[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