[Federal Register Volume 64, Number 230 (Wednesday, December 1, 1999)]
[Notices]
[Pages 67363-67364]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31166]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42173; File No. SR-MBSCC-99-06]


Self-Regulatory Organization; MBS Clearing Corporation; Order 
Granting Approval of a Proposed Rule Change Relating to Market Margin 
Differential Deposits

November 23, 1999.
    On July 14, 1999, the MBS Clearing Corporation (``MBSCC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change, File No. SR-MBSCC-99-06, pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ to amend the formula 
MBSCC uses to calculate market margin differential deposits. Notice of 
the proposal was published in the Federal Register on October 22, 
1999.\2\ No comment letters were received. For the reasons discussed 
below, the Commission is granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 42005 (October 13, 
1999), 64 FR 57170.
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I. Description

    The rule change amends the formula MBSCC uses to calculate market 
margin differential deposits to the participants fund.\3\ Specifically, 
the 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 depositions to the participants fund. Each participant's 
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.
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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 as 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 rule change replaces the 130% of adjusted net losses component 
as contained in subsection (a) of the formula with 130% (or such other 
percentage as MBSCC from time to time may determine) of the greater of: 
(i) adjusted net losses or (ii) 25 basis points (or such other number 
of basis points as MBSCC from time to time may determine) of net 
position and 25 basis points (or such other number of basis points as 
MBSCC from time to time may determine) of the largest outstanding net-
out position minus excess profits from forward transactions.\4\
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    \4\ The 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.''
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II. Discussion

    Section 17(A)(b)(3)(F) \5\ of the Act requires that the rules of 
the clearing agency be designed to promote the prompt and accurate 
safeguarding of securities transactions. The Commission believes that 
the rule change is consistent with MBSCC's obligations under the Act 
because the revised market margin differential deposit formula 
encompasses more circumstances where an MBSCC participant could pose 
risk to MBSCC.
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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    The revised formula establishes a margin requirement for net 
position risk and for net-out position risk. For example, under the 
previous formula a participant was not subject to a margin call on a 
day it did not have adjusted net losses. Under the revised formula, the 
net position component should address the circumstances where a 
participant does not have adjusted net losses but has a large net 
position, and there is market volatility between margin calls. (The 
130% multiplier, which is designated to address market volatility, was 
not effective if the participant did not have adjusted net losses.)
    A second situation where the revised formula addresses risk not 
covered by the previous formula 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 this 
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. Under the previous 
formula, the participants fund did not include a margin component for 
potential pro-rata assessments against original contra-sides. Under the 
revised formula, the net-out component should address the circumstances 
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.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 17A of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-MBSCC-99-06) be and hereby 
is approved.


[[Page 67364]]


    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. 99-31166 Filed 11-30-99; 8:45 am]
BILLING CODE 8010-01-M