[Federal Register Volume 67, Number 56 (Friday, March 22, 2002)]
[Notices]
[Pages 13389-13391]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-6936]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45563; File No. SR-MBSCC-2001-02]


Self-Regulatory Organizations; MBS Clearing Corporation; Order 
Granting Approval of a Proposed Rule Change Implementing a Real-Time 
Trade Matching Service

    March 14, 2002.

I. Introduction

    On September 19, 2001, MBS Clearing Corporation (``MBSCC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-MBSCC-2001-02 pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\. On September 26, 2001, 
MBSCC filed an amendment to the proposed rule change. Notice of the 
proposal was published in the Federal Register on January 25, 2002.\2\ 
No comment letters were received. For the reasons discussed below, the 
Commission is

[[Page 13390]]

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. 45299, (January 17, 
2002), 67 FR 3762.
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II. Description

    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 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, reduce execution/market risk, and 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 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 during published business 
hours, MBSCC performs its matching process of participant submitted 
data twice per day: at 10:30 a.m. (``AM Pass'') and 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 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 that a trade has achieved 
``binding confirmation'' status at the earliest 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 because it allows them 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, reduce execution/market risk, 
and 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 for 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 such as the ``Don't Know'' or 
``DK'' function used by participants.
    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 adding two 
provisions to its rules to provide generally for the RTTM service. One 
of these provisions (new Section 1 of Rule 3 of Article II) will 
provide that 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 adding to its definitions 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 two new ``Reports.'' The ``RTTM Compare 
Report'' \4\ will indicate the transactions whose trade input has 
compared, and the ``RTTM Uncompare Report'' will indicate the 
transactions whose trade input has not compared.
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    \4\ The RTTM Compare Report will also indicate cancellataions 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 and 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

[[Page 13391]]

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 Transaction 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: MBSCC's 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 produced twice daily 
listing 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 
amending its rules so that the RTTM Compare Reports constitute sole and 
binding trade confirmation of trade input. 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 compliant confirmation.
    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 on give-up trades: one identifying the buying dealer and 
one identifying the selling dealer. The rule on IDB trade input 
(currently Section 1 of Rule 3 of Article II) speaks generally in terms 
of trade input and does not specify the number of submissions required. 
MBSCC is modifying this rule to add 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 that 
dealer's MBSCC-eligible transactions involving an IDB. The rules 
currently provide for three match modes: the ``exact 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 retiring the maximum match mode 
due to lack of participant demand for this option. The proposed rule 
change deletes 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 or 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 
is expanding 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 after 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 adding to its definitions the 
following new terms: ``Real Time,'' ``RTTM Processing,'' ``RTTM Compare 
Report,'' ``RTTM Uncompare Report,'' and ``Report.'' Various amendments 
are made to existing definitions that 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 dealers will gain 
from RTTM usage because a large percentage of the dealers' matching 
activity is against IDBs. The perception of reduced benefits could lead 
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 the $.25/side 
``Give-Up Trade Create'' trade recording fee for IDBs that participate 
in MBSCC's ``beta'' (testing) phase of the RTTM service and that 
subsequently move to production.\6\
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    \6\ IDBs must be interactive in order to participate in the 
testing phase, which is scheduled to take place during the first 
quarter of 2002.
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III. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and to assure the 
safeguarding of securities and funds which are in the custody or 
control of MBSCC.\7\ The rule change, which allows MBSCC to implement 
real-time trade matching, should help MBSCC to reduce risk and provide 
more certainty by enabling firms to know earlier of any trades which do 
not compare and to have more time to resolve the problems. As a result, 
the proposed rule change should facilitate the prompt and accurate 
clearance and settlement of securities at MBSCC and should help MBSCC 
to protect the securities and funds in its possession or control or for 
which it is responsible. Therefore, the Commission finds that the rule 
change is consistent with Section 17A and the rules and regulations 
thereunder.
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    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. 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 with the requirements of section 17A of the Act and the 
rules and regulations thereunder applicable.
    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-MBSCC-2001-02) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-6936 Filed 3-21-02; 8:45 am]
BILLING CODE 8010-01-P