[Federal Register Volume 64, Number 156 (Friday, August 13, 1999)]
[Notices]
[Pages 44251-44252]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-21046]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41714; File No. SR-MBSCC-99-02]
Self-Regulatory Organizations; MBS Clearing Corporation; Order
Approving Proposed Rule Change Relating to MBSCC's Risk Management
Rules and Procedures
August 6, 1999.
On April 15, 1999, the MBS Clearing Corporation (``MBSCC'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change (File No. SR-MBSCC-99-02) pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'').\1\ Notice of proposal
was published in the Federal Register on June 21, 1999.\2\ No comment
letters were received. For the reasons discussed below, the Commission
is approving the rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 41516 (June 10, 1999),
64 FR 33125.
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I. Description
The rule change makes several modifications to MBSCC's risk
management rules. Specifically, the rule change: (i) Implements a net-
out report, (ii) modifies financial reporting by participants, (iii)
modifies certain special provisions applicable to nondomestic
participants, (iv) adds a provision for additional assurances, and (v)
clarifies MBSCC's role as agent in a liquidation.
The specific objectives of the rule change and the corresponding
modifications to MBSCC's rules are described below.
1. Net-Out Report
The rule change modifies Article II, Rule 4 of MBSCC's rules to add
a provision for a daily net-out report that will list all of a
participant's open net-out obligations. Article I, Rule 1 of MBSCC's
rules is also being modified to add a definition of the term ``net-out
report.''
2. Financing Reporting
The rule change modifies Article III, Rule 1, Section 10 of MBSCC's
rules to replace the general requirement for quarterly unaudited
financial statements with a requirement that a participant must file
unaudited financial statements as frequently as required by the
participant's appropriate regulator. If a participant is not regulated
or is a nondomestic participant, the participant must file monthly
unaudited financial statements.
3. Non-Domestic Participants
The rule change modifies Article III, Rule 1, Section 13 of MBSCC's
rules to codify the existing practice of requiring non-U.S.
participants to: (i) Execute and deliver to MSBCC a master agreement,
(ii) provide MBSCC with an opinion of counsel, and (iii) confirm the
master agreement and opinion of counsel as MBSCC's may require. The
master agreement and the opinion of counsel generally address the
enforceability of MBSCC's rules. Article I, Rule 1 of MBSCC'S rules is
also being modified to add definitions of the terms ``master
agreement'' and ``opinion of counsel.''
4. Additional Assurances
The rule change modifies Article III, Rule 1 of MBSCC's rules by
adding a new Section 16. The new section provides that any participant
that contemplates it no longer will be in compliance with MBSCC's rules
and procedures or will no longer be able to perform its contracts or
satisfy its obligations to MBSCC or MBSCC participants must immediately
notify MBSCC. If MBSCC has reasonable grounds to believe that a
participant no longer will be in compliance with MBSCC's rules and
procedures or no longer will be able to perform its contracts or
satisfy its obligations to MBSCC or MBSCC participants, MBSCC may
require additional information from such participant relating to its
ability to comply with the rules and procedures, perform its contracts,
and satisfy its obligations to MBSCC or MBSCC participants. MBSCC may
also increase a participant's minimum required deposits to the
participants fund if MBSCC has reasonable grounds to believe such
conditions may exist. The new section also states that it does not
restrict MBSCC from exercising its right at any time to cease to act
for the participant pursuant to MBSCC's rules.
The new section providing for additional assurances is designed to
enable MBSCC to better determine a participant's potential inability to
meet its obligations and to increase the likelihood that a
participant's collateral will be sufficient to satisfy its obligations.
5. MBSCC as Agent
The proposed rule change modifies Article III, Rule 3, Section 5(f)
to make explicit that any distribution of funds relating to a
participant for which MBSCC has ceased to act is made by MBSCC as
agent. MBSCC's role as an agent in the distribution of funds is
currently implied in MBSCC's rules
[[Page 44252]]
because MBSCC does not guarantee its participant's obligations.
II. Discussion
Section 17A(b)(3)(F) \3\ of the Act requires that the rules of a
clearing agency be designed to assure the safeguarding of funds which
are in the custody or control of the clearing agency or for which it is
responsible. The Commission finds that each of MBSCC's rule changes is
consistent with its obligations under the Act. The net-out report
should provide participants with timely information regarding their
open net-out obligations to enable them to better monitor potential
risk exposure with original contra sides. This information is important
because MBSCC's rules generally provide that if a defaulting
participant's fund contribution is insufficient to cover the losses of
the defaulting participant's non original contra sides, the deficiency
is assessed against the defaulting participant's original contra sides.
Therefore, the original contra sides remain liable for potential
assessments even if as a result of MBSCC's netting process they net-out
of transactions. This should help reduce the potential that the default
of one participant will cause other participants to default on their
obligations at MBSCC because of unexpected risk exposure.
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\3\ 15 U.S.C. 78q-1(b)(3)(F).
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Requiring participants to provide MBSCC with financial information
as frequently as required by the participant's appropriate regulator
and requiring participants to notify MBSCC in situations where the
participant contemplates that it will be unable to meet its obligations
will provide MBSCC with more timely information on the financial
condition of certain participants.
The additional master agreement, opinion of counsel, and periodic
confirmation requirements applicable to non-U.S. participants should
better enable MBSCC to evaluate and to lesson or eliminate any negative
effects that jurisdictional issues could have on MBSCC's exercise of
its rights and remedies against a non-U.S. participant.
Requiring a participant to give notice of potential problems in
meeting MBSCC's rules or in satisfying its obligations to MBSCC and
other participants and MBSCC's right to require additional assurances
and participants fund contributions as needed should better enable
MBSCC to determine participants' continuing ability to meet their
obligations and to have sufficient collateral on hand.
Because MBSCC does not guaranty its participants' transactions,
clarifying that MBSCC is acting as an agent when it ceases to act for a
participant should eliminate any potential confusion and potential
liability with respect to MBSCC's role.
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of 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-99-02) be, and hereby
is, approved.
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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-21046 Filed 8-12-99; 8:45 am]
BILLING CODE 8010-01-M
