[Federal Register Volume 64, Number 204 (Friday, October 22, 1999)]
[Notices]
[Pages 57170-57171]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27602]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42005; File No. SR-MBSCC-99-06]


Self-Regulatory Organizations; MBS Clearing Corporation; Notice 
of Filing of a Proposed Rule Change Relating to Market Margin 
Differential Deposits

October 13, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 14, 1999, the MBS 
Clearing Corporation (``MBSCC'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change (File No. SR-MBCC-
99-06) 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 proposed rule change amends the formula MBSCC uses to calculate 
market margin differential deposits.

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), 
(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 amend the formula 
MBSCC uses to calculate market margin differential deposits to the 
participants fund.\3\ Specifically, the proposed rule change adds net 
position and net-out position components to the market margin 
differential deposit formula.
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    \3\ MBSCC requires participants to maintain collateral in the 
form of deposits to the participants fund. Each participant's 
participants fund is comprised of a basic deposit, a minimum market 
margin differential deposit, and a market margin differential 
deposit. The basic deposit is equal to a minimum of $1,000 and a 
maximum of $10,000 with the actual amount determined based on the 
average six months billing for the participant. The minimum market 
margin differential deposit is equal to $250,000. The market margin 
differential deposit is based on the formula set forth in Article 
IV, Rule 2, Section 4 of MBSCC's rules and is the subject of this 
rule filing.
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    Article IV, Rule 2, Section 4 of MBSCC's rules sets forth the 
formula used to calculate a participant's daily market margin 
differential deposit to the participants fund. This formula currently 
requires a participant to make a daily market margin differential 
deposit to the participants fund equal to the sum of: (a) 130% (or such 
other percentage of MBSCC from time to time may determine) of adjusted 
net losses, plus (b) 100% (or such other percentage as MBSCC from time 
to time may determine) of certain projected cash settlement obligations 
owed to MBSCC, minus (c) the amount of any market margin differential 
deposits previously made by the participant to and remaining in the 
participants fund.
    The proposed rule change replaces the 130% of adjusted net losses 
component as contained in subsection (a) of the formula with 130% (or 
such other percentage of MBSCC from time to time may determine) of the 
greater of: (i) adjusted net losses or (ii) 25 basic points

[[Page 57171]]

(or such other number of basic points as MBSCC from time to time may 
determine) of net position and 25 basic points (or such other number of 
basic points as MBSCC from time to time may determine) of the largest 
outstanding net-out position minus excess profits from forward 
transactions.
    The proposed rule change establishes a baseline margin requirement 
for net position and net-out position risk as illustrated by the 
following two examples. The first circumstance arises where a 
participant is not subject to a margin call on a particular day because 
it does not have adjusted net losses. The 130% multiplier, which is 
designed to address market volatility, is not effective if the 
participant does not have adjusted net losses. The net position 
component, therefore, should address the circumstance where a 
participant does not have adjusted net losses but has a large net 
position and there is market volatility between margin calls.
    The second circumstance relates to the fact that losses of non-
original contra-sides in excess of an insolvent participant's 
participant fund are prorated to and assessments are made against the 
insolvent participant's original contra-sides. MBSCC's netting system 
pairs-off and nets-out buy and sell trades with original and non-
original contra-sides. Netting substantially reduces the number of 
trades requiring clearance. Although netting eliminates the need to 
clear net-out trades, it does not eliminate the potential liability for 
pro-rata assessments against original contra-sides. The participants 
fund, however, currently does not include a margin component for 
potential pro-rata assessments against original contra-sides. The net-
out component, therefore, should address the circumstance where an 
original contra-side nets-out of transactions and otherwise does not 
have sufficient deposits to the participants fund to satisfy potential 
pro-rata assessments.
    The new requirement is initially set at 25 basis points of net 
position and 25 basis points of largest outstanding net-out position. 
MBSCC has determined that 25 basis points and crediting excess profits 
from forward transactions is currently appropriate based on an 
assessment of participants' participants fund deposits.
    The proposed rule change also modifies Article I, Rule 1 of MBSCC's 
rules to add definitions of the terms ``Excess Profits from Forward 
Transactions'' and ``Net Position.''
    MBSCC believes that the proposed rule change is consistent with the 
requirements of the Section 17A(b)(3)(F) of the Act and the rules and 
regulations thereunder because the proposal should help MBSCC 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.

(C) 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 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, NW, Washington, DC 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. 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 also will be available for 
inspection and copying at the principal office of MBSCC. All 
submissions should refer to File No. SR-MBSCC-99-06 and should be 
submitted by November 12, 1999.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 99-27602 Filed 10-21-99; 8:45 am]
BILLING CODE 8010-01-M