[Federal Register Volume 60, Number 83 (Monday, May 1, 1995)]
[Notices]
[Pages 21228-21230]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10606]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35641; File No. SR-PTC-95-03]
Self-Regulatory Organizations; Participants Trust Co.; Notice of
Filing and Order Granting Accelerated Approval of Proposed Rule Change
Extending Temporary Approval of Current Margin and Pricing Methodology
for Collateralized Mortgage Obligations
April 24, 1995.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on March 28, 1995, the
Participants Trust Company (``PTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change (File No.
SR-PTC-95-03) as described in Items I and II below, which Items have
been prepared primarily by PTC. The Commission is publishing this
notice and order to solicit comments from interested persons and to
grant accelerated approval of the proposed rule change through April
30, 1996.
\1\15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change extends through April 30, 1996, the
temporary approval of the current margin and pricing methodology
utilized by PTC for collateralized mortgage obligations (``CMO'') that
are eligible for deposit or that may become eligible for deposit at
PTC.\2\
\2\Securities Exchange Act Release No. 34017 (May 5, 1994), 59
FR 24495 (File No. SR-PTC-92-16) (order approving through April 30,
1995, PTC's CMO margin and pricing methodology).
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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. Summaries of the most significant aspects of such
statements are set forth in sections A, B, and C below.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
Margin Under PTC's Rules
Under PTC's rules, a certain percentage (``applicable percentage'')
of [[Page 21229]] the market value of securities is included in the
computation of participants' Net Free Equity.\3\ Net Free Equity of
zero or greater is required to be maintained by participants in each of
its agency, pledgee transfer, or proprietary accounts in order for
transactions to be processed.\4\ Net Free Equity represents PTC's
calculation of the amount of excess equity available in a participant's
account which PTC may borrow against or liquidate in the event the
participant's debit balance is not satisfied at the end of the day.
\3\As set forth in PTC Rules, Article II, Rule 9, Net Free
Equity is calculated as the sum of (a) the cash balance in the
account; (b) the market value of securities in the account less the
applicable percentage; (c) the value of the optional deposits to the
Participants Fund which are allocated to that account (optional
deposits to the Participants Fund are deposits that exceed the
minimum deposit required pursuant to PTC's rules and procedures);
and (d) 20% of the mandatory deposits to the Participants Fund for
the master account (mandatory deposits to the Participants Fund are
minimum deposits required to be deposited into such fund pursuant to
PTC's rules and procedures) minus (e) ``reserve on gain.'' Reserve
on gain means (1) the contract value credited to the cash balance of
a delivering participant or limited purpose participant over the
market value of securities credited to the transfer account
associated with the account of the receiving participant or (2) the
market value of securities credited to the transfer account
associated with the account of a receiving participant over the
contract value credited to the cash balance of the delivering
participant or limited purpose participant.
\4\PTC Rules, Article II, Rule 13, ``Transfers of Securities.''
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By including only a portion of the market value of securities in
Net Free Equity, PTC attempts to limit the risk caused by fluctuations
in the market value of these securities. For Government National
Mortgage Association (``GNMA'') single-class securities, other than
construction, project, and mobile home securities, margins are set at
five percent, which is a rate that exceeds their largest historic
consecutive two-day downward price movement. GNMA construction,
project, and mobile home securities have a higher margin to reflect
their reduced liquidity.\5\
\5\Securities Exchange Act Release No. 33840 (March 31, 1994),
59 FR 16672 (File No. PTC-93-04) (order approving proposed rule
change).
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CMO Margins
CMO securities that are currently eligible for deposit at PTC are
GNMA REMICs, Department of Veterans Affairs (``VA'') REMICs, and
certain Federal Home Loan Mortgage Corporation (``FHLMC'') REMICs.
Unlike GNMA single-class securities, CMO securities are structured as a
series of tranches or classes, each of which represents a separate
security with unique characteristics, such as differing payment
schedules and price volatility.\6\ PTC, therefore, uses a model which
takes into account the unique characteristics of each tranche to
predict its potential price movement. The parameters of the model
include prepayment speeds, a yield spread, and the yield on a benchmark
Treasury security. PTC subjects each CMO tranche to a stress test to
determine its response to yield changes in order to assign each tranche
an appropriate margin.
\6\A CMO is a multiple-class mortgage cash flow security which
redirects the cash flow from an underlying standard mortgage-backed
security, such as a GNMA security, and allows the CMO issuer to
create classes, or tranches, with many different interest rates,
average lives, prepayment sensitivities, final maturities, and
payment priorities.
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Currently, margins are based on a fifty basis point upward movement
in the underlying Treasury securities for CMO tranches that exhibit
positive effective duration (i.e., rise in value with falling interest
rates) or a fifty basis point downward movement in the underlying
Treasury security for CMO tranches that exhibit negative effective
duration (i.e., decline in value with falling interest rates). CMO
tranches that are not modeled by PTC's pricing vendor are margined at
one hundred percent and the minimum margin for any CMO tranche is five
percent.
PTC believes that the proposed rule change is consistent with
section 17A(b)(3)(F) of the Act\7\ and the rules and regulations
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.
\7\15 U.S.C. 78q-1(b)(3)(F) (1988).
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B. Self-Regulatory Organization's Statement on Burden on Competition
PTC does not believe that the proposed rule change imposes 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 neither solicited nor received comments on this proposed
rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
PTC's current margin and pricing methodology for CMO securities was
approved by the Commission on a temporary basis through April 30,
1995,\8\ in order to allow PTC further time in which to evaluate the
methodology and to take steps to address any concerns which exist with
respect to the methodology. During the temporary approval period, PTC
has provided information to the Commission describing the steps taken
by PTC to improve the margin and pricing methodology including
finalizing arrangements with a second vendor for daily pricing and
stress test analysis.\9\
\8\Supra note 2.
\9\Letters from Michael D. Frieband, Senior Vice President and
Chief Financial Officer, PTC, to Jerry W. Carpenter, Assistant
Director, Division of Market Regulation (``Division''), Commission
(August 5, 1994, November 8, 1994, February 27, 1995, and March 23,
1995).
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Section 17A(b)(3)(F) of the Act\10\ requires that the rules of a
clearing agency be designed to assure the safeguarding of securities
and funds in the custody or control of the clearing agency or for which
it is responsible. The Commission believes that extending temporary
approval of the current margin and pricing methodology utilized by PTC
for CMO securities should help assure the safeguarding of securities
and funds in PTC's custody or control. PTC's current margin and pricing
methodology helps ensure that CMO margins will be established that take
into account the unique characteristics of each CMO tranche and that
PTC's reliance on a daily pricing source will provide it with timely
price information. The resulting margins will afford PTC protection
should it be necessary for PTC to borrow against or liquidate these
assets. In addition, the Commission believes that extending the
temporary approval will permit PTC to make technical enhancements to
its system that will enable it to use and compare data from two sources
and also enable PTC to further evaluate the results of the CMO pricing
and margin methodology as so enhanced.
\10\15 U.S.C. 78q-1(b)(3)(F) (1988).
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PTC has requested that the Commission find good cause for approving
the proposed rule change prior to the thirtieth day after the date of
publication of notice of the filing. In order to allow PTC to continue
employing its current margin and pricing methodology without disruption
of service, it is necessary for the Commission to approve the proposed
rule change prior to the expiration of the current temporary approval
of the methodology on April 30, 1995. The Commission, therefore, finds
sufficient cause to accelerate approval of this proposal. In addition,
the staff of the Board of Governors of the Federal Reserve System
(``Board of Governors'') [[Page 21230]] has concurred with the
Commission's granting of accelerated approval.\11\
\11\Telephone conversation between William R. Stanley, Board of
Governors, and Ari Burstein, Division, Commission (April 11, 1995).
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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, NW., Washington, DC 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, NW.,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of PTC. All submissions
should refer to file number SR-PTC-95-03 and should be submitted by May
22, 1995.
It is therefore ordered, pursuant to section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-PTC-95-03) be and hereby is
approved on an accelerated basis through April 30, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\12\
\12\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-10606 Filed 4-28-95; 8:45 am]
BILLING CODE 8010-01-M