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DOCUMENT ID: [Release No. 34-48796; File No. SR-FICC-2003-10]

NOTICE: NOTICES

ACTION: Self-regulatory organizations; proposed rule changes:

SUBJECT CATEGORY: Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Amend the Fixed Income Clearing Corporation's Cross-Margining Agreements With the Chicago Mercantile Exchange, BrokerTec Clearing Company, and the Board of Trade Clearing Corporation and To Eliminate the Cross-Margining Agreement With the New York Clearing Corporation

DOCUMENT SUMMARY: November 17, 2003.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ notice is hereby given that on October 6, 2003, the Fixed Income Clearing Corporation (``FICC'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change described in Items I, II, and III below, which items have been prepared primarily by FICC. The Commission is publishing this notice to
[[Page 65754]]
solicit comments on the proposed rule change from interested parties. \1\ 15 U.S.C. 78s(b)(1).
I. SelfRegulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

FICC is seeking to amend its crossmargining agreements with the Chicago Mercantile Exchange (``CME''), BrokerTec Clearing Company (``BCC''), and the Board of Trade Clearing Corporation (``BOTCC'') and to eliminate its crossmargining agreement with the New York Clearing Corporation (``NYCC'').
II. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, FICC 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. FICC has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of these statements.\2\
\2\ The Commission has modified the text of the summaries prepared by FICC.
(A) SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

1. New CrossMargining Agreement With CME

Through its Government Securities Division (``GSD''), FICC has a crossmargining arrangement with CME.\3\ FICC is proposing to terminate its existing crossmargining agreement with CME and to enter into a new crossmargining agreement with the CME (``New FICCCME Agreement'') to reflect the fact that, as of January 2, 2004, the CME will begin clearing certain Treasury and Agency futures contracts and options on futures contracts that are traded on the Chicago Board of Trade (``CBOT'') and are currently cleared by BOTCC. Under the New FICCCME Agreement, the FICC products that will be eligible for crossmargining will be Treasury securities that fall into the GSD's offset classes A through G and GCF Repo Treasury securities with equivalent remaining maturities and nonmortgagebacked Agency securities that fall into the GSD's offset classes e and f and GCF Repo nonmortgagebacked Agency securities with equivalent remaining maturities. The CME products that will be eligible for crossmargining will be of two types: (i) the products currently eligible under the existing arrangement between FICC and CME which are Eurodollar futures contracts with ranges in maturity from 3 months to 10 years and options on such future contracts cleared by CME and (ii) the CBOT products which are TwoYear Treasury Note Futures contracts and options thereon, FiveYear Treasury Note Futures contracts and options thereon, TenYear Treasury Note Futures contracts and options thereon, ThirtyYear Treasury Bond Futures contracts and options thereon, FiveYear Agency Note Futures contracts and options thereon, and TenYear Agency Note Futures contracts and options thereon to be cleared by CME.
\3\ Securities Exchange Act Release No. 44301 (May 11, 2001), 66 FR 28207 (May 22, 2001) [File No. SRGSCC0013].

No significant changes are being proposed to the existing FICCCME crossmargining arrangement other than the addition of the CBOT products and certain FICC products as discussed in more detail below. The key aspects of the crossmargining arrangement, most notably, the calculation of the crossmargining reduction and the loss sharing provisions in the event of a participant default are not being amended. 2. Key Proposed Changes to the Existing CrossMargining Agreement Between FICC and CME

The addition of the CBOT products has necessitated new definitions for ``CBOT Eligible Products,'' ``CME Eligible Products,'' and ``FICC Eligible Products,'' as well as Offset Class tables for these products in Appendix B of the agreement.

Appendix B of the FICCCME Agreement is also being amended to include FICC's GCF Repo Treasury and nonmortgagebacked Agency products in the crossmargining arrangement.\4\ By the effective date of the New FICCCME Agreement, FICC will be margining its GCF Repo Treasury and nonmortgagebacked Agency products based upon the specific underlying collateral, as opposed to the current system of margining these products based upon the longest maturity of eligible underlying collateral.\5\ Therefore, these GCF Repo products can now be included in the crossmargining arrangement because they will no longer be margined at a generic rate but rather at a specific rate based on the actual underlying Treasury and Agency collateral.
\4\ This amendment is also being proposed with respect to the GCF Repo Treasury products and the BCC crossmargining arrangement as discussed below.
\5\ Because of a previous inability to obtain timely data on the actual instruments posted in support of GCF Repo positions, the GSD has calculated affected members' Clearing Fund requirements based upon the assumption that collateral providers have assigned to each generic CUSIP the most volatile (i.e., the longest maturity) collateral eligible. The GSD has been in the process of developing improvements to the current margining methodology. By the effective date of the proposed rule change, the GSD will be able to identify the specific CUSIP posted in calculating a member's Clearing Fund requirement related to its Treasury and Agency GCF Repo activity.

As is the case with the current agreement between FICC and CME, the parties provide in the New FICCCME Agreement that they will agree from time to time in a separate writing on the disallowance factors that will be used in the crossmargining arrangement. The disallowance factors that will be used upon implementation of the new arrangement are the ones set forth as examples in Appendix B to the New FICCCME Agreement. The disallowance factors between FICC eligible products and CME eligible products (i.e., Eurodollar products) have not changed. A new disallowance factor table has been added for crossmargining of FICC eligible Treasury and Agency products with CBOT Treasury and Agency eligible products.\6\
\6\ FICC has computed and tested disallowance factors that will be applicable to each potential pair of positions being offset.

Appendix C of the current agreement which sets forth the methodology for converting CME eligible products into Treasury cash equivalents for purposes of ultimately calculating the crossmargining reduction has been made into Appendix C1 and a new Appendix C2 has been added which contains the methodology for converting the CBOT eligible products into Treasury cash equivalents. This is identical to the methodology contained in the BOTCC and BCC crossmargining agreements.

The existing agreement between FICC and CME provides for a ``Maximization Payment'' which is a crossguaranty provision that sets forth a mechanism for a clearing organization with a remaining surplus after all guaranty payments in relation to crossmargining have been made (``Aggregate Net Surplus'') to distribute funds to one or more crossmargining partners with remaining losses. The New FICCCME Agreement will make it clear that: (i) The Maximization Payment is also a guaranty payment (albeit outside of crossmargining, arising out of the ``Maximization Payment Guaranty'') and (ii) the defaulting member would have a reimbursement obligation with respect to such payment (``Maximization
[[Page 65755]]
Reimbursement Obligation''). This means that should a clearing organization become obligated to pay the Maximization Payment, it may rely on the defaulting member's collateral to do so.\7\
\7\ The new guaranty provisions with respect to the Maximization Payment Guaranty will be identical to the ones in the current cross margining agreement between FICC and BCC. In order to protect the clearing organizations in the event that a court determines that any amount of a Maximization Reimbursement Obligation may not be recovered by the clearing organization that made a Maximization Payment pursuant to a Maximization Payment Guaranty, a provision has been added (Section 8C(c)) to the New FICCCME Agreement to provide that the payee clearing organization will be expected to return that amount. This protective provision is also in the BCC crossmargining agreement.

A provision has been added to the New FICCCME Agreement to take into account that a regulator or other entity having supervisory authority over FICC or CME may for safety and soundness purposes direct the clearing organization not to liquidate a defaulting member or to partially liquidate such member. In order to prevent the affected clearing organization from being penalized under the agreement for failing to liquidate or partially liquidating the member in this type of situation, the last two paragraphs of section 7(d) of the New FICC CME Agreement will provide that the affected clearing organization would be deemed to have a crossmargin gain equal to the base amount of the guaranty (i.e., crossmargining reduction) or a pro rated amount of the base amount of the guaranty in a partial liquidation scenario.

A sentence has been added to section 7(h) making clear that the clearing organizations have security interests in the ``Aggregate Net Surplus,'' a large component of which would be the collateral and proceeds of positions of a defaulting member, as security for any reimbursement obligation including any maximization reimbursement obligation that may arise on the part of a defaulting member.

Language has been added to the crossmargining participant agreements in Appendices D and E in order to further protect the clearing organizations by making clear that the clearing organizations have a security interest in the Aggregate Net Surplus and that a participant will have a reimbursement obligation in the event that a clearing organization becomes obligated to make a maximization payment. Participants in the current arrangement between FICC and CME and those in the arrangement between FICC and BOTCC to the extent they are not the same are being asked to reexecute the revised participant agreements in order to make them subject to the provisions of the New FICCCME Agreement.\8\
\8\ Crossmargining is available to any FICC GSD netting member (with the exception of interdealer broker netting members) that is, or that has an affiliate that is, a member of a Participating CO. The FICC member (and its affiliate, if applicable) sign an agreement under which it (or they) agree to be bound by the crossmargining agreement between FICC and the Participating CO and which allows FICC or the Participating CO to apply the member's (or its affiliate's) margin collateral to satisfy any obligation of FICC to the Participating CO (or vice versa) that results from a default of the member (or its affiliate). Ownership of 50 percent or more of the common stock of an entity indicates control of the entity for purposes of the definition of ``affiliate.''
3. Key Proposed Changes to FICC's CrossMargining of CBOT Products

Because FICC is currently crossmargining its products with certain CBOT products pursuant to its agreement with BOTCC and because these CBOT products will be crossmargined pursuant to the proposed New FICC CME Agreement if the proposed rule change is approved by the Commission, it is important to note the key differences between the crossmargining of the CBOT products under the existing arrangement with BOTCC and under the proposed new arrangement with the CME.

The minimum margin factor under FICC's crossmargining arrangement with BOTCC is 50 percent. FICC and CME have agreed to a minimum margin factor of 25 percent to apply to the crossmargining of CBOT products versus FICC products. This is the same minimum margin factor as is used in the current crossmargining arrangement with the CME with respect to the eligible Eurodollar products and is the same minimum margin factor used in the arrangement with BCC.

The New FICCCME Agreement provides for interoffset class cross margining whereas the BOTCC arrangement is limited to intraoffset class crossmargining. The new agreement is consistent with the approach in the existing arrangements between FICC and both CME and BCC.

The current agreement between FICC and CME provides that in order to determine the gain or loss from the liquidation of the positions that were crossmargined resulting from a default of a member, only the proceeds from the side of the market that was offset pursuant to the agreement at the last margin cycle are considered. In the New FICCCME Agreement, this approach will be extended to the CBOT products in order to provide consistency in the liquidation methods.
4. Amendments 1, 2, and 3 to the FICCBCC crossmargining agreement

FICC is proposing to amend its crossmargining agreement with BCC \9\ with Amendment 3 to the agreement. Amendment 3 will (i) add FICC's GCF Repo Treasury and nonmortgagebacked Agency products to the arrangement, (ii) add FICC's nonmortgagebacked Agency offset classes e and f, and (iii) amend the contingency procedures between the clearing organizations (contained in Appendix I of the agreement) to provide that FICC will not wait past 12 a.m. Eastern time for the BCC crossmargining file in order to run its crossmargining system. With respect to (ii), FICC has determined that even though BCC does not currently clear nonmortgagebacked Agency futures, the parties can still crossmargin FICC's Agency products against BCC's Treasury products given that the agreement provides for interoffset class crossmargining using the appropriate correlation factors. With respect to (iii), the operational procedures provide that FICC will wait until 3 a.m. Eastern time for the BCC file which is the same cutoff time for all of its other crossmargining partners. However, FICC has determined that the 3 a.m. Eastern time cutoff, which is significantly later than the GSD's normal crossmargining processing time, should only be used for extreme situations where not including a particular file would be disruptive to members. Currently, this would not be anticipated to be the case for a BCC file because of BCC's files relatively low historical impact.\10\ Therefore, FICC has determined that it would be more prudent from a risk management perspective to adopt a cutoff time of 12 a.m. Eastern time for receipt of BCC files.
\9\ Securities Exchange Act Release No. 45656 (March 27, 2002), 67 FR 15646 (April 2, 2002) [File No. SRGSCC200201].
\10\ The operational and contingency procedures contained in the FICCBCC agreement provide that in the event FICC does not receive BCC's file by the cutoff time, FICC will calculate the applicable crossmargining reductions assuming that BCC submitted a file with no positions available for crossmargining which may result in margin calls for the affected participants by both FICC and BCC. These margin calls would not be disruptive to members because the crossmargining reductions in the program with the BCC are not anticipated to be large amounts.

As part of this proposed rule change filing, FICC would like to include Amendments 1 and 2 that were previously made with respect to its existing crossmargining agreement with BCC. The purpose of Amendment 1 was to update the list of products being crossmargined. The purposes of Amendment 2 were to remove
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references to the crossmargining agreement with NYCC from Appendix A in which the parties are required to list other outstanding cross margining arrangements and to update the notice provision.
5. Amendments 1 and 2 to the FICCBOTCC CrossMargining Agreement

As in the case of the BCC agreement, FICC would like to include as part of this proposed rule change filing Amendments 1 and 2 that were previously made with respect to its existing crossmargining arrangement with BOTCC. \11\ The purposes of Amendment 1 were to update the list of products being crossmargined, add an appendix setting forth operational contingency procedures, clarify procedures to be used if one clearing organization discovers a calculation error, correct cited Bankruptcy Code language, correct language in one of the participant agreements, and refine the timing of the effectiveness of changes to the crossmargining reduction. The purpose of Amendment 2 was to remove references to the crossmargining agreement with NYCC from Appendix A.
\11\ FICC currently has a crossmargining agreement in place with BOTCC through which certain CBOT products are crossmargined with certain FICC products. Securities Exchange Act Release No. 45335 (January 25, 2002), 67 FR 4768 (January 31, 2001) [File No. SRGSCC200103]. BOTCC recently announced that it will become the clearing corporation for Eurex. In the next few weeks, FICC will determine the status of its crossmargining arrangement with BOTCC and will submit a proposed rule change filing addressing changes to the existing agreement, if necessary.
6. Removal of NYCC CrossMargining Agreement From the GSD's Rules

FICC is proposing to remove its crossmargining agreement with NYCC \12\ from the GSD's rules. That arrangement has been dormant for some time and the parties have agreed that should they determine to reinstitute crossmargining, they will enter into a new crossmargining agreement that will be similar to FICC's other crossmargining agreements. At that time, FICC would file the appropriate proposed rule change with the Commission.
\12\ Securities Exchange Act Release No. 41766 (August 19, 1999), 64 FR 46737 (August 26, 1999) [File No. SRGSCC9804].

FICC believes that the proposed rule change is consistent with the requirements of section 17A of the Act \13\ and the rules and regulations thereunder applicable to FICC because it will facilitate the safeguarding of securities and funds which are in its custody or control or for which it is responsible and in general will protect investors and the public interest by continuing FICC's crossmargining program which provides members with significant benefits, such as greater liquidity and more efficient use of collateral in a prudent manner, and enhances FICC's overall risk management process. \13\ 15 U.S.C. 78q1.
(B) SelfRegulatory Organization's Statement on Burden on Competition

FICC does not believe that the proposed rule change will have any impact, or impose any burden, on competition.
(C) SelfRegulatory Organization's Statement on Comments on the Proposed Rule Change Received from Members, Participants or Others

Written comments relating to the proposed rule change have not yet been solicited or received. FICC will notify the Commission of any written comments received by FICC.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

Within thirtyfive days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to ninety days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the selfregulatory organization consents, the Commission will:
(A) By order approve such proposed rule change or;
(B) institute proceedings to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 205490609. Comments may also be submitted electronically at the following email address: rulecomments@sec.gov. All comment letters should refer to File No. SRFICC200310. This file number should be included on the subject line if email is used. To help us process and review comments more efficiently, comments should be sent in hardcopy or by email but not by both methods.

Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of FICC and at http://www.ficc.com .

All submissions should refer to File No. SRFICC200310 and should be submitted by December 12, 2003.

For the Commission by the Division of Market Regulation, pursuant to delegated authority.\14\
\14\ 17 CFR 200.303(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 0329085 Filed 112003; 8:45 am]
BILLING CODE 801001P

SUMMARY: Fixed Income Clearing Corp.,

DOCUMENT BODY 2: November 17, 2003.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ notice is hereby given that on October 6, 2003, the Fixed Income Clearing Corporation (``FICC'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change described in Items I, II, and III below, which items have been prepared primarily by FICC. The Commission is publishing this notice to
[[Page 65754]]
solicit comments on the proposed rule change from interested parties. \1\ 15 U.S.C. 78s(b)(1).
I. SelfRegulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

FICC is seeking to amend its crossmargining agreements with the Chicago Mercantile Exchange (``CME''), BrokerTec Clearing Company (``BCC''), and the Board of Trade Clearing Corporation (``BOTCC'') and to eliminate its crossmargining agreement with the New York Clearing Corporation (``NYCC'').
II. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, FICC 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. FICC has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of these statements.\2\
\2\ The Commission has modified the text of the summaries prepared by FICC.
(A) SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

1. New CrossMargining Agreement With CME

Through its Government Securities Division (``GSD''), FICC has a crossmargining arrangement with CME.\3\ FICC is proposing to terminate its existing crossmargining agreement with CME and to enter into a new crossmargining agreement with the CME (``New FICCCME Agreement'') to reflect the fact that, as of January 2, 2004, the CME will begin clearing certain Treasury and Agency futures contracts and options on futures contracts that are traded on the Chicago Board of Trade (``CBOT'') and are currently cleared by BOTCC. Under the New FICCCME Agreement, the FICC products that will be eligible for crossmargining will be Treasury securities that fall into the GSD's offset classes A through G and GCF Repo Treasury securities with equivalent remaining maturities and nonmortgagebacked Agency securities that fall into the GSD's offset classes e and f and GCF Repo nonmortgagebacked Agency securities with equivalent remaining maturities. The CME products that will be eligible for crossmargining will be of two types: (i) the products currently eligible under the existing arrangement between FICC and CME which are Eurodollar futures contracts with ranges in maturity from 3 months to 10 years and options on such future contracts cleared by CME and (ii) the CBOT products which are TwoYear Treasury Note Futures contracts and options thereon, FiveYear Treasury Note Futures contracts and options thereon, TenYear Treasury Note Futures contracts and options thereon, ThirtyYear Treasury Bond Futures contracts and options thereon, FiveYear Agency Note Futures contracts and options thereon, and TenYear Agency Note Futures contracts and options thereon to be cleared by CME.
\3\ Securities Exchange Act Release No. 44301 (May 11, 2001), 66 FR 28207 (May 22, 2001) [File No. SRGSCC0013].

No significant changes are being proposed to the existing FICCCME crossmargining arrangement other than the addition of the CBOT products and certain FICC products as discussed in more detail below. The key aspects of the crossmargining arrangement, most notably, the calculation of the crossmargining reduction and the loss sharing provisions in the event of a participant default are not being amended. 2. Key Proposed Changes to the Existing CrossMargining Agreement Between FICC and CME

The addition of the CBOT products has necessitated new definitions for ``CBOT Eligible Products,'' ``CME Eligible Products,'' and ``FICC Eligible Products,'' as well as Offset Class tables for these products in Appendix B of the agreement.

Appendix B of the FICCCME Agreement is also being amended to include FICC's GCF Repo Treasury and nonmortgagebacked Agency products in the crossmargining arrangement.\4\ By the effective date of the New FICCCME Agreement, FICC will be margining its GCF Repo Treasury and nonmortgagebacked Agency products based upon the specific underlying collateral, as opposed to the current system of margining these products based upon the longest maturity of eligible underlying collateral.\5\ Therefore, these GCF Repo products can now be included in the crossmargining arrangement because they will no longer be margined at a generic rate but rather at a specific rate based on the actual underlying Treasury and Agency collateral.
\4\ This amendment is also being proposed with respect to the GCF Repo Treasury products and the BCC crossmargining arrangement as discussed below.
\5\ Because of a previous inability to obtain timely data on the actual instruments posted in support of GCF Repo positions, the GSD has calculated affected members' Clearing Fund requirements based upon the assumption that collateral providers have assigned to each generic CUSIP the most volatile (i.e., the longest maturity) collateral eligible. The GSD has been in the process of developing improvements to the current margining methodology. By the effective date of the proposed rule change, the GSD will be able to identify the specific CUSIP posted in calculating a member's Clearing Fund requirement related to its Treasury and Agency GCF Repo activity.

As is the case with the current agreement between FICC and CME, the parties provide in the New FICCCME Agreement that they will agree from time to time in a separate writing on the disallowance factors that will be used in the crossmargining arrangement. The disallowance factors that will be used upon implementation of the new arrangement are the ones set forth as examples in Appendix B to the New FICCCME Agreement. The disallowance factors between FICC eligible products and CME eligible products (i.e., Eurodollar products) have not changed. A new disallowance factor table has been added for crossmargining of FICC eligible Treasury and Agency products with CBOT Treasury and Agency eligible products.\6\
\6\ FICC has computed and tested disallowance factors that will be applicable to each potential pair of positions being offset.

Appendix C of the current agreement which sets forth the methodology for converting CME eligible products into Treasury cash equivalents for purposes of ultimately calculating the crossmargining reduction has been made into Appendix C1 and a new Appendix C2 has been added which contains the methodology for converting the CBOT eligible products into Treasury cash equivalents. This is identical to the methodology contained in the BOTCC and BCC crossmargining agreements.

The existing agreement between FICC and CME provides for a ``Maximization Payment'' which is a crossguaranty provision that sets forth a mechanism for a clearing organization with a remaining surplus after all guaranty payments in relation to crossmargining have been made (``Aggregate Net Surplus'') to distribute funds to one or more crossmargining partners with remaining losses. The New FICCCME Agreement will make it clear that: (i) The Maximization Payment is also a guaranty payment (albeit outside of crossmargining, arising out of the ``Maximization Payment Guaranty'') and (ii) the defaulting member would have a reimbursement obligation with respect to such payment (``Maximization
[[Page 65755]]
Reimbursement Obligation''). This means that should a clearing organization become obligated to pay the Maximization Payment, it may rely on the defaulting member's collateral to do so.\7\
\7\ The new guaranty provisions with respect to the Maximization Payment Guaranty will be identical to the ones in the current cross margining agreement between FICC and BCC. In order to protect the clearing organizations in the event that a court determines that any amount of a Maximization Reimbursement Obligation may not be recovered by the clearing organization that made a Maximization Payment pursuant to a Maximization Payment Guaranty, a provision has been added (Section 8C(c)) to the New FICCCME Agreement to provide that the payee clearing organization will be expected to return that amount. This protective provision is also in the BCC crossmargining agreement.

A provision has been added to the New FICCCME Agreement to take into account that a regulator or other entity having supervisory authority over FICC or CME may for safety and soundness purposes direct the clearing organization not to liquidate a defaulting member or to partially liquidate such member. In order to prevent the affected clearing organization from being penalized under the agreement for failing to liquidate or partially liquidating the member in this type of situation, the last two paragraphs of section 7(d) of the New FICC CME Agreement will provide that the affected clearing organization would be deemed to have a crossmargin gain equal to the base amount of the guaranty (i.e., crossmargining reduction) or a pro rated amount of the base amount of the guaranty in a partial liquidation scenario.

A sentence has been added to section 7(h) making clear that the clearing organizations have security interests in the ``Aggregate Net Surplus,'' a large component of which would be the collateral and proceeds of positions of a defaulting member, as security for any reimbursement obligation including any maximization reimbursement obligation that may arise on the part of a defaulting member.

Language has been added to the crossmargining participant agreements in Appendices D and E in order to further protect the clearing organizations by making clear that the clearing organizations have a security interest in the Aggregate Net Surplus and that a participant will have a reimbursement obligation in the event that a clearing organization becomes obligated to make a maximization payment. Participants in the current arrangement between FICC and CME and those in the arrangement between FICC and BOTCC to the extent they are not the same are being asked to reexecute the revised participant agreements in order to make them subject to the provisions of the New FICCCME Agreement.\8\
\8\ Crossmargining is available to any FICC GSD netting member (with the exception of interdealer broker netting members) that is, or that has an affiliate that is, a member of a Participating CO. The FICC member (and its affiliate, if applicable) sign an agreement under which it (or they) agree to be bound by the crossmargining agreement between FICC and the Participating CO and which allows FICC or the Participating CO to apply the member's (or its affiliate's) margin collateral to satisfy any obligation of FICC to the Participating CO (or vice versa) that results from a default of the member (or its affiliate). Ownership of 50 percent or more of the common stock of an entity indicates control of the entity for purposes of the definition of ``affiliate.''
3. Key Proposed Changes to FICC's CrossMargining of CBOT Products

Because FICC is currently crossmargining its products with certain CBOT products pursuant to its agreement with BOTCC and because these CBOT products will be crossmargined pursuant to the proposed New FICC CME Agreement if the proposed rule change is approved by the Commission, it is important to note the key differences between the crossmargining of the CBOT products under the existing arrangement with BOTCC and under the proposed new arrangement with the CME.

The minimum margin factor under FICC's crossmargining arrangement with BOTCC is 50 percent. FICC and CME have agreed to a minimum margin factor of 25 percent to apply to the crossmargining of CBOT products versus FICC products. This is the same minimum margin factor as is used in the current crossmargining arrangement with the CME with respect to the eligible Eurodollar products and is the same minimum margin factor used in the arrangement with BCC.

The New FICCCME Agreement provides for interoffset class cross margining whereas the BOTCC arrangement is limited to intraoffset class crossmargining. The new agreement is consistent with the approach in the existing arrangements between FICC and both CME and BCC.

The current agreement between FICC and CME provides that in order to determine the gain or loss from the liquidation of the positions that were crossmargined resulting from a default of a member, only the proceeds from the side of the market that was offset pursuant to the agreement at the last margin cycle are considered. In the New FICCCME Agreement, this approach will be extended to the CBOT products in order to provide consistency in the liquidation methods.
4. Amendments 1, 2, and 3 to the FICCBCC crossmargining agreement

FICC is proposing to amend its crossmargining agreement with BCC \9\ with Amendment 3 to the agreement. Amendment 3 will (i) add FICC's GCF Repo Treasury and nonmortgagebacked Agency products to the arrangement, (ii) add FICC's nonmortgagebacked Agency offset classes e and f, and (iii) amend the contingency procedures between the clearing organizations (contained in Appendix I of the agreement) to provide that FICC will not wait past 12 a.m. Eastern time for the BCC crossmargining file in order to run its crossmargining system. With respect to (ii), FICC has determined that even though BCC does not currently clear nonmortgagebacked Agency futures, the parties can still crossmargin FICC's Agency products against BCC's Treasury products given that the agreement provides for interoffset class crossmargining using the appropriate correlation factors. With respect to (iii), the operational procedures provide that FICC will wait until 3 a.m. Eastern time for the BCC file which is the same cutoff time for all of its other crossmargining partners. However, FICC has determined that the 3 a.m. Eastern time cutoff, which is significantly later than the GSD's normal crossmargining processing time, should only be used for extreme situations where not including a particular file would be disruptive to members. Currently, this would not be anticipated to be the case for a BCC file because of BCC's files relatively low historical impact.\10\ Therefore, FICC has determined that it would be more prudent from a risk management perspective to adopt a cutoff time of 12 a.m. Eastern time for receipt of BCC files.
\9\ Securities Exchange Act Release No. 45656 (March 27, 2002), 67 FR 15646 (April 2, 2002) [File No. SRGSCC200201].
\10\ The operational and contingency procedures contained in the FICCBCC agreement provide that in the event FICC does not receive BCC's file by the cutoff time, FICC will calculate the applicable crossmargining reductions assuming that BCC submitted a file with no positions available for crossmargining which may result in margin calls for the affected participants by both FICC and BCC. These margin calls would not be disruptive to members because the crossmargining reductions in the program with the BCC are not anticipated to be large amounts.

As part of this proposed rule change filing, FICC would like to include Amendments 1 and 2 that were previously made with respect to its existing crossmargining agreement with BCC. The purpose of Amendment 1 was to update the list of products being crossmargined. The purposes of Amendment 2 were to remove
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references to the crossmargining agreement with NYCC from Appendix A in which the parties are required to list other outstanding cross margining arrangements and to update the notice provision.
5. Amendments 1 and 2 to the FICCBOTCC CrossMargining Agreement

As in the case of the BCC agreement, FICC would like to include as part of this proposed rule change filing Amendments 1 and 2 that were previously made with respect to its existing crossmargining arrangement with BOTCC. \11\ The purposes of Amendment 1 were to update the list of products being crossmargined, add an appendix setting forth operational contingency procedures, clarify procedures to be used if one clearing organization discovers a calculation error, correct cited Bankruptcy Code language, correct language in one of the participant agreements, and refine the timing of the effectiveness of changes to the crossmargining reduction. The purpose of Amendment 2 was to remove references to the crossmargining agreement with NYCC from Appendix A.
\11\ FICC currently has a crossmargining agreement in place with BOTCC through which certain CBOT products are crossmargined with certain FICC products. Securities Exchange Act Release No. 45335 (January 25, 2002), 67 FR 4768 (January 31, 2001) [File No. SRGSCC200103]. BOTCC recently announced that it will become the clearing corporation for Eurex. In the next few weeks, FICC will determine the status of its crossmargining arrangement with BOTCC and will submit a proposed rule change filing addressing changes to the existing agreement, if necessary.
6. Removal of NYCC CrossMargining Agreement From the GSD's Rules

FICC is proposing to remove its crossmargining agreement with NYCC \12\ from the GSD's rules. That arrangement has been dormant for some time and the parties have agreed that should they determine to reinstitute crossmargining, they will enter into a new crossmargining agreement that will be similar to FICC's other crossmargining agreements. At that time, FICC would file the appropriate proposed rule change with the Commission.
\12\ Securities Exchange Act Release No. 41766 (August 19, 1999), 64 FR 46737 (August 26, 1999) [File No. SRGSCC9804].

FICC believes that the proposed rule change is consistent with the requirements of section 17A of the Act \13\ and the rules and regulations thereunder applicable to FICC because it will facilitate the safeguarding of securities and funds which are in its custody or control or for which it is responsible and in general will protect investors and the public interest by continuing FICC's crossmargining program which provides members with significant benefits, such as greater liquidity and more efficient use of collateral in a prudent manner, and enhances FICC's overall risk management process. \13\ 15 U.S.C. 78q1.
(B) SelfRegulatory Organization's Statement on Burden on Competition

FICC does not believe that the proposed rule change will have any impact, or impose any burden, on competition.
(C) SelfRegulatory Organization's Statement on Comments on the Proposed Rule Change Received from Members, Participants or Others

Written comments relating to the proposed rule change have not yet been solicited or received. FICC will notify the Commission of any written comments received by FICC.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

Within thirtyfive days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to ninety days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the selfregulatory organization consents, the Commission will:
(A) By order approve such proposed rule change or;
(B) institute proceedings to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 205490609. Comments may also be submitted electronically at the following email address: rulecomments@sec.gov. All comment letters should refer to File No. SRFICC200310. This file number should be included on the subject line if email is used. To help us process and review comments more efficiently, comments should be sent in hardcopy or by email but not by both methods.

Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of FICC and at http://www.ficc.com .

All submissions should refer to File No. SRFICC200310 and should be submitted by December 12, 2003.

For the Commission by the Division of Market Regulation, pursuant to delegated authority.\14\
\14\ 17 CFR 200.303(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 0329085 Filed 112003; 8:45 am]
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