Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Granting Approval of a Proposed Rule Change To Modify the Assessment Process for Late Submissions of Collateral Made Through the GCF Repo Service and To Increase the Types of Securities Available To Satisfy Collateral Allocation Obligations, 23285 [E5-2165]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 85 (Wednesday, May 4, 2005)]
[Notices]
[Page 23285]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-2165]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51623; File No. SR-FICC-2004-17]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change To Modify the 
Assessment Process for Late Submissions of Collateral Made Through the 
GCF Repo Service and To Increase the Types of Securities Available To 
Satisfy Collateral Allocation Obligations

April 28, 2005.

I. Introduction

    On August 13, 2004, the Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') and on March 14, 2005, amended proposed rule change 
File No. SR-FICC-2004-17 pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'').\1\ Notice of the proposed rule change 
was published in the Federal Register on March 29, 2005.\2\ No comment 
letters were received. For the reasons discussed below, the Commission 
is now granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 51413 (March 23, 2005), 
70 FR 15960.
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II. Description

    FICC is amending the rules of the Government Securities Division 
(``GSD'') of FICC to modify the assessment process for late submissions 
of collateral allocations made through its GCF Repo service and to 
increase the types of securities that can be used by a member in 
satisfaction of collateral obligations.\3\
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    \3\ The proposed rule change also amends GSD's rules to clarify 
that where a collateral allocation obligation is satisfied by the 
posting of U.S. Treasury Bills, notes, or bonds, such securities 
must mature in a time frame no greater than that of the securities 
that have been traded except if such traded securities are U.S. 
Treasury Bills, such obligations must be satisfied with the posting 
of ``comparable securities'' and/or cash only.
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1. Assessment Process for Late Submissions of Collateral Allocations 
Made Through the GCF Repo Service

    On October 30, 1998, the Commission granted approval to FICC's 
predecessor, the Government Securities Clearing Corporation, to 
implement its GCF Repo service, which is a significant alternative 
financing vehicle to the delivery versus payment and tri-party repo 
markets.\4\ That approval included a fine schedule for failure to 
adhere to relevant timeframes. The fine schedule was not implemented 
because of certain events.\5\ More recently, FICC has shifted the 
service from an interbank service to an intrabank service in order to 
address certain payment system risk issues that have arisen and that 
have resulted in decreased volumes.\6\ FICC believes, given the lower 
volumes and likely forthcoming changes to the service to address the 
payment system risk issues, that the original fine schedule should be 
replaced.
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    \4\ Securities Exchange Act Release No. 40623 (October 30, 
1998), 63 FR 59831 (November 5, 1998) [File No. SR-GSCC-98-02].
    \5\ As a new and complex service, members had difficulty 
adhering to the time frames. In addition, the initial rate of 
participation was very low, and there was a need to encourage growth 
in the service.
    \6\ Securities Exchange Act Release No. 48006 (June 10, 2003), 
68 FR 35745 (June 16, 2003) [SR-FICC-2003-04].
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    Specifically, FICC is implementing a late fee schedule to replace 
the late fine schedule. FICC believes that late fee schedules are 
appropriate in situations where the member's lateness causes an 
operational burden on FICC but does not result in risk to FICC or its 
members.\7\ In addition, in order to encourage members to make their 
collateral allocations on a timely basis, there will now be one late 
fee targeted to the most significant time frame surrounding the 
service. Specifically, if a dealer does not make the required 
collateral allocation by the later of 4:30 p.m. (New York time) or 1 
hour after the actual close of Fedwire GCF repo reversals, the dealer 
will be subject to a late fee of $500.00. Finally, in order to 
alleviate the potential operational and administrative burdens caused 
by late collateral allocations, FICC is amending the GCF Repo rules to 
provide that FICC will process collateral allocation obligations that 
are received after 6 p.m. on a good faith basis only. This 6 p.m. 
deadline will replace the 7 p.m. final cutoff for dealer allocations of 
collateral to satisfy obligations.
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    \7\ In a GCF Repo transaction, a borrower does not receive the 
funds borrowed until it makes the required collateral allocation. 
The lender maintains control of the funds until the allocation is 
made. The transaction does not produce a risk of loss to FICC, the 
lender, or other members.
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2. Types of Collateral Used To Satisfy Collateral Allocation 
Obligations

    Currently, GSD Rule 20 provides that a collateral allocation 
obligation may be satisfied with ``comparable securities,'' Treasury 
securities, and/or cash. ``Comparable securities'' are defined to 
include any securities that are represented by the same generic CUSIP 
number as the securities in question. Therefore, in the event that a 
member does not have enough of the collateral securities or the 
``comparable securities,'' the only collateral that can be used is 
Treasury securities and/or cash.
    GSD members have approached FICC and have asked that it amend rules 
to add certain additional collateral options. In response, FICC is 
amending its rules as set forth below:
    (a) Ginnie Mae adjustable-rate mortgage obligations can be 
satisfied with Ginnie Mae fixed-rate mortgage backed securities and
    (b) Fannie Mae and Freddie Mac adjustable-rate mortgage obligations 
can be satisfied with: (i) Fannie Mae and Freddie Mac fixed-rate 
mortgage-backed securities, (ii) Ginnie Mae fixed-rate mortgage-backed 
securities, and (iii) Ginnie Mae adjustable-rate mortgage obligations.

III. Discussion

    Section 17A(b)(3)(F) of the Act requires among other things that 
the rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions.\8\ The 
Commission finds that by allowing FICC's members additional collateral 
options with which to meet GCF collateral allocation obligations and by 
implementing a fee schedule that should incentivize members to allocate 
collateral on a timely basis, FICC's proposed rule change should 
promote the prompt and accurate clearance and settlement of GCF Repo 
transactions. As such, FICC's proposed rule change is consistent with 
Section 17A(b)(3)(F) of the Act.
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    \8\ 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 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 17A of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\9\ that the proposed rule change (File No. SR-FICC-2004-17) be and 
hereby is approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-2165 Filed 5-3-05; 8:45 am]
BILLING CODE 8010-01-P