[Federal Register Volume 64, Number 10 (Friday, January 15, 1999)]
[Notices]
[Pages 2691-2693]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-922]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40889; File No. SR-MBSCC-98-04]
Self-Regulatory Organizations; MBS Clearing Corporation; Notice
of Filing and Order Granting Accelerated Approval of a Proposed Rule
Change Regarding Year 2000 Testing
January 6, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on December 24, 1998, MBS
Clearing Corporation (``MBSCC'') filed with the Securities and Exchange
Commission (``Commission'') and on January 5, 1999, amended the
proposed rule change as described in Items I and II below, which items
have been prepared primarily by MBSCC. The Commission is publishing
this notice and order to solicit comments from interested persons and
to grant accelerated approval of the proposal.
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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
Under the proposed rule change, MBSCC will require certain MBSCC
participants to conduct Year 2000 testing with MBSCC.
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 add an addendum to
MBSCC's rules regarding: participants that are required to conduct Year
2000 testing with MBSCC, participants that are exempt from Year 2000
testing with MBSCC, the scope of Year 2000 testing with MBSCC,
reporting by participants, and remedial action for non-compliance.
Participants Required To Conduct Year 2000 Testing
All participants in MBSCC's Comparison and Clearing System
(``clearing participants'') and Electronic Pool Notification (``EPN'')
System (``EPN participants'') with automated interfaces (i.e.,
computer-to-computer interfaces and PC interfaces that use file uploads
and downloads) to MBSCC are required to conduct Year 2000 testing with
MBSCC.
Participants Exempt From Year 2000 Testing With MBSCC
Clearing participants and EPN participants that are terminal
service (i.e., PC interfaces that do not use file uploads and
downloads) only users are exempt and are not required to conduct Year
2000 testing with MBSCC.
Scope of Year 2000 Testing With MBSCC
Year 2000 testing is being conducted directly between MBSCC and
clearing participants and EPN participants that are required to test
with MBSCC. MBSCC, in consultation with the Mortgage-Backed Securities
Focus Group of the Securities Industry Association (``SIA'') Year 2000
Committee, determined not to participate in the industry-wide SIA Year
2000 tests due to the uniqueness of mortgage-backed securities.
Instead, MBSCC's Year 2000 tests require clearing participants and EPN
participants that are required to test with MBSCC to execute a test
script designed to exercise functionality with MBSCC in a Year 2000
environment.
MBSCC conducted Year 2000 tests with certain clearing participants
and EPN participants on June 6, 13, 25, and 27, 1998 (``June 1998
test'') and October 3, 10, 17, 22, and 24, 1998, (``October 1998
test''). Clearing participants and EPN participants that successfully
tested with MBSCC in the June 1998 test or in the October 1998 test or
in both are not required to participate in additional Year 2000 testing
with MBSCC.
MBSCC has scheduled an additional Year 2000 test cycle for clearing
participants and EPN participants with automated interfaces to MBSCC
that have not successfully tested with MBSCC. The additional Year 2000
test cycle is scheduled for January 30, February 6, February 20,
February 25, and February 27, 1999.
MBSCC intends to conduct additional Year 2000 tests during 1999 and
will advise clearing participants and EPN participants of the specific
test dates by Administrative Bulletin.
MBSCC will determine whether a clearing participant or EPN
participant has successfully tested with MBSCC based on the
participant's satisfactory execution of the test script described above
and based on timely and satisfactory completion of the testing survey
described below. MBSCC will advise each clearing participant and EPN
participant whether it has successfully tested with MBSCC. MBSCC may
also periodically publish by Administrative Bulletin a list of the
clearing participants and EPN participants that have successfully
tested with MBSCC.
[[Page 2692]]
Reporting by Participants
Clearing participants and EPN participants that are required to
participate in Year 2000 testing with MBSCC must promptly provide MBSCC
with a testing survey upon completion of Year 2000 testing. The survey
must be in the form prescribed by MBSCC, must be signed by a senior
officer, and must indicate whether it is satisfied with the testing
results and describing the processing environment in which the test was
executed. Clearing participants and EPN participants that are required
to participate in Year 2000 testing with MBSCC also must promptly
provide MBSCC with such other information relating to the testing
survey as MBSCC may require.
Remedial Action for Non-compliance
Each clearing participant that does not successfully participate in
the scheduled tests will be required to post an increased minimum
market margin differential deposit with MBSCC beginning October 1,
1999. The increased minimum market margin differential deposit will be
as follows: October 1, 1999--100 additional basis points of net
position; November 1, 1999--200 additional basis points of net
position; December 1, 1999--300 additional basis points of net
position; and January 3, 2000--300 additional basis points of net
position. On and after February 1, 2000, MBSCC will have the authority
to continue to require 300 additional basis points of net position if a
clearing participant that has not successfully participated in the
scheduled tests does not demonstrate adequate operational capabilities
to process trades in the Year 2000. The increased minimum market margin
differential deposit is designed to provide additional collateral that
can be used if the clearing participant that has not successfully
participated in the scheduled tests is unable to process trades due to
Year 2000 problems.
MBSCC has the discretion to convert trades for settlement in the
Year 2000 and destined for netting of clearing participants that do not
successfully participate in the scheduled tests to trade-for-trade
status. MBSCC also has the discretion to continue to convert trades
destined for netting to trade-for-trade status if a clearing
participant that has not successfully participated in the scheduled
tests does not demonstrate adequate operational capabilities to process
trades in the Year 2000. The conversion of trades destined for netting
to trade-for-trade status is designed to eliminate the risk of a
clearing participant being paired-off as a result of the netting
process with a clearing participant that has not successfully tested
with MBSCC.
MBSCC will enforce the EPN user agreement that requires all pool
notification information to be submitted through EPN regardless of
whether an EPN participant has successfully participated in the
scheduled tests. If an EPN participant that has not successfully
participated in the scheduled tests has processing difficulties, it
will need to use EPN terminal service to receive the message thereby
not impacting the sending EPN participant. MBSCC will have additional
terminals available at its site as a contingency for those EPN
participants that experience processing difficulties. Enforcement of
the EPN user agreement is designed to ensure that an EPN participant
sending a message to an EPN participant that has not successfully
participated in the scheduled tests will benefit from the Bond Market
Association's good delivery guidelines.
The proposed addendum also contains a statement that it is in
addition to and not a limitation of MBSCC's rights pursuant to its
rules and procedures. The proposed addendum to MBSCC's rules will
automatically expire at such time as MBSCC determines that clearing
participants and EPN participants demonstrate adequate operational
capabilities to process trades in the Year 2000. MBSCC will advise
clearing participants and EPN participants of such determination by
Administrative Bulletin.
MBSCC believes that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder. In
particular, the proposed rule change is consistent with Section
17A(b)(3)(F) of the Act,\3\ which requires that the rules of a clearing
agency be designed to promote the prompt and accurate clearance and
settlement of securities transactions and, in general, to protect
investors and the public interest.
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\3\ 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
MBSCC advised participants of the proposed rule change by
Administrative Bulletins dated July 28, 1998, and September 18, 1998.
No written comments relating to the proposed rule change have been
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
Section 17A(b)(3)(F) of the Act \4\ requires that the rules of a
clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions. The Commission
believes that the proposed rule change is consistent with this
obligation because the required Year 2000 testing with MBSCC should
help MBSCC to address potential problems associated with certain
members' Year 2000 readiness. As a result, MBSCC should be able to
continue to provide for the prompt and accurate clearance and
settlement of securities transactions before, on, and after Year 2000
without interruption.
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\4\ 15 U.S.C. 78q-1(b)(3)(F).
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MBSCC requested that the Commission find good cause for approving
the proposed rule change prior to the thirtieth day after the
publication of notice of the filing. The Commission finds good cause
for approving the proposed rule change prior to the thirtieth day after
the publication of notice of the filing because such approval will
allow MBSCC to implement its mandatory Year 2000 testing program in a
timely manner.
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. Sec. 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
[[Page 2693]]
filing will also be available for inspection and copying at the
principal office of MBSCC. All submissions should refer to the File No.
SR-MBSCC-98-04 and should be submitted by February 5, 1999.
IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the
Act,\5\ that the proposed rule change (File No. SR-MBSCC-98-04) be and
hereby is approved.
\5\ 15 U.S.C. 78s(b)(2).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-922 Filed 1-14-99; 8:45 am]
BILLING CODE 8010-01-M