[Federal Register Volume 63, Number 154 (Tuesday, August 11, 1998)]
[Notices]
[Pages 42897-42898]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21477]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40304; File No. SR-PTC-98-03]
Self-Regulatory Organizations; Participants Trust Company; Notice
of Filing of a Proposed Rule Change Regarding PTC's Pricing and
Margining Methodology for Newly Issued Collateralized Mortgage
Obligation Securities
August 4, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on June 15, 1998, 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 PTC. The Commission is publishing this notice to solicit
comments from interested persons on the proposed rule change.
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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 will modify PTC's pricing and margining
methodology with respect to newly issued collateralized mortgage
obligation (``CMO'') securities to more accurately reflect the value of
CMOs.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, PTC 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. PTC 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 PTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In general, PTC values a participant's securities for the purpose
of assuring that sufficient collateral will be available for PTC to
borrow against or liquidate in the event the participant's debit
balance is not satisfied at end of day settlement. Securities in a
participant's account are valued by applying a margin to the assigned
market value of the securities. The purpose of margin is to limit the
risk caused by fluctuations in the market value of the securities.
CMOs that are currently on deposit at PTC are CMO securities issued
or guaranteed by the Government National Mortgage Association
(``GNMA'') and the Department of Veteran's Affairs (``VA'') and certain
issues guaranteed by the Federal Home Loan Mortgage Association
(``FHLMA'') and the Federal National Mortgage Association (``FNMA'')
that are collateralized by GNMA securities.
PTC assigns a market value to a CMO security by selecting the lower
of the two prices for the security as supplied by two nationally
recognized pricing sources. To establish a margin for a CMO, PTC
subjects each CMO tranche to a ``stress test'' to project the largest
percentage price decrease resultant of a 50 basis point upward movement
in Treasury yields and a 100 basis point downward movement in Treasury
yields.\3\
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\3\ PTC's current CMO margin and pricing methodology was
approved by the Commission on April 30, 1996. Securities Exchange
Act Release No. 37152 (April 30, 1996), 61 FR 20304 [File No. SR-
PTC-96-02].
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CMO tranches for which prices are not available from PTC's pricing
vendors are margined at 100% (i.e., are given no value in PTC's
system), and the minimum margin for any CMO tranche is 5%. Margins are
reevaluated at least quarterly and in response to certain defined
market or price shifts. PTC currently prices and margins new issue CMO
securities in the same manner in which secondary or seasoned CMO
securities are priced and margined (i.e., based upon the lower of two
prices received from PTC's two vendors and application of the standard
stress test).
In the case of newly issued CMO securities, however, the
information on the security that the vendor uses to establish its price
is generally not available to the vendor until after issuance. The
release of information after issuance does not allow the vendor
sufficient time to model and price a new
[[Page 42898]]
issue security until several days or weeks after the issuance. As a
result of PTC's pricing and margining methodology, new issue CMOs are
given a value of zero for this initial period because they are unpriced
by PTC's pricing vendors. Although PTC makes every effort to have the
underwriters provide PTC's pricing vendors with the prospectus
supplements prior to initial settlement, the information is generally
not available in sufficient time to permit the vendors to model and
price the new issue securities prior to settlement.
PTC proposes to modify its pricing and margining methodology for
newly issued CMO securities to more accurately reflect their value for
this initial period during which pricing vendors are generally unable
to provide prices. Prior to the issuance of a CMO security, PTC will
seek to obtain indicative bid side prices for each class of the issue
from the deal underwriter prior to the closing. PTC will establish
margins on new issue CMO securities (that it has priced by reference to
underwriter supplies prices) based on larger interest rate shifts, +100
or -200 basis points, than are applied to vendor priced CMO issues, +50
or -100 basis points. Interest only, principal only, and inverse
floater classes will be given no value.
Underwriter supplied values will be used for a maximum of three
weeks after the issuance. Any CMO issue not priced by both vendors at
three weeks from issuance will be given a value of zero by increasing
the margin to 100%, as is currently the case with all CMO issues, and
will continue to be the case with respect to all but new CMO issues for
this three week period.
PTC believes that the proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act \4\ and the rules and regulations
promulgated thereunder because it facilitates the prompt and accurate
clearance and settlement of securities transactions and provides for
the safeguarding of securities and funds in PTC's custody or control or
for which PTC is responsible.
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\4\ 15 U.S.C. 78q-1(b)(3)(F).
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(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 discussed the proposed methodology with its Risk Management
Committee, which is comprised of participant representatives that are
knowledgeable in this area. PTC has not solicited or received any
unsolicited written comments from participants or other interested
parties.
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 PTC 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 Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing also will be available
for inspection and copying at the principal office of PTC. All
submissions should refer to File No. SR-PTC-98-03 and should be
submitted by September 1, 1998.
For the Commission by the Division of Market Regulations,
pursuant to delegated authority.\5\
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\5\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-21477 Filed 8-10-98; 8:45 am]
BILLING CODE 8010-01-M
