[Federal Register Volume 60, Number 83 (Monday, May 1, 1995)]
[Notices]
[Pages 21228-21230]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10606]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35641; File No. SR-PTC-95-03]


Self-Regulatory Organizations; Participants Trust Co.; Notice of 
Filing and Order Granting Accelerated Approval of Proposed Rule Change 
Extending Temporary Approval of Current Margin and Pricing Methodology 
for Collateralized Mortgage Obligations

April 24, 1995.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on March 28, 1995, the 
Participants Trust Company (``PTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-PTC-95-03) as described in Items I and II below, which Items have 
been prepared primarily by PTC. The Commission is publishing this 
notice and order to solicit comments from interested persons and to 
grant accelerated approval of the proposed rule change through April 
30, 1996.

    \1\15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change extends through April 30, 1996, the 
temporary approval of the current margin and pricing methodology 
utilized by PTC for collateralized mortgage obligations (``CMO'') that 
are eligible for deposit or that may become eligible for deposit at 
PTC.\2\

    \2\Securities Exchange Act Release No. 34017 (May 5, 1994), 59 
FR 24495 (File No. SR-PTC-92-16) (order approving through April 30, 
1995, PTC's CMO margin and pricing methodology).
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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, 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. Summaries of the most significant aspects of such 
statements are set forth in sections A, B, and C below.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

Margin Under PTC's Rules
    Under PTC's rules, a certain percentage (``applicable percentage'') 
of [[Page 21229]] the market value of securities is included in the 
computation of participants' Net Free Equity.\3\ Net Free Equity of 
zero or greater is required to be maintained by participants in each of 
its agency, pledgee transfer, or proprietary accounts in order for 
transactions to be processed.\4\ 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 the 
participant's debit balance is not satisfied at the end of the day.

    \3\As set forth in PTC Rules, Article II, Rule 9, Net Free 
Equity is calculated as the sum of (a) the cash balance in the 
account; (b) the market value of securities in the account less the 
applicable percentage; (c) the value of the optional deposits to the 
Participants Fund which are allocated to that account (optional 
deposits to the Participants Fund are deposits that exceed the 
minimum deposit required pursuant to PTC's rules and procedures); 
and (d) 20% of the mandatory deposits to the Participants Fund for 
the master account (mandatory deposits to the Participants Fund are 
minimum deposits required to be deposited into such fund pursuant to 
PTC's rules and procedures) minus (e) ``reserve on gain.'' Reserve 
on gain means (1) the contract value credited to the cash balance of 
a delivering participant or limited purpose participant over the 
market value of securities credited to the transfer account 
associated with the account of the receiving participant or (2) the 
market value of securities credited to the transfer account 
associated with the account of a receiving participant over the 
contract value credited to the cash balance of the delivering 
participant or limited purpose participant.
    \4\PTC Rules, Article II, Rule 13, ``Transfers of Securities.''
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    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 Government National 
Mortgage Association (``GNMA'') single-class securities, other than 
construction, project, and mobile home securities, margins are set at 
five percent, which is a rate that exceeds their largest historic 
consecutive two-day downward price movement. GNMA construction, 
project, and mobile home securities have a higher margin to reflect 
their reduced liquidity.\5\

    \5\Securities Exchange Act Release No. 33840 (March 31, 1994), 
59 FR 16672 (File No. PTC-93-04) (order approving proposed rule 
change).
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CMO Margins
    CMO securities that are currently eligible for deposit at PTC are 
GNMA REMICs, Department of Veterans Affairs (``VA'') REMICs, and 
certain Federal Home Loan Mortgage Corporation (``FHLMC'') REMICs. 
Unlike GNMA single-class securities, CMO securities are structured as a 
series of tranches or classes, each of which represents a separate 
security with unique characteristics, such as differing payment 
schedules and price volatility.\6\ PTC, therefore, uses a model which 
takes into account the unique characteristics of each tranche to 
predict its potential price movement. The parameters of the model 
include prepayment speeds, a yield spread, and the yield on a benchmark 
Treasury security. PTC subjects each CMO tranche to a stress test to 
determine its response to yield changes in order to assign each tranche 
an appropriate margin.

    \6\A CMO is a multiple-class mortgage cash flow security which 
redirects the cash flow from an underlying standard mortgage-backed 
security, such as a GNMA security, and allows the CMO issuer to 
create classes, or tranches, with many different interest rates, 
average lives, prepayment sensitivities, final maturities, and 
payment priorities.
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    Currently, margins are based on a fifty basis point upward movement 
in the underlying Treasury securities for CMO tranches that exhibit 
positive effective duration (i.e., rise in value with falling interest 
rates) or a fifty basis point downward movement in the underlying 
Treasury security for CMO tranches that exhibit negative effective 
duration (i.e., decline in value with falling interest rates). CMO 
tranches that are not modeled by PTC's pricing vendor are margined at 
one hundred percent and the minimum margin for any CMO tranche is five 
percent.
    PTC believes that the proposed rule change is consistent with 
section 17A(b)(3)(F) of the Act\7\ and the rules and regulations 
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.

    \7\15 U.S.C. 78q-1(b)(3)(F) (1988).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    PTC does not believe that the proposed rule change imposes 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 neither solicited nor received comments on this proposed 
rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    PTC's current margin and pricing methodology for CMO securities was 
approved by the Commission on a temporary basis through April 30, 
1995,\8\ in order to allow PTC further time in which to evaluate the 
methodology and to take steps to address any concerns which exist with 
respect to the methodology. During the temporary approval period, PTC 
has provided information to the Commission describing the steps taken 
by PTC to improve the margin and pricing methodology including 
finalizing arrangements with a second vendor for daily pricing and 
stress test analysis.\9\

    \8\Supra note 2.
    \9\Letters from Michael D. Frieband, Senior Vice President and 
Chief Financial Officer, PTC, to Jerry W. Carpenter, Assistant 
Director, Division of Market Regulation (``Division''), Commission 
(August 5, 1994, November 8, 1994, February 27, 1995, and March 23, 
1995).
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    Section 17A(b)(3)(F) of the Act\10\ requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds in the custody or control of the clearing agency or for which 
it is responsible. The Commission believes that extending temporary 
approval of the current margin and pricing methodology utilized by PTC 
for CMO securities should help assure the safeguarding of securities 
and funds in PTC's custody or control. PTC's current margin and pricing 
methodology helps ensure that CMO margins will be established that take 
into account the unique characteristics of each CMO tranche and that 
PTC's reliance on a daily pricing source will provide it with timely 
price information. The resulting margins will afford PTC protection 
should it be necessary for PTC to borrow against or liquidate these 
assets. In addition, the Commission believes that extending the 
temporary approval will permit PTC to make technical enhancements to 
its system that will enable it to use and compare data from two sources 
and also enable PTC to further evaluate the results of the CMO pricing 
and margin methodology as so enhanced.

    \10\15 U.S.C. 78q-1(b)(3)(F) (1988).
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    PTC has requested that the Commission find good cause for approving 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of the filing. In order to allow PTC to continue 
employing its current margin and pricing methodology without disruption 
of service, it is necessary for the Commission to approve the proposed 
rule change prior to the expiration of the current temporary approval 
of the methodology on April 30, 1995. The Commission, therefore, finds 
sufficient cause to accelerate approval of this proposal. In addition, 
the staff of the Board of Governors of the Federal Reserve System 
(``Board of Governors'') [[Page 21230]] has concurred with the 
Commission's granting of accelerated approval.\11\

    \11\Telephone conversation between William R. Stanley, Board of 
Governors, and Ari Burstein, Division, Commission (April 11, 1995).
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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-95-03 and should be submitted by May 
22, 1995.
    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-PTC-95-03) be and hereby is 
approved on an accelerated basis through April 30, 1996.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\

    \12\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-10606 Filed 4-28-95; 8:45 am]
BILLING CODE 8010-01-M