[Federal Register Volume 64, Number 204 (Friday, October 22, 1999)]
[Notices]
[Pages 57170-57171]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27602]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42005; File No. SR-MBSCC-99-06]
Self-Regulatory Organizations; MBS Clearing Corporation; Notice
of Filing of a Proposed Rule Change Relating to Market Margin
Differential Deposits
October 13, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on July 14, 1999, the MBS
Clearing Corporation (``MBSCC'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change (File No. SR-MBCC-
99-06) as described in Items I, II, and III below, which items have
been prepared primarily by MBSCC. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The proposed rule change amends the formula MBSCC uses to calculate
market margin differential deposits.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, MBSCC 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. MBSCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\2\
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\2\ The Commission has modified the text of the summaries
prepared by MBSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The purpose of the proposed rule change is to amend the formula
MBSCC uses to calculate market margin differential deposits to the
participants fund.\3\ Specifically, the proposed rule change adds net
position and net-out position components to the market margin
differential deposit formula.
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\3\ MBSCC requires participants to maintain collateral in the
form of deposits to the participants fund. Each participant's
participants fund is comprised of a basic deposit, a minimum market
margin differential deposit, and a market margin differential
deposit. The basic deposit is equal to a minimum of $1,000 and a
maximum of $10,000 with the actual amount determined based on the
average six months billing for the participant. The minimum market
margin differential deposit is equal to $250,000. The market margin
differential deposit is based on the formula set forth in Article
IV, Rule 2, Section 4 of MBSCC's rules and is the subject of this
rule filing.
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Article IV, Rule 2, Section 4 of MBSCC's rules sets forth the
formula used to calculate a participant's daily market margin
differential deposit to the participants fund. This formula currently
requires a participant to make a daily market margin differential
deposit to the participants fund equal to the sum of: (a) 130% (or such
other percentage of MBSCC from time to time may determine) of adjusted
net losses, plus (b) 100% (or such other percentage as MBSCC from time
to time may determine) of certain projected cash settlement obligations
owed to MBSCC, minus (c) the amount of any market margin differential
deposits previously made by the participant to and remaining in the
participants fund.
The proposed rule change replaces the 130% of adjusted net losses
component as contained in subsection (a) of the formula with 130% (or
such other percentage of MBSCC from time to time may determine) of the
greater of: (i) adjusted net losses or (ii) 25 basic points
[[Page 57171]]
(or such other number of basic points as MBSCC from time to time may
determine) of net position and 25 basic points (or such other number of
basic points as MBSCC from time to time may determine) of the largest
outstanding net-out position minus excess profits from forward
transactions.
The proposed rule change establishes a baseline margin requirement
for net position and net-out position risk as illustrated by the
following two examples. The first circumstance arises where a
participant is not subject to a margin call on a particular day because
it does not have adjusted net losses. The 130% multiplier, which is
designed to address market volatility, is not effective if the
participant does not have adjusted net losses. The net position
component, therefore, should address the circumstance where a
participant does not have adjusted net losses but has a large net
position and there is market volatility between margin calls.
The second circumstance relates to the fact that losses of non-
original contra-sides in excess of an insolvent participant's
participant fund are prorated to and assessments are made against the
insolvent participant's original contra-sides. MBSCC's netting system
pairs-off and nets-out buy and sell trades with original and non-
original contra-sides. Netting substantially reduces the number of
trades requiring clearance. Although netting eliminates the need to
clear net-out trades, it does not eliminate the potential liability for
pro-rata assessments against original contra-sides. The participants
fund, however, currently does not include a margin component for
potential pro-rata assessments against original contra-sides. The net-
out component, therefore, should address the circumstance where an
original contra-side nets-out of transactions and otherwise does not
have sufficient deposits to the participants fund to satisfy potential
pro-rata assessments.
The new requirement is initially set at 25 basis points of net
position and 25 basis points of largest outstanding net-out position.
MBSCC has determined that 25 basis points and crediting excess profits
from forward transactions is currently appropriate based on an
assessment of participants' participants fund deposits.
The proposed rule change also modifies Article I, Rule 1 of MBSCC's
rules to add definitions of the terms ``Excess Profits from Forward
Transactions'' and ``Net Position.''
MBSCC believes that the proposed rule change is consistent with the
requirements of the Section 17A(b)(3)(F) of the Act and the rules and
regulations thereunder because the proposal should help MBSCC assure
the safeguarding of securities and funds which are in the custody or
control of MBSCC or for which it is responsible.
(B) Self-Regulatory Organization's Statement on Burden on Competition
MBSCC does not believe that the proposed rule change will have an
impact on or impose a burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
No written comments relating to the proposed rule change have been
solicited or received. MBSCC will notify the Commission of any written
comments received by MBSCC.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within thirty-five 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 MBSCC 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 20549-0609.
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 MBSCC. All
submissions should refer to File No. SR-MBSCC-99-06 and should be
submitted by November 12, 1999.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\4\
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\4\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 99-27602 Filed 10-21-99; 8:45 am]
BILLING CODE 8010-01-M
