[Federal Register Volume 79, Number 10 (Wednesday, January 15, 2014)]
[Notices]
[Pages 2735-2736]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-00576]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71265; File No. SR-FICC-2013-10]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving Proposed Rule Change To Establish the Minimum Financial
Requirements for the Existing Membership Category of Registered
Investment Company Netting Members in the Government Securities
Division
January 9, 2014.
I. Introduction
On November 12, 2013, the Fixed Income Clearing Corporation
(``FICC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-FICC-2013-10 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 November 29, 2013.\3\ The
Commission received one comment letter in response to the proposed rule
change.\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. 70925 (Nov. 22, 2013),
78 FR 71702 (Nov. 29, 2013) (SR-FICC-2013-09).
\4\ Letter from Peter Nowicki (December 5, 2013) (expressing
general support for allowing Registered Investment Companies to
participate in netting and clearing).
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II. Description
The purpose of this rule filing is to amend the Rulebook
(``Rules'') of the Government Securities Division (``GSD'') of FICC to
establish the minimum financial requirements for the existing
membership category of Registered Investment Company Netting Members
(``RIC'').\5\ Historically, the GSD has served the ``sell-side''
community (which primarily consists of entities such as banks and
broker-dealers). FICC believes the participation of RICs as guaranteed
service members will contribute to the safety, efficiency, and
transparency of the market by allowing FICC to capture a greater part
of the activity of its existing members and by introducing activity of
current non-members to FICC. FICC also believes that RICs will benefit
from the GSD netting service and the associated operational
efficiencies of a central counterparty service. RICs will not be
permitted to use the GCF Repo[supreg] service.
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\5\ Pursuant to GSD Rule 1, the term ``Registered Investment
Company Netting Member'' is an Investment Company (1) that is
registered with the Commission, (2) admitted to membership in GSD's
Netting System pursuant to the GSD Rules, and (3) whose membership
in the Netting System has not been terminated.
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Currently, RICs are already a permitted category in the GSD Rules;
the rule as amended establishes minimum financial requirements for
RICs.\6\ Specifically, Rule 2A (``Initial Membership Requirements'') of
the GSD Rules provides that the minimum financial requirement for RICs
is $100 million in net asset value.
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\6\ The membership requirements for RICs will be the same as
those already in place for RICs at FICC's Mortgage-Backed Securities
Division (``MBSD'').
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Currently, GSD Rule 3, ``Ongoing Membership Requirements,'' permits
GSD to assess a premium against a netting member whose Clearing Fund
requirement exceeds its specified regulatory capital figure.\7\
Pursuant to this rule change, GSD will now be permitted to assess RICs
in the same manner as other members.
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\7\ By way of example, under GSD Rule 4, if a member has a
Clearing Fund requirement of $11.4 million and excess net capital of
$10 million, its ``ratio'' is 1.14 (or 114 percent), and the
applicable collateral premium would be 114 percent of $1.4 million
(which is equal to the amount by which the member's Clearing Fund
requirement exceeds its excess net capital), or $1,596,000. The
current GSD Rules provide that FICC has 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 collateral
premium amount if it believes that the member's risk profile does
not require the maintenance of that amount.
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Pursuant to GSD Rules, Tier One Netting Members are subject to
potential loss mutualization and Tier Two Netting Members are not.
Pursuant to this rule change, RICs will be Tier Two Netting
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Members because they are not permitted by law to mutualize loss.\8\
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\8\ Tier One Members include banks, dealers, futures commission
merchants, government securities issuers and registered clearing
agencies and Tier Two Members include RICs. See Securities Exchange
Act Release No. 63986 (Feb. 28, 2011), 76 FR 12144 (Mar. 4, 2011)
(SR-FICC-2010-09).
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Under FICC's current loss allocation methodology, any loss
allocation is first made against the retained earnings of FICC
attributable to the GSD (after application of the defaulting member's
Clearing Fund, funds-only settlement amounts and any other collateral
on deposit with the GSD and any funds from any cross-margining or
cross-guaranty agreements), in an amount up to 25 percent of FICC's
retained earnings or such higher amount as may be approved by the Board
of Directors of FICC.\9\ If a loss still remains, the GSD will divide
the loss between the Tier One Netting Members and the Tier Two Netting
Members. Tier One Netting Members will be allocated the loss applicable
to them first by assessing the Clearing Fund deposit of each such
member in the amount of up to $50,000, equally. If a loss still
remains, Tier One Netting Members will be assessed ratably, in
accordance with the respective amounts of their Required Fund Deposits,
based on the average daily amount of the member's Required Fund Deposit
over the prior twelve months. Applicable Tier Two Netting Members will
be assigned the Tier Two loss amount using a loss allocation
methodology based on the activity that the Tier Two Netting Member
conducted with the defaulting member.\10\
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\9\ See GSD Rule 4.
\10\ GSD Rule 4, Section 7 pertains to the satisfaction of any
loss incurred by FICC as a result of the failure of a defaulting
member to fulfill its obligations to FICC. MBSD Rule 4 contains the
same loss allocation methodology.
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FICC is also amending GSD's rules to state explicitly that GSD will
make its services available to Persons \11\ in other categories as FICC
may determine, subject to the approval of the Commission. A parallel
provision is already contained in MBSD's rules.\12\
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\11\ Pursuant to GSD Rule 1, the term ``Person'' means a
partnership, corporation, limited liability corporation or other
organization, entity, or individual.
\12\ See MBSD Rule 2A, Section 1.
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III. Discussion
Section 19(b)(2)(C) of the Act \13\ directs the Commission to
approve a self-regulatory organization's proposed rule change if the
Commission 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)(B) \14\ states that
a clearing agency shall not be registered unless the Commission
determines that the rules of the clearing agency provide that certain
categories of parties may become participants, subject to certain
provisions governing denials of participation. RICs are one of the
listed categories of participants deemed appropriate to the development
of a national system for the prompt and accurate clearance and
settlement of securities transactions.\15\ Moreover, Section
17A(b)(3)(F) of the Act \16\ requires, among other things, that the
rules of a clearing agency registered with the Commission be designed
to promote the prompt and accurate clearance and settlement of
securities transactions and, in general to protect investors and the
public interest.
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\13\ 15 U.S.C. 78s(b)(2)(C).
\14\ 15 U.S.C. 78q-1(b)(3)(B).
\15\ See Id.
\16\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission finds that the proposed rule change is consistent
with Section 17A(b)(3)(B) and (F) of the Act.\17\ The proposal
establishes minimum financial requirements for RICs, thus extending GSD
membership to participants in a category enumerated by Section
17A(b)(3)(B). Furthermore, it promotes the prompt and accurate
clearance and settlement of securities transactions and protects
investors and the public interest by allowing FICC to clear a greater
market share of activity of its existing members and non-members. \18\
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\17\ 15 U.S.C. 78q-1(b)(3)(B) and (F).
\18\ This Order addresses whether the proposed rule change is
consistent with the Act. As such, this Order does not address any
relief that may be necessary under the Investment Company Act of
1940 for an individual RIC to participate as a Registered Investment
Company Netting Member as defined by GSD Rule 1. See footnote 5,
supra.
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IV. Conclusion
On the basis of the foregoing, the Commission concludes that the
proposal is consistent with the requirements of the Act, particularly
the requirements of Section 17A of the Act,\19\ and the rules and
regulations thereunder.
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\19\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\20\ that the proposed rule change (File No. SR-FICC-2013-10) be
and hereby is approved.\21\
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\20\ 15 U.S.C. 78s(b)(2).
\21\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission by the Division of Trading and Markets,
pursuant todelegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-00576 Filed 1-14-14; 8:45 am]
BILLING CODE 8011-01-P