[Federal Register Volume 59, Number 12 (Wednesday, January 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1168]


[[Page Unknown]]

[Federal Register: January 19, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33446; File No. SR-MBS-92-03]

 

Self-Regulatory Organizations; MBS Clearing Corporation; Order 
Granting Approval of Proposed Rule Change Regarding Revised Securities 
Reports and Revised Letter of Credit Issuer Standards

January 7, 1994.
    On July 30, 1992, the MBS Clearing Corporation (``MBS'') filed a 
proposed rule change (File No. SR-MBS-92-03) with the Securities and 
Exchange Commission (``Commission'') pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'').\1\ Notice of the 
proposal was published in the Federal Register on November 27, 1992.\2\ 
No comments were received by the Commission. This order approves the 
proposal.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\Securities Exchange Act Release No. 31419 (November 19, 
1992), 57 FR 56396.
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I. Description of the Proposal

    The proposal amends the MBS Rules at Article IV (Participants 
Fund), Rule 2 (Daily Market Margin Differential Deposits to 
Participants Fund), Sections 6 (Forms of Deposits) and 7 (Special 
Provisions Relating to Deposits of Cash). The proposed rule change also 
clarifies MBS's existing rules regarding acceptable deposits of debt 
securities and letters of credit to MBS's Participants Fund (``Fund'').

1. MBS Rules, Article IV, Rule 2, Section 6

    Currently, MBS Rules, Article IV, Rule 2, Section 6 require that 
deposits of debt securities to the Fund be valued at the lesser of 
their par value or 100% of their current market value. MBS asserts 
that, in accordance with good financial practices, it should value 
Treasury securities for purposes of the Fund only on a Current Market 
Value basis. MBS also states that the proposal will help clarify 
valuation of securities deposits. Moreover, it is MBS' practice not to 
accept deposits of Treasury securities that are within six months of 
their callable period in order to avoid any risk of loss due to a 
callable bond trading at a premium being called at par.

2. MBS Rules, Article IV, Rule 2, Section 7(b)

    Currently, MBS Rules, Article IV, Rule 2, Section 7(b), provided 
that MBS is not required to accept a letter of credit as a deposit if, 
as a result of such acceptance, more than 25% of all Market Margin 
Differential Deposits to the Fund (including deposits other than 
letters of credit) would consist of letters of credit by one bank or 
trust company. The intent of this existing rule, and MBS's current 
policy is: (1) To reject such letters of credit if acceptance would 
result in more than 25% of all Market Margin Differential Deposits\3\ 
to the Fund (including all types of deposits) being in the form of 
letters of credit from one bank or trust company, and (2) to minimize 
the risk of concentration in one bank or trust company of a substantial 
portion of letters of credit deposited as Market Margin Differential. 
The proposed rule change clarifies the intent of the existing rule and 
reflects MBS's current policy.
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    \3\The term ``Market Margin Differential Deposit'' means the 
amount a Participant is required to deposit to MBS's Participants 
Fund under Article IV, Rule 2 of MBS's Rules.
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II. Discussion

    The Commission believes that this proposal is consistent with the 
Act, particularly Section 17A of the Act.\4\ Sections 17A(b)(3) (A) and 
(F) of the Act require that a clearing agency be organized and its 
rules be designed to promote, among other things, the prompt and 
accurate clearance and settlement of securities transactions and the 
safeguarding of securities and funds within its custody or control or 
for which it is responsible.\5\
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    \4\15 U.S.C. 78q-1 (1988).
    \5\15 U.S.C. 78q-1(b)(3) (A) and (F) (1988).
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    This proposal permits Treasury securities in MBS' Participants Fund 
to be carried at 100% of their current market value, in place of the 
current practice of carrying them at the lesser of their par value or 
100% of their current market value. MBS reports that its customers have 
requested the proposed single price determinant for valuing Treasuries 
because, from the customers' perspective, it constitutes a more 
straightforward business practice and is less onerous to apply.
    In assessing the merits of this proposed change in the valuation of 
a major clearing margin asset, the Commission recognizes that allowing 
MBS to value the Treasury securities at prices above par would add some 
market and interest rate risk to MBS' valuation formula. But the 
Commission believes that the risk of this valuation change is 
manageable and acceptable inasmuch as the Treasury securities in 
question: (1) will be limited to non-callable Treasuries, meaning there 
will be no risk that a bond trading at a premium will be called at par; 
and (2) will be valued and marked-to-the-market by MBS on a daily 
basis, meaning that the maximum marketplace risk exposure will be a one 
day price move.
    The proposal also includes technical changes to MBS' practices 
concerning its Participants Fund. Among other things, the proposal 
clarifies, with no change in meaning, MBS' standards for accepting 
letters of credit for deposits into its Fund. In particular, the 
proposal clarifies a previously-approved MBS rule filing stating that 
no more than 25% of the Participants Fund may consist of letters of 
credit from any one issuer.\6\ The Commission believes, therefore, that 
this portion of the proposal is not making any significant changes to 
existing rules. The Commission believes that the 25% limitation is a 
prudent measure to safeguard against exposure to any one financial 
institution.
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    \6\Securities Exchange Act Release No. 30278 (January 22, 1992), 
57 FR 3660 [File No. SR-MBS-90-08] (order approving proposed rule 
change).
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III. Conclusion

    For the reasons set forth above, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular the requirements of Section 17A of the Act.\7\
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    \7\15 U.S.C. 78q-1 (1988).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\8\ that the above-mentioned proposed rule change (File No. SR-MBS-
92-03) be, and hereby is, approved.

    \8\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-1168 Filed 1-18-94; 8:45 am]
BILLING CODE 8010-01-M