[Federal Register Volume 63, Number 31 (Tuesday, February 17, 1998)]
[Notices]
[Pages 7844-7846]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-3854]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39633; File No. SR-MBSCC-97-10]


Self-Regulatory Organizations; MBS Clearing Corporation; Notice 
of Filing of a Proposed Rule Change Relating to Modifications to 
MBSCC's Liquidation Rules

February 9, 1998.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 13, 1997, the MBS 
Clearing Corporation (``MBSCC'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change (File No. SR-
MBSCC-97-10) as described in Items I, II, and III below, which items 
have been prepared primarily by MBSCC. MBSCC amended the proposed rule 
change on January 30, 1998.\2\ 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).
    \2\ Letter from Anthony H. Davidson, Vice President and 
Associate General Counsel, MBSCC (January 30, 1998).
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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 modify MBSCC's rules 
on liquidation of open trades.

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

    In its filing with the Commission, MBSCC 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. MBSCC has prepared summaries, set forth in sections (A),

[[Page 7845]]

(B),and (C) below, of the most significant aspects of such 
statements.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by MBSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The proposed rule change will modify MBSCC's rules governing the 
liquidation of open trades when MBSCC ceases to act for a participant. 
The modifications will affect Section 5 of Rule 3 of Article III of 
MBSCC's rules, which governs the disposition of a former participant's 
open commitments.
    MBSCC's open commitment report is a daily report that show a 
participant's open compared trades and is used to identify a former 
participant's open commitments in a liquidation situation. MBSCC's 
rules will provide that participants authorize MBSCC to obtain, if 
necessary, immediate disclosure of the settlement status of any trade 
from depository institutions or clearing banks. This modification is 
intended to reduce MBSCC's reliance on independent contraside 
verification of trades reflected on the open commitment report and, 
therefore, the time required to identify a former participant's open 
trades.
    MBSCC's rules will provide that the liquidation of a former 
participant's open trades will occur on a net basis as determined by 
MBSCC and as reflected on the open commitment report. However, 
transactions will be liquidated on a net basis only if the contraside 
participants and trade terms are eligible for netting. This 
modification is expected to reduce the number of trades requiring 
liquidation and, therefore, to reduce the time to liquidate the former 
participant's open trades.
    The proposed rule change addresses the liquidation of trades with 
specified pools. MBSCC has determined that the liquidation of a former 
participants' open trades that contain specified pools could 
substantially delay the liquidation process. Pursuant to the proposed 
rule change, any open trade of the former participant that contains a 
specified pool will be disposed of as if it did not contain such 
specified pool (i.e., the trade will be disposed of based on its 
generic trade terms such as agency, product, coupon rate, and maturity) 
unless otherwise determined by MBSCC.
    The proposed rule change will modify payment of settlement balance 
order market differential (``SBOMD'') credits in a liquidation 
situation. SBOMD represents the cash difference between the contract 
price of a transaction and the settlement price as a result of SBO 
netting. MBSCC typically pays SBOMD credits to participants on 
settlement date. MBSCC's rules will provide that in a liquidation 
situation MBSCC may temporarily delay SBOMD credits due to original 
contrasides of the former participant (i.e., the participant with whom 
the former participant contracted) until the completion of the 
liquidation of the former participant's open trades. In addition, MBSCC 
will be able to apply SBOMD credits due to original contrasides of the 
former participant to offset any assessment against such original 
contraside pursuant to MBSCC's liquidation rules. This modification is 
intended to strengthen MBSCC's cash flow position during the 
extraordinary circumstances presented by a liquidation of a former 
participant's open trades.
    The proposed rule change also will clarify the status of claims 
resulting from variance in the context of a liquidation of a former 
participant's open trades. Sellers in the mortgage-backed securities 
market are typically permitted to deliver securities that vary by a 
certain percentage from the originally traded face value pursuant to 
The Bond Market Association's guidelines for mortgage-backed securities 
(i.e., a variance). MBSCC calculates a cash adjustment for its 
participants that includes variance only for trades that have gone 
through the netting process. Accordingly, the proposed rule change will 
make explicit that MBSCC will not allow claims for variance pursuant to 
The Bond Market Association's guidelines relating to a former 
participant's open trades that have not completed SBO netting or that 
have a trade-for-trade status. Claims will be allowed for cash 
adjustments relating to a former participant's open trades that have 
completed SBO netting if such claims are reasonable as determined 
solely by MBSCC. In addition, the proposed rule change will clarify 
that original contrasides will be responsible for prorated cash 
adjustments of the former participant if the amount available from the 
former participant is insufficient to cover its obligations.
    The proposed rule change will address claims for losses associated 
with unmargined trades in a liquidation situation. Currently, MBSCC 
generally gives priority to claims by contrasides which were matched 
with the former participant through MBSCC's netting process provided 
that the contraside was not the original contraside to the trade (``SBO 
contrasides'') before claims by original contrasides in the event that 
the amount available from the former participant is insufficient to 
cover its obligations. The proposed rule change will create an 
additional priority that gives claims for losses by original 
contrasides relating to unmargined trades a lesser priority than claims 
for losses by original contrasides relating to previously margined 
trades if the amount available from the former participant is 
insufficient to cover its obligations. As a result of this 
modification, MBSCC's priority structure will be (1) SBO contrasides, 
(2) original contrasides for previously margined trades,\4\ and (3) 
original contrasides for unmargined trades.
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    \4\ In this instance, original contrasides could include an 
original party to the trade which was again matched against the 
former participant through the netting process or an original 
contraside to a trade that has been margined but has not yet been 
through the netting process.
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    The proposal will add a reference to SBO destined trade in Section 
5(d)(i) of Rule 3 of Article III that was inadvertently omitted from 
such section. Such section provides that the original contract price 
will be used to determine the profit or loss arising from an SBO 
destined trade. The proposed rule change will modify MBSCC's 
liquidation rules to add the word ``and'' in the first sentence of 
Section 5 of Rule 3 of Article III, to correct cross-references in 
Sections 5(c) and 5(f) of Rule 3 of Article III, and to replace the 
reference to ``new trade'' with ``liquidated trade'' in the last 
paragraph of Section 5(f) of Rule 3 of Article III. The proposed rule 
change also will make a technical modification to MBSCC's rules to 
replace all references to the Public Securities Association with The 
Bond Market Association to reflect the recent name change of such 
organization.
    MBSCC believes that the proposed rule change is consistent with the 
requirements of Section 17A(b)(3)(F) of the Act \5\ and the rules and 
regulations thereunder because it is designed to promote the prompt and 
accurate clearance and settlement of securities transactions and to 
assure the safeguarding of securities and funds which are in the 
custody or control of MBSCC or for which it is responsible.
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    MBSCC does not believe that the proposed rule change will have an 
impact on or impose a burden on competition.

[[Page 7846]]

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    MBSCC advised participants of the proposed rule change by an 
administrative bulletin dated May 9, 1997. No written comments relating 
to the proposed rule change have been received. MBSCC will notify the 
Commission of any written comments received by MBSCC.

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 MBSCC 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 Room, 450 Fifth Street, N.W., Washington, 
D.C. 20549. Copies of such filing will also be available for inspection 
and copying at the principal office of MBSCC. All submissions should 
refer to the file number SR-MBSCC-97-10 and should be submitted by 
March 10, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-3854 Filed 2-13-98; 8:45 am]
BILLING CODE 8010-01-M