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[Federal Register Volume 62, Number 66 (Monday, April 7, 1997)]
[Notices]
[Pages 16634-16635]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8791]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38461; File No. SR-MBSCC-97-03]

Self-Regulatory Organizations; MBS Clearing Corporation; Notice 
of Filing of a Proposed Rule Change Relating to the Establishment of 
the Comparison Only System

April 1, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on February 18, 1997, the MBS 
Clearing Corporation (``MBSCC'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change (File No. SR-
MBSCC-97-03) 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 modifies MBSCC's rules to establish the 
Comparison Only System (``COS'') and to create a new category of 
participant, a ``limited purpose participant'', eligible to use this 
system.

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 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 modify MBSCC's rules 
to establish the COS and to create a new category of participant, a 
limited purpose participant, eligible to use this system.
    As a result of interest expressed by the Federal National Mortgage 
Association and other organizations, the proposed COS, which will be a 
limited system for principals to compare trade data, was developed by 
MBSCC. The mortgage-backed securities marketplace has unique 
characteristics that affect how trades are compared and how industry 
participants communicate with each other. For example, the average time 
between a mortgage-backed securities trade and settlement date is much 
longer than that in the government bond and equity markets, forty-five 
to ninety days compared to one and three days, respectively. The 
objective of MBSCC's proposed system is to improve market 
communications for the comparison of trade data by providing qualified 
entities with an automated alternative to manually initiating verbal 
confirmations and then exchanging hardcopy trade confirmations and/or 
contract letters.
    Under current MBSCC rules, MBSCC processes securities through the 
Comparison and Clearing System (``CCS'') for qualified participants. 
CCS provides a centralized process to compare and confirm trades 
electronically, risk management services to continually assess the 
current value of each underlying trade and to ensure that all 
participants meet their margin requirements, and a netting facility 
that provides a multilateral netting service which creates netted 
receive and deliver obligations.
    The proposed COS is a more limited system than the CCS in that it 
will only provide a centralized process to compare and confirm trades 
electronically. COS will be a system restricted to those that trade in 
a principal capacity where specified trade data must exactly and 
promptly compare between like contra-sides. Because the COS is limited 
to comparison, participants will not be required to put up margin or 
meet specific net worth financial requirements.
    COS will require a limited purpose participant to submit financial 
information to demonstrate its financial ability to meet its cash 
balance debit obligations to MBSCC, which are limited to the fees for 
using the COS and any late fees imposed. It is expected that these fees 
will be significantly lower than those imposed on participants in the 
CCS; therefore, no basic deposit fee will be required of COS 
participants. MBSCC will bill the limited purpose participant on a 
monthly basis. The bill will be payable to MBSCC via the federal funds 
wire.
    Each limited purpose participant will be required to maintain 
specified data processing and communications

[[Page 16635]]

equipment to be able to process transactions through the facilities of 
MBSCC and be able to receive reports, notices, and other communications 
relating to transactions prepared by MBSCC. Any current MBSCC 
participant trading a COS eligible security in a principal capacity 
will be able to participate in COS if the counterparty is a limited 
purpose participant or the security traded is not eligible in CCS.
    Under COS, a trade will be negotiated by the parties. Trade terms 
will then be submitted electronically by the parties to MBSCC for 
comparison. The submitted trade terms will then be compared in MBSCC's 
AM or PM processing pass. For a trade to compare in COS, certain trade 
data will have to match exactly.\3\ If a trade compares, MBSCC will 
issue a purchase and sale report go each side of the trade. The 
purchase and sale report will serve as the sole binding confirmation of 
the trade. The trade will then be settled outside of the MBSCC system. 
Trade terms that do not compare will be reported as unmatched on a 
transaction summary report sent to the parties. Individually or 
jointly, the parties must then resolve or delete the unmatched trade by 
taking one or more of the following on-line actions: deletes, DK's 
(don't know), affirms, and new input. Unmatched trades will remain on a 
transaction summary report until resolved. MBSCC's current rule on CCS 
unmatched items will similarly be applied to COS unmatched items. 
Specifically, until the unmatched item is resolved or deleted, the 
participant(s) will be subject to the imposition of late fees by MBSCC. 
For purposes of computing the late fees, each missed processing pass 
after a two pass grace period will result in a separate assessment 
against the participant(s). If the unmatched trade is resolved, MBSCC 
will compare and confirm it with a purchase and sale report as 
described above.
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    \3\ Specifically, the trade data will be buyer versus seller, 
buyer account, seller account, class code or CUSIP/pool number, 
price, trade type, trade date, settlement date, and par value.
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    MBSCC believes that the proposed rule change is consistent with the 
requirements of Section 17A(3)(F) of the Act \4\ and the rules and 
regulations thereunder because it will facilitate the prompt and 
accurate clearance and settlement of securities transactions.
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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

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

(C) 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 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 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. 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 Room, 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 the file number SR-MBSCC-97-03 and 
should be submitted by April 28, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-8791 Filed 4-4-97; 8:45 am]
BILLING CODE 8010-01-M
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