[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