On April 11, 2000, the MBS Clearing Corporation (“MBSCC”) filed with the Securities and Exchange Commission (“Commission”) a proposed rule change (File No. SR-MBSCC-00-01) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”). On June 13, 2000, MBSCC amended the proposed rule change. Notice of the proposal was published in the Federal Register on June 26, 2000. No comment letters were received. For the reasons discussed below, the Commission is approving the proposed rule change.
Securities Exchange Act Release No. 42961 (June 20, 2000), 65 FR 39456.
I. Discussion
The rule change adds subsection (b) to Article IV, Rule 2, Section 9 of MBSCC's rules to prohibit MBSCC from accepting a letter of credit from a participant that is issued by that participant or by an affiliate of that participant. This rule change codifies MBSCC's historical practice of requiring that a letter of credit deposited by a participant to the participants fund be issued by an approved letter of credit other than the participant or an affiliate of the participant.
Article IV, Rule 2, Section 9 of MBSCC's rules, which governs deposits of letters of credit by MBSCC's participants to the participants fund for margin purposes, provides, among other things, that MBSCC may approve as the issuer of a letter of credit any domestic or foreign bank or trust company meeting the requirements set forth in procedures adopted by MBSCC.
The rule change also amends Article I, Rule 1 of MBSCC's Rules to add a definition of “affiliate.” Affiliate is defined as follows: “The term an ‘Affiliate’ of, or a person ‘Affiliated’ with, a specified person, means a person that directly, or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified. For purposes of this definition, the term ‘control’ (including the terms ‘controls,’ ‘controlled by,’ and ‘under common control with’) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.”
The proposed rule change also makes a technical modification to Article III, Rule 5 of MBSCC's Rules to correct the reference contained within such rule from “Rule 4” to “Rule 5.”
II. Discussion
Section 17A(b)(3)(F) of the Act requires that the rules of a clearing agency be designed to assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible. As set forth below, the Commission believes that MBSCC's rule change is consistent with this obligation.
Letters of credit are used at MBSCC and at other clearing agencies as collateral to meet clearing fund obligations. MBSCC's clearing fund is intended to provide liquidity and protection to MBSCC and its members in the event a MBSCC member defaults on its obligation. If a member were allowed to issue a letter of credit to itself (or an affiliate of the member to the member), the letter of credit would probably not be honored in a default situation.
Because the rule change will prohibit a participant from providing a letter of credit for itself or from an affiliated entity, the rule change helps ensure that MBSCC can draw upon a letter of credit used as clearing fund collateral if MBSCC ever had the need to do so. This should assist MBSCC in safeguarding securities and funds in its possession or control or for which it is responsible.
III. Conclusion
On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act and in particular with the requirements of Section 17A of the Act and the rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (File No. SR-MBSCC-00-01) be, and hereby is, approved.
For the Commission by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-29286 Filed 11-15-00; 8:45 am]
BILLING CODE 8010-01-M