[Federal Register Volume 64, Number 118 (Monday, June 21, 1999)]
[Notices]
[Pages 33125-33127]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-15599]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41516; File No. SR-MBSCC-99-02]


Self-Regulatory Organizations; MBS Clearing Corporation; Notice 
of Filing of Proposed Rule Change Relating to MBSCC's Risk Management 
Rules and Procedures

June 10, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ notice is hereby given that on April 15, 1999, MBS 
Clearing Corporation (``MBSCC'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change (File No. SR-
MBSCC-99-02) as described in Items I, II, and III below, which Items 
have been prepared primarily by MBSCC. 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).
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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 make several 
modifications to MBSCC's risk management rules. Specifically, the 
proposed rule change: (i) implements the net-out report, (ii) modifies 
financial reporting by participants, (iii) modifies certain special 
provisions applicable to nondomestic participants, (iv) requires 
additional assurances from MBSCC participants, and (v) clarifies 
MBSCC's role as agent in a liquidation.

II. Self-Regulatory Organization's Statement of the Terms of 
Substance of 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), 
(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 MBSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to make several 
modifications to MBSCC's risk management rules. Specifically, the 
proposed rule change: (i) implements the 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 proposed rule change and the 
corresponding modifications to MBSCC's rules are described below.
1. Net-Out Report
    Article III, Rule 3, Section 5 of MBSCC's rules governs when MBSCC 
ceases to act for a participant, This rule generally provides that if a 
defaulting participant's participants fund contribution is insufficient 
to cover losses of the defaulting participant's nonoriginal contra 
sides, the deficiency

[[Page 33126]]

is assessed against the defaulting participant's original contra sides. 
Original contra sides remain liable for potential assessments even if 
as a result of MBSCC's netting process they net-out of transactions. 
MBSCC, however, does not currently provide participants with 
information regarding their open net-out obligations.
    The proposed 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.'' The net-out report is intended to provide 
participants with timely information regarding their open net-out 
obligations to enable them to better monitor potential risk exposure 
with original contra sides.
2. Financial Reporting
    Article III, Rule 1, Section 10 of MBSCC's rules sets forth the 
financial reporting requirements for participants. This rule generally 
requires participants to provide MBSCC with annual audited and 
quarterly unaudited financial statements.
     MBSCC's rules also contain special provisions applicable to 
certain participants. Article III, Rule 1, Section 11 provides that 
MBSCC may permit: (i) Any registered broker-dealer to satisfy its 
obligation to furnish financial statements by providing MBSCC with Form 
X-17A-5 FOCUS Reports or Form G-405 Report on Finances and Operations, 
(ii) any bank to satisfy its obligation to furnish financial statements 
by providing MBSCC with Consolidated Reports of Condition and Income 
(Call Reports), and (iii) any participant that is subject to the 
periodic reporting requirements of Section 13 of the Act to satisfy its 
obligation to furnish financial statements to MBSCC by providing MBSCC 
with Form 10-K and Form 10-Q Reports.
    The proposed rule change modifies Article III, Rule 1, Section 10 
of MBSCC's rules to replace the general requirement for quarterly 
unaudited financial statements with unaudited financial statements as 
frequently as required by the participant's appropriate regulator, and 
if not regulated or a nondomestic participant, monthly unaudited 
financial statements.
    This modification is intended to provide MBSCC with more frequent 
information on the financial condition of certain participants. MBSCC 
believes that this information should be especially useful in periods 
of market volatility.
3. Non Domestic Participants
    Article III, Rule 1, Section 13 of MBSCC's rules contains special 
provisions applicable to non domestic participants. This rule generally 
provides that any participant that is not organized under the laws of 
the United States must comply with certain additional financial and 
operational requirements.
    The proposed rule change modifies Article III, Rule 1, Section 13 
of MBSCC's rules to codify the existing practice of requiring non 
domestic participants to: (i) execute and deliver to MBSCC a master 
agreement, (ii) provide MBSCC with an opinion of counsel, and (iii) 
confirm the master agreement and option of counsel as MBSCC 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.''
    The master agreement, opinion of counsel, and periodic confirmation 
thereof are designed to provide MBSCC with additional comfort from non 
domestic participants regarding the enforceability of MBSCC's rules and 
procedures.
4. Additional Assurances
    Article III, Rule 3, Section 1 of MBSCC' rules requires a 
participant that is unable to meet its obligations or perform its 
contracts or is insolvent to immediately notify MBSCC. However, MBSCC's 
rules do not currently require a participant to notify MBSCC in 
situations where the participant contemplates that it will be unable to 
meet its obligations or perform its contracts or will no longer be in 
compliance with MBSCC's rules and procedures.
    The proposed rule change modifies Article III, Rule 1 of MBSCC's 
rules by adding a new Section 16 regarding additional assurances. 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 participants must immediately notify MBSCC. If MBSCC has 
reasonable ground 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 
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 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
    Article III, Rule 3, Section 5(f) of MBSCC's rules governs the 
distribution of funds when MBSCC ceases to act for a participant. 
MBSCC's role as agent in the distribution of funds is currently implied 
within the rules because MBSCC does not guaranty its participants' 
transactions. 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 believes that the proposed rule change is consistent with the 
requirements of Section 17A(b)(3)(F) of the Act and the rules and 
regulations thereunder because it is designed to assure the 
safeguarding of securities and funds which are in the custody or 
control of MBSCC or for which it is responsible.

(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.

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

    No written comments relating to the proposed rule change have been 
solicited or 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

[[Page 33127]]

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 the self-regulatory organization 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-
0609. 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. Sec. 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 will also be available 
for inspection and copying at the principal office of MBSCC. All 
submissions should refer to File No. SR-MBSCC-99-02 and should be 
submitted by July 12, 1999.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\3\
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    \3\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-15599 Filed 6-18-99; 8:45 am]
BILLING CODE 8010-01-M