Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change Relating to Membership Requirements, 14736-14738 [E5-1257]
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14736
Federal Register / Vol. 70, No. 55 / Wednesday, March 23, 2005 / Notices
NW., Room 10235, Washington, DC
20503.
OFFICE OF PERSONNEL
MANAGEMENT
Submission for OMB Review;
Comment Request for Review of A
Revised Collection: RI 20–64, RI 20–
64A, and RI 20–64B
Office of Personnel
Management.
ACTION: Notice.
AGENCY:
SUMMARY: In accordance with the
Paperwork Reduction Act of 1995 (Pub.
L. 104–13, May 22, 1995), this notice
announces that the Office of Personnel
Management (OPM) has submitted to
the Office of Management and Budget a
request for review of a revised
information collection. RI 20–64, Letter
Reply to Request for Information, is
used by the Civil Service Retirement
System to provide information about the
amount of annuity payable after a
survivor reduction, to explain the
annuity reductions required to pay for
the survivor benefit, and to give the
beginning rate of survivor annuity. RI
20–64A, Former Spouse Survivor
Annuity Election, is used by the Civil
Service Retirement System to obtain a
survivor benefits election from
annuitants who are eligible to elect to
provide survivor benefits for a former
spouse. RI 20–64B, Information on
Electing a Survivor Annuity for Your
Former Spouse, is a pamphlet that
provides important information to
retirees under the Civil Service
Retirement System who want to provide
a survivor annuity for a former spouse.
We estimate that 30 survivor elections
on RI 20–64A will be processed per year
and that of these eight will use RI 20–
64 to ask for information about electing
a smaller survivor benefit. Form RI 20–
64A requires 45 minutes to complete for
a burden of 23 hours. Form RI 20–64
requires eight minutes to complete for a
burden of one hour. The total burden is
24 hours.
For copies of this proposal, contact
Mary Beth Smith-Toomey on (202) 606–
8358, FAX (202) 418–3251 or via E-mail
to mbtoomey@opm.gov. Please include a
mailing address with your request.
DATES: Comments on this proposal
should be received within 30 calendar
days from the date of this publication.
ADDRESSES: Send or deliver comments
to—Pamela S. Israel, Chief, Operations
Support Group, Retirement Services
Program, U.S. Office of Personnel
Management, 1900 E Street, NW., Room
3349, Washington, DC 20415–3540; and
Joseph F. Lackey, OPM Desk Officer,
Office of Information and Regulatory
Affairs, Office of Management and
Budget, New Executive Office Building,
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16:27 Mar 22, 2005
Jkt 205001
FOR INFORMATION REGARDING
ADMINISTRATIVE COORDINATION CONTACT:
Cyrus S. Benson, Team Leader,
Publications Team, Administrative
Services Branch, (202) 606–0623.
U.S. Office of Personnel Management.
Dan G. Blair,
Acting Director.
[FR Doc. 05–5748 Filed 3–22–05; 8:45 am]
BILLING CODE 6325–38–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51385; File No. SR–FICC–
2004–14]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Order
Approving a Proposed Rule Change
Relating to Membership Requirements
March 16, 2005.
On July 14, 2004, the Fixed Income
Clearing Corporation (‘‘FICC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) a
proposed rule change pursuant to
section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’).1 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.
Notice of the proposal was published in
the Federal Register on January 18,
2005.2 The Commission received three
comment letters.3 For the reasons
discussed below, the Commission is
approving the proposed rule change.
I. Description
Under the rule change, FICC will
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.
A. Annual Audited Financial
Statements
Prior to the rule change, GSD required
non-U.S. members and applicants to
submit financial statements prepared in
U.S.C. 78s(b)(1).
Exchange Act Release No. 51018 (Jan.
11, 2005), 70 FR 2911.
3 Letters from Kevin M. Brandt, Director, III
Global Ltd., III Finance Ltd., and III Relative Value/
Macro Hub Fund Ltd. (Oct. 25, 2004) and Lawrence
R. Uhlick, Executive Director and General Counsel,
Institute of International Bankers (Oct. 26, 2004,
and Feb. 9, 2005). See also Memorandum to File re:
Meeting with Institute of International Bankers
(Mar. 15, 2005).
PO 00000
1 15
2 Securities
Frm 00102
Fmt 4703
Sfmt 4703
accordance with U.S. generally accepted
accounting principles (‘‘U.S. GAAP’’)
‘‘whenever necessary and feasible.’’
MBSD required 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 is amending 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’’). Specifically, FICC will
increase the existing minimum financial
requirements of each applicant and
member based on the type of non-U.S.
GAAP that was used to prepare the
audited financial statement in the
following manner:
1. 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 will be one and
one-half times the applicable
requirements.
2. For applicants and members whole
financial statements are prepared in
accordance with a European Union
country GAAP (‘‘EU GAAP’’) other than
U.K. GAAP, the minimum financial
requirements will be five times the
applicable requirements.
3. For applicants and members whose
financial statements are prepared in
accordance with any other type of
GAAP, the minimum financial
requirements will be seven times the
applicable requirements.
For example, under 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.
However, 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.
E:\FR\FM\23MRN1.SGM
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Federal Register / Vol. 70, No. 55 / Wednesday, March 23, 2005 / Notices
In order to apply this change to nonU.S. applicants and members, FICC will
delete the terms ‘‘Excess Liquid Capital’’
and ‘‘Excess Net Capital’’ in GSD Rule
3, Section 6, and instead will use the
term ‘‘applicable minimum regulatory
capital,’’ which is defined in GSD Rule
3, Section 2 as ‘‘regulatory capital as
defined by the applicant’s home country
regulator.’’ MBSD Article III, Rule 1,
Section 2(d) will state that the
references to the terms ‘‘net capital’’ or
‘‘liquid capital’’ in, ‘‘shall be deemed to
refer to regulatory capital in cases where
the U.S. regulatory capital terms are not
applicable to a non-domestic entity.’’
FICC will retain the requirement that
annual audited financial statements
submitted by members and applicants
be certified without qualification. The
rule change makes clear that annual
audited financial statements must be
prepared in accordance with generally
accepted accounting principles. In
addition, all information submitted to
FICC will have to be in English or will
have to be a fair and accurate English
translation if the information is
translated into English.
The proposed rule changes will be
applied to current members and
applicants.
B. 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, GSD and 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.
In addition, the GSD rules 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.
Under the rule change, which will be
adopted uniformly across both FICC
divisions, FICC will require non-U.S.
members (other than those organized or
established in the U.K. and regulated by
the Financial Services Authority
(‘‘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. Each non-
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16:27 Mar 22, 2005
Jkt 205001
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 highranking 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 FSA will be required to
submit certain regulatory monthly or
quarterly reports, as applicable, that are
filed with the FSA.4 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. FICC’s
rules will provide that failure to submit
the financial form or the U.K. regulatory
reports, as applicable, to FICC within
the timeframes established by FICC will
subject a member to the same
consequences, including a fine, as is
currently provided for in FICC’s rules
for late submission of required financial
documents.
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.5
The rule change expands this by
requiring 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 rule
change makes 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.6 This rule change
4 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.
5 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].
6 Securities Exchange Act. Release Nos. 50659
(Nov. 15, 2004), 69 FR 67767 (Nov. 19, 2004) [File
No. SR–FICC–2004–11] and 51146 (Feb. 7, 2005), 70
PO 00000
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Fmt 4703
Sfmt 4703
14737
requires 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 rule change requires
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.7
C. Legal Risk
FICC members that are incorporated
outside of the U.S. present FICC with
increased legal risk in the event they
become insolvent.8 Notwithstanding the
protections for clearing agencies
contained in the U.S. federal laws 9 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.10 In such event, the
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. As is its
current practice, FICC will continue to
make a case-by-case determination,
based on its analysis of the legal
opinion, of the legal risks presented by
the home country laws of such
applicants. In doing so, FICC will now
retain U.S. outside counsel to review the
legal opinions and to advise FICC of any
risks presented. The rule change makes
clear that, based on its review of the
legal opinion, FICC will determine
FR 7984 (Feb. 16, 2005) [File No. SR–FICC–2004–
13].
7 Securities Exchange Act Release No. 50617
(Nov. 1, 2004), 69 FR 64796 (Nov. 8, 2004) [File No.
SR–FICC–2004–01].
8 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.
9 E.g., the Federal Deposit Insurance Corporation
Improvement Act of 1991 and the U.S. Bankruptcy
Code.
10 This particular matter is currently being
adjudicated in a case that will be argued before the
Second Circuit. The case involves 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).
E:\FR\FM\23MRN1.SGM
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14738
Federal Register / Vol. 70, No. 55 / Wednesday, March 23, 2005 / Notices
what, if any, protective measures it will
impose 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).
In order to protect FICC against any
adverse changes in home country law
that may have arisen since the members
submitted their legal opinions as a part
of the membership/application process
and in order to determine whether any
positive developments in home country
law would support eliminating or
relaxing any collateral premiums that
may have been imposed on any
members,11 FICC will 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 will 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 will 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
will determine whether protective
measures need to be taken or whether
the current increased collateral
requirements should continue, be
relaxed, or be eliminated.
The rule change will 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
non-U.S. members as described above
based on review of such updated legal
opinions.
D. Additional Changes
The rule change will delete all
references to certifications by the chief
executive officer, chief financial officer,
or other that accompany financial
11 GSD
currently has three non-U.S. netting
members that are subject to increased clearing fund
requirements due to past determinations of
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 or securities.
VerDate jul<14>2003
16:27 Mar 22, 2005
Jkt 205001
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 will 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 previous rule change,
FICC amended its rules with the
intention of giving FICC the option to
request that financial figures be
submitted in U.S. dollar equivalents.12
This 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.
Finally, the rule change will amend
the number of recent routine regulatory
reports that a U.S. GSD netting
applicant 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. 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.
II. Comments
The Institute of International Bankers
(‘‘IIB’’) submitted two comment letters.
While the first letter objected to the
increased financial requirements for
entities submitting financial statements
prepared using non-U.S. GAAP, its
primarily focus was on its objections to
standard clearing fund premiums for all
non-U.S. members. After FICC amended
the proposal to remove the standard
clearing fund premiums for non-U.S.
members, the IIB wrote in support of the
proposed rule change, particularly with
respect to the provisions that address
how FICC will manage the legal risk
arising from the participation in FICC by
branches of international banks that
operate in the United States.
The III Global Ltd., III Finance Ltd.,
and III Relative Value/Macro Hub Fund
Ltd. investment companies submitted a
comment letter also objecting to
PO 00000
standard clearing fund premiums for
non-U.S. members. However, as with
the IIB’s first letter, this letter also
addressed a version of the proposed rule
change that the Commission had not yet
published for comment and that FICC
substantively modified.
III. Discussion
Section 17A(b)(3)(F) of the Act
requires, among other things, that the
rules of a clearing be designed to assure
the safeguarding of securities and funds
which are in its custody or control.13
The proposed rule change should
enhance FICC’s surveillance and
assessment of applicants’ and members’
financial and legal condition. In
addition, the proposed rule change will
harmonize both of FICC’s division’s
application and membership
requirements and will make clear to all
applicants and members of the breadth
of financial and legal information that
FICC will require and review in order to
develop an accurate risk profile to
evaluate an applicant’s or member’s
financial condition. Accordingly, the
proposed rule should appropriately
enhance FICC’s ability to mitigate
financial risk to itself and to its
members and therefore should help
FICC to assure the safeguarding of
securities and funds that are in its
custody or control or for which it is
responsible.
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposal is
consistent with the requirements of the
Act and in particular with the
requirements of Section 17A of the
Act 14 and the rules and regulations
thereunder.
It is therefore ordered, pursuant to
section 19(b)(2) of the Act, that the
proposed rule change (File No. SR–
FICC–2004–14) be, and hereby is,
approved.
For the Commission by the Division of
Market Regulation, pursuant to delegated
authority.15
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–1257 Filed 3–22–05; 8:45 am]
BILLING CODE 8010–01–P
13 15
U.S.C. 78q–1(b)(3)(F).
U.S.C. 78q–1.
15 17 CFR 200.30–3(a)(12).
14 15
12 Supra
note 8, SR–FICC–2004–01.
Frm 00104
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23MRN1
Agencies
[Federal Register Volume 70, Number 55 (Wednesday, March 23, 2005)]
[Notices]
[Pages 14736-14738]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-1257]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51385; File No. SR-FICC-2004-14]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving a Proposed Rule Change Relating to Membership
Requirements
March 16, 2005.
On July 14, 2004, the Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change pursuant to section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'').\1\ 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. Notice of the proposal was published in the Federal
Register on January 18, 2005.\2\ The Commission received three comment
letters.\3\ For the reasons discussed below, the Commission is
approving the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 51018 (Jan. 11, 2005),
70 FR 2911.
\3\ Letters from Kevin M. Brandt, Director, III Global Ltd., III
Finance Ltd., and III Relative Value/Macro Hub Fund Ltd. (Oct. 25,
2004) and Lawrence R. Uhlick, Executive Director and General
Counsel, Institute of International Bankers (Oct. 26, 2004, and Feb.
9, 2005). See also Memorandum to File re: Meeting with Institute of
International Bankers (Mar. 15, 2005).
---------------------------------------------------------------------------
I. Description
Under the rule change, FICC will 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.
A. Annual Audited Financial Statements
Prior to the rule change, GSD required 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 required 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 is amending 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''). Specifically, FICC will
increase the existing minimum financial requirements of each applicant
and member based on the type of non-U.S. GAAP that was used to prepare
the audited financial statement in the following manner:
1. 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 will be one and one-half times
the applicable requirements.
2. For applicants and members whole financial statements are
prepared in accordance with a European Union country GAAP (``EU GAAP'')
other than U.K. GAAP, the minimum financial requirements will be five
times the applicable requirements.
3. For applicants and members whose financial statements are
prepared in accordance with any other type of GAAP, the minimum
financial requirements will be seven times the applicable requirements.
For example, under 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. However, 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.
[[Page 14737]]
In order to apply this change to non-U.S. applicants and members,
FICC will delete the terms ``Excess Liquid Capital'' and ``Excess Net
Capital'' in GSD Rule 3, Section 6, and instead will use the term
``applicable minimum regulatory capital,'' which is defined in GSD Rule
3, Section 2 as ``regulatory capital as defined by the applicant's home
country regulator.'' MBSD Article III, Rule 1, Section 2(d) will state
that the references to the terms ``net capital'' or ``liquid capital''
in, ``shall be deemed to refer to regulatory capital in cases where the
U.S. regulatory capital terms are not applicable to a non-domestic
entity.''
FICC will retain the requirement that annual audited financial
statements submitted by members and applicants be certified without
qualification. The rule change makes clear that annual audited
financial statements must be prepared in accordance with generally
accepted accounting principles. In addition, all information submitted
to FICC will have to be in English or will have to be a fair and
accurate English translation if the information is translated into
English.
The proposed rule changes will be applied to current members and
applicants.
B. 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, GSD and 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. In addition, the GSD rules 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.
Under the rule change, which will be adopted uniformly across both
FICC divisions, FICC will require non-U.S. members (other than those
organized or established in the U.K. and regulated by the Financial
Services Authority (``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. 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 FSA will be required to submit certain
regulatory monthly or quarterly reports, as applicable, that are filed
with the FSA.\4\ 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. FICC's rules will provide that failure to
submit the financial form or the U.K. regulatory reports, as
applicable, to FICC within the timeframes established by FICC will
subject a member to the same consequences, including a fine, as is
currently provided for in FICC's rules for late submission of required
financial documents.
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\4\ 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.
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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.\5\
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\5\ 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].
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The rule change expands this by requiring 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
rule change makes 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.\6\ This rule change requires 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.
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\6\ Securities Exchange Act. Release Nos. 50659 (Nov. 15, 2004),
69 FR 67767 (Nov. 19, 2004) [File No. SR-FICC-2004-11] and 51146
(Feb. 7, 2005), 70 FR 7984 (Feb. 16, 2005) [File No. SR-FICC-2004-
13].
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Finally, the rule change requires 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.\7\
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\7\ Securities Exchange Act Release No. 50617 (Nov. 1, 2004), 69
FR 64796 (Nov. 8, 2004) [File No. SR-FICC-2004-01].
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C. Legal Risk
FICC members that are incorporated outside of the U.S. present FICC
with increased legal risk in the event they become insolvent.\8\
Notwithstanding the protections for clearing agencies contained in the
U.S. federal laws \9\ 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.\10\ In such event, the foregoing protections
may not be available to FICC.
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\8\ 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.
\9\ E.g., the Federal Deposit Insurance Corporation Improvement
Act of 1991 and the U.S. Bankruptcy Code.
\10\ This particular matter is currently being adjudicated in a
case that will be argued before the Second Circuit. The case
involves 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).
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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. As is its current practice, FICC will continue
to make a case-by-case determination, based on its analysis of the
legal opinion, of the legal risks presented by the home country laws of
such applicants. In doing so, FICC will now retain U.S. outside counsel
to review the legal opinions and to advise FICC of any risks presented.
The rule change makes clear that, based on its review of the legal
opinion, FICC will determine
[[Page 14738]]
what, if any, protective measures it will impose 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).
In order to protect FICC against any adverse changes in home
country law that may have arisen since the members submitted their
legal opinions as a part of the membership/application process and in
order to determine whether any positive developments in home country
law would support eliminating or relaxing any collateral premiums that
may have been imposed on any members,\11\ FICC will 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 will 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 will 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 will 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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\11\ GSD currently has three non-U.S. netting members that are
subject to increased clearing fund requirements due to past
determinations of 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 or securities.
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The rule change will 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 non-U.S. members as described above
based on review of such updated legal opinions.
D. Additional Changes
The rule change will 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 will 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 previous rule change, FICC amended its rules with
the intention of giving FICC the option to request that financial
figures be submitted in U.S. dollar equivalents.\12\ This 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.
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\12\ Supra note 8, SR-FICC-2004-01.
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Finally, the rule change will amend the number of recent routine
regulatory reports that a U.S. GSD netting applicant 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.
II. Comments
The Institute of International Bankers (``IIB'') submitted two
comment letters. While the first letter objected to the increased
financial requirements for entities submitting financial statements
prepared using non-U.S. GAAP, its primarily focus was on its objections
to standard clearing fund premiums for all non-U.S. members. After FICC
amended the proposal to remove the standard clearing fund premiums for
non-U.S. members, the IIB wrote in support of the proposed rule change,
particularly with respect to the provisions that address how FICC will
manage the legal risk arising from the participation in FICC by
branches of international banks that operate in the United States.
The III Global Ltd., III Finance Ltd., and III Relative Value/Macro
Hub Fund Ltd. investment companies submitted a comment letter also
objecting to standard clearing fund premiums for non-U.S. members.
However, as with the IIB's first letter, this letter also addressed a
version of the proposed rule change that the Commission had not yet
published for comment and that FICC substantively modified.
III. Discussion
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of a clearing be designed to assure the safeguarding of
securities and funds which are in its custody or control.\13\ The
proposed rule change should enhance FICC's surveillance and assessment
of applicants' and members' financial and legal condition. In addition,
the proposed rule change will harmonize both of FICC's division's
application and membership requirements and will make clear to all
applicants and members of the breadth of financial and legal
information that FICC will require and review in order to develop an
accurate risk profile to evaluate an applicant's or member's financial
condition. Accordingly, the proposed rule should appropriately enhance
FICC's ability to mitigate financial risk to itself and to its members
and therefore should help FICC to assure the safeguarding of securities
and funds that are in its custody or control or for which it is
responsible.
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\13\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act \14\ and the
rules and regulations thereunder.
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\14\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-FICC-2004-14) be, and hereby
is, approved.
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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-1257 Filed 3-22-05; 8:45 am]
BILLING CODE 8010-01-P