[Federal Register Volume 65, Number 222 (Thursday, November 16, 2000)]
[Notices]
[Pages 69356-69357]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-29286]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43505; File No. SR-MBSCC-00-01]


Self-Regulatory Organizations; MBS Clearing Corporation; Order 
Approving a Proposed Rule Change Relating to Letters of Credit

November 1, 2000.
    On April 11, 2000, the MBS Clearing Corporation (``MBSCC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-MBSCC-00-01) pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'').\1\ On June 13, 2000, 
MBSCC amended the proposed rule change. Notice of the proposal was 
published in the Federal Register on June 26, 2000.\2\ No comment 
letters were received. For the reasons discussed below, the Commission 
is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 42961 (June 20, 2000), 
65 FR 39456.
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I. Discussion

    The rule change adds subsection (b) to Article IV, Rule 2, Section 
9 of MBSCC's rules to prohibit MBSCC from accepting a letter of credit 
from a participant that is issued by that participant or by an 
affiliate of that participant.\3\ This rule change codifies MBSCC's 
historical practice of requiring that a letter of credit deposited by a 
participant to the

[[Page 69357]]

participants fund be issued by an approved letter of credit other than 
the participant or an affiliate of the participant.\4\
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    \3\ Article IV, Rule 2, Section 9 of MBSCC's rules, which 
governs deposits of letters of credit by MBSCC's participants to the 
participants fund for margin purposes, provides, among other things, 
that MBSCC may approve as the issuer of a letter of credit any 
domestic or foreign bank or trust company meeting the requirements 
set forth in procedures adopted by MBSCC.
    The rule change also amends Article I, Rule 1 of MBSCC's Rules 
to add a definition of ``affiliate.'' Affiliate is defined as 
follows: ``The term an `Affiliate' of, or a person `Affiliated' 
with, a specified person, means a person that directly, or 
indirectly, through one or more intermediaries, controls, or is 
controlled by, or is under common control with, the person 
specified. For purposes of this definition, the term `control' 
(including the terms `controls,' `controlled by,' and `under common 
control with') means the possession, direct or indirect, of the 
power to direct or cause the direction of the management and 
policies of a person, whether through the ownership of voting 
securities, by contract, or otherwise.''
    \4\ The proposed rule change also makes a technical modification 
to Article III, Rule 5 of MBSCC's Rules to correct the reference 
contained within such rule from ``Rule 4'' to ``Rule 5.''
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II. Discussion

    Section 17A(b)(3)(F) \5\ of the Act requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible. As set forth below, the Commission 
believes that MBSCC's rule change is consistent with this obligation.
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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    Letters of credit are used at MBSCC and at other clearing agencies 
as collateral to meet clearing fund obligations. MBSCC's clearing fund 
is intended to provide liquidity and protection to MBSCC and its 
members in the event a MBSCC member defaults on its obligation. If a 
member were allowed to issue a letter of credit to itself (or an 
affiliate of the member to the member), the letter of credit would 
probably not be honored in a default situation.
    Because the rule change will prohibit a participant from providing 
a letter of credit for itself or from an affiliated entity, the rule 
change helps ensure that MBSCC can draw upon a letter of credit used as 
clearing fund collateral if MBSCC ever had the need to do so. This 
should assist MBSCC in safeguarding securities and funds in its 
possession or control or for which it is responsible.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of 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-00-01) be, and hereby 
is, approved.

    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. 00-29286 Filed 11-15-00; 8:45 am]
BILLING CODE 8010-01-M