Self-Regulatory Organizations; MBS Clearing Corporation; Notice of Filing of Proposed Rule Change Relating to MBSCC's Risk Management Rules and Procedures

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41516; File No. SR-MBSCC-99-02]

Self-Regulatory Organizations; MBS Clearing Corporation; Notice

of Filing of Proposed Rule Change Relating to MBSCC's Risk Management

Rules and Procedures

June 10, 1999.

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

(the ``Act''),\1\ notice is hereby given that on April 15, 1999, MBS

Clearing Corporation (``MBSCC'') filed with the Securities and Exchange

Commission (``Commission'') the proposed rule change (File No. SR-

MBSCC-99-02) 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 purpose of the proposed rule change is to make several

modifications to MBSCC's risk management rules. Specifically, the

proposed rule change: (i) implements the net-out report, (ii) modifies

financial reporting by participants, (iii) modifies certain special

provisions applicable to nondomestic participants, (iv) requires

additional assurances from MBSCC participants, and (v) clarifies

MBSCC's role as agent in a liquidation.

II. Self-Regulatory Organization's Statement of the Terms of

Substance of 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 the text of the summaries

prepared by MBSCC.

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

Statutory Basis for, the Proposed Rule Change

The purpose of the proposed rule change is to make several

modifications to MBSCC's risk management rules. Specifically, the

proposed rule change: (i) implements the net-out report, (ii) modifies

financial reporting by participants, (iii) modifies certain special

provisions applicable to nondomestic participants, (iv) adds a

provision for additional assurances, and (v) clarifies MBSCC's role as

agent in a liquidation.

The specific objectives of the proposed rule change and the

corresponding modifications to MBSCC's rules are described below.

1. Net-Out Report

Article III, Rule 3, Section 5 of MBSCC's rules governs when MBSCC

ceases to act for a participant, This rule generally provides that if a

defaulting participant's participants fund contribution is insufficient

to cover losses of the defaulting participant's nonoriginal contra

sides, the deficiency

[[Page 33126]]

is assessed against the defaulting participant's original contra sides.

Original contra sides remain liable for potential assessments even if

as a result of MBSCC's netting process they net-out of transactions.

MBSCC, however, does not currently provide participants with

information regarding their open net-out obligations.

The proposed rule change modifies Article II, Rule 4 of MBSCC's

rules to add a provision for a daily net-out report that will list all

of a participant's open net-out obligations. Article I, Rule 1 of

MBSCC's rules is also being modified to add a definition of the term

``net-out report.'' The net-out report is intended to provide

participants with timely information regarding their open net-out

obligations to enable them to better monitor potential risk exposure

with original contra sides.

2. Financial Reporting

Article III, Rule 1, Section 10 of MBSCC's rules sets forth the

financial reporting requirements for participants. This rule generally

requires participants to provide MBSCC with annual audited and

quarterly unaudited financial statements.

MBSCC's rules also contain special provisions applicable to

certain participants. Article III, Rule 1, Section 11 provides that

MBSCC may permit: (i) Any registered broker-dealer to satisfy its

obligation to furnish financial statements by providing MBSCC with Form

X-17A-5 FOCUS Reports or Form G-405 Report on Finances and Operations,

(ii) any bank to satisfy its obligation to furnish financial statements

by providing MBSCC with Consolidated Reports of Condition and Income

(Call Reports), and (iii) any participant that is subject to the

periodic reporting requirements of Section 13 of the Act to satisfy its

obligation to furnish financial statements to MBSCC by providing MBSCC

with Form 10-K and Form 10-Q Reports.

The proposed rule change modifies Article III, Rule 1, Section 10

of MBSCC's rules to replace the general requirement for quarterly

unaudited financial statements with unaudited financial statements as

frequently as required by the participant's appropriate regulator, and

if not regulated or a nondomestic participant, monthly unaudited

financial statements.

This modification is intended to provide MBSCC with more frequent

information on the financial condition of certain participants. MBSCC

believes that this information should be especially useful in periods

of market volatility.

3. Non Domestic Participants

Article III, Rule 1, Section 13 of MBSCC's rules contains special

provisions applicable to non domestic participants. This rule generally

provides that any participant that is not organized under the laws of

the United States must comply with certain additional financial and

operational requirements.

The proposed rule change modifies Article III, Rule 1, Section 13

of MBSCC's rules to codify the existing practice of requiring non

domestic participants to: (i) execute and deliver to MBSCC a master

agreement, (ii) provide MBSCC with an opinion of counsel, and (iii)

confirm the master agreement and option of counsel as MBSCC may

require. The master agreement and the opinion of counsel generally

address the enforceability of MBSCC's rules. Article I, Rule 1 of

MBSCC's rules is also being modified to add definitions of the terms

``master agreement'' and ``opinion of counsel.''

The master agreement, opinion of counsel, and periodic confirmation

thereof are designed to provide MBSCC with additional comfort from non

domestic participants regarding the enforceability of MBSCC's rules and

procedures.

4. Additional Assurances

Article III, Rule 3, Section 1 of MBSCC' rules requires a

participant that is unable to meet its obligations or perform its

contracts or is insolvent to immediately notify MBSCC. However, MBSCC's

rules do not currently require a participant to notify MBSCC in

situations where the participant contemplates that it will be unable to

meet its obligations or perform its contracts or will no longer be in

compliance with MBSCC's rules and procedures.

The proposed rule change modifies Article III, Rule 1 of MBSCC's

rules by adding a new Section 16 regarding additional assurances. The

new section provides that any participant that contemplates it no

longer will be in compliance with MBSCC's rules and procedures or will

no longer be able to perform its contracts or satisfy its obligations

to MBSCC or participants must immediately notify MBSCC. If MBSCC has

reasonable ground to believe that a participant no longer will be in

compliance with MBSCC's rules and procedures or no longer will be able

to perform its contracts or satisfy its obligations to MBSCC or

participants, MBSCC may require additional information from such

participant relating to its ability to comply with the rules and

procedures, perform its contracts, and satisfy its obligations to MBSCC

or participants. MBSCC may also increase a participant's minimum

required deposits to the participants fund if MBSCC has reasonable

grounds to believe such conditions may exist. The new section also

states that it does not restrict MBSCC from exercising its right at any

time to cease to act for the participant pursuant to MBSCC's rules.

The new section providing for additional assurances is designed to

enable MBSCC to better determine a participant's potential inability to

meet its obligations and to increase the likelihood that a

participant's collateral will be sufficient to satisfy its obligations.

5. MBSCC as Agent

Article III, Rule 3, Section 5(f) of MBSCC's rules governs the

distribution of funds when MBSCC ceases to act for a participant.

MBSCC's role as agent in the distribution of funds is currently implied

within the rules because MBSCC does not guaranty its participants'

transactions. The proposed rule change modifies Article III, Rule 3,

Section 5(f) to make explicit that any distribution of funds relating

to a participant for which MBSCC has ceased to act is made by MBSCC as

agent.

MBSCC believes that the proposed rule change is consistent with the

requirements of Section 17A(b)(3)(F) of the Act and the rules and

regulations thereunder because it is designed to assure the

safeguarding of securities and funds which are in the custody or

control of MBSCC or for which it is responsible.

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

MBSCC does not believe that the proposed rule change will have an

impact on or impose a burden on competition.

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

Proposed Rule Change Received from Members, Participants, or Others

No written comments relating to the proposed rule change have 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

[[Page 33127]]

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 the self-regulatory organization 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-

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. Sec. 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 will also be available

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

submissions should refer to File No. SR-MBSCC-99-02 and should be

submitted by July 12, 1999.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\3\

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

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 99-15599 Filed 6-18-99; 8:45 am]

BILLING CODE 8010-01-M