Self-Regulatory Organizations; Fixed Income Clearing Corporation and National Securities Clearing Corporation; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Changes to Institute a Clearing Fund Premium Based Upon a Member's Clearing Fund Requirement to Excess Regulatory Capital Ratio, 55239-55243 [06-7844]
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Federal Register / Vol. 71, No. 183 / Thursday, September 21, 2006 / Notices
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 the 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–2006–77 and should
be submitted on or before October 12,
2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.13
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06–7843 Filed 9–20–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54457; File Nos. SR–FICC–
2006–03 and SR–NSCC–2006–03]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation and
National Securities Clearing
Corporation; Notice of Filing and Order
Granting Accelerated Approval of
Proposed Rule Changes to Institute a
Clearing Fund Premium Based Upon a
Member’s Clearing Fund Requirement
to Excess Regulatory Capital Ratio
September 15, 2006.
On February 22, 2006, the Fixed
Income Clearing Corporation (‘‘FICC’’)
and the National Securities Clearing
Corporation (‘‘NSCC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) proposed rule changes
SR–FICC–2006–03 and SR–NSCC–
2006–03 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
April 24, 2006.2 Seven comment letters
were received.3 FICC and NSCC
13 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 Securities Exchange Act Release No. 53671
(April 18, 2006), 71 FR 21060.
3 Jim Nardone, Schonfeld Securities, LLC
(‘‘Schonfeld’’) (May 5, 2006); Richard Gill, Senior
Vice President, and Donald Galante, Senior Vice
President, Man Securities Inc. (‘‘Man’’) (May 15,
2006); L. Thomas Patterson, Chief Executive Officer,
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amended the proposed rule changes on
July 28, 2006, to address certain
concerns raised by the commenters and
others.
The Commission is publishing this
notice and order to solicit comments
from interested persons and to grant
accelerated approval of the proposals.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Changes
FICC and NSCC are each seeking to
institute a clearing fund premium based
on a member’s clearing fund
requirement to excess regulatory capital
ratio.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Changes
In their filings with the Commission,
FICC and NSCC included statements
concerning the purpose of and basis for
the proposed rule changes and
discussed any comments they received
on the proposed rule changes. The text
of these statements may be examined at
the places specified in Item VI below.
FICC and NSCC have prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.4
(A) Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Changes
FICC and NSCC are each seeking to
institute a clearing fund premium based
on a member’s clearing fund
requirement to excess regulatory capital
ratio.
1. FICC Clearing Fund Premium
The degree to which the collateral
requirement of a clearing agency
member compares to the member’s
excess regulatory capital is an important
indicator of the potential risk that the
member presents to a clearing agency. In
2002, the Government Securities
and Kathleen M. Toner, Chief Regulatory Officer,
LaBranche & Co. Inc. (‘‘LaBranche’’) (May 18, 2006);
Peter Chepucavage, International Association of
Small Broker-Dealers and Advisers (‘‘IASBDA’’)
(May 19, 2006); Greggory A. Teeter, Howrey LLC,
representing Wilson-Davis & Co., Inc. (‘‘WilsonDavis’’), Alpine Securities Corporation (‘‘Alpine’’),
and IASBDA (June 1, 2006); Cheryl T. Lambert,
Managing Director, Risk Management, The
Depository Trust and Clearing Corporation
(‘‘DTCC’’) (July 28, 2006); and Peter Chepucavage,
IASBDA (August 9, 2006).
Schonfeld, Wilson-Davis, Alpine, and LaBranche
are members of NSCC. Man is a member of FICC.
IASBDA is an organization created for the purpose
of protecting the interests of small and midsize
broker-dealers and micro-cap issuers.
4 The Commission has modified the text of the
summaries prepared by FICC and NSCC.
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Clearing Corporation (‘‘GSCC’’), the
predecessor to the Government
Securities Division (‘‘GSD’’) of FICC,
received Commission approval to
impose a collateral premium on netting
members whose clearing fund
requirements exceed their excess
regulatory capital.5 Specifically, the
GSD implemented a 25 percent
collateral premium when a member’s
ratio of clearing fund requirement to its
excess regulatory capital is greater than
1.0. The 25 percent premium is applied
to the amount by which the member’s
clearing fund requirement exceeds the
member’s excess regulatory capital.
In order to more effectively manage
the risk posed by a GSD member whose
activity causes it to have a clearing fund
requirement that is greater than its
excess regulatory capital, FICC now
proposes to strengthen the abovementioned risk management tool by
applying a clearing fund premium that
is based on a member’s ratio of clearing
fund requirement to excess regulatory
capital in place of the current flat
premium of 25 percent.6 The premium
would be determined by multiplying the
amount by which a member’s clearing
fund requirement exceeds its excess
regulatory capital by the member’s ratio
of required clearing fund to excess
regulatory capital expressed as a
percent. This formula would allow the
premium to increase or decrease in
proportion to changes in the ratio and
should allow for risk management that
is measured in proportion to the risk
presented. For example, if a member has
a clearing fund requirement of $11.4
million and excess net capital of $10
million, its clearing fund requirement
would exceed its excess net capital by
$1.4 million, its ratio of clearing fund
requirement to excess net capital is 1.14
(or 114 percent), and the applicable
collateral premium would be 114
percent of $1.4 million or $1,596,000. If
the same member had a clearing fund
requirement of $20 million, its clearing
fund requirement would exceed its
excess net capital by $10 million, its
ratio of clearing fund requirement to
excess net capital would be 2.0 (or 200
percent), and the applicable collateral
premium would be 200 percent of $10
million or $20 million.
5 Securities Exchange Act Release No. 45647
(March 26, 2002), 67 FR 15438 (April 1, 2002) [File
No. SR–GSCC–2001–15]. ‘‘Excess regulatory
capital’’ for purposes of GSD’s collateral premium
included excess net capital, excess liquid capital, or
excess adjusted capital.
6 If FICC imposes this premium on a netting
member, then it shall be considered included as
part of the netting member’s ‘‘required fund
deposit’’ as defined in the GSD’s rules.
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Currently, FICC’s collateral premium
applies to members whose excess
regulatory capital is measured as excess
net capital, excess liquid capital, or
excess adjusted net capital. The
proposed rule change would also
include excess equity capital as
regulatory excess capital so that the
premium can be applied to bank and
trust company netting members whose
capital is measured as equity capital.
The proposed rule change would also
make an additional change to Rule 4
(Clearing Fund, Watch List and Loss
Allocation), Section 3 (Watch List) to
remove a provision that allows FICC to
require a netting member to adjust its
trading activity so that its excess
regulatory capital ratio decreases to a
satisfactory level. While this provision
was appropriate under the fixed 25
percent premium, it would no longer be
appropriate under the new ratio-based
clearing fund premium because the new
premium formula would impose a
variable premium based on activity that
would require members to either adjust
their trading activity or be subject to the
higher premium.
2. NSCC Clearing Fund Premium
NSCC is proposing to impose a
clearing fund premium on Rule 2
(Members) broker/dealer and bank
members whose clearing fund
requirement exceeds their regulatory
excess capital. NSCC’s proposed excess
regulatory capital premium would apply
to members whose regulatory excess
capital is measured as excess net capital
or excess equity capital. The excess
regulatory capital premium would be
triggered when a member’s ratio of
clearing fund requirement to excess
regulatory capital is greater than 1.0 and
would be determined using the same
formula as that proposed by FICC. The
new premium would be added to
NSCC’s clearing fund formula in
Procedure XV (Clearing Fund Formula
and Other Matters). 7
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3. FICC and NSCC Clearing Fund
Premiums
As a matter of practice, when a FICC
or NSCC member’s clearing fund
requirement to excess regulatory capital
ratio is between .50 and 1.0, a warning
notification would be issued to put the
member on notice that a collateral
premium will be required if the ratio
reaches an amount greater than 1.0.
When a member’s ratio exceeds 1.0, it
would be notified on the business day
7 This premium would not apply to The Canadian
Depository for Securities Limited (‘‘CDS’’) clearing
fund requirement that is computed pursuant to
Appendix 1 of NSCC’s rules.
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that a collateral premium has been
calculated and is to be collected.
FICC and NSCC reserve the right to:
(i) Apply a lesser collateral premium
(including no premium) based on
specific circumstances (such as a
member being subject to an unexpected
haircut or capital charge that does not
fundamentally change its risk profile)
and (ii) return all or a portion of the
premium amount if it believes that the
member’s risk profile does not require
the maintenance of that amount.
FICC and NSCC believe that the
proposed rule changes are consistent
with the requirements of Section 17A of
the Act 8 and the rules and regulations
thereunder applicable to FICC and
NSCC because they should help FICC
and NSCC assure the safeguarding of
securities and funds which are in their
custody or control or for which they are
responsible by allowing FICC and NSCC
to more effectively manage risk
presented by certain members.
(B) Self-Regulatory Organization’s
Statement on Burden on Competition
FICC and NSCC do not believe that
the proposed rule changes would
impose any burden on competition.
(C) Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Changes Received From
Members, Participants, or Others
Written comments relating to the
proposed rule changes have been
received and addressed by FICC and
NSCC.
III. Comments
The Commission received seven
comment letters to the proposed rule
changes. Schonfeld, Wilson-Davis,
Alpine, LaBranche, Man, and IASBDA
wrote letters opposing the proposed rule
changes.9 DTCC submitted a letter
responding to those letters.10
All of the commenters in opposition
to the proposed rule changes argued that
the imposition of the clearing fund
premium would place a
disproportionate burden on smaller
broker-dealers because they are
generally less capitalized than the larger
broker-dealers and are not in a position
to meet higher capital requirements that
could result from the proposed rule
changes. FICC and NSCC responded that
the premium calculation is based on a
ratio that is applied to all members
equally and is meant to reflect the risk
a member introduces to the clearing
agencies.
8 15
U.S.C. 78q–1.
note 3.
10 Id.
9 Supra
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All of the commenters opposing the
proposed rule changes argued that the
proposed rule changes would have an
anticompetitive effect and/or place an
undue burden on competition in that
smaller broker-dealers would be unable
to meet the higher clearing fund
obligations and would be forced out of
business which could result in less
competition among broker-dealers. One
result of the clearing fund premium
would be that small issuers and
emerging companies would not have
such smaller broker-dealers to assist in
capital formation.
FICC and NSCC responded that there
are over 6000 broker-dealers registered
with the Commission. FICC has 61
broker-dealer members in its GSD and
NSCC has approximately 221 full
service broker-dealer members. Such
figures, according to FICC and NSCC
indicate that the competition among
broker-dealers is healthy. FICC and
NSCC also responded that the proposed
rule changes would not be barriers to
entry to the brokerage business and that
the Act does not provide broker-dealers
with a right to be a direct member of a
registered clearing agency. FICC and
NSCC noted that a firm that is
potentially affected by the proposed rule
changes could (1) Retain or raise
additional capital relative to the
business it clears through the clearing
agency, (2) limit the business it clears
through the clearing agency so that the
risk to which the clearing agency and its
members is exposed based upon such
business is proportionate to the firm’s
excess net capital, or (3) seek another
firm through which to clear its business.
LaBranche and Schonfeld suggested
that a general fund similar to the SIPC
or FDIC models could be created to
mitigate risks in the clearing system.
FICC and NSCC responded that the
clearing fund, like the SIPC or FDIC
models, exists as a means to mutualize
the risk that any given member presents
as a result of its business should the
member fail and the clearing agency be
required to close the member out and
assume the risk of loss on those
operations. FICC and NSCC argued that
the commenters seeking a general fund
like SIPC or the FDIC model are seeking
an entity other than themselves to bear
the risk of their businesses by shifting
the credit risk from the member to FICC
or NSCC and the memberships at large.
Howrey and Man argue that the
current risk management tools used by
FICC and NSCC are adequate. Man
states that the FICC minimum net worth
requirement of $50,000,000 and the
minimum net excess capital
requirement of $10,000,000 have
provided adequate protection to FICC as
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related to counterparty risk. FICC
responded that net worth requirements
on their own, as illustrated by the Refco
Securities LLC (‘‘Refco’’) case, do not
protect against counterparty risk,
particularly in an environment where
trading activity is not linked to capital
levels. In addition, FICC noted that the
net worth requirement does not address
the nature of the business that the
member brings to FICC and its members.
Howrey points out that NSCC has the
ability to collect additional clearing
fund deposits pursuant to its rules
should it deem it necessary. The lack of
explanation or clarification by NSCC on
how the current deposit requirement is
calculated reveals a pattern of arbitrary
amounts being imposed on clearing
firms. This arbitrary amount, argued
Howrey, would then be added to the
arbitrary amount which would be
calculated by the proposed rule change.
NSCC responded that it concurs that
Rule 15 (Financial Responsibility and
Operational Capability) could perhaps
be used as a basis on which to charge
an occasional clearing fund premium to
cover the perceived systemic risk sought
to be addressed by the proposed rule
change. However, FICC and NSCC’s
management and user representative
boards have chosen to address the
charge systemically and include the
premium as a stated additional charge
in an effort to be clear to members about
the types of activity and risks they are
trying to address.
Man asserted that FICC’s ability to
grant exceptions based upon subjective
judgments in undefined circumstances,
however well intentioned, will
undermine the confidence in the margin
process. Thus, members should know
what rules for granting exceptions will
be applied. FICC and NSCC responded
that such discretion would only be used
to reduce or eliminate the premium, not
to raise it, and that the situations where
such discretion would be used are likely
to be very fact and circumstances
driven. Thus, it would be contrary to the
principle and purpose of discretion to
require that NSCC and FICC adopt in
advance of the event, detailed criteria,
circumstances, and procedures for
exercising such discretion. However, as
discussed further below, FICC and
NSCC amended their proposed rule
changes to alleviate this concern and
others expressed by the commenters.
IV. FICC and NSCC Amendments
To address certain concerns expressed
in the comment letters and by others,
FICC and NSCC amended the proposed
rule changes as set forth below.
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1. FICC
FICC has amended its proposed rule
change to exclude from the premium
calculation the look back provisions of
the GSD clearing fund formula’s
Receive/Deliver and Repo Volatility
components (‘‘Excess Capital Premium
Calculation Amount’’) 11 with respect to
the computation of the clearing fund
requirement used in both the numerator
of the ratio and in the Excess Capital
Differential.12
FICC has also amended its proposed
rule change to clarify that it may at its
discretion: (i) Collect an amount less
than the Excess Capital Premium
(including no premium) and (ii) return
all or a portion of the Excess Capital
Premium if it believes that the
imposition or maintenance of the Excess
Capital Premium is not necessary or
appropriate.13
In order to allow members time to
effect any necessary operational or
systems changes, FICC’s proposed rule
change will become effective on the first
Monday following the 29th day after
which the Commission issues an order
granting approval of the change.
2. NSCC
NSCC amended its proposed rule
change to clarify that the Excess Capital
Premium will be determined by
multiplying: (a) The amount by which a
member’s base clearing fund
requirement (that is the amount
determined prior to the imposition of
11 The adjusted clearing fund requirement is
referred to in the amendment as the ‘‘Excess Capital
Premium Calculation Amount.’’ It is defined by the
amendment as the calculation of the member’s
Required Fund Deposit, which excludes
consideration of the Average Offset Margin Amount
and the Average Offset Repo Volatility Amount.
Excluding these look back components, known as
the Average Post Offset Margin Amount (‘‘POMA’’)
and the Average Repo POMA (and defined in the
GSD’s Rules as the Average Offset Margin Amount
and the Average Offset Repo Volatility Amount,
respectively), from the calculation of the proposed
premium is expected to provide relief from the
Excess Capital Premium to members whose current
portfolios would have a lower clearing fund
requirement than their clearing fund requirement
with the look back would suggest.
12 As defined by the amendment, ‘‘Excess Capital
Differential’’ means the amount by which a netting
member’s Excess Capital Premium Calculation
Amount exceeds its excess capital.
13 FICC management will look to see whether the
premium results from unusual or non-recurring
circumstances where management believes it would
not be appropriate to assess the premium. Examples
of such circumstances are a member’s late
submission of trade data for comparison that would
have otherwise reduced the margined position if
timely submission had occurred or an unexpected
haircut or capital charge that does not
fundamentally change a member’s risk profile. FICC
has stated that these examples are intended to serve
as guidelines and are intended to be illustrative but
not limiting in nature as to when the premium will
not be imposed.
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55241
the Excess Capital Premium) exceeds
the member’s excess regulatory capital
by (b) the member’s ratio, expressed as
a percent. The calculation of the base
clearing fund requirement for purposes
of determining both the ratio and the
Excess Capital Premium will not take
into account either (i) Market-maker
domination charges or (ii) special
charges, as determined pursuant to
Procedure XV, that are imposed on a
member as part of its base requirement.
This adjusted clearing fund amount (i.e.,
calculated clearing fund amount minus
any market-maker domination or other
special charges) used for purposes of
calculating the Excess Capital Premium
would be called the ‘‘Calculated
Amount.’’ These charges are not
included in the clearing fund premium
calculation because NSCC recognizes
that these types of charges already
provide an additional reserve in the
base clearing fund requirement against
the risk of that position.
NSCC has also amended its proposed
rule change to clarify that it may at its
discretion: (i) Collect an amount less
than the Excess Capital Premium
(including no premium) and (ii) return
all or a portion of the Excess Capital
Premium if it believes that the
imposition or maintenance of the Excess
Capital Premium is not necessary or
appropriate.14
In order to allow member’s time to
effect any necessary operational or
systems changes, NSCC’s proposed rule
change will become effective on the first
Monday following the 29th day after
which the Commission issues an order
granting approval of the proposed rule
change.
V. Date of Effectiveness of the Proposed
Rule Change and Timing for
Commission Action
After carefully considering the
proposed rule changes as amended and
all of the written comments received,
the Commission finds that the proposed
rule changes are consistent with the
14 NSCC has identified the following guidelines or
circumstances, which NSCC has stated are intended
to be illustrative but not limiting in nature as to
when the premium will not be imposed: (1) Where
the premium results from charges applied with
respect to municipal securities trades settling in
CNS where the member has offsetting compared
trades settling on a trade-for trade basis through
DTC and (2) where management has determined
that the premium results from an unusual or nonrecurring circumstance where management believes
it would not be appropriate to assess the premium.
Examples of such circumstances are a member’s late
submission of trade data for comparison or trade
recording that would have otherwise reduced the
margined position if timely submission had
occurred or an unexpected haircut or capital charge
that does not fundamentally change a member’s risk
profile.
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requirements of the Act and the rules
and regulations thereunder and
particularly with the requirements of
Section 17A(b)(3)(F).15 Section
17A(b)(3)(F) requires that the rules of a
clearing agency be designed 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. The Commission believes
that the approval of FICC and NSCC’s
rule changes is consistent with this
section because it should help FICC and
NSCC to assure the safeguarding of
securities and funds which are in their
custody or control or for which they are
responsible by allowing FICC and NSCC
to more effectively manage risk
presented by highly leveraged
members 16 and thus avoid potential
losses to FICC and to NSCC and their
members.
When a member presents transactions
for clearance and settlement through
FICC or NSCC in an amount that is not
supported by its excess regulatory
capital, should the member fail, FICC,
NSCC, or both if the member is a
member of both FICC and NSCC would
have to close out the failing member’s
open positions and assume the risk of
loss. If the failing member’s clearing
fund deposit is insufficient to cover any
such loss, the loss would be borne by
FICC and/or NSCC and ultimately could
be borne by the other members of the
clearing agency(ies) from their collective
clearing fund deposits.
All of the commenters in opposition
to the proposed rule changes argued that
the imposition of a clearing fund
premium would place a
disproportionate burden on smaller
broker-dealers because they are
generally less capitalized than the larger
broker-dealers and not in a position to
meet higher capital requirements that
could result from the proposed rule
changes. FICC and NSCC responded that
the premium calculation is based on a
ratio that is applied to all members
equally and is meant to reflect the risk
a member introduces to the clearing
agencies. Section 17A(b)(3)(F)17
provides that the rules of a clearing
agency shall not permit unfair
discrimination among participants in
the use of the clearing agency. Because
the premium calculation is applied to
all members equally based on a ratio of
each member’s required clearing fund to
its excess net capital, the Commission is
not persuaded by the commenters’
15 15
U.S.C. 78q-1(b)(3)(F).
highly leveraged member is identified as one
whose regulatory and excess capital are
substantially less than it’s clearing fund
requirements.
17 15 U.S.C. 78q-1(b)(3)(F).
16 A
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arguments. It should be noted that the
proposed rule changes were prompted
in part by the bankruptcy and winddown of Refco, which was not a small
broker-dealer.
All of the commenters opposing the
proposed rule changes argued that the
proposed rule changes would have
anticompetitive effect and/or place an
undue burden on competition in that
smaller broker-dealers would be unable
to meet the higher clearing fund
obligations and would be forced out of
business, and that that could result in
less competition among broker-dealers.
FICC and NSCC responded that the
proposed rule changes are not barriers
to entry to the brokerage business and
that the Act does not provide brokerdealers with a right to be a direct
member of a registered clearing agency.
FICC and NSCC noted that a firm that
is potentially affected by the proposed
rule changes could (1) Retain or raise
additional capital relative to the
business it clears through the clearing
agency, (2) limit the business it clears
through the clearing agency so that the
risk to which the clearing agency and its
other members is exposed based upon
such business is proportionate to the
firm’s excess regulatory capital, or (3)
seek another firm through which to
clear its business.
The Commission is not persuaded by
the commenters’ claims that the
proposed rule changes are
anticompetitive and/or will result in an
undue burden on competition. While it
is possible that the proposed rule
changes will force some members of
FICC and NSCC to discontinue their
direct membership in FICC and/or
NSCC, the Act does not provide brokerdealers with the right to be direct
members in a clearing agency. Affected
firms have a choice to raise excess
regulatory capital or to limit their
trading activities so that the risk to
which the clearing agency and its other
members is exposed is proportionate to
the firm’s excess regulatory capital. The
Commission finds that the proposed
rule changes should not impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act in accordance
with Section 17A(b)(3)(I).18
FICC and NSCC have requested that
the Commission approve the proposed
rule changes prior to the thirtieth day
after publication of the notice of the
amendment to the filing. The
Commission finds good cause for
approving the proposed rule changes
prior to the thirtieth day after the
publication of notice because
18 15
PO 00000
U.S.C. 78q-1(b)(3)(I).
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implementation of the proposed rule
changes will allow FICC and NSCC to
activate the systems which are
necessary to implement the proposed
rule changes which are integral to
assuring the safeguarding of securities
and funds which are in their custody or
control or for which they are
responsible. Additionally, the
Commission notes that FICC and
NSCC’s amendments were in large part
in response to comments it received.
VI. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
changes are consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml) or
• Send an e-mail to rulecomments@sec.gov. Please include File
Numbers SR–FICC–2006–03 and SR–
NSCC–2006–03 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Numbers SR–FICC–2006–03 and SR–
NSCC–2006–03. These file numbers
should be included on the subject line
if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
changes that are filed with the
Commission, and all written
communications relating to the
proposed rule changes between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Section, 100 F Street, NE., Washington,
DC 20549. Copies of such filings also
will be available for inspection and
copying at the principal offices of FICC
and NSCC and on FICC’s Web site at
https://www.ficc.com/gov/
gov.docs.jsp?NS-query and on NSCC’s
Web site at https://
E:\FR\FM\21SEN1.SGM
21SEN1
Federal Register / Vol. 71, No. 183 / Thursday, September 21, 2006 / Notices
www.nscc.com/legal/. 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 Numbers SR–FICC–
2006–03 and SR–NSCC–2006–03 and
should be submitted on or before
October 12, 2006.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,19 that the
proposed rule changes (File Nos. SR–
FICC–2006–03 and SR–NSCC–2006–03)
be and hereby are approved on an
accelerated basis.
For the Commission by the Division of
Market Regulation, pursuant to delegated
authority.20
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06–7844 Filed 9–20–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54451; File No. SR–NASD–
2006–104]
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc.; Notice of Filing of
Proposed Rule Change To Reflect
Nasdaq’s Complete Separation From
NASD Upon the NASDAQ Stock Market
LLC’s Operation as a National
Securities Exchange for Non-Nasdaq
Exchange-Listed Securities
September 15, 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
September 5, 2006, the National
Association of Securities Dealers, Inc.
(‘‘NASD’’) 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 NASD. On
September 14, 2006, NASD submitted
Amendment No. 1 to the proposed rule
change.3 The Commission is publishing
19 15
U.S.C. 78s(b)(2).
20 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 In Amendment No. 1, NASD clarifies that (1)
The effective date of the proposed rule change will
be the date upon which The NASDAQ Stock Market
LLC (‘‘Nasdaq Exchange’’) operates as an exchange
for non-Nasdaq exchange listed securities, which
the Nasdaq Exchange anticipates will be in
November 2006; (2) the NASD’s Market Regulation
Committee will perform substantially the same
functions as performed by the Nasdaq’s Quality of
jlentini on PROD1PC65 with NOTICES
1 15
VerDate Aug<31>2005
16:30 Sep 20, 2006
Jkt 208001
this notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
NASD is proposing to: (1) Delete The
Nasdaq Stock Market Inc.’s (‘‘Nasdaq’’)
By-Laws and amend the Plan of
Allocation and Delegation of Functions
by NASD to Subsidiaries (‘‘Delegation
Plan’’), NASD By-Laws, NASD
Regulation, Inc. By-Laws, NASD
Dispute Resolution, Inc. By-Laws, and
NASD rules to reflect Nasdaq’s
separation from NASD upon the
operation of the Nasdaq Exchange as a
national securities exchange for nonNasdaq exchange-listed securities; (2)
amend NASD rules relating to quoting
and trading otherwise than on an
exchange in non-Nasdaq exchangelisted securities to reflect changes in the
services provided by NASD in this
regard; and (3) expand the scope of the
NASD/Nasdaq Trade Reporting Facility
rules to include trade reporting in nonNasdaq exchange-listed securities.
The text of the proposed rule is
available on the NASD Web Site
(https://www.nasd.com), on the
Commission’s Web Site at (https://
www.sec.gov), at the NASD Office of
Secretary and at the Commission’s
Public Reference Room. All NASD rules
that do not have rule text changes
specified remain unchanged and
effective for all NASD members.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
NASD included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. NASD has prepared
summaries, set forth in Sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
On June 30, 2006, the Commission
approved proposed rule change SR–
NASD–2005–087, which, among other
things, amended NASD’s Delegation
Markets Committee; and (3) the proposed rule
change reflects NASD’s continued participation in
the Intermarket Trading System (‘‘ITS’’) Plan.
PO 00000
Frm 00084
Fmt 4703
Sfmt 4703
55243
Plan, By-Laws, and NASD rules to
reflect the Nasdaq Exchange’s operation
as a national securities exchange for
purposes of Nasdaq-listed securities.4
Specifically, to facilitate an orderly
transition and minimize any potential
disruption to the marketplace, for a
transitional period that commenced on
August 1, 2006, the Nasdaq Exchange
has been operating as an exchange for
purposes of Nasdaq-listed securities
only, while Nasdaq continues to
perform its current obligations under
the NASD’s Delegation Plan with
respect to non-Nasdaq exchange-listed
securities.5 Pursuant to SR–NASD–
2005–087 and under the Delegation
Plan, Nasdaq, as a subsidiary of NASD,
continues to perform during this
transitional period only those functions
relating to over-the-counter (‘‘OTC’’)
quoting, trading, and execution of nonNasdaq exchange-listed securities. As
such, Nasdaq no longer performs
functions relating to Nasdaq-listed
securities pursuant to delegated
authority from NASD.
The proposed rule change described
herein provides amendments to NASD
rules to reflect Nasdaq’s complete
separation from NASD upon the
operation of the Nasdaq Exchange as a
national securities exchange for
purposes of non-Nasdaq exchange-listed
securities in addition to Nasdaq-listed
securities. In addition, the proposed
rule change amends the current NASD
rules for quoting and trading otherwise
than on an exchange in non-Nasdaq
exchange-listed securities to reflect the
manner in which NASD would be
satisfying its regulatory obligations
under the Act and the rules thereunder
on a temporary basis until the
Alternative Display Facility (‘‘ADF’’) is
able to satisfy those obligations. Further,
this proposed rule change reflects
NASD’s continued participation in the
ITS Plan.6 This is one of the conditions
that must be met before Nasdaq can
operate as an exchange for non-Nasdaq
exchange-listed securities.7 Finally, the
proposed rule change expands the scope
of the NASD/Nasdaq Trade Reporting
4 See Securities Exchange Act Release No. 54084
(June 30, 2006), 71 FR 38935 (July 10, 2006) (File
No. SR–NASD–2005–087).
5 The Commission approved the Nasdaq
Exchange application on January 13, 2006. See
Securities Exchange Act Release No. 53128 (Jan. 13,
2006), 71 FR 3550 (Jan. 23, 2006) (File No. 10–131).
See also Securities Exchange Act Release No. 54085
(June 30, 2006), 71 FR 38910 (July 10, 2006), which
modified the conditions set forth in the Nasdaq
Exchange Approval Order to allow the Nasdaq
Exchange to operate as a national securities
exchange solely with respect to Nasdaq-listed
securities.
6 See Amendment No. 1.
7 See id.
E:\FR\FM\21SEN1.SGM
21SEN1
]]>Agencies
[Federal Register Volume 71, Number 183 (Thursday, September 21, 2006)]
[Notices]
[Pages 55239-55243]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-7844]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54457; File Nos. SR-FICC-2006-03 and SR-NSCC-2006-03]
Self-Regulatory Organizations; Fixed Income Clearing Corporation
and National Securities Clearing Corporation; Notice of Filing and
Order Granting Accelerated Approval of Proposed Rule Changes to
Institute a Clearing Fund Premium Based Upon a Member's Clearing Fund
Requirement to Excess Regulatory Capital Ratio
September 15, 2006.
On February 22, 2006, the Fixed Income Clearing Corporation
(``FICC'') and the National Securities Clearing Corporation (``NSCC'')
filed with the Securities and Exchange Commission (``Commission'')
proposed rule changes SR-FICC-2006-03 and SR-NSCC-2006-03 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 April
24, 2006.\2\ Seven comment letters were received.\3\ FICC and NSCC
amended the proposed rule changes on July 28, 2006, to address certain
concerns raised by the commenters and others.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 53671 (April 18, 2006),
71 FR 21060.
\3\ Jim Nardone, Schonfeld Securities, LLC (``Schonfeld'') (May
5, 2006); Richard Gill, Senior Vice President, and Donald Galante,
Senior Vice President, Man Securities Inc. (``Man'') (May 15, 2006);
L. Thomas Patterson, Chief Executive Officer, and Kathleen M. Toner,
Chief Regulatory Officer, LaBranche & Co. Inc. (``LaBranche'') (May
18, 2006); Peter Chepucavage, International Association of Small
Broker-Dealers and Advisers (``IASBDA'') (May 19, 2006); Greggory A.
Teeter, Howrey LLC, representing Wilson-Davis & Co., Inc. (``Wilson-
Davis''), Alpine Securities Corporation (``Alpine''), and IASBDA
(June 1, 2006); Cheryl T. Lambert, Managing Director, Risk
Management, The Depository Trust and Clearing Corporation (``DTCC'')
(July 28, 2006); and Peter Chepucavage, IASBDA (August 9, 2006).
Schonfeld, Wilson-Davis, Alpine, and LaBranche are members of
NSCC. Man is a member of FICC. IASBDA is an organization created for
the purpose of protecting the interests of small and midsize broker-
dealers and micro-cap issuers.
---------------------------------------------------------------------------
The Commission is publishing this notice and order to solicit
comments from interested persons and to grant accelerated approval of
the proposals.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Changes
FICC and NSCC are each seeking to institute a clearing fund premium
based on a member's clearing fund requirement to excess regulatory
capital ratio.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
In their filings with the Commission, FICC and NSCC included
statements concerning the purpose of and basis for the proposed rule
changes and discussed any comments they received on the proposed rule
changes. The text of these statements may be examined at the places
specified in Item VI below. FICC and NSCC have prepared summaries, set
forth in sections (A), (B), and (C) below, of the most significant
aspects of these statements.\4\
---------------------------------------------------------------------------
\4\ The Commission has modified the text of the summaries
prepared by FICC and NSCC.
---------------------------------------------------------------------------
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
FICC and NSCC are each seeking to institute a clearing fund premium
based on a member's clearing fund requirement to excess regulatory
capital ratio.
1. FICC Clearing Fund Premium
The degree to which the collateral requirement of a clearing agency
member compares to the member's excess regulatory capital is an
important indicator of the potential risk that the member presents to a
clearing agency. In 2002, the Government Securities Clearing
Corporation (``GSCC''), the predecessor to the Government Securities
Division (``GSD'') of FICC, received Commission approval to impose a
collateral premium on netting members whose clearing fund requirements
exceed their excess regulatory capital.\5\ Specifically, the GSD
implemented a 25 percent collateral premium when a member's ratio of
clearing fund requirement to its excess regulatory capital is greater
than 1.0. The 25 percent premium is applied to the amount by which the
member's clearing fund requirement exceeds the member's excess
regulatory capital.
---------------------------------------------------------------------------
\5\ Securities Exchange Act Release No. 45647 (March 26, 2002),
67 FR 15438 (April 1, 2002) [File No. SR-GSCC-2001-15]. ``Excess
regulatory capital'' for purposes of GSD's collateral premium
included excess net capital, excess liquid capital, or excess
adjusted capital.
---------------------------------------------------------------------------
In order to more effectively manage the risk posed by a GSD member
whose activity causes it to have a clearing fund requirement that is
greater than its excess regulatory capital, FICC now proposes to
strengthen the above-mentioned risk management tool by applying a
clearing fund premium that is based on a member's ratio of clearing
fund requirement to excess regulatory capital in place of the current
flat premium of 25 percent.\6\ The premium would be determined by
multiplying the amount by which a member's clearing fund requirement
exceeds its excess regulatory capital by the member's ratio of required
clearing fund to excess regulatory capital expressed as a percent. This
formula would allow the premium to increase or decrease in proportion
to changes in the ratio and should allow for risk management that is
measured in proportion to the risk presented. For example, if a member
has a clearing fund requirement of $11.4 million and excess net capital
of $10 million, its clearing fund requirement would exceed its excess
net capital by $1.4 million, its ratio of clearing fund requirement to
excess net capital is 1.14 (or 114 percent), and the applicable
collateral premium would be 114 percent of $1.4 million or $1,596,000.
If the same member had a clearing fund requirement of $20 million, its
clearing fund requirement would exceed its excess net capital by $10
million, its ratio of clearing fund requirement to excess net capital
would be 2.0 (or 200 percent), and the applicable collateral premium
would be 200 percent of $10 million or $20 million.
---------------------------------------------------------------------------
\6\ If FICC imposes this premium on a netting member, then it
shall be considered included as part of the netting member's
``required fund deposit'' as defined in the GSD's rules.
---------------------------------------------------------------------------
[[Page 55240]]
Currently, FICC's collateral premium applies to members whose
excess regulatory capital is measured as excess net capital, excess
liquid capital, or excess adjusted net capital. The proposed rule
change would also include excess equity capital as regulatory excess
capital so that the premium can be applied to bank and trust company
netting members whose capital is measured as equity capital.
The proposed rule change would also make an additional change to
Rule 4 (Clearing Fund, Watch List and Loss Allocation), Section 3
(Watch List) to remove a provision that allows FICC to require a
netting member to adjust its trading activity so that its excess
regulatory capital ratio decreases to a satisfactory level. While this
provision was appropriate under the fixed 25 percent premium, it would
no longer be appropriate under the new ratio-based clearing fund
premium because the new premium formula would impose a variable premium
based on activity that would require members to either adjust their
trading activity or be subject to the higher premium.
2. NSCC Clearing Fund Premium
NSCC is proposing to impose a clearing fund premium on Rule 2
(Members) broker/dealer and bank members whose clearing fund
requirement exceeds their regulatory excess capital. NSCC's proposed
excess regulatory capital premium would apply to members whose
regulatory excess capital is measured as excess net capital or excess
equity capital. The excess regulatory capital premium would be
triggered when a member's ratio of clearing fund requirement to excess
regulatory capital is greater than 1.0 and would be determined using
the same formula as that proposed by FICC. The new premium would be
added to NSCC's clearing fund formula in Procedure XV (Clearing Fund
Formula and Other Matters). \7\
---------------------------------------------------------------------------
\7\ This premium would not apply to The Canadian Depository for
Securities Limited (``CDS'') clearing fund requirement that is
computed pursuant to Appendix 1 of NSCC's rules.
---------------------------------------------------------------------------
3. FICC and NSCC Clearing Fund Premiums
As a matter of practice, when a FICC or NSCC member's clearing fund
requirement to excess regulatory capital ratio is between .50 and 1.0,
a warning notification would be issued to put the member on notice that
a collateral premium will be required if the ratio reaches an amount
greater than 1.0. When a member's ratio exceeds 1.0, it would be
notified on the business day that a collateral premium has been
calculated and is to be collected.
FICC and NSCC reserve the right to: (i) Apply a lesser collateral
premium (including no premium) based on specific circumstances (such as
a member being subject to an unexpected haircut or capital charge that
does not fundamentally change its risk profile) and (ii) return all or
a portion of the premium amount if it believes that the member's risk
profile does not require the maintenance of that amount.
FICC and NSCC believe that the proposed rule changes are consistent
with the requirements of Section 17A of the Act \8\ and the rules and
regulations thereunder applicable to FICC and NSCC because they should
help FICC and NSCC assure the safeguarding of securities and funds
which are in their custody or control or for which they are responsible
by allowing FICC and NSCC to more effectively manage risk presented by
certain members.
---------------------------------------------------------------------------
\8\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
(B) Self-Regulatory Organization's Statement on Burden on Competition
FICC and NSCC do not believe that the proposed rule changes would
impose any burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Changes Received From Members, Participants, or Others
Written comments relating to the proposed rule changes have been
received and addressed by FICC and NSCC.
III. Comments
The Commission received seven comment letters to the proposed rule
changes. Schonfeld, Wilson-Davis, Alpine, LaBranche, Man, and IASBDA
wrote letters opposing the proposed rule changes.\9\ DTCC submitted a
letter responding to those letters.\10\
---------------------------------------------------------------------------
\9\ Supra note 3.
\10\ Id.
---------------------------------------------------------------------------
All of the commenters in opposition to the proposed rule changes
argued that the imposition of the clearing fund premium would place a
disproportionate burden on smaller broker-dealers because they are
generally less capitalized than the larger broker-dealers and are not
in a position to meet higher capital requirements that could result
from the proposed rule changes. FICC and NSCC responded that the
premium calculation is based on a ratio that is applied to all members
equally and is meant to reflect the risk a member introduces to the
clearing agencies.
All of the commenters opposing the proposed rule changes argued
that the proposed rule changes would have an anticompetitive effect
and/or place an undue burden on competition in that smaller broker-
dealers would be unable to meet the higher clearing fund obligations
and would be forced out of business which could result in less
competition among broker-dealers. One result of the clearing fund
premium would be that small issuers and emerging companies would not
have such smaller broker-dealers to assist in capital formation.
FICC and NSCC responded that there are over 6000 broker-dealers
registered with the Commission. FICC has 61 broker-dealer members in
its GSD and NSCC has approximately 221 full service broker-dealer
members. Such figures, according to FICC and NSCC indicate that the
competition among broker-dealers is healthy. FICC and NSCC also
responded that the proposed rule changes would not be barriers to entry
to the brokerage business and that the Act does not provide broker-
dealers with a right to be a direct member of a registered clearing
agency. FICC and NSCC noted that a firm that is potentially affected by
the proposed rule changes could (1) Retain or raise additional capital
relative to the business it clears through the clearing agency, (2)
limit the business it clears through the clearing agency so that the
risk to which the clearing agency and its members is exposed based upon
such business is proportionate to the firm's excess net capital, or (3)
seek another firm through which to clear its business.
LaBranche and Schonfeld suggested that a general fund similar to
the SIPC or FDIC models could be created to mitigate risks in the
clearing system. FICC and NSCC responded that the clearing fund, like
the SIPC or FDIC models, exists as a means to mutualize the risk that
any given member presents as a result of its business should the member
fail and the clearing agency be required to close the member out and
assume the risk of loss on those operations. FICC and NSCC argued that
the commenters seeking a general fund like SIPC or the FDIC model are
seeking an entity other than themselves to bear the risk of their
businesses by shifting the credit risk from the member to FICC or NSCC
and the memberships at large.
Howrey and Man argue that the current risk management tools used by
FICC and NSCC are adequate. Man states that the FICC minimum net worth
requirement of $50,000,000 and the minimum net excess capital
requirement of $10,000,000 have provided adequate protection to FICC as
[[Page 55241]]
related to counterparty risk. FICC responded that net worth
requirements on their own, as illustrated by the Refco Securities LLC
(``Refco'') case, do not protect against counterparty risk,
particularly in an environment where trading activity is not linked to
capital levels. In addition, FICC noted that the net worth requirement
does not address the nature of the business that the member brings to
FICC and its members. Howrey points out that NSCC has the ability to
collect additional clearing fund deposits pursuant to its rules should
it deem it necessary. The lack of explanation or clarification by NSCC
on how the current deposit requirement is calculated reveals a pattern
of arbitrary amounts being imposed on clearing firms. This arbitrary
amount, argued Howrey, would then be added to the arbitrary amount
which would be calculated by the proposed rule change. NSCC responded
that it concurs that Rule 15 (Financial Responsibility and Operational
Capability) could perhaps be used as a basis on which to charge an
occasional clearing fund premium to cover the perceived systemic risk
sought to be addressed by the proposed rule change. However, FICC and
NSCC's management and user representative boards have chosen to address
the charge systemically and include the premium as a stated additional
charge in an effort to be clear to members about the types of activity
and risks they are trying to address.
Man asserted that FICC's ability to grant exceptions based upon
subjective judgments in undefined circumstances, however well
intentioned, will undermine the confidence in the margin process. Thus,
members should know what rules for granting exceptions will be applied.
FICC and NSCC responded that such discretion would only be used to
reduce or eliminate the premium, not to raise it, and that the
situations where such discretion would be used are likely to be very
fact and circumstances driven. Thus, it would be contrary to the
principle and purpose of discretion to require that NSCC and FICC adopt
in advance of the event, detailed criteria, circumstances, and
procedures for exercising such discretion. However, as discussed
further below, FICC and NSCC amended their proposed rule changes to
alleviate this concern and others expressed by the commenters.
IV. FICC and NSCC Amendments
To address certain concerns expressed in the comment letters and by
others, FICC and NSCC amended the proposed rule changes as set forth
below.
1. FICC
FICC has amended its proposed rule change to exclude from the
premium calculation the look back provisions of the GSD clearing fund
formula's Receive/Deliver and Repo Volatility components (``Excess
Capital Premium Calculation Amount'') \11\ with respect to the
computation of the clearing fund requirement used in both the numerator
of the ratio and in the Excess Capital Differential.\12\
---------------------------------------------------------------------------
\11\ The adjusted clearing fund requirement is referred to in
the amendment as the ``Excess Capital Premium Calculation Amount.''
It is defined by the amendment as the calculation of the member's
Required Fund Deposit, which excludes consideration of the Average
Offset Margin Amount and the Average Offset Repo Volatility Amount.
Excluding these look back components, known as the Average Post
Offset Margin Amount (``POMA'') and the Average Repo POMA (and
defined in the GSD's Rules as the Average Offset Margin Amount and
the Average Offset Repo Volatility Amount, respectively), from the
calculation of the proposed premium is expected to provide relief
from the Excess Capital Premium to members whose current portfolios
would have a lower clearing fund requirement than their clearing
fund requirement with the look back would suggest.
\12\ As defined by the amendment, ``Excess Capital
Differential'' means the amount by which a netting member's Excess
Capital Premium Calculation Amount exceeds its excess capital.
---------------------------------------------------------------------------
FICC has also amended its proposed rule change to clarify that it
may at its discretion: (i) Collect an amount less than the Excess
Capital Premium (including no premium) and (ii) return all or a portion
of the Excess Capital Premium if it believes that the imposition or
maintenance of the Excess Capital Premium is not necessary or
appropriate.\13\
---------------------------------------------------------------------------
\13\ FICC management will look to see whether the premium
results from unusual or non-recurring circumstances where management
believes it would not be appropriate to assess the premium. Examples
of such circumstances are a member's late submission of trade data
for comparison that would have otherwise reduced the margined
position if timely submission had occurred or an unexpected haircut
or capital charge that does not fundamentally change a member's risk
profile. FICC has stated that these examples are intended to serve
as guidelines and are intended to be illustrative but not limiting
in nature as to when the premium will not be imposed.
---------------------------------------------------------------------------
In order to allow members time to effect any necessary operational
or systems changes, FICC's proposed rule change will become effective
on the first Monday following the 29th day after which the Commission
issues an order granting approval of the change.
2. NSCC
NSCC amended its proposed rule change to clarify that the Excess
Capital Premium will be determined by multiplying: (a) The amount by
which a member's base clearing fund requirement (that is the amount
determined prior to the imposition of the Excess Capital Premium)
exceeds the member's excess regulatory capital by (b) the member's
ratio, expressed as a percent. The calculation of the base clearing
fund requirement for purposes of determining both the ratio and the
Excess Capital Premium will not take into account either (i) Market-
maker domination charges or (ii) special charges, as determined
pursuant to Procedure XV, that are imposed on a member as part of its
base requirement. This adjusted clearing fund amount (i.e., calculated
clearing fund amount minus any market-maker domination or other special
charges) used for purposes of calculating the Excess Capital Premium
would be called the ``Calculated Amount.'' These charges are not
included in the clearing fund premium calculation because NSCC
recognizes that these types of charges already provide an additional
reserve in the base clearing fund requirement against the risk of that
position.
NSCC has also amended its proposed rule change to clarify that it
may at its discretion: (i) Collect an amount less than the Excess
Capital Premium (including no premium) and (ii) return all or a portion
of the Excess Capital Premium if it believes that the imposition or
maintenance of the Excess Capital Premium is not necessary or
appropriate.\14\
---------------------------------------------------------------------------
\14\ NSCC has identified the following guidelines or
circumstances, which NSCC has stated are intended to be illustrative
but not limiting in nature as to when the premium will not be
imposed: (1) Where the premium results from charges applied with
respect to municipal securities trades settling in CNS where the
member has offsetting compared trades settling on a trade-for trade
basis through DTC and (2) where management has determined that the
premium results from an unusual or non-recurring circumstance where
management believes it would not be appropriate to assess the
premium. Examples of such circumstances are a member's late
submission of trade data for comparison or trade recording that
would have otherwise reduced the margined position if timely
submission had occurred or an unexpected haircut or capital charge
that does not fundamentally change a member's risk profile.
---------------------------------------------------------------------------
In order to allow member's time to effect any necessary operational
or systems changes, NSCC's proposed rule change will become effective
on the first Monday following the 29th day after which the Commission
issues an order granting approval of the proposed rule change.
V. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
After carefully considering the proposed rule changes as amended
and all of the written comments received, the Commission finds that the
proposed rule changes are consistent with the
[[Page 55242]]
requirements of the Act and the rules and regulations thereunder and
particularly with the requirements of Section 17A(b)(3)(F).\15\ Section
17A(b)(3)(F) requires that the rules of a clearing agency be designed
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. The Commission believes that the approval of FICC and
NSCC's rule changes is consistent with this section because it should
help FICC and NSCC to assure the safeguarding of securities and funds
which are in their custody or control or for which they are responsible
by allowing FICC and NSCC to more effectively manage risk presented by
highly leveraged members \16\ and thus avoid potential losses to FICC
and to NSCC and their members.
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\15\ 15 U.S.C. 78q-1(b)(3)(F).
\16\ A highly leveraged member is identified as one whose
regulatory and excess capital are substantially less than it's
clearing fund requirements.
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When a member presents transactions for clearance and settlement
through FICC or NSCC in an amount that is not supported by its excess
regulatory capital, should the member fail, FICC, NSCC, or both if the
member is a member of both FICC and NSCC would have to close out the
failing member's open positions and assume the risk of loss. If the
failing member's clearing fund deposit is insufficient to cover any
such loss, the loss would be borne by FICC and/or NSCC and ultimately
could be borne by the other members of the clearing agency(ies) from
their collective clearing fund deposits.
All of the commenters in opposition to the proposed rule changes
argued that the imposition of a clearing fund premium would place a
disproportionate burden on smaller broker-dealers because they are
generally less capitalized than the larger broker-dealers and not in a
position to meet higher capital requirements that could result from the
proposed rule changes. FICC and NSCC responded that the premium
calculation is based on a ratio that is applied to all members equally
and is meant to reflect the risk a member introduces to the clearing
agencies. Section 17A(b)(3)(F)\17\ provides that the rules of a
clearing agency shall not permit unfair discrimination among
participants in the use of the clearing agency. Because the premium
calculation is applied to all members equally based on a ratio of each
member's required clearing fund to its excess net capital, the
Commission is not persuaded by the commenters' arguments. It should be
noted that the proposed rule changes were prompted in part by the
bankruptcy and wind-down of Refco, which was not a small broker-dealer.
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\17\ 15 U.S.C. 78q-1(b)(3)(F).
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All of the commenters opposing the proposed rule changes argued
that the proposed rule changes would have anticompetitive effect and/or
place an undue burden on competition in that smaller broker-dealers
would be unable to meet the higher clearing fund obligations and would
be forced out of business, and that that could result in less
competition among broker-dealers. FICC and NSCC responded that the
proposed rule changes are not barriers to entry to the brokerage
business and that the Act does not provide broker-dealers with a right
to be a direct member of a registered clearing agency. FICC and NSCC
noted that a firm that is potentially affected by the proposed rule
changes could (1) Retain or raise additional capital relative to the
business it clears through the clearing agency, (2) limit the business
it clears through the clearing agency so that the risk to which the
clearing agency and its other members is exposed based upon such
business is proportionate to the firm's excess regulatory capital, or
(3) seek another firm through which to clear its business.
The Commission is not persuaded by the commenters' claims that the
proposed rule changes are anticompetitive and/or will result in an
undue burden on competition. While it is possible that the proposed
rule changes will force some members of FICC and NSCC to discontinue
their direct membership in FICC and/or NSCC, the Act does not provide
broker-dealers with the right to be direct members in a clearing
agency. Affected firms have a choice to raise excess regulatory capital
or to limit their trading activities so that the risk to which the
clearing agency and its other members is exposed is proportionate to
the firm's excess regulatory capital. The Commission finds that the
proposed rule changes should not impose any burden on competition that
is not necessary or appropriate in furtherance of the purposes of the
Act in accordance with Section 17A(b)(3)(I).\18\
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\18\ 15 U.S.C. 78q-1(b)(3)(I).
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FICC and NSCC have requested that the Commission approve the
proposed rule changes prior to the thirtieth day after publication of
the notice of the amendment to the filing. The Commission finds good
cause for approving the proposed rule changes prior to the thirtieth
day after the publication of notice because implementation of the
proposed rule changes will allow FICC and NSCC to activate the systems
which are necessary to implement the proposed rule changes which are
integral to assuring the safeguarding of securities and funds which are
in their custody or control or for which they are responsible.
Additionally, the Commission notes that FICC and NSCC's amendments were
in large part in response to comments it received.
VI. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
changes are consistent with the Act. Comments may be submitted by any
of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml) or
Send an e-mail to rule-comments@sec.gov. Please include
File Numbers SR-FICC-2006-03 and SR-NSCC-2006-03 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Numbers SR-FICC-2006-03 and
SR-NSCC-2006-03. These file numbers should be included on the subject
line if e-mail is used. To help the Commission process and review your
comments more efficiently, please use only one method. The Commission
will post all comments on the Commission's Internet Web site (https://
www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent
amendments, all written statements with respect to the proposed rule
changes that are filed with the Commission, and all written
communications relating to the proposed rule changes between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for inspection and copying in the Commission's Public
Reference Section, 100 F Street, NE., Washington, DC 20549. Copies of
such filings also will be available for inspection and copying at the
principal offices of FICC and NSCC and on FICC's Web site at https://
www.ficc.com/gov/gov.docs.jsp?NS-query and on NSCC's Web site at http:/
/
[[Page 55243]]
www.nscc.com/legal/. 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 Numbers
SR-FICC-2006-03 and SR-NSCC-2006-03 and should be submitted on or
before October 12, 2006.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule changes (File Nos. SR-FICC-2006-03 and
SR-NSCC-2006-03) be and hereby are approved on an accelerated basis.
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\19\ 15 U.S.C. 78s(b)(2).
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For the Commission by the Division of Market Regulation, pursuant
to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06-7844 Filed 9-20-06; 8:45 am]
BILLING CODE 8010-01-P
