Self-Regulatory Organizations; Participants Trust Company; Notice of Filing of a Proposed Rule Change Regarding PTC's Pricing and Margining Methodology for Newly Issued Collateralized Mortgage Obligation Securities

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40304; File No. SR-PTC-98-03]

Self-Regulatory Organizations; Participants Trust Company; Notice

of Filing of a Proposed Rule Change Regarding PTC's Pricing and

Margining Methodology for Newly Issued Collateralized Mortgage

Obligation Securities

August 4, 1998.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ notice is hereby given that on June 15, 1998, the

Participants Trust Company (``PTC'') filed with the Securities and

Exchange Commission (``Commission'') the proposed rule change as

described in Items I, II, and III below, which items have been prepared

primarily by PTC. The Commission is publishing this notice to solicit

comments from interested persons on the proposed rule change.

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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 modify PTC's pricing and margining

methodology with respect to newly issued collateralized mortgage

obligation (``CMO'') securities to more accurately reflect the value of

CMOs.

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, PTC 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. PTC 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 PTC.

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(A) Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In general, PTC values a participant's securities for the purpose

of assuring that sufficient collateral will be available for PTC to

borrow against or liquidate in the event the participant's debit

balance is not satisfied at end of day settlement. Securities in a

participant's account are valued by applying a margin to the assigned

market value of the securities. The purpose of margin is to limit the

risk caused by fluctuations in the market value of the securities.

CMOs that are currently on deposit at PTC are CMO securities issued

or guaranteed by the Government National Mortgage Association

(``GNMA'') and the Department of Veteran's Affairs (``VA'') and certain

issues guaranteed by the Federal Home Loan Mortgage Association

(``FHLMA'') and the Federal National Mortgage Association (``FNMA'')

that are collateralized by GNMA securities.

PTC assigns a market value to a CMO security by selecting the lower

of the two prices for the security as supplied by two nationally

recognized pricing sources. To establish a margin for a CMO, PTC

subjects each CMO tranche to a ``stress test'' to project the largest

percentage price decrease resultant of a 50 basis point upward movement

in Treasury yields and a 100 basis point downward movement in Treasury

yields.\3\

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\3\ PTC's current CMO margin and pricing methodology was

approved by the Commission on April 30, 1996. Securities Exchange

Act Release No. 37152 (April 30, 1996), 61 FR 20304 [File No. SR-

PTC-96-02].

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CMO tranches for which prices are not available from PTC's pricing

vendors are margined at 100% (i.e., are given no value in PTC's

system), and the minimum margin for any CMO tranche is 5%. Margins are

reevaluated at least quarterly and in response to certain defined

market or price shifts. PTC currently prices and margins new issue CMO

securities in the same manner in which secondary or seasoned CMO

securities are priced and margined (i.e., based upon the lower of two

prices received from PTC's two vendors and application of the standard

stress test).

In the case of newly issued CMO securities, however, the

information on the security that the vendor uses to establish its price

is generally not available to the vendor until after issuance. The

release of information after issuance does not allow the vendor

sufficient time to model and price a new

[[Page 42898]]

issue security until several days or weeks after the issuance. As a

result of PTC's pricing and margining methodology, new issue CMOs are

given a value of zero for this initial period because they are unpriced

by PTC's pricing vendors. Although PTC makes every effort to have the

underwriters provide PTC's pricing vendors with the prospectus

supplements prior to initial settlement, the information is generally

not available in sufficient time to permit the vendors to model and

price the new issue securities prior to settlement.

PTC proposes to modify its pricing and margining methodology for

newly issued CMO securities to more accurately reflect their value for

this initial period during which pricing vendors are generally unable

to provide prices. Prior to the issuance of a CMO security, PTC will

seek to obtain indicative bid side prices for each class of the issue

from the deal underwriter prior to the closing. PTC will establish

margins on new issue CMO securities (that it has priced by reference to

underwriter supplies prices) based on larger interest rate shifts, +100

or -200 basis points, than are applied to vendor priced CMO issues, +50

or -100 basis points. Interest only, principal only, and inverse

floater classes will be given no value.

Underwriter supplied values will be used for a maximum of three

weeks after the issuance. Any CMO issue not priced by both vendors at

three weeks from issuance will be given a value of zero by increasing

the margin to 100%, as is currently the case with all CMO issues, and

will continue to be the case with respect to all but new CMO issues for

this three week period.

PTC believes that the proposed rule change is consistent with

Section 17A(b)(3)(F) of the Act \4\ and the rules and regulations

promulgated thereunder because it facilitates the prompt and accurate

clearance and settlement of securities transactions and provides for

the safeguarding of securities and funds in PTC's custody or control or

for which PTC is responsible.

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\4\ 15 U.S.C. 78q-1(b)(3)(F).

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

PTC does not believe that the proposed rule change will impose any

burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received From Members, Participants or Others

PTC has discussed the proposed methodology with its Risk Management

Committee, which is comprised of participant representatives that are

knowledgeable in this area. PTC has not solicited or received any

unsolicited written comments from participants or other interested

parties.

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 PTC 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, N.W., Washington, D.C. 20549.

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, N.W.,

Washington, D.C. 20549. Copies of such filing also will be available

for inspection and copying at the principal office of PTC. All

submissions should refer to File No. SR-PTC-98-03 and should be

submitted by September 1, 1998.

For the Commission by the Division of Market Regulations,

pursuant to delegated authority.\5\

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\5\ 17 CFR 200.30-3(a)(12).

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Jonathan G. Katz,

Secretary.

[FR Doc. 98-21477 Filed 8-10-98; 8:45 am]

BILLING CODE 8010-01-M