[Federal Register Volume 78, Number 137 (Wednesday, July 17, 2013)]
[Notices]
[Pages 42809-42811]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-17096]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69972; File No. SR-FICC-2013-05]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving Proposed Rule Change To Include trueEX LLC as a
Designated Locked-In Trade Source Pursuant to the Rulebook of the
Government Securities Division
July 11, 2013.
On May 15, 2013, the Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'')
proposed rule change SR-FICC-2013-05 pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder.\2\ The proposed rule change was published for comment in
the Federal Register on June 4, 2013.\3\ The Commission received one
comment on the proposed rule change that did not address the content of
the proposal.\4\ For the reasons discussed below, the Commission is
approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 69653 (May 29, 2013), 78
FR 33456 (June 4, 2013) (SR-FICC-2013-05).
\4\ Email submission by Laura Skinner (June 10, 2013), available
at http://www.sec.gov/comments/sr-ficc-2013-05/ficc201305-1.htm.
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I. Description of the Proposed Rule Change
FICC's proposed rule change would amend the rulebook of the
Government Securities Division (``GSD'') to include trueEX LLC
(``trueEX'') as one of the GSD's designated locked-in trade sources.
The GSD's rules currently provide for the submission of locked-in
trades \5\ by certain locked-in trade sources \6\ on behalf of GSD
members. Currently, the GSD's designated locked-in trade sources are
the following entities: (i) Federal Reserve Banks (as fiscal agents of
the United States); (ii) the Federal Home Loan Mortgage
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Corporation (``Freddie Mac''); (iii) GCF-Authorized Inter-Dealer
Brokers; \7\ (iv) the U.S. Department of the Treasury; and (v) New York
Portfolio Clearing, LLC.
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\5\ The GSD's rulebook defines the term ``Locked-In Trade'' as
``a trade, involving Eligible Securities, that is deemed a Compared
Trade once the data on such trade is received from a single,
designated source and meets the requirements for submission of data
on a Locked-In Trade pursuant to [the GSD's] Rules, without the
necessity of matching the data regarding the trade with data
provided by each Member that is or is acting on behalf of an
original counterparty to the trade.'' GSD Rulebook, Rule 1, p.33.
\6\ The GSD Rulebook defines the term ``Locked-in Trade Source''
as ``a source of data on Locked-In Trades that the Corporation has
so designated, subject to such terms and conditions as to which the
Locked-In Trade Source and the [GSD] may agree.'' GSD Rulebook, Rule
1, p.33.
\7\ The GSD Rulebook defines the term ``GCF-Authorized Inter-
Dealer Broker'' as ``an Inter-Dealer Broker Netting Member that the
[GSD] has designated as eligible to submit to the [GSD] data on GCF
Repo Transactions on a Locked-In Basis.'' GSD Rulebook, Rule 1,
p.27.
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trueEX is an electronic exchange for interest rate swaps, and has
been designated a contract market by the Commodity Futures Trading
Commission.\8\ The swap transactions executed by trueEX are cleared by
a clearinghouse other than the GSD, but in the event one of these swap
transactions results in the physical delivery of the underlying
instrument,\9\ the GSD will clear and settle the exchange of that
instrument in certain instances.\10\ Accordingly, for the delivery-
versus-payment (``DVP'') \11\ leg of these physical delivery
transactions, trueEX will offer members who are also members of GSD the
ability to have such transactions submitted to the GSD by trueEX as
netting-eligible transactions (e.g., as Treasury DVP transactions). In
its capacity as a designated locked-in trade source, trueEX will
transmit transactions to the GSD throughout the day by submitting
single tickets in a batch format. Once trueEX transmits a locked-in
trade to the GSD, the GSD will process the trade normally, along with
the respective GSD member's other DVP trades. Because the ticket
submitted by trueEX lists trueEX as the submitter on behalf of two GSD
counterparties, the single-ticket format ensures that trueEX will not
have a resulting settlement obligation, even though it is a party to
the trade.\12\ If trueEX is approved as a locked-in trade source by the
GSD during the onboarding phase,\13\ it will be the first designated
contract market \14\ to act as a locked-in trade source for the GSD.
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\8\ See In the Matter of the Request of trueEX LLC for
Designation as a Contract Market (September 25, 2012) (approving
trueEX's application for designation as a contract market),
available at http://www.cftc.gov/ucm/groups/public/@otherif/documents/ifdocs/trueexapplicationorder.pdf.
\9\ Generally, fewer than 3% of interest rate swaps result in a
physical delivery when they are unwound.
\10\ The GSD would clear only those transactions involving the
physical delivery of U.S. Treasury bills, notes, bonds, Treasury
inflation-protected securities (TIPS) and separate trading of
registered interest and principal securities (STRIPS), as well as
federal agency notes, bonds and zero-coupon securities that are
book-entry, Fedwire eligible and non-mortgage backed.
\11\ Delivery-versus-payment is a settlement procedure in which
the buyer's cash payment for the securities it has purchased is due
at the time the securities are delivered.
\12\ In its capacity as a locked-in trade source, trueEX will
initially not be subject to any fees pursuant to the existing GSD
Rules. The GSD may, however, consider imposing a fee on certain
locked-in trade sources in the future based on volumes and
processing costs.
\13\ During the onboarding phase, trueEX will be subject to the
GSD's existing due diligence process, including testing trueEX's
trade input and receipt of output capabilities prior to the go-live
date.
\14\ Designated contract markets are exchanges that may list for
trading both futures and option contracts based on all types of
commodities, and that may allow access to their facilities by all
types of traders, including retail customers. See http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm.
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As is the case with other locked-in trade submissions accepted by
the GSD, GSD members will be required to execute appropriate
documentation evidencing to the GSD their authorization of trueEX to
submit trades on their behalf. The GSD will notify members of the
availability of this documentation via Important Notice.
II. Discussion
Section 19(b)(2)(C) of the Act \15\ 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. Section 17A(b)(3)(F) of the Act \16\
requires, among other things, that the rules of a clearing agency be
designed to achieve several goals, including (i) Promoting the prompt
and accurate clearance and settlement of securities transactions and,
to the extent applicable, derivative agreements, contracts, and
transactions, (ii) assuring the safeguarding of securities and funds
that are in the custody or control of the clearing agency or for which
it is responsible, and (iii) protecting investors and the public
interest.
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\15\ 15 U.S.C. 78s(b)(2)(C).
\16\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission concludes that the proposed rule change is
consistent with the requirements of the Act and the rules and
regulations thereunder. The Commission believes that adding trueEX as a
source of locked-in trades for the GSD will promote the prompt and
accurate clearance and settlement of securities transactions by
expediting the GSD's receipt of accurate trade data. In the absence of
a locked-in trade source, trades must be compared bilaterally, which
requires that both parties to the transaction independently transmit
trade information to the GSD.\17\ This confirmation process can
occasion delays when the parties fail to submit trade information in a
timely fashion, or when they submit inaccurate or incomplete
information that the GSD must then verify. The Commission believes that
allowing the GSD to accept trade information from trueEX on a locked-in
basis will help the GSD process transactions more rapidly, and will
enhance the accuracy of the trade information the GSD uses in
performing its clearing services.
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\17\ The bilateral comparison process requires that both
counterparties to the trade submit trade details to the GSD, and
that the details submitted by the parties either match or fall
within predefined parameters. See GSD Rulebook, Rule 6A (providing
that, for the GSD to process a trade for bilateral comparison, it
``must receive data from the long and short sides of the trade'' and
that, with certain limited exceptions, ``there must be an exact
match of all Required Match Data submitted on the trade . . . .'').
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In addition, the Commission believes that allowing trueEX to serve
as a locked-in trade source is generally consistent with the
safeguarding of the securities and funds in the GSD's control, or for
which it is responsible.\18\ Trades originating on the trueEX exchange
will remain subject to all of the GSD's normal risk management
procedures, which include marking member portfolios to the market on an
intraday basis and charging variation margins accordingly.\19\ These
risk management procedures should help ensure the safety of the
securities and funds handled by the GSD in connection with transactions
effected on the trueEX exchange.
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\18\ See 15 U.S.C. 78q-1(b)(3)(F) (requiring 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.'').
\19\ See GSD Rulebook, Rule 4, Section 2a, p.89.
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Finally, the Commission believes that trueEX satisfies the general
criteria for serving as a locked-in trade source to the GSD, provided
the GSD determines that trueEX meets all of the GSD's applicable
onboarding protocols. The Commission has previously determined that the
GSD may utilize locked-in comparison for trades executed on a ``pure
electronic trading system that is [computer] terminal-driven'' and
which permits ``no discretion over trade details . . . once the trade
is submitted.'' \20\ trueEX meets all of these requirements. The trueEX
exchange is exclusively an electronic trading platform, and
counterparties executing trades there may not unilaterally modify or
cancel trades once trueEX has matched them.\21\
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\20\ Securities Exchange Act Release No. 44946 (October 17,
2001), 66 FR 53816, 53817 (October 24, 2001) (SR-GSCC-2001-01)
(internal quotation marks omitted).
\21\ As with bilateral trades, counterparties to a locked-in
trade may submit a ``DK Notice'' for any trades they believe to be
``invalid or incorrect.'' See GSD Rulebook Rule 6C, Section 6. But,
unlike with bilateral trades, the GSD considers a DK Notice in the
context of a locked-in trade to be ``a request for cancellation'' to
the locked-in trade source. See id.; see also GSD Rulebook, Rule 1,
p.19. Thus, only trueEX may modify or cancel a trade in response to
a DK Notice. See GSD Rulebook Rule 6C, Section 10.
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III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act,
particularly those set forth in Section 17A,\22\ and the rules and
regulations thereunder.
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\22\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\23\ that the proposed rule change (File No. SR-FICC-2013-05) be,
and hereby is, approved.\24\
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\23\ 15 U.S.C. 78s(b)(2).
\24\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. See 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-17096 Filed 7-16-13; 8:45 am]
BILLING CODE 8011-01-P