[Federal Register Volume 78, Number 5 (Tuesday, January 8, 2013)]
[Notices]
[Pages 1278-1280]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-00122]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68555; File No. SR-FICC-2012-07]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving Proposed Rule Change Relating to Enhancements That the
Mortgage-Backed Securities Division Intends To Implement to its
Services and Certain Other Clarifications and Corrections to Its Rules
January 2, 2013.
I. Introduction
On November 6, 2012, the Fixed Income Clearing Corporation
(``FICC'' or the ``Corporation'') filed with the Securities and
Exchange Commission (``Commission'') proposed rule change SR-FICC-2012-
07 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19ba-4 thereunder.\2\ The proposed rule change
was published for comment in the Federal Register on November 21,
2012.\3\ No comments letters were received on the proposed rule change.
This order approves 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. 68245 (November 15,
2012), 77 FR 69913 (November 21, 2012).
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II. Description
The proposed rule change relates to certain enhancements that the
Mortgage-Backed Securities Division (``MBSD'') of FICC intends to
implement to its services. In addition, FICC proposes to make certain
corrections and clarifications to the MBSD Rules. As noted below, some
of the proposed changes do not require revisions to the MBSD Rules.
1. Expansion of Pool Netting To Include Pool Instructs From the
Previous Settlement Months
MBSD proposed to further extend pool netting benefits to its
members by capturing Pool Instructs \4\ submitted for allocations made
after the traded pool's settlement month has passed. The proposed
changes allow more activity into the pool net which results in fewer
settlements.
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\4\ A Pool Instruct is an input used by a member to submit pool
details directly into the Real-Time Trade Matching [supreg]
(``RTTM[supreg]'') system for bilateral matching and assignment to a
corresponding open TBA position as a prerequisite to the pool
netting process.
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Currently, MBSD's pool netting process only nets Pool Instructs for
the current delivery date if their corresponding contractual settlement
dates (``CSD'') are also in the current month.\5\ For example, with
respect to a delivery date of August 14, 2012, MBSD's pool netting
process would only net Pool Instructs having a CSD ranging from August
1, 2012 through August 14, 2012 and having a delivery date of August
14, 2012. As such, only Pool Instructs having a CSD in the current
month will be included in pool netting.
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\5\ See MBSD Rule 8 Section 3.
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The proposed new process will net Pool Instructs from previous
settlement months that are submitted for delivery dates in the current
month. For example, if we assume that today is August 13, 2012, and a
member submits multiple Pool Instructs all having a CSD equal to July
12, 2012 and a delivery date equal to August 14, 2012, on the evening
of August 13th, these Pool Instructs would be netted against each other
to arrive at a single pool net settlement position for the July 12,
2012 CSD and August 14th delivery date.
The proposed changes do not require revisions to the text of the
MBSD Rules.
2. Notification of Settlement for Specified Pool Trades
A Notification of Settlement (``NOS'') is an instruction submitted
to the Corporation by a purchasing or selling clearing member which
reflects the settlement of a Settlement Balance Order Trade, Trade-for-
Trade Transaction or Specified Pool Trade (``SPT'').\6\ MBSD is
proposing to change the manner in which NOS processing occurs for SPTs
so that it follows similar processing rules as those applied to NOS for
Settlement Balance Order Trades and Trade-for-Trade Transactions.
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\6\ See MBSD Rule 1, Definitions.
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Currently, MBSD Rule 10 Section 2 states that the trade details for
a NOS submitted by both parties of a SPT must fully match in order for
the clearance of the SPTs to be reflected on the member's Purchase and
Sale Report \7\ or both parties must submit a cancellation of the
transaction in order for the transaction to be deleted from each
party's respective Open Commitment Report.\8\
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\7\ ``Purchase and Sale Report'' is defined as the report
furnished by the Corporation reflecting a member's Compared Trades
in Eligible Securities.'' See MBSD Rule 1, Definitions.
\8\ ``Open Commitment Report'' is defined as the report
furnished by the Corporation to members reflecting such member's
open commitments in the Clearing System. See MBSD Rule 1,
Definitions.
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MBSD proposed to enhance the NOS for SPTs by no longer requiring
the current face value submitted on each
[[Page 1279]]
member's NOS to exactly match the current face value of the SPT.
Instead, members will have the ability to submit and match multiple NOS
to reduce the SPT current face until it is fully settled. For example,
if a SPT has a current face value of $125MM and the pool number of the
trade has a factor of 0.975, FICC will accept either (a) one piece of
NOS for $125,000,000 or (b) three pieces of NOS for $48,750,000,
$48,750,000 and $27,500,000. The current face values equal an original
face settlement value of $50,000,000, $50,000,000 and $28,205,128.
In addition to the above, MBSD will apply a tolerance of +/- $1
when matching buy and sell NOS for SPT trades to account for
differences in rounding conventions used by members to convert original
face to current face on their NOS.
The proposed changes will make NOS for SPTs similar to NOS for
Settlement Balance Order Trades and Trade-for-Trade Transactions
whereby matching is permitted within a tolerance and multiple NOS may
be submitted and matched separately until the trade is fully settled.
The proposed changes require revisions to the text of the MBSD
Rules.
3. Comparison of Dummy Pool Number to Valid Pool Number
FICC supports the submission of a defined generic or ``dummy'' pool
number on NOS instead of a valid pool number. A dummy pool is a
standard convention used by members when the actual pool number is not
readily available to some members. Currently, the pool number is a
matching criterion on NOS. Consequently, if one member submits a dummy
pool number and the other enters a valid pool number the NOS will not
compare even though all of the other matching criteria are the same. In
an effort to address this, FICC is proposing to change its processing
in order to allow matching of NOS when all mandatory terms compare and
one member submits a dummy pool number and the other member submits a
valid pool.
The proposed changes do not require revisions to the text of the
MBSD Rules.
4. Automatically Marking Certain Open TBA Trades as Fully Settled
Mortgage-backed securities trades settle with an industry-accepted
variance of 0.01% (i.e., $100 per $1MM). When FICC applies NOS to open
trades, it does so using the upper limit of the variance to ensure that
trades are not marked as fully settled until all NOS have been received
and processed by FICC. However, because trades may settle using any
value within the variance, FICC's processing may leave residual trade
amounts open on its books for trades that have actually been fully
settled. To address this, FICC is proposing to automatically generate
internal NOS which will mark the residual trade as fully settled. The
FICC generated NOS will occur on the last business day of each month,
in every instance where a member has a To-Be-Announced (``TBA'') trade
with an open par that falls below an established threshold. The
threshold is initially contemplated to be $1000 par, however, this may
be modified following member feedback. All changes to the threshold
will be provided in advance to members via Important Notice.
The proposed changes require revisions to the text of the MBSD
Rules.
5. Corrections and Clarification to the MBSD Rules
The MBSD Rules define the term ``Fully Compared'' as ``* * * trade
input submitted by a Broker matches trade input submitted by each
Dealer on whose behalf the Broker is acting the Net Position Match
Mode.'' \9\ The phrase ``in accordance with'' was inadvertently deleted
from this definition when it was revised in connection with Amendment
No. 1 to SR-FICC-2008-01.\10\ FICC proposes to restore this phrase so
that the definition states the following: ``* * * trade input submitted
by a Broker matches trade input submitted by each Dealer on whose
behalf the Broker is acting in accordance with the Net Position Match
Mode.''
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\9\ See MBSD Rule 1, Definitions.
\10\ Securities Exchange Act Release No. 66550 (March 9, 2012);
77 FR 15155 (March 14, 2012).
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In the second to last paragraph of MBSD Rule 2A Section 1, there is
a sentence which states that the Corporation will determine whether the
applicants in ``categories (g and i)'' of the referenced Section will
be designated as tier one or tier two members. FICC proposes to correct
the typographical error in the cross-reference so that it instead
references ``categories (g) and (i).''
Implementation
FICC proposes to implement the proposed changes relating to the
MBSD enhancements during the second quarter of 2013 pending rule filing
approval from the Securities and Exchange Commission. The proposed
changes relating to the clarifications and corrections of the
referenced rules will be effective immediately upon receipt of rule
filing approval.
III. Discussion
Section 19(b)(2)(C) of the Act \11\ 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 \12\
requires, among other things, that the rules of the clearing agency are
designed to promote the prompt and accurate clearance and settlement of
securities transactions.
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\11\ 15 U.S.C. 78s(b)(2)(C).
\12\ 15 U.S.C. 78q-1(b)(3)(F).
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The proposed changes to FICC's Rules are consistent with promoting
the prompt and accurate clearance and settlement of securities
transactions in the following ways: (1) The expansion of the pool
netting system extends the netting benefits to clearing members by
capturing allocations made after the traded pools current settlement
month, (2) the change in NOS processing for SPTs creates efficiency
through the standardization of NOS processing for TBA trades, (3)
automatically marking certain TBA trades as fully settled improves the
monitoring and reporting of trade settlement status and (4) allowing
the comparison of dummy Pool number to valid pool number provides for
timelier matching of NOS. Each of these enhancements creates a more
efficient netting system which promotes the prompt and accurate
clearance and settlement for securities transactions. Furthermore, the
clarifications and corrections to the MBSD Rules ensure that the Rules
are accurate. As a result, the proposed rule change is consistent with
the requirements of Section 17A(b)(3)(F) of the Act.\13\
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\13\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act \14\ and the
rules and regulations thereunder.
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\14\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\15\ that the proposed rule change, as amended, (File No. SR-FICC-
2012-07) be, and hereby is, approved.\16\
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\15\ 15 U.S.C. 78s(b)(2).
\16\ 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).
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For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00122 Filed 1-7-13; 8:45 am]
BILLING CODE 8011-01-P