[Federal Register Volume 63, Number 31 (Tuesday, February 17, 1998)]
[Notices]
[Pages 7844-7846]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-3854]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39633; File No. SR-MBSCC-97-10]
Self-Regulatory Organizations; MBS Clearing Corporation; Notice
of Filing of a Proposed Rule Change Relating to Modifications to
MBSCC's Liquidation Rules
February 9, 1998.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on November 13, 1997, the MBS
Clearing Corporation (``MBSCC'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change (File No. SR-
MBSCC-97-10) as described in Items I, II, and III below, which items
have been prepared primarily by MBSCC. MBSCC amended the proposed rule
change on January 30, 1998.\2\ 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).
\2\ Letter from Anthony H. Davidson, Vice President and
Associate General Counsel, MBSCC (January 30, 1998).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The purpose of the proposed rule change is to modify MBSCC's rules
on liquidation of open trades.
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),
[[Page 7845]]
(B),and (C) below, of the most significant aspects of such
statements.\3\
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\3\ 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 proposed rule change will modify MBSCC's rules governing the
liquidation of open trades when MBSCC ceases to act for a participant.
The modifications will affect Section 5 of Rule 3 of Article III of
MBSCC's rules, which governs the disposition of a former participant's
open commitments.
MBSCC's open commitment report is a daily report that show a
participant's open compared trades and is used to identify a former
participant's open commitments in a liquidation situation. MBSCC's
rules will provide that participants authorize MBSCC to obtain, if
necessary, immediate disclosure of the settlement status of any trade
from depository institutions or clearing banks. This modification is
intended to reduce MBSCC's reliance on independent contraside
verification of trades reflected on the open commitment report and,
therefore, the time required to identify a former participant's open
trades.
MBSCC's rules will provide that the liquidation of a former
participant's open trades will occur on a net basis as determined by
MBSCC and as reflected on the open commitment report. However,
transactions will be liquidated on a net basis only if the contraside
participants and trade terms are eligible for netting. This
modification is expected to reduce the number of trades requiring
liquidation and, therefore, to reduce the time to liquidate the former
participant's open trades.
The proposed rule change addresses the liquidation of trades with
specified pools. MBSCC has determined that the liquidation of a former
participants' open trades that contain specified pools could
substantially delay the liquidation process. Pursuant to the proposed
rule change, any open trade of the former participant that contains a
specified pool will be disposed of as if it did not contain such
specified pool (i.e., the trade will be disposed of based on its
generic trade terms such as agency, product, coupon rate, and maturity)
unless otherwise determined by MBSCC.
The proposed rule change will modify payment of settlement balance
order market differential (``SBOMD'') credits in a liquidation
situation. SBOMD represents the cash difference between the contract
price of a transaction and the settlement price as a result of SBO
netting. MBSCC typically pays SBOMD credits to participants on
settlement date. MBSCC's rules will provide that in a liquidation
situation MBSCC may temporarily delay SBOMD credits due to original
contrasides of the former participant (i.e., the participant with whom
the former participant contracted) until the completion of the
liquidation of the former participant's open trades. In addition, MBSCC
will be able to apply SBOMD credits due to original contrasides of the
former participant to offset any assessment against such original
contraside pursuant to MBSCC's liquidation rules. This modification is
intended to strengthen MBSCC's cash flow position during the
extraordinary circumstances presented by a liquidation of a former
participant's open trades.
The proposed rule change also will clarify the status of claims
resulting from variance in the context of a liquidation of a former
participant's open trades. Sellers in the mortgage-backed securities
market are typically permitted to deliver securities that vary by a
certain percentage from the originally traded face value pursuant to
The Bond Market Association's guidelines for mortgage-backed securities
(i.e., a variance). MBSCC calculates a cash adjustment for its
participants that includes variance only for trades that have gone
through the netting process. Accordingly, the proposed rule change will
make explicit that MBSCC will not allow claims for variance pursuant to
The Bond Market Association's guidelines relating to a former
participant's open trades that have not completed SBO netting or that
have a trade-for-trade status. Claims will be allowed for cash
adjustments relating to a former participant's open trades that have
completed SBO netting if such claims are reasonable as determined
solely by MBSCC. In addition, the proposed rule change will clarify
that original contrasides will be responsible for prorated cash
adjustments of the former participant if the amount available from the
former participant is insufficient to cover its obligations.
The proposed rule change will address claims for losses associated
with unmargined trades in a liquidation situation. Currently, MBSCC
generally gives priority to claims by contrasides which were matched
with the former participant through MBSCC's netting process provided
that the contraside was not the original contraside to the trade (``SBO
contrasides'') before claims by original contrasides in the event that
the amount available from the former participant is insufficient to
cover its obligations. The proposed rule change will create an
additional priority that gives claims for losses by original
contrasides relating to unmargined trades a lesser priority than claims
for losses by original contrasides relating to previously margined
trades if the amount available from the former participant is
insufficient to cover its obligations. As a result of this
modification, MBSCC's priority structure will be (1) SBO contrasides,
(2) original contrasides for previously margined trades,\4\ and (3)
original contrasides for unmargined trades.
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\4\ In this instance, original contrasides could include an
original party to the trade which was again matched against the
former participant through the netting process or an original
contraside to a trade that has been margined but has not yet been
through the netting process.
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The proposal will add a reference to SBO destined trade in Section
5(d)(i) of Rule 3 of Article III that was inadvertently omitted from
such section. Such section provides that the original contract price
will be used to determine the profit or loss arising from an SBO
destined trade. The proposed rule change will modify MBSCC's
liquidation rules to add the word ``and'' in the first sentence of
Section 5 of Rule 3 of Article III, to correct cross-references in
Sections 5(c) and 5(f) of Rule 3 of Article III, and to replace the
reference to ``new trade'' with ``liquidated trade'' in the last
paragraph of Section 5(f) of Rule 3 of Article III. The proposed rule
change also will make a technical modification to MBSCC's rules to
replace all references to the Public Securities Association with The
Bond Market Association to reflect the recent name change of such
organization.
MBSCC believes that the proposed rule change is consistent with the
requirements of Section 17A(b)(3)(F) of the Act \5\ and the rules and
regulations thereunder because it is designed to promote the prompt and
accurate clearance and settlement of securities transactions and to
assure the safeguarding of securities and funds which are in the
custody or control of MBSCC or for which it is responsible.
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\5\ 15 U.S.C. 78q-1(b)(3)(F).
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(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.
[[Page 7846]]
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
MBSCC advised participants of the proposed rule change by an
administrative bulletin dated May 9, 1997. No written comments relating
to the proposed rule change have been 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, N.W., Washington, D.C. 20549.
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 Room, 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of such filing will also be available for inspection
and copying at the principal office of MBSCC. All submissions should
refer to the file number SR-MBSCC-97-10 and should be submitted by
March 10, 1998.
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. 98-3854 Filed 2-13-98; 8:45 am]
BILLING CODE 8010-01-M
