[Federal Register Volume 64, Number 230 (Wednesday, December 1, 1999)]
[Notices]
[Pages 67363-67364]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31166]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42173; File No. SR-MBSCC-99-06]
Self-Regulatory Organization; MBS Clearing Corporation; Order
Granting Approval of a Proposed Rule Change Relating to Market Margin
Differential Deposits
November 23, 1999.
On July 14, 1999, the MBS Clearing Corporation (``MBSCC'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change, File No. SR-MBSCC-99-06, pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ to amend the formula
MBSCC uses to calculate market margin differential deposits. Notice of
the proposal was published in the Federal Register on October 22,
1999.\2\ No comment letters were received. For the reasons discussed
below, the Commission is granting approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 42005 (October 13,
1999), 64 FR 57170.
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I. Description
The rule change amends the formula MBSCC uses to calculate market
margin differential deposits to the participants fund.\3\ Specifically,
the 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 depositions to the participants fund. Each participant's
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.
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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 as 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 rule change replaces the 130% of adjusted net losses component
as contained in subsection (a) of the formula with 130% (or such other
percentage as MBSCC from time to time may determine) of the greater of:
(i) adjusted net losses or (ii) 25 basis points (or such other number
of basis points as MBSCC from time to time may determine) of net
position and 25 basis points (or such other number of basis points as
MBSCC from time to time may determine) of the largest outstanding net-
out position minus excess profits from forward transactions.\4\
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\4\ The 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.''
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II. Discussion
Section 17(A)(b)(3)(F) \5\ of the Act requires that the rules of
the clearing agency be designed to promote the prompt and accurate
safeguarding of securities transactions. The Commission believes that
the rule change is consistent with MBSCC's obligations under the Act
because the revised market margin differential deposit formula
encompasses more circumstances where an MBSCC participant could pose
risk to MBSCC.
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\5\ 15 U.S.C. 78q-1(b)(3)(F).
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The revised formula establishes a margin requirement for net
position risk and for net-out position risk. For example, under the
previous formula a participant was not subject to a margin call on a
day it did not have adjusted net losses. Under the revised formula, the
net position component should address the circumstances where a
participant does not have adjusted net losses but has a large net
position, and there is market volatility between margin calls. (The
130% multiplier, which is designated to address market volatility, was
not effective if the participant did not have adjusted net losses.)
A second situation where the revised formula addresses risk not
covered by the previous formula 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 this
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. Under the previous
formula, the participants fund did not include a margin component for
potential pro-rata assessments against original contra-sides. Under the
revised formula, the net-out component should address the circumstances
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.
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
in particular Section 17A of the Act and the rules and regulations
thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-MBSCC-99-06) be and hereby
is approved.
[[Page 67364]]
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-31166 Filed 11-30-99; 8:45 am]
BILLING CODE 8010-01-M
