Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving Proposed Rule Change To Enhance the Repo Collateral Substitution Process of FICC's Government Securities Division, 15781-15784 [E6-4527]

Download as PDF Federal Register / Vol. 71, No. 60 / Wednesday, March 29, 2006 / Notices The Exchange is also revising CBOE Rule 6.9.04 to make that provision consistent with the first paragraph of proposed CBOE Rule 6.74(d). 2. Statutory Basis The Exchange believes the proposed rule change is consistent with Section 6(b) of the Act 11 in general and furthers the objectives of Section 6(b)(5) of the Act 12 in particular in that it is designed to promote just and equitable principles of trade, serve to remove impediments to and perfect the mechanism of a free and open market and a national market system, and protect investors and the public interest. B. Self-Regulatory Organization’s Statement on Burden on Competition CBOE does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others The Exchange neither solicited nor received comments on the proposal. hsrobinson on PROD1PC68 with NOTICES III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change: (1) Does not significantly affect the protection of investors or the public interest; (2) does not impose any significant burden on competition; and (3) by its terms does not become operative for 30 days after the date of this filing, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) 13 of the Act and Rule 19b–4(f)(6) thereunder.14 CBOE requests that the Commission waive the 30-day operative delay, as specified in Rule 19b–4(f)(6)(iii),15 and combination, or ratio order (or a stock-option order or security future-option order, as defined in CBOE Rules 1.1(ii)(b) and 1.1(zz)(b), respectively) or any other complex order defined in CBOE Rule 6.53C) must contain one leg alone which is for the eligible order size or greater. Telephone conversation of March 15, 2006. 11 15 U.S.C. 78f(b). 12 15 U.S.C. 78f(b)(5). 13 15 U.S.C. 78s(b)(3)(A). 14 17 CFR 240.19b–4(f)(6). The Exchange provided the Commission with written notice of its intention to file the proposed rule change on February 13, 2006. The Commission received the Exchange’s submission, and asked the Exchange to file the instant proposed rule change, pursuant to Rule 19b–4(f)(6) under the Act. 15 17 CFR 240.19b–4(f)(6)(iii). VerDate Aug<31>2005 15:39 Mar 28, 2006 Jkt 208001 designate the proposed rule change to become operative immediately. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest because the proposed rule change establishes a uniform set of rules with respect to facilitation and solicitation orders for all options based on principles already approved by the Commission, while setting forth parameters by which the appropriate Exchange Procedure Committee may apply these rules flexibly on a class-byclass basis.16 Waiving the 30-day preoperative period will allow the Exchange to implement these changes without delay. At any time within 60 days of the filing of the 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 (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File No. SR–CBOE–2006–21 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–CBOE–2006–21. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements 16 For purposes only of waiving the operative delay for this proposal, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 15781 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 Room. Copies of such filing also will be available for inspection and copying at the principal office of CBOE. 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–CBOE–2006–21 and should be submitted on or before April 19, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.17 Nancy M. Morris, Secretary. [FR Doc. E6–4539 Filed 3–28–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–53534; File No. SR–FICC– 2005–18] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving Proposed Rule Change To Enhance the Repo Collateral Substitution Process of FICC’s Government Securities Division March 21, 2006. I. Introduction On September 30, 2005, the Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) and on December 20, 2005, amended proposed rule change SR–FICC–2005–18 pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’).1 Notice of the proposal was published in the Federal Register on January 5, 2006.2 No comment letters were received. On March 20, 2006, FICC filed an amendment to the proposed rule 17 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 Securities Exchange Act Release No. 53036 (December 29, 2005), 71 FR 629. 1 15 E:\FR\FM\29MRN1.SGM 29MRN1 15782 Federal Register / Vol. 71, No. 60 / Wednesday, March 29, 2006 / Notices change.3 For the reasons discussed below, the Commission is approving the proposed rule change as amended. II. Description In general, FICC is enhancing the repo collateral substitution process of its Government Securities Division (‘‘GSD’’). The rule change: (i) Permits the repo dealer or repo broker, as appropriate, to submit a substitution notification to FICC without information about the replacement collateral, (ii) revises the repo collateral substitution process deadline and fee schedule, and (iii) implements certain risk management measures and technical changes. A. Initial Substitution Notification Without Replacement Collateral Information hsrobinson on PROD1PC68 with NOTICES The GSD’s repo collateral substitution process provides a mechanism for a repo dealer to process its right to substitute the original collateral it provided as part of a repo transaction with replacement collateral. With respect to a brokered transaction, typically the repo dealer notifies the broker that it wishes to substitute the repo collateral before it specifically identifies the replacement collateral.4 The repo broker then contacts the reverse repo dealer and informs it that a repo collateral substitution process is being initiated. The reverse repo dealer then sends the original repo collateral to FICC. However, since under FICC’s current system the repo dealer’s substitution notification that it must send to FICC must contain information about the replacement collateral, often the substitution notification is not delivered to FICC by the time FICC receives the returned original repo collateral from the reverse repo dealer. When the repo dealer does determine what securities will constitute the replacement collateral, it often delivers the replacement collateral to FICC before sending the repo collateral substitution notification. Thus the original and replacement collateral frequently are delivered to FICC before FICC is able to forward the collateral to the appropriate party. This leaves FICC in an overdraft position at the clearing bank, which can cause expense and risk to FICC and to its members and can cause settlement processing delays. 3 The amendment, as noted below, is not substantive and did not require republication of the notice. 4 With respect to a non-brokered repo transaction, the repo dealer would contact the reverse repo dealer directly about the repo collateral substitution. VerDate Aug<31>2005 15:39 Mar 28, 2006 Jkt 208001 The rule change permits the repo dealer or repo broker, as appropriate, to submit a substitution notification to FICC without information about the replacement collateral. FICC will deliver the original collateral to the repo party’s account at its clearing bank upon receipt of the substitution notification so the original collateral will no longer linger in FICC’s account.5 B. Revised Repo Collateral Substitution Process Deadline and Fee Schedule The rule change in repo processing requires a revision to GSD’s schedule of time frames. Currently, there is a twotiered deadline for a repo party to submit a substitution notification and associated late-fee.6 The rule change establishes: (i) An 11 a.m. Eastern Time deadline 7 for a repo party to submit a substitution notification and (ii) a latefee of $100 for each substitution notification that is received after the deadline. The rule change also establishes a two-tiered deadline for a repo party to submit replacement collateral information and an associated late-fee schedule. The deadlines for submission of replacement collateral information are: (i) 12 p.m. Eastern Time and (ii) 12:30 p.m. Eastern Time. The late-fee assessments are: (i) $100 for each submission of replacement collateral information that is received after the first deadline but before the second deadline and (ii) $250 for each submission of replacement collateral information that is received after the second deadline.8 In order to accommodate members’ preparations to comply with the time frames contained herein, the proposed 5 The changes necessary to reflect this part of the rule change are contained in GSD Rule 18, sections 3(a), (b), (c), and (d) and in the Schedule of Required and Accepted Data Submission Items for a Right of Substitution. A new schedule, titled Schedule of Required and Accepted Data Submission Items for New Securities Collateral, is being added to the rules to reflect that information on the replacement collateral will be contained in a separate submission to FICC. 6 The current deadlines are 12 p.m. Eastern Time and 12:30 p.m. Eastern Time. The deadlines are extended by one hour on days that: (i) FICC determines are high-volume days or (ii) The Bond Market Association announces in advance will be high-volume days. FICC assesses a late-fee of: (i) $100 for each substitution notification that is received after the first deadline but before the second deadline and (ii) $250 for each substitution notification that is received after the second deadline. 7 The proposed 11 a.m. Eastern Time deadline will not be extended on high-volume days. 8 The allocation of collateral deadlines will be extended by one hour on days that: (i) FICC determines are high-volume days or (ii) The Bond Market Association announces in advance will be high-volume days. The rule changes necessary to affect this part of the proposed rule are contained in the Schedule of Timeframes and in the Fee Structure under ‘‘Late Fees.’’ PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 changes to the schedule of time frames and applicable late-fees will be implemented at a later date than the other rule changes contained in this filing. FICC will announce the implementation of the proposed schedule of time frames by Important Notice at least thirty calendar days prior to implementation. Until such implementation, currently existing time frames and late-fees applied to repo collateral substitutions shall remain in effect. C. Risk Management Measures and Technical Changes Generally, FICC is implementing certain measures to address the risk presented to it by the failure of a party to submit in a timely manner information regarding the replacement collateral to FICC. Specifically, FICC is: (i) Increasing the clearing fund calculation of the repo dealer and allowing margining with respect to replacement collateral based on applicable generic CUSIP numbers only 9 and (ii) imposing mark-to-market consequences on both the repo dealer and the reverse dealer with respect to unknown replacement collateral. 1. Clearing Fund Calculation and Permissible Margin Offsets With respect to the calculation of the repo dealer’s clearing fund requirement, FICC is assigning a value of 150 percent of the contract value of the original securities collateral to a repo transaction where FICC has not received information regarding the replacement collateral.10 FICC also is applying the highest applicable margin factor in its rules in connection with the repo transaction. In GSD’s rules, the highest margin factor is the factor for securities with a remaining maturity of 15 years and 16 days or greater. Therefore, if the generic CUSIP number that is assigned to the unknown replacement collateral is the generic CUSIP number for Treasury securities with a remaining maturity of 15 years and 16 days or greater, FICC will use the existing margin factor of 1.450 (applicable to 9 Generic CUSIP numbers represent the range of permissible securities that can constitute the replacement collateral. For example, there is a generic CUSIP number which represents Treasury securities with remaining maturity of fewer than thirty years. 10 New subsection 3(f) is being added to Rule 18 in order to effect this change. It should be noted that the application of the 150 percent for clearing fund purposes applies to both the receive/deliver and repo volatility components of the clearing fund calculation. E:\FR\FM\29MRN1.SGM 29MRN1 Federal Register / Vol. 71, No. 60 / Wednesday, March 29, 2006 / Notices category 1 members with positions in non-zeros).11 The proposed risk management measures applicable to non-timely allocation of replacement collateral will further affect the clearing fund calculation of the repo dealer by limiting permissible offsets. A regular part of the GSD’s margining system is to permit offsets between resulting margin amounts of long and short net settlement positions. The GSD’s rules contain disallowance factor tables that set forth specific limits on these permissible offsets. For example, where a short net settlement position in Treasury Offset Class A is to be offset against a long net settlement position in Treasury Offset Class B, the applicable disallowance factor table provides that 30 percent of this offset will be disallowed.12 For offset purposes under the proposed rule change, FICC is defining two new offset classes to capture the generic CUSIP numbers that can be assigned to unknown replacement collateral. These new offset classes are identified as ‘‘H’’ for Treasury securities and ‘‘h’’ for nonmortgage-backed Agency securities. Under the proposed rule change, as a further risk management measure, FICC will not permit offsets between Offset Classes H and h or between Offset Classes H or h and any other existing GSD Offset Class. hsrobinson on PROD1PC68 with NOTICES 2. Modified Mark-to-Market Calculation FICC also is calculating a modified mark-to-market obligation with respect to the replacement collateral and imposing this on both the repo dealer and the reverse repo dealer in the case where a generic CUSIP number is used for underlying collateral. In a typical scenario where the replacement collateral is identified, FICC reverses any previous mark-to-market calculation for the old collateral and recalculates, collects, and passes through a mark-tomarket associated with the actual replacement collateral. This computation is defined as the Forward Mark Adjustment Payment.13 In the 11 The GSD’s margin factor schedules apply different margin factors to category 1 and category 2 dealers. In this example, if the member were a category 2 member electing to receive credit forward mark adjustment payments, the applicable margin factor under the proposed rule change would be 2.0. 12 As originally filed, FICC mistakenly stated that 20 percent of the offset would be disallowed. In its March 20, 2006, amendment, FICC changed this to 30 percent to accurately reflect the disallowance factor for such securities. 13 The Forward Mark Adjustment Payment is the sum of two components: the Collateral Mark and the Financing Mark. The Collateral Mark is the absolute value of the difference between the trade’s contract value and market value. The Financing VerDate Aug<31>2005 15:39 Mar 28, 2006 Jkt 208001 scenario where the replacement collateral has not been identified, FICC will calculate a modified Forward Mark Adjustment Payment to protect FICC against market risk. Specifically, the definition of Forward Mark Adjustment Payment is amended by noting that with respect to a repo transaction for which a substitution request has been made but for which replacement collateral information has not been provided to FICC, a new Forward Unallocated Sub Mark will be applied. This new mark will take into account repo interest that has accrued with respect to the repo transaction to date, as well as changes in the repo rate (to reflect the difference between the contract rate and the market rate for the remaining term of the repo transaction).14 3. Technical Changes Additionally, FICC is making certain technical changes to its GSD rules relating to repo collateral substitutions and repo transactions generally. a. Section 3(a) of Rule 18: Delete the requirement that details regarding the rights of substitution match between counterparties. Details regarding rights of substitution are not a required trade reporting item and thus will not be a required match item in GSD’s system. References in this respect are deleted to reflect actual operating practice. b. Sections 3(e) and 3(f) of Rule 18: Delete the requirement that upon receipt of either the original or the replacement collateral, FICC will promptly redeliver the securities to the appropriate party. As stated in the narrative above, FICC may receive securities that are the subject of a repo collateral substitution request but may not yet have the requisite information for delivery of those securities. These provisions are deleted to reflect actual operating practice and also to make the rule consistent with the proposed changes. c. Section 3(h) of Rule 18: Delete the provision regarding implications of repo collateral substitutions on margin and mark-to-market requirements. This provision is redundant because the effects of repo substitutions on such requirements are covered in the rules governing these items and the rules to be modified by the proposed rule change. d. Section 4 of Rule 18: Make optional a requirement that for general collateral, Mark reflects the financing cost that would be incurred by FICC if it replaced the reverse side of the repo by buying securities and putting them out on repo. 14 The following new definitions effect this change: Accrued Repo Interest-to-Date, Repo Interest Rate Differential, and Forward Unallocated Sub Mark. PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 15783 forward-starting repos, the specific CUSIP and par value be submitted prior to the repo start date. FICC typically does not receive such allocations from its members prior to the repo start date and thus the proposed change aligns the rule with industry practice. The proposed change further reflects operating practice as well as industry expectations that a general collateral, forward-starting repo will be removed from the GSD’s books if FICC does not receive the specific CUSIP by the time noted in the rule. Members typically submit new transactions with the specific CUSIPs and expect that the general collateral transaction will be removed from the GSD’s books. e. Section 5 of Rule 18: Amend the provision that addresses repo transactions with maturing collateral. The proposed rule change provides that the repo party in such a repo transaction must make the required substitution of collateral by the time noted in the rule or FICC will remove the transaction from its books. This is because the underlying contract terminates if the collateral is not replaced in time, and therefore, the proposed rule change reflects industry practice. The proposed rule change further reflects industry practice by deleting the requirement that the replacement collateral meet certain specific criteria and by replacing that requirement with a requirement that the replacement collateral be ‘‘in accordance with the terms of the transaction.’’ This change also reflects industry practice. III. Discussion Section 19(b) of the Act directs the Commission to approve a proposed rule change of a self-regulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization.15 Section 17A(b)(3)(F) of the Act requires that the rules of a clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions and to assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible.16 The Commission finds that FICC’s rule change is consistent with these requirements. By revising its repo substitution rules to more accurately reflect industry practice, FICC’s proposed rule change should result in repo substitution transactions being completed in a more timely 15 15 16 15 E:\FR\FM\29MRN1.SGM U.S.C. 78s(b). U.S.C. 78q–1(b)(3)(F). 29MRN1 15784 Federal Register / Vol. 71, No. 60 / Wednesday, March 29, 2006 / Notices manner. FICC’s proposed rule change also includes revised risk management measures (e.g., revised clearing fund calculation and margin offsets) to address potential risk resulting from the revised repo substitution rules. As such, FICC’s proposed rule change also should result in FICC being able to safeguard securities and funds which are in its possession and control or for which it is responsible. 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,17 that the proposed rule change (File No. SR– FICC–2005–18) be and hereby is approved. I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change Nasdaq proposes to modify fees for Nasdaq access through the Computer to Computer Interface (‘‘CTCI’’) protocol.6 The text of the proposed rule change is below. Proposed new language is in italics; proposed deletions are in brackets.7 For the Commission by the Division of Market Regulation, pursuant to delegated authority.18 Nancy M. Morris, Secretary. [FR Doc. E6–4527 Filed 3–28–06; 8:45 am] Rule 7010. System Services (a)–(e) No Change (f)(1)–(2) No Change (3) [Computer to computer interface (CTCI) and] Financial Information Exchange (FIX) BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION Options [Release No. 34–53536; File No. SR–NASD– 2006–026] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto Establishing CTCI StationBased Pricing for Members hsrobinson on PROD1PC68 with NOTICES March 21, 2006. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on February 22, 2006, 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’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by Nasdaq. Nasdaq filed Amendment No. 1 to the proposed rule change on March 10, 2006.3 Nasdaq 17 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 For purposes of calculating the 60-day abrogation period, the Commission considers the 18 17 VerDate Aug<31>2005 15:39 Mar 28, 2006 Jkt 208001 has designated this proposal as establishing or changing a due, fee, or other charge of a self-regulatory organization, pursuant to section 19(b)(3)(A)(ii) of the Act,4 and Rule 19b–4(f)(2) thereunder,5 which renders the proposed rule change effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. Price [Option 1: Dual 56kb lines (one for redundancy) single hub and router, and optional single FIX port.]. [Option 2: Dual 56kb lines (one for redundancy), dual hubs (one for redundancy), and dual routers (one for redundancy), and optional single FIX port.]. [$1275/month]. [$1600/month]. period to have commenced on March 10, 2006, the date Nasdaq filed Amendment No. 1. 4 15 U.S.C. 78s(b)(3)(A)(ii). 5 17 CFR 240.19b–4(f)(2). 6 The instant proposed rule change establishes fees for NASD members. The identical fees for nonmemebers were established in SR–NASD–2006– 027. See Securities Exchange Act Release No. 53535 (March 21, 2006). 7 Changes are marked to the rule text that appears in the electronic NASD Manual found at http:// www.nasd.com. Prior to the date when The NASDAQ Stock Market LLC (‘‘NASDAQ LLC’’) commences operations, NASDAQ LLC will file a confirming change to the rules of NASDAQ LLC approved in Securites Exchange Act Release No. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 10–131). PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 Options Price [Option 3: Dual T1 lines (one for redundancy), dual hubs (one for redundancy), dual routers (one for redundancy), and optional single FIX port. Includes base bandwidth of 128kb.]. FIX Trading Port (NMC and Brut). FIX Port for Services Other than Trading. Dedicated FIX server Dedicated FIX server (Brut). [$8000/month (CTCI or CTCI/FIX lines) $4000/month (FIXonly lines)]. [Option 1, 2, or 3 with Message Queue software enhancement]. [Disaster Recovery Option: Single 56kb line with single hub and router and optional single FIX port. (For remote disaster recovery sites only.)]. [Bandwidth Enhancement Fee (for T1 subscribers only)]. [Installation Fee] ........ [Relocation Fee (for the movement of TCP/IP-capable lines within a single location)]. $400/port/month. $500/port/month. $1,000/server/month. $3,000/server/month; initial term of not less than 12 months is required. [Fee for Option 1, 2, or 3 (including any Bandwidth Enhancement Fee) plus 20%]. [$975/month]. [$600/month per 64kb increase above 128kb T1 base]. [$2000 per site for dual hubs and routers $1000 per site for single hub and router]. [$1700 per relocation]. [FIX connectivity through Options 1, 2, or 3 or the Disaster Recovery Option will not be available to new subscribers that are (i) NASD members after January 1, 2004, or (ii) not NASD members after the effective date of SR–NASD–2003– 196.] (4) Computer to Computer Interface (CTCI). The fees in the table below are applicable to NASD members that have transitioned off of Nasdaq-supported circuits, and as of July 1, 2006, also apply to NASD members that have not transitioned. Stations Fee component 1st Station ................. Each Additional Station. E:\FR\FM\29MRN1.SGM 29MRN1 Fee $200/Station/month $600/Station/month

Agencies

[Federal Register Volume 71, Number 60 (Wednesday, March 29, 2006)]
[Notices]
[Pages 15781-15784]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-4527]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53534; File No. SR-FICC-2005-18]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change To Enhance the Repo Collateral 
Substitution Process of FICC's Government Securities Division

March 21, 2006.

I. Introduction

    On September 30, 2005, the Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') and on December 20, 2005, amended proposed rule change 
SR-FICC-2005-18 pursuant to section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act'').\1\ Notice of the proposal was published in the 
Federal Register on January 5, 2006.\2\ No comment letters were 
received. On March 20, 2006, FICC filed an amendment to the proposed 
rule

[[Page 15782]]

change.\3\ For the reasons discussed below, the Commission is approving 
the proposed rule change as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 53036 (December 29, 
2005), 71 FR 629.
    \3\ The amendment, as noted below, is not substantive and did 
not require republication of the notice.
---------------------------------------------------------------------------

II. Description

    In general, FICC is enhancing the repo collateral substitution 
process of its Government Securities Division (``GSD''). The rule 
change: (i) Permits the repo dealer or repo broker, as appropriate, to 
submit a substitution notification to FICC without information about 
the replacement collateral, (ii) revises the repo collateral 
substitution process deadline and fee schedule, and (iii) implements 
certain risk management measures and technical changes.

A. Initial Substitution Notification Without Replacement Collateral 
Information

    The GSD's repo collateral substitution process provides a mechanism 
for a repo dealer to process its right to substitute the original 
collateral it provided as part of a repo transaction with replacement 
collateral. With respect to a brokered transaction, typically the repo 
dealer notifies the broker that it wishes to substitute the repo 
collateral before it specifically identifies the replacement 
collateral.\4\ The repo broker then contacts the reverse repo dealer 
and informs it that a repo collateral substitution process is being 
initiated. The reverse repo dealer then sends the original repo 
collateral to FICC. However, since under FICC's current system the repo 
dealer's substitution notification that it must send to FICC must 
contain information about the replacement collateral, often the 
substitution notification is not delivered to FICC by the time FICC 
receives the returned original repo collateral from the reverse repo 
dealer. When the repo dealer does determine what securities will 
constitute the replacement collateral, it often delivers the 
replacement collateral to FICC before sending the repo collateral 
substitution notification. Thus the original and replacement collateral 
frequently are delivered to FICC before FICC is able to forward the 
collateral to the appropriate party. This leaves FICC in an overdraft 
position at the clearing bank, which can cause expense and risk to FICC 
and to its members and can cause settlement processing delays.
---------------------------------------------------------------------------

    \4\ With respect to a non-brokered repo transaction, the repo 
dealer would contact the reverse repo dealer directly about the repo 
collateral substitution.
---------------------------------------------------------------------------

    The rule change permits the repo dealer or repo broker, as 
appropriate, to submit a substitution notification to FICC without 
information about the replacement collateral. FICC will deliver the 
original collateral to the repo party's account at its clearing bank 
upon receipt of the substitution notification so the original 
collateral will no longer linger in FICC's account.\5\
---------------------------------------------------------------------------

    \5\ The changes necessary to reflect this part of the rule 
change are contained in GSD Rule 18, sections 3(a), (b), (c), and 
(d) and in the Schedule of Required and Accepted Data Submission 
Items for a Right of Substitution. A new schedule, titled Schedule 
of Required and Accepted Data Submission Items for New Securities 
Collateral, is being added to the rules to reflect that information 
on the replacement collateral will be contained in a separate 
submission to FICC.
---------------------------------------------------------------------------

B. Revised Repo Collateral Substitution Process Deadline and Fee 
Schedule

    The rule change in repo processing requires a revision to GSD's 
schedule of time frames. Currently, there is a two-tiered deadline for 
a repo party to submit a substitution notification and associated late-
fee.\6\ The rule change establishes: (i) An 11 a.m. Eastern Time 
deadline \7\ for a repo party to submit a substitution notification and 
(ii) a late-fee of $100 for each substitution notification that is 
received after the deadline. The rule change also establishes a two-
tiered deadline for a repo party to submit replacement collateral 
information and an associated late-fee schedule. The deadlines for 
submission of replacement collateral information are: (i) 12 p.m. 
Eastern Time and (ii) 12:30 p.m. Eastern Time. The late-fee assessments 
are: (i) $100 for each submission of replacement collateral information 
that is received after the first deadline but before the second 
deadline and (ii) $250 for each submission of replacement collateral 
information that is received after the second deadline.\8\
---------------------------------------------------------------------------

    \6\ The current deadlines are 12 p.m. Eastern Time and 12:30 
p.m. Eastern Time. The deadlines are extended by one hour on days 
that: (i) FICC determines are high-volume days or (ii) The Bond 
Market Association announces in advance will be high-volume days. 
FICC assesses a late-fee of: (i) $100 for each substitution 
notification that is received after the first deadline but before 
the second deadline and (ii) $250 for each substitution notification 
that is received after the second deadline.
    \7\ The proposed 11 a.m. Eastern Time deadline will not be 
extended on high-volume days.
    \8\ The allocation of collateral deadlines will be extended by 
one hour on days that: (i) FICC determines are high-volume days or 
(ii) The Bond Market Association announces in advance will be high-
volume days. The rule changes necessary to affect this part of the 
proposed rule are contained in the Schedule of Timeframes and in the 
Fee Structure under ``Late Fees.''
---------------------------------------------------------------------------

    In order to accommodate members' preparations to comply with the 
time frames contained herein, the proposed changes to the schedule of 
time frames and applicable late-fees will be implemented at a later 
date than the other rule changes contained in this filing. FICC will 
announce the implementation of the proposed schedule of time frames by 
Important Notice at least thirty calendar days prior to implementation. 
Until such implementation, currently existing time frames and late-fees 
applied to repo collateral substitutions shall remain in effect.

C. Risk Management Measures and Technical Changes

    Generally, FICC is implementing certain measures to address the 
risk presented to it by the failure of a party to submit in a timely 
manner information regarding the replacement collateral to FICC. 
Specifically, FICC is: (i) Increasing the clearing fund calculation of 
the repo dealer and allowing margining with respect to replacement 
collateral based on applicable generic CUSIP numbers only \9\ and (ii) 
imposing mark-to-market consequences on both the repo dealer and the 
reverse dealer with respect to unknown replacement collateral.
---------------------------------------------------------------------------

    \9\ Generic CUSIP numbers represent the range of permissible 
securities that can constitute the replacement collateral. For 
example, there is a generic CUSIP number which represents Treasury 
securities with remaining maturity of fewer than thirty years.
---------------------------------------------------------------------------

1. Clearing Fund Calculation and Permissible Margin Offsets
    With respect to the calculation of the repo dealer's clearing fund 
requirement, FICC is assigning a value of 150 percent of the contract 
value of the original securities collateral to a repo transaction where 
FICC has not received information regarding the replacement 
collateral.\10\ FICC also is applying the highest applicable margin 
factor in its rules in connection with the repo transaction. In GSD's 
rules, the highest margin factor is the factor for securities with a 
remaining maturity of 15 years and 16 days or greater. Therefore, if 
the generic CUSIP number that is assigned to the unknown replacement 
collateral is the generic CUSIP number for Treasury securities with a 
remaining maturity of 15 years and 16 days or greater, FICC will use 
the existing margin factor of 1.450 (applicable to

[[Page 15783]]

category 1 members with positions in non-zeros).\11\
---------------------------------------------------------------------------

    \10\ New subsection 3(f) is being added to Rule 18 in order to 
effect this change. It should be noted that the application of the 
150 percent for clearing fund purposes applies to both the receive/
deliver and repo volatility components of the clearing fund 
calculation.
    \11\ The GSD's margin factor schedules apply different margin 
factors to category 1 and category 2 dealers. In this example, if 
the member were a category 2 member electing to receive credit 
forward mark adjustment payments, the applicable margin factor under 
the proposed rule change would be 2.0.
---------------------------------------------------------------------------

    The proposed risk management measures applicable to non-timely 
allocation of replacement collateral will further affect the clearing 
fund calculation of the repo dealer by limiting permissible offsets. A 
regular part of the GSD's margining system is to permit offsets between 
resulting margin amounts of long and short net settlement positions. 
The GSD's rules contain disallowance factor tables that set forth 
specific limits on these permissible offsets. For example, where a 
short net settlement position in Treasury Offset Class A is to be 
offset against a long net settlement position in Treasury Offset Class 
B, the applicable disallowance factor table provides that 30 percent of 
this offset will be disallowed.\12\ For offset purposes under the 
proposed rule change, FICC is defining two new offset classes to 
capture the generic CUSIP numbers that can be assigned to unknown 
replacement collateral. These new offset classes are identified as 
``H'' for Treasury securities and ``h'' for non-mortgage-backed Agency 
securities. Under the proposed rule change, as a further risk 
management measure, FICC will not permit offsets between Offset Classes 
H and h or between Offset Classes H or h and any other existing GSD 
Offset Class.
---------------------------------------------------------------------------

    \12\ As originally filed, FICC mistakenly stated that 20 percent 
of the offset would be disallowed. In its March 20, 2006, amendment, 
FICC changed this to 30 percent to accurately reflect the 
disallowance factor for such securities.
---------------------------------------------------------------------------

2. Modified Mark-to-Market Calculation
    FICC also is calculating a modified mark-to-market obligation with 
respect to the replacement collateral and imposing this on both the 
repo dealer and the reverse repo dealer in the case where a generic 
CUSIP number is used for underlying collateral. In a typical scenario 
where the replacement collateral is identified, FICC reverses any 
previous mark-to-market calculation for the old collateral and 
recalculates, collects, and passes through a mark-to-market associated 
with the actual replacement collateral. This computation is defined as 
the Forward Mark Adjustment Payment.\13\ In the scenario where the 
replacement collateral has not been identified, FICC will calculate a 
modified Forward Mark Adjustment Payment to protect FICC against market 
risk. Specifically, the definition of Forward Mark Adjustment Payment 
is amended by noting that with respect to a repo transaction for which 
a substitution request has been made but for which replacement 
collateral information has not been provided to FICC, a new Forward 
Unallocated Sub Mark will be applied. This new mark will take into 
account repo interest that has accrued with respect to the repo 
transaction to date, as well as changes in the repo rate (to reflect 
the difference between the contract rate and the market rate for the 
remaining term of the repo transaction).\14\
---------------------------------------------------------------------------

    \13\ The Forward Mark Adjustment Payment is the sum of two 
components: the Collateral Mark and the Financing Mark. The 
Collateral Mark is the absolute value of the difference between the 
trade's contract value and market value. The Financing Mark reflects 
the financing cost that would be incurred by FICC if it replaced the 
reverse side of the repo by buying securities and putting them out 
on repo.
    \14\ The following new definitions effect this change: Accrued 
Repo Interest-to-Date, Repo Interest Rate Differential, and Forward 
Unallocated Sub Mark.
---------------------------------------------------------------------------

3. Technical Changes
    Additionally, FICC is making certain technical changes to its GSD 
rules relating to repo collateral substitutions and repo transactions 
generally.
    a. Section 3(a) of Rule 18: Delete the requirement that details 
regarding the rights of substitution match between counterparties. 
Details regarding rights of substitution are not a required trade 
reporting item and thus will not be a required match item in GSD's 
system. References in this respect are deleted to reflect actual 
operating practice.
    b. Sections 3(e) and 3(f) of Rule 18: Delete the requirement that 
upon receipt of either the original or the replacement collateral, FICC 
will promptly redeliver the securities to the appropriate party. As 
stated in the narrative above, FICC may receive securities that are the 
subject of a repo collateral substitution request but may not yet have 
the requisite information for delivery of those securities. These 
provisions are deleted to reflect actual operating practice and also to 
make the rule consistent with the proposed changes.
    c. Section 3(h) of Rule 18: Delete the provision regarding 
implications of repo collateral substitutions on margin and mark-to-
market requirements. This provision is redundant because the effects of 
repo substitutions on such requirements are covered in the rules 
governing these items and the rules to be modified by the proposed rule 
change.
    d. Section 4 of Rule 18: Make optional a requirement that for 
general collateral, forward-starting repos, the specific CUSIP and par 
value be submitted prior to the repo start date. FICC typically does 
not receive such allocations from its members prior to the repo start 
date and thus the proposed change aligns the rule with industry 
practice. The proposed change further reflects operating practice as 
well as industry expectations that a general collateral, forward-
starting repo will be removed from the GSD's books if FICC does not 
receive the specific CUSIP by the time noted in the rule. Members 
typically submit new transactions with the specific CUSIPs and expect 
that the general collateral transaction will be removed from the GSD's 
books.
    e. Section 5 of Rule 18: Amend the provision that addresses repo 
transactions with maturing collateral. The proposed rule change 
provides that the repo party in such a repo transaction must make the 
required substitution of collateral by the time noted in the rule or 
FICC will remove the transaction from its books. This is because the 
underlying contract terminates if the collateral is not replaced in 
time, and therefore, the proposed rule change reflects industry 
practice. The proposed rule change further reflects industry practice 
by deleting the requirement that the replacement collateral meet 
certain specific criteria and by replacing that requirement with a 
requirement that the replacement collateral be ``in accordance with the 
terms of the transaction.'' This change also reflects industry 
practice.

III. Discussion

    Section 19(b) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\15\ Section 17A(b)(3)(F) of the Act requires that the 
rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions and to 
assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible.\16\ The Commission finds that FICC's rule change is 
consistent with these requirements. By revising its repo substitution 
rules to more accurately reflect industry practice, FICC's proposed 
rule change should result in repo substitution transactions being 
completed in a more timely

[[Page 15784]]

manner. FICC's proposed rule change also includes revised risk 
management measures (e.g., revised clearing fund calculation and margin 
offsets) to address potential risk resulting from the revised repo 
substitution rules. As such, FICC's proposed rule change also should 
result in FICC being able to safeguard securities and funds which are 
in its possession and control or for which it is responsible.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b).
    \16\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

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,\17\ that the proposed rule change (File No. SR-FICC-2005-18) be 
and hereby is approved.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
[FR Doc. E6-4527 Filed 3-28-06; 8:45 am]
BILLING CODE 8010-01-P