regulatory reports that a U.S. GSD netting or MBSD 
clearing applicant is required to submit to FICC to the number of such 
reports that the entity has filed during the preceding 12 months or a 
lesser period if the applicant has been in business or has been 
registered or licensed for a lesser period. For example, a GSD U.S. 
broker-dealer applicant that is a monthly FOCUS filer would need to 
submit copies of all of its FOCUS reports filed during the preceding 12 
months. With respect to 17a-11 reports, where the current rules do not 
specify the necessary time period, the proposed rule change requires 
U.S. broker-dealer applicants to submit all 17a-11 reports filed during 
the preceding 24 months.
    FICC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \14\ and the rules and 
regulations thereunder because it will enhance FICC's assessment and 
surveillance of applicants and members and therefore help assure the 
safeguarding of securities and funds which are in its custody or 
control.
---------------------------------------------------------------------------

    \14\ 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

    FICC has received comments on the proposed rule change orally and 
in writing from the Institute of International Banks, representing the 
GSD non-U.S. members and from one non-U.S. MBSD participant. All such 
comments have been forwarded to the Commission.

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 is consistent with the Act.

[[Page 2914]]

Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FICC-2004-14 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609. All submissions should refer to File Number 
SR-FICC-2004-14. 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 (https://
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, 450 Fifth Street, NW., Washington, DC 20549. Copies 
of such filing also will be available for inspection and copying at 
FICC's principal office and on FICC's Web site at https://ficc.com/gov/
gov.docs.jsp?NS-query=#rf. 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-2004-14 and should be submitted on or before February 8, 2005.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-160 Filed 1-14-05; 8:45 am]
BILLING CODE 8010-01-P
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