Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change Establishing a Sponsored Membership Program, 36981-36982 [E5-3324]

Download as PDF Federal Register / Vol. 70, No. 122 / Monday, June 27, 2005 / Notices should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CHX–2005–18 and should be submitted on or before July 18, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.15 Jill M. Peterson, Assistant Secretary. [FR Doc. E5–3334 Filed 6–24–05; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–51896; File No. SR–FICC– 2004–22] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change Establishing a Sponsored Membership Program June 21, 2005. On November 12, 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 and on February 28, 2005, and May 6, 2005, amended the proposed rule change.2 Notice of the proposal was published in the Federal Register on May 12, 2005.3 No comment letters were received. For the reasons discussed below, the Commission is approving the proposed rule change. I. Description The rule change creates a new Rule 3A of FICC’s Government Securities Division’s (‘‘GSD’’) rules that will establish new membership categories and requirements for sponsoring members and sponsored members whereby certain existing netting members will be permitted to sponsor certain buy-side entities into membership. The rule change will also make conforming changes to FICC’s existing rules to accommodate the 15 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 The May 6, 2005, amendment to the proposed rule change clarified that sponsored members must ‘‘immediately’’ notify the sponsoring member (instead of ‘‘promptly’’ notify FICC as would have been required by the original filing) and that sponsoring members must promptly notify FICC if the sponsored member is no longer in compliance with the membership requirements. Because this change is technical in nature, republication of the notice was not required. 3 Securities Exchange Act Release No. 51659 (May 5, 2005); 70 FR 25129. 1 15 VerDate jul<14>2003 18:11 Jun 24, 2005 Jkt 205001 introduction of these new membership categories. GSD will initially permit only bank netting members to apply to become sponsoring members.4 In order to be eligible to become a sponsoring member, a bank netting member will have to meet more stringent minimum financial requirements than those required for GSD netting membership. Specifically, the sponsoring member will have to have a level of equity capital of at least $5 billion and will have to satisfy the ratios established by the Federal Deposit Insurance Corporation for being ‘‘wellcapitalized.’’ If the sponsoring member has a bank holding company that is registered under the Bank Holding Company Act of 1956, then the bank holding company will also have to be ‘‘well-capitalized’’ under the relevant regulations of the Board of Governors of the Federal Reserve System. These financial criteria are both the initial and the continuing minimum financial requirements for sponsoring members. All applications for sponsoring membership will be decided on by FICC’s Membership and Risk Management Committee.5 To become a sponsored member, GSD will permit only entities that are (i) registered investment companies under the Investment Company Act of 1940 and (ii) qualified institutional buyers under Rule 144A of the Securities Act of 1933.6 In addition, an entity will only be able to become a sponsored member if there is a sponsoring member willing to sponsor the entity into membership. FICC will require each sponsoring member to represent in writing that each entity it wishes to sponsor meets these requirements. Thereafter, sponsoring members will have to make these representations to FICC on an ongoing basis. Sponsored members will have to immediately notify their sponsoring member anytime it is no longer in compliance with the membership requirements. GSD management will decide on entities applying to become sponsored members.7 Since a sponsoring member will act as the processing agent for its sponsored members, FICC will interact solely with the sponsoring member for operational purposes. The sponsoring member will have to establish an omnibus account for all of its sponsored members’ activity. The omnibus account will be in addition to the sponsoring member’s regular netting account. FICC will permit, but not require, the sponsoring member to submit sponsored member activity on a locked-in basis. 8 FICC will provide its settlement guaranty to each sponsored member with respect to its respective net settlement positions (i.e., for clearing fund calculation, each sponsored member’s trading activity is treated separately). For operational and securities clearance purposes, however, all of the activity in the omnibus account will be netted as if it were the activity of one netting member. As a result, the omnibus account will have only one net settlement obligation per CUSIP on a daily basis.9 The same will be true with respect to funds-only settlement for the omnibus account.10 The required clearing fund deposit of each sponsored member whose trading activity is submitted to the omnibus account will be calculated in the same manner as is done for the trading activity of a netting member in its regular netting account except that FICC will compute the required clearing fund deposit for each sponsored member on a standalone basis. FICC then will add each sponsored member’s calculated requirement to two additional figures that will be calculated at the omnibus account level (i.e., the portion of the clearing fund calculation for adjusted funds-only settlement amounts for and fail net settlement positions) to come to a total clearing fund requirement for the omnibus account. For risk management purposes, FICC will not net the resulting clearing fund calculations of each sponsored member within the omnibus account with those of other sponsored members in the omnibus account.11 FICC understands that the custodial banks that are likely to be interested in becoming sponsoring members generally collateralize their custody clients (i.e., the potential sponsored members) at 102 percent for U.S. Treasury repurchase agreements.12 Under the GSD clearing fund formula, this would cause a sponsoring member to pay clearing fund of an additional 4 percent of its overall transactional volume with its sponsored members, 8 Rule 3A, Sections 5 and 6. 3A, Sections 7 and 8. 10 Rule 3A, Section 9. 11 Rule 3A, Section 10. 12 This means that when a custody client wishes to engage in a reverse repo transaction (for example, the custodian client is lending $100), it will generally require collateral of 102 percent of the value of the money loaned (in this example, $102 worth of U.S. Treasury securities). 9 Rule 4 FICC will submit a proposed rule change should it decide to expand the types of entities that may be sponsoring members. 5 Rule 3A, Section 2. 6 FICC will submit a proposed rule change should it decide to expand the types of entities that may be sponsored members. 7 Rule 3A, Sections 2(d) and 3. PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 36981 E:\FR\FM\27JNN1.SGM 27JNN1 36982 Federal Register / Vol. 70, No. 122 / Monday, June 27, 2005 / Notices which may potentially amount to hundreds of millions of dollars of additional clearing fund obligations.13 FICC believes that this potential adverse impact on a sponsoring member is unnecessary because these additional funds payments are pass-through amounts between sponsored members and their sponsoring members do not represent risk to FICC or its members. Therefore, FICC will amend the clearing fund rule to adjust for this funds-only settlement component when calculating the clearing fund requirements for the sponsored members, the omnibus account, and the sponsoring member’s regular netting account. FICC will reserve the right to not adjust the fundsonly settlement component when, in its discretion, the circumstances warrant such action (for example, under extraordinary market conditions). Each sponsored member will be principally liable for satisfying its securities and funds-only settlement obligations. For operational and administrative purposes, FICC will interact with the sponsoring member as agent for the sponsored members for day-to-day satisfaction of these obligations.14 While the sponsored members will be principally liable for their settlement obligations, the sponsoring member will be required to provide a guaranty to FICC with respect to such obligations. This means that in the event one or more sponsored members do not satisfy their settlement obligations, FICC will be able to invoke the guaranty provided by the sponsoring member.15 Sponsored members will not be liable for any loss allocation obligations. To the extent that a ‘‘remaining loss’’ (as defined in the GSD’s rules) arises in connection with ‘‘direct transactions’’ 13 The following example will illustrate why this occurs under FICC’s GSD’s clearing fund formula. Assume that the start leg of the repo transaction between the sponsoring member and the sponsored member calls for the sponsored member to lend $100 and receive $102 in securities. The next day, the close leg of the repo transaction to which FICC has become counterparty will call for the sponsored member to send the collateral back to FICC, and FICC, which settles at market value, the sponsored member will pay $102 in funds. This requires FICC to make an adjustment for funds-only settlement purposes by debiting the sponsored member $2 and crediting the sponsoring member $2. These fundsonly settlement amount payments are referred to as ‘‘transaction adjustment payments’’ in the GSD’s rules. Because one component of the clearing fund requires inclusion of the absolute value of the funds-only settlement amounts (i.e., regardless of whether they are debits or credits), the transaction adjustment payments will artificially inflate the clearing fund requirements related to both the sponsored member omnibus account and the sponsoring member’s regular netting account. 14 Rule 3A, Sections 8 and 9. 15 Definition of ‘‘Sponsoring Member Guaranty’’ and Rule 3A, Section 2. VerDate jul<14>2003 18:11 Jun 24, 2005 Jkt 205001 (as defined in the GSD’s rules) between the sponsoring member and its sponsored members (i.e., the sponsoring member is the insolvent party), the sponsored members will not be responsible for or considered in the calculation of the loss allocation obligations. Such obligations will be the obligation of the other netting members that had direct transactions with the sponsoring member in its capacity as a netting member. To the extent there is an allocation other than for direct transactions between the sponsoring member and its sponsored members, the sponsored members will be counted as if they were obligated to pay the loss allocation amounts, but it will be the sponsoring member’s obligation to pay such amounts.16 II. 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.17 The proposed rule change is consistent with the requirements of Section 17A of the Act and the rules and regulations thereunder because the sponsoring and sponsored membership categories and related rules have been crafted in a manner that, while providing for sponsored members, adequately takes into account any associated risks. III. 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 18 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–2004–22) be, and hereby is, approved. For the Commission by the Division of Market Regulation, pursuant to delegated authority.19 Jill M. Peterson, Assistant Secretary. [FR Doc. E5–3324 Filed 6–24–05; 8:45 am] BILLING CODE 8010–01–P PO 00000 3A, Section 12. U.S.C. 78q-1(b)(3)(F). 18 15 U.S.C. 78q-1. 19 17 CFR 200.30–3(a)(12). 17 15 Fmt 4703 [Release No. 34–51891; File No. SR–NASD– 2004–139] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 2 Relating to the Listing and Trading of Leveraged Index Return Notes Linked to the Dow Jones Industrial Average June 21, 2005. I. Introduction On September 15, 2004, the National Association of Securities Dealers, Inc. (‘‘NASD’’), through its subsidiary, The Nasdaq Stock Market, Inc. (‘‘Nasdaq’’), filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade Leveraged Index Return Notes Linked to the Dow Jones Industrial Average (‘‘Notes’’) issued by Merrill Lynch & Co., Inc. (‘‘Merrill Lynch’’). On March 21, 2005, Nasdaq submitted Amendment No. 1.3 The proposed rule change, as modified by Amendment No. 1, was published for notice and comment in the Federal Register on March 30, 2005.4 The Commission received no comment letters regarding the proposed rule change. On May 31, 2005, Nasdaq submitted Amendment No. 2 to the proposal.5 This order approves the proposed rule change, as modified by Amendment No. 1. Simultaneously, the Commission provides notice of filing of Amendment No. 2 and grants accelerated approval of Amendment No. 2. II. Description of Proposal Nasdaq proposes to list and trade the Notes, which provide for a return based upon the Dow Jones Industrial Average (‘‘Index’’). As set forth in the Notice, the Index is a price-weighted index published by Dow Jones & Company, Inc. A component stock’s weight in the Index is based on its price per share, 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 In Amendment No. 1, Nasdaq provided additional details regarding the proposed index linked notes and underlying index. 4 See Securities Exchange Act Release No. 51425 (March 23, 2005), 70 FR 16322 (‘‘Notice’’). 5 In Amendment No. 2, Nasdaq modified its proposal to include conditions under which it would commence delisting or removal proceedings with respect to the Notes. 2 17 16 Rule Frm 00067 SECURITIES AND EXCHANGE COMMISSION Sfmt 4703 E:\FR\FM\27JNN1.SGM 27JNN1

Agencies

[Federal Register Volume 70, Number 122 (Monday, June 27, 2005)]
[Notices]
[Pages 36981-36982]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-3324]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51896; File No. SR-FICC-2004-22]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving a Proposed Rule Change Establishing a Sponsored 
Membership Program

June 21, 2005.
    On November 12, 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\ and on February 28, 
2005, and May 6, 2005, amended the proposed rule change.\2\ Notice of 
the proposal was published in the Federal Register on May 12, 2005.\3\ 
No comment letters were received. For the reasons discussed below, the 
Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ The May 6, 2005, amendment to the proposed rule change 
clarified that sponsored members must ``immediately'' notify the 
sponsoring member (instead of ``promptly'' notify FICC as would have 
been required by the original filing) and that sponsoring members 
must promptly notify FICC if the sponsored member is no longer in 
compliance with the membership requirements. Because this change is 
technical in nature, republication of the notice was not required.
    \3\ Securities Exchange Act Release No. 51659 (May 5, 2005); 70 
FR 25129.
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I. Description

    The rule change creates a new Rule 3A of FICC's Government 
Securities Division's (``GSD'') rules that will establish new 
membership categories and requirements for sponsoring members and 
sponsored members whereby certain existing netting members will be 
permitted to sponsor certain buy-side entities into membership. The 
rule change will also make conforming changes to FICC's existing rules 
to accommodate the introduction of these new membership categories.
    GSD will initially permit only bank netting members to apply to 
become sponsoring members.\4\ In order to be eligible to become a 
sponsoring member, a bank netting member will have to meet more 
stringent minimum financial requirements than those required for GSD 
netting membership. Specifically, the sponsoring member will have to 
have a level of equity capital of at least $5 billion and will have to 
satisfy the ratios established by the Federal Deposit Insurance 
Corporation for being ``well-capitalized.'' If the sponsoring member 
has a bank holding company that is registered under the Bank Holding 
Company Act of 1956, then the bank holding company will also have to be 
``well-capitalized'' under the relevant regulations of the Board of 
Governors of the Federal Reserve System. These financial criteria are 
both the initial and the continuing minimum financial requirements for 
sponsoring members. All applications for sponsoring membership will be 
decided on by FICC's Membership and Risk Management Committee.\5\
---------------------------------------------------------------------------

    \4\ FICC will submit a proposed rule change should it decide to 
expand the types of entities that may be sponsoring members.
    \5\ Rule 3A, Section 2.
---------------------------------------------------------------------------

    To become a sponsored member, GSD will permit only entities that 
are (i) registered investment companies under the Investment Company 
Act of 1940 and (ii) qualified institutional buyers under Rule 144A of 
the Securities Act of 1933.\6\ In addition, an entity will only be able 
to become a sponsored member if there is a sponsoring member willing to 
sponsor the entity into membership. FICC will require each sponsoring 
member to represent in writing that each entity it wishes to sponsor 
meets these requirements. Thereafter, sponsoring members will have to 
make these representations to FICC on an on-going basis. Sponsored 
members will have to immediately notify their sponsoring member anytime 
it is no longer in compliance with the membership requirements. GSD 
management will decide on entities applying to become sponsored 
members.\7\
---------------------------------------------------------------------------

    \6\ FICC will submit a proposed rule change should it decide to 
expand the types of entities that may be sponsored members.
    \7\ Rule 3A, Sections 2(d) and 3.
---------------------------------------------------------------------------

    Since a sponsoring member will act as the processing agent for its 
sponsored members, FICC will interact solely with the sponsoring member 
for operational purposes. The sponsoring member will have to establish 
an omnibus account for all of its sponsored members' activity. The 
omnibus account will be in addition to the sponsoring member's regular 
netting account. FICC will permit, but not require, the sponsoring 
member to submit sponsored member activity on a locked-in basis. \8\
---------------------------------------------------------------------------

    \8\ Rule 3A, Sections 5 and 6.
---------------------------------------------------------------------------

    FICC will provide its settlement guaranty to each sponsored member 
with respect to its respective net settlement positions (i.e., for 
clearing fund calculation, each sponsored member's trading activity is 
treated separately). For operational and securities clearance purposes, 
however, all of the activity in the omnibus account will be netted as 
if it were the activity of one netting member. As a result, the omnibus 
account will have only one net settlement obligation per CUSIP on a 
daily basis.\9\ The same will be true with respect to funds-only 
settlement for the omnibus account.\10\
---------------------------------------------------------------------------

    \9\ Rule 3A, Sections 7 and 8.
    \10\ Rule 3A, Section 9.
---------------------------------------------------------------------------

    The required clearing fund deposit of each sponsored member whose 
trading activity is submitted to the omnibus account will be calculated 
in the same manner as is done for the trading activity of a netting 
member in its regular netting account except that FICC will compute the 
required clearing fund deposit for each sponsored member on a 
standalone basis. FICC then will add each sponsored member's calculated 
requirement to two additional figures that will be calculated at the 
omnibus account level (i.e., the portion of the clearing fund 
calculation for adjusted funds-only settlement amounts for and fail net 
settlement positions) to come to a total clearing fund requirement for 
the omnibus account. For risk management purposes, FICC will not net 
the resulting clearing fund calculations of each sponsored member 
within the omnibus account with those of other sponsored members in the 
omnibus account.\11\
---------------------------------------------------------------------------

    \11\ Rule 3A, Section 10.
---------------------------------------------------------------------------

    FICC understands that the custodial banks that are likely to be 
interested in becoming sponsoring members generally collateralize their 
custody clients (i.e., the potential sponsored members) at 102 percent 
for U.S. Treasury repurchase agreements.\12\ Under the GSD clearing 
fund formula, this would cause a sponsoring member to pay clearing fund 
of an additional 4 percent of its overall transactional volume with its 
sponsored members,

[[Page 36982]]

which may potentially amount to hundreds of millions of dollars of 
additional clearing fund obligations.\13\ FICC believes that this 
potential adverse impact on a sponsoring member is unnecessary because 
these additional funds payments are pass-through amounts between 
sponsored members and their sponsoring members do not represent risk to 
FICC or its members. Therefore, FICC will amend the clearing fund rule 
to adjust for this funds-only settlement component when calculating the 
clearing fund requirements for the sponsored members, the omnibus 
account, and the sponsoring member's regular netting account. FICC will 
reserve the right to not adjust the funds-only settlement component 
when, in its discretion, the circumstances warrant such action (for 
example, under extraordinary market conditions).
---------------------------------------------------------------------------

    \12\ This means that when a custody client wishes to engage in a 
reverse repo transaction (for example, the custodian client is 
lending $100), it will generally require collateral of 102 percent 
of the value of the money loaned (in this example, $102 worth of 
U.S. Treasury securities).
    \13\ The following example will illustrate why this occurs under 
FICC's GSD's clearing fund formula. Assume that the start leg of the 
repo transaction between the sponsoring member and the sponsored 
member calls for the sponsored member to lend $100 and receive $102 
in securities. The next day, the close leg of the repo transaction 
to which FICC has become counterparty will call for the sponsored 
member to send the collateral back to FICC, and FICC, which settles 
at market value, the sponsored member will pay $102 in funds. This 
requires FICC to make an adjustment for funds-only settlement 
purposes by debiting the sponsored member $2 and crediting the 
sponsoring member $2. These funds-only settlement amount payments 
are referred to as ``transaction adjustment payments'' in the GSD's 
rules. Because one component of the clearing fund requires inclusion 
of the absolute value of the funds-only settlement amounts (i.e., 
regardless of whether they are debits or credits), the transaction 
adjustment payments will artificially inflate the clearing fund 
requirements related to both the sponsored member omnibus account 
and the sponsoring member's regular netting account.
---------------------------------------------------------------------------

    Each sponsored member will be principally liable for satisfying its 
securities and funds-only settlement obligations. For operational and 
administrative purposes, FICC will interact with the sponsoring member 
as agent for the sponsored members for day-to-day satisfaction of these 
obligations.\14\
---------------------------------------------------------------------------

    \14\ Rule 3A, Sections 8 and 9.
---------------------------------------------------------------------------

    While the sponsored members will be principally liable for their 
settlement obligations, the sponsoring member will be required to 
provide a guaranty to FICC with respect to such obligations. This means 
that in the event one or more sponsored members do not satisfy their 
settlement obligations, FICC will be able to invoke the guaranty 
provided by the sponsoring member.\15\
---------------------------------------------------------------------------

    \15\ Definition of ``Sponsoring Member Guaranty'' and Rule 3A, 
Section 2.
---------------------------------------------------------------------------

    Sponsored members will not be liable for any loss allocation 
obligations. To the extent that a ``remaining loss'' (as defined in the 
GSD's rules) arises in connection with ``direct transactions'' (as 
defined in the GSD's rules) between the sponsoring member and its 
sponsored members (i.e., the sponsoring member is the insolvent party), 
the sponsored members will not be responsible for or considered in the 
calculation of the loss allocation obligations. Such obligations will 
be the obligation of the other netting members that had direct 
transactions with the sponsoring member in its capacity as a netting 
member. To the extent there is an allocation other than for direct 
transactions between the sponsoring member and its sponsored members, 
the sponsored members will be counted as if they were obligated to pay 
the loss allocation amounts, but it will be the sponsoring member's 
obligation to pay such amounts.\16\
---------------------------------------------------------------------------

    \16\ Rule 3A, Section 12.
---------------------------------------------------------------------------

II. 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.\17\ The 
proposed rule change is consistent with the requirements of Section 17A 
of the Act and the rules and regulations thereunder because the 
sponsoring and sponsored membership categories and related rules have 
been crafted in a manner that, while providing for sponsored members, 
adequately takes into account any associated risks.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

III. 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 \18\ and the 
rules and regulations thereunder.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-FICC-2004-22) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3324 Filed 6-24-05; 8:45 am]
BILLING CODE 8010-01-P