[Federal Register Volume 67, Number 17 (Friday, January 25, 2002)]
[Notices]
[Pages 3762-3764]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-1901]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45299; File No. SR-MBSCC-2001-02]


Self-Regulatory Organizations; MBS Clearing Corporation; Notice 
of Filing of a Proposed Rule Change Implementing a Real-Time Trade 
Matching Service

January 17, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 19, 2001, MBS 
Clearing Corporation (``MBSCC'') filed with the Securities and Exchange 
Commission (``Commission'') and on September 26, 2001, amended the 
proposed rule change 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 will implement a real-time trade matching 
service.

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 parts of these statements.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In furtherance of MBSCC's mission to reduce the costs and risks 
associated with trading in the mortgage-backed securities market, MBSCC 
has enhanced its services to enable its participants to submit executed 
trade terms and to receive comparison results from MBSCC in a more 
timely manner. The cornerstone of this objective is the implementation 
of the Real-Time Trade Matching (``RTTM'') service that will replace 
MBSCC's current twice-daily match process with respect to trade input 
information. MBSCC anticipates that the RTTM service will provide more 
certainty, will reduce execution/market risk, and will eliminate the 
redundancy between the verbal checkout process (which is described 
below) and the current MBSCC matching process.\3\
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    \3\ One of the main objectives of the RTTM service is to 
significantly reduce the risks associated with a prolonged period of 
time between trade execution and achievement of legal and binding 
confirmation. The elapsed time between trade execution and verbal 
checkout, followed by a legal and binding confirmation, is a known 
and serious risk to the ultimate settlement of the trade for all 
trading organizations. Reducing the elapsed time between trade 
execution and achievement of a legal and binding confirmation 
increases certainty and reduces risk.
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    MBSCC's objective in implementing the RTTM service is to match all 
trade input in real-time within minutes of trade execution while 
providing participants with the greatest flexibility and least amount 
of disruption in the

[[Page 3763]]

migration towards this goal. MBSCC will retire its batch trade matching 
process with respect to trade input information upon implementation of 
the RTTM service. All trade activity for all participants, regardless 
of the form of trade input, will be matched solely by the RTTM service 
upon its implementation. Therefore, participants that increase the 
frequency of submission and reconciliation throughout the business day 
will be able to realize the benefits of the RTTM service.
MBSCC's Current Matching Process
    Currently, MBSCC participants submit details of executed trades 
daily to MBSCC by means of terminal or batch submissions. While 
participants may submit trade input to MBSCC anytime during published 
business hours, MBSCC performs its matching process of participant 
submitted data twice per day: at 10:30 a.m. (``AM Pass'') and at 11:30 
p.m. (``PM Pass'').
    Output reports/files detailing the results of the matching process 
are available to participants at 11:30 a.m. for the AM Pass and at 4:00 
a.m., for the PM Pass. The primary outputs are the ``Purchase and Sale 
Report'' listing submitted trades that successfully compared and the 
``Transaction Summary Report'' listing, among other things, submitted 
trades that did not compare. The Purchase and Sale Report serves as the 
sole and binding confirmation of trades and provides data for Rule 10b-
10 compliance purposes as well.
    Given that the majority of trades are submitted after the AM Pass, 
the timing limitations of a twice-daily matching/reporting process mean 
that participants generally are notified, at the earliest, that a trade 
has achieved ``binding confirmation'' status during the morning 
following submission to MBSCC. To overcome this time delay, 
participants engage in a process known as ``verbal checkout.'' Shortly 
after execution, participants contact each other and verbally confirm 
executed trade details. The verbal checkout process is important to 
participants to ascertain, with some degree of certainty, their 
intraday trading positions. While generally effective, the verbal 
checkout process is cumbersome, error-prone, and lacks the ``binding'' 
status afforded by the two-sided matching and confirmation through 
MBSCC.
The RTTM Service and the Requisite Rules Changes
    In order to provide more certainty, to reduce execution/market 
risk, and to eliminate the redundancy between the verbal checkout 
process and MBSCC's trade input matching process, MBSCC will offer the 
RTTM service. As stated above, MBSCC currently processes transaction 
information in two batch processing passes. One segment of that 
processing, the matching of trade input information, will be processed 
by the RTTM service. The other segments of the daily processing, 
including the matching of clearance information, will continue to be 
done in either one or both of the two existing batch processing passes.
    The RTTM service will provide trade input matching for dealer-to-
dealer trades and inter-dealer broker trades. The RTTM service will 
support all of the trade types currently supported by MBSCC (settlement 
balance order destined, trade-for-trade, comparison only, and option) 
as well as the various trade functions used by participants, such as 
the ``Don't Know'' or ``DK'' function.
    Participants will be able to submit transaction information for 
processing through the RTTM service using the batch file submission 
method that is used today, which is called ``File Transmission 
Service.'' In addition, participants will also be able to use a batch 
file transmission method that employs SWIFT formats, the RTTM terminal 
service, and interactive messaging. Regardless of the input method, 
MBSCC will make available to participants real-time updates on all 
transactions entered into the system.
    The following rule changes are necessary to accommodate the 
introduction of the RTTM service:
    i. General provisions on the RTTM service: MBSCC is proposing to 
add two provisions to its rules to provide generally for the RTTM 
service. One of these provisions (new Section 1 or Rule 3 of Article 
II) will provide taht MBSCC's comparison of trade input will occur in 
real time, and the other (new Section 1 of Rule 4 of Article II) will 
distinguish the RTTM processing from the current processing passes.
    ii. New reports provided by the RTTM service: MBSCC's RTTM 
processing will produce output via the RTTM terminal service as well as 
via interactive messages. MBSCC is proposing to add a definition for 
the term ``Report'' to encompass any type of output in any form that is 
provided by MBSCC to its participants. As a result specifically of RTTM 
processing, there will be ``Reports'' that will indicate the 
transactions whose trade input has compared (``RTTM Compare 
Reports''),\4\ and ``Reports'' that will indicate the transactions 
whose trade input has not compared (``RTTM Uncompare Reports'').
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    \4\ These reports will also indicate cancellations of previously 
compared trades.
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    iii. Changes to existing reports: MBSCC will continue to provide 
the reports that are created as a result of its current two processing 
passes, with some modifications in one case. The Purchase and Sale 
Report details the results of the current batch trade processing, which 
includes the matching of trade input submissions, as well as the 
matching of clearance information. No changes are proposed to the 
information provided by the Purchase and Sale Report. Like the Purchase 
and Sale Report, the Transaction Summary Report is also provided as a 
result of the current twice-daily processing passes. Upon 
implementation of RTTM processing, the Transaction Summary Report will 
no longer provide details of unmatched trade terms. Unmatched trade 
terms will be available to participants via the RTTM Uncompare Reports 
(which as stated above, will be in the form of output provided by MBSCC 
via the RTTM terminal service as well as via interactive messages). 
MBSCC is proposing to modify its rules to delete references to the 
Transmission Summary Report as notification of unmatched trades and to 
provide for this notification to occur by means of the RTTM Uncompare 
Reports.
    iv. Sole and binding confirmation of trades: The rules currently 
provide that the Purchase and Sale Report is the sole and binding 
confirmation of the trade. In addition, the Purchase and Sale Report 
currently fulfills Rule 10b-10 requirements for generation of trade 
confirms. As stated above, upon implementation of RTTM, the Purchase 
and Sale Report will continue to be purchased twice daily displaying 
matched trades. Participants will, however, have received notice of 
trade input matching prior to the production of the Purchase and Sale 
report by means of the RTTM Compare Reports. To enable participants to 
rely upon the results of the RTTM processing, MBSCC is proposing to 
amend its rules to confer sole and binding trade confirmation status on 
the RTTM Compare Reports. Since the Purchase and Sale Report covers the 
matching of clearing information (which is not covered by the RTTM 
processing and thus would not be reported in the RTTM Compare Reports), 
it will remain the sole and binding confirmation with respect to that 
information. The Purchase and Sale Report will remain the Rule 10b-10 
complaint confirmation.

[[Page 3764]]

    v. Trade input submission by inter-dealer brokers (``IDBs''): 
Certain RTTM trade input formats require that an IDB submit two 
separate transactions linked together by a common reference number per 
trade. Under the current trade submission format, IDBs submit two 
transactions, one identifying one dealer (buyer) and one identifying 
the other dealer (seller), on give-up trades. The rule on IDB trade 
input (current Section 1 of Rule 3of Article II) speaks generally in 
terms of trade input and does not specify the number of submissions 
required. The only rule change that is proposed in this respect is a 
reference to MBSCC's procedures, which will describe in detail the 
trade input submission requirements.
    vi. Retirement of maximum match mode: MBSCC's rules provide that 
each dealer must select a match mode to govern the comparison of each 
such dealer's MBSCC-eligible transactions involving an IDB. The rules 
currently provide for three match modes: theexact match mode, the net 
position match mode, and the maximum match mode.\5\ Upon implementation 
of the RTTM service, only the exact and net position match modes will 
be available. MBSCC is proposing to retire the maximum match mode due 
to lack of participant demand for this feature. The proposed rule 
changes delete all references to the maximum match mode.
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    \5\ The ``exact match mode'' means that trade input that matches 
in all other respects will be compared only if the par amount of the 
eligible securities reported to have been sold or purchased by the 
dealer for a particular transaction is identical to the par amount 
of a particular transaction reported by the broker. The ``net 
position match mode'' means that trade input that matches in all 
other respects will be compared only if the aggregate par amount of 
one or more transactions in eligible securities reported to have 
been sold or purchased by the dealer equals the aggregate par amount 
for one or more transactions reported by the broker. The ``maximum 
match mode'' means that trade input that matches in all other 
respects will be compared to the extent that the par amount of 
eligible securities reported to have been sold or purchased by the 
dealer does not exceed the aggregate par amount for one ore more 
transactions reported by the broker with transactions reported by 
the broker in any excess par amount remaining uncompared.
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    vii. Review of reports by participants: MBSCC's rules currently 
contain a provision that requires participants and limited purpose 
participants to review the reports that they receive from MBSCC. MBSCC 
desires to expand the provision to cover any type of communication 
provided to participants by MBSCC and to require participants to inform 
MBSCC promptly, and in no event later than ten calendar days upon 
receipt of the communication, if there is any error, omission, or other 
problem with respect to the communication. MBSCC believes that the ten-
day timeframe will provide participants with a sufficient amount of 
time within which to detect problems in a communication from MBSCC.
    viii. New definitions: MBSCC is proposing to add definitions for 
the following new terms: ``Real Time'' and ``RTTM Processing'' to 
encompass the new real-time processing concepts that will be introduced 
in the rules; ``RTTM Compare Report'' and ``RTTM Uncompare Report'' to 
specify the reports that will be available under the RTTM service; and 
``Report'' to encompass all of the different types of output that can 
be provided by MBSCC to participants. The proposed amendments to 
existing definitions are incidental to the changes described above.
    ix. Amendment to MBSCC's Schedule of Charges for IDBs: MBSCC is 
proposing to amend its Schedule of Charges to give IDBs a service-fee 
based incentive to move to interactive messaging. MBSCC believes that 
it is important to offer the incentive to its IDB participants because 
their early participation is critical to a successful implementation of 
the RTTM service. From a dealer perspective, lack of participation by 
one or more of the IDBs severely dilutes the benefits the dealer will 
gain from RTTM usage because a large percentage of the dealers' 
matching activity is against IDBs. The perception of reduced benefit 
leads to delays in dealer participation and a protracted rollout 
process. Therefore, MBSCC is proposing to waive, for a period of one 
year commencing with putting the RTTM service into production, all 
trade recording ``Give-Up Trade Create'' fees for IDBs that participate 
in MBSCC's testing (or ``beta'') phase of the RTTM service and 
subsequently move to production (IDBs must be interactive in order to 
participate in the testing phase, which is scheduled to take place 
during the first quarter of 2002).
    The proposed rule change is consistent with the requirements of 
Section 17A of the Act and the rules and regulations thereunder, 
because they will reduce execution/market risk and eliminate the 
redundancy between the verbal checkout process and MBSCC's trade input 
matching process.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    MBSCC does not believe that the proposed rule change will have any 
impact or impose any burden on competition.

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

    Written comments relating to the proposed rule change have not yet 
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 the 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 
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 will also be available for inspection and copying 
at the principal office of MBSCC. All submissions should refer to file 
No. SR-MBSCC 2001-02 and should be submitted by February 15, 2002.

    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. 02-1901 Filed 1-24-02; 8:45 am]
BILLING CODE 8010-01-M