[Federal Register Volume 59, Number 25 (Monday, February 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2726]
[[Page Unknown]]
[Federal Register: February 7, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33546; File No. SR-PTC-92-16]
Self-Regulatory Organizations; Filing of Proposed Rule Change by
Participants Trust Company Relating to Margin Levels for Collateralized
Mortgage Obligations
January 31, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on December 28, 1992, the
Participants Trust Company (``PTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
primarily by the self-regulatory organization. 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 purpose of the proposed rule change is to allow PTC to
establish margin levels on Collateralized Mortgage Obligations (``CMO
security'' or ``CMO'') currently eligible for deposit or which may
become eligible for deposit at PTC by formula as follows:
Each time a CMO security initially is deposited at PTC, PTC's
management will set the margin level for each tranche of that CMO
security (``CMO tranche'') at a percentage which exceeds the CMO
tranche's maximum two-day downward price volatility, based on a model
which assumes: i) A change in prepayment speeds based on a sustained
change in interest rates; and ii) the largest historic two day movement
in the yield of the underlying Treasury security.\2\ Margin on CMO
tranches which cannot be modeled by an independent pricing source will
be set at 100%.
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\2\The latter assumes:
A 35 basis point upward shift in the underlying Treasury
security for CMO securities which exhibit ``positive effective
duration'' (i.e., rise in value with falling interest rates) (letter
from Michael D. Frieband, Senior Vice President & Chief Financial
Officer, PTC, to Judith Poppalardo, Assistant Director, Division of
Market Regulation (``Division''), Commission, and James Hodgetts,
Assistant Vice President, Federal Reserve Bank of New York
(``FRBNY''), amending the original proposed use of a 25 basis point
upward shift in the underlying Treasury security); or
A 50 basis point move in the underlying Treasury
security for CMO securities which exhibit ``negative effective
duration'' (i.e., decline in value with falling interest rates).
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
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. The self-regulatory organization
has prepared summaries, set forth in sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
The proposed rule change would allow PTC to establish a method for
calculating the percentages (i.e., margin) to be deducted from the
market value of CMO securities, as distinguished from GNMA securities,
currently eligible for deposit or which may become eligible for deposit
at PTC. Currently, the only CMO securities eligible for deposit at PTC
are VA REMICs.\3\
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\3\A REMIC is a Real Estate Mortgage Investment Conduit. VA
REMICs are securities for which the full and timely payment of
principal and interest is guaranteed by the United States Department
of Veterans Affairs and backed by the full faith and credit of the
United States government.
The Commission approved VA REMICs, guaranteed by the United
States government, as eligible for deposit at PTC in Securities
Exchange Act Release Nos. 30792 (June 10, 1992), 57 FR 27495, and
31914 (February 24, 1993), 58 FR 12295.
Subsequent to its initial filing, PTC submitted additional
information concerning the method by which margin for VA REMICs will
be calculated. See letter from Leopold S. Rassnick, Vice President &
General Counsel, PTC, to Ester Saverson, Branch Chief, Division,
Commission (January 12, 1993) (containing prospectuses for VA REMIC
issues 1992-1 and 1992-2, PTC internal analysis entitled ``Margins
in Collateralized Mortgage Obligations,'' and sales literature from
Trepp Pricing Services, Inc. (``Trepp'') entitled ``CMO/REMIC
Valuation Methodology''); letters from Michael D. Frieband, Senior
Vice President & Chief Financial Officer, PTC, to Judith Poppalardo,
Assistant Director, Division, Commission, and James Hodgetts,
Assistant Vice President, Federal Reserve Bank (June 11, 1993, and
July 1, 1993) (containing data comparing actual CMO prices to Trepp
predicted prices); letter from Michael D. Frieband, dated August 17,
1993, supra note 2 (containing additional volatility information).
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PTC requires its participants to maintain Net Free Equity of zero
or greater in each of their agency, pledgee transfer, or proprietary
accounts in order for transactions to be processed. Net Free Equity
represents PTC's calculation of the amount of excess equity, available
in a participant's account, which PTC may borrow against or liquidate
in the event a participant's debit balance is not satisfied at the end
of the day. Under Article II, Rule 9 of PTC's Rules, a certain
percentage, as determined by PTC (``Applicable Percentage''), of the
market value of securities is included in the computation of Net Free
Equity. Net Free Equity is calculated as the sum of:
(a) The cash balance;
(b) The Applicable Percentage of the market value of securities
in the account;
(c) The value of the optional deposits to the Participants Fund
which are allocated to that account;
(d) 20% of the mandatory deposits to the Participants Fund for
the master account; and
(e) Reserve on gain.
The Applicable Percentage is determined by deducting certain
percentages (i.e., margin) from the market value of securities. By
including only a portion of the market value of securities in Net Free
Equity, PTC attempts to limit the risk caused by fluctuations in the
market value of these securities. For GNMA securities (other than
construction loan, project loan, and mobile home), margins are set at
5%, which is a rate that exceeds their largest historic consecutive
two-day downward price movement.
Unlike GNMA securities, CMO securities are structured as a series
of tranches or classes. Each tranche within a CMO is a separate
security with unique characteristics, such as differing payment
schedules and price volatility. In addition, historical price data, to
determine volatility, exists for GNMA securities, whereas historical
price data to determine CMO securities' volatility does not yet exist.
For CMO securities, therefore, PTC has developed a model utilizing the
yield on Treasury securities to predict the potential movement of a CMO
tranche based on the rise or fall of interest rates. Under PTC's model,
the largest two day movement for CMO tranches which exhibit positive
effective duration was a 35 basis point upward move in the underlying
Treasury securities. For CMO tranches which exhibit negative effective
duration, the largest two-day move was a 50 basis point downward move
in the underlying Treasury security. For CMO tranches which cannot be
modeled, PTC will set the margin at 100% (i.e., the Applicable
Percentage will be zero). PTC proposes to establish the margin for each
CMO tranche based on this method, rather than assigning a specific
percentage for CMO securities, because each CMO security has unique
characteristics. Without historical information, such as that available
for GNMA securities, PTC believes the use of an analytical model is the
best method to determine the expected volatility of a CMO tranche. The
margin for each CMO tranche will be set by PTC management, on the basis
of the stated analysis and formula, as the CMO tranche is deposited in
PTC.
Since the proposed rule change provides for the safeguarding of
securities and funds within PTC's custody or control or for which it is
responsible, PTC believes it is consistent with Section 17A of the Act
and the rules and regulations thereunder applicable to PTC.
B. Self-Regulatory Organization's Statement on Burden on Competition
PTC does not believe that the proposed rule change will impose any
burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
PTC has not solicited, and does not intend to solicit, comments on
this proposed rule change. PTC has not received any unsolicited
comments from participants or other interested parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 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 90 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 self-regulatory 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 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 Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of PTC. All submissions
should refer to File Number SR-PTC-92-16 and should be submitted by
February 28, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-2726 Filed 2-4-94; 8:45 am]
BILLING CODE 8010-01-M
