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Notice

Self-Regulatory Organizations; MBS Clearing Corporation; Order Granting Approval of a Proposed Rule Change Regarding the Monitoring of MBSCC Participants' Financial Condition and Activities

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Information about this document as published in the Federal Register.

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Start Preamble January 30, 2004.

I. Introduction

On November 27, 2001, MBS Clearing Corporation (“MBSCC”) [1] filed with the Securities and Exchange Commission (“Commission”) proposed rule change SR-MBSCC-2001-06 pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”).[2] On December 26, 2001, MBSCC filed an amendment to the proposed rule change. Notice of the proposal was published in the Federal Register on March 27, 2002.[3] On August 21, 2002,[4] October 22, 2002,[5] February 25, 2003,[6] April 10, 2003,[7] and October 10, 2003,[8] MBSCC filed amendments to the proposed rule change.[9] No comment letters were received. For the reasons discussed below, the Commission is granting approval of the proposed rule change.

II. Description

To strengthen MBSCC's monitoring of participants' financial condition and activities, as well as to conform its rules to its standard practices, MBSCC is amending its rules to (i) add a requirement that registered brokers and dealers submit copies to MBSCC of supplemental reports filed with the Commission pursuant to Rule 17a-11 and that all participants submit to MBSCC copies of any similar types of regulatory notifications and (ii) expand the financial criteria used by MBSCC for Start Printed Page 5882calculating a participant's financial ability.

The first modification to the rules requires broker-dealer participants to submit copies of supplemental reports filed pursuant to Rule 17a-11 to MBSCC concurrently with their submission to the Commission. Rule 17a-11 requires registered broker-dealers to notify the Commission of a decline in net capital below minimum requirements. In addition, MBSCC's participants may have other similar regulatory notification requirements imposed by the SEC, another regulator, or other similar authority when their capital levels or other financial requirements fall below certain levels. This rule change also requires participants to submit such notifications to MBSCC concurrently with their submission to the relevant regulatory authority. Such notices should provide MBSCC with an early warning of potential financial problems with respect to its participants.

The second modification allows MBSCC to use net asset value or other applicable indicia in calculating a participant's financial ability. MBSCC's rules do not currently specify the types of financial indicia that MBSCC may use to calculate a participant's net worth for determining whether the participant meets MBSCC's minimum financial requirements. MBSCC's analysts currently use the appropriate financial indicia for each type of participant. For example, shareholders equity is used to determine the financial ability of a bank whereas net asset value is more appropriate for determining the financial ability of certain types of funds, such as most registered investment companies. This rule change will expand the language in MBSCC's rules to permit use of the appropriate financial indicia.

III. 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 MBSCC.[10] The rule change should help MBSCC to reduce risk by improving MBSCC's ability to monitor and assess the financial condition of its participants. Accordingly, the proposed rule change should help MBSCC to protect the securities and funds in its possession or control or for which it is responsible. Therefore, the Commission finds that the rule change is consistent with section 17A(b)(3)(F).

IV. Conclusion

On the basis of the foregoing, the Commission finds that the proposed rule change 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 applicable.

It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (File No. SR-MBSCC-2001-06) as amended be and hereby is approved.

Start Signature

For the Commission by the Division of Market Regulation, pursuant to delegated authority.[11]

Jill M. Peterson,

Assistant Secretary.

End Signature End Preamble

Footnotes

1.  On January 1, 2003, MBSCC was merged into the Government Securities Clearing Corporation (“GSCC”) and GSCC was renamed the Fixed Income Clearing Corporation. Securities Exchange Act Release No. 47015 (December 17, 2002), 67 FR 78531 (December 24, 2002) (File Nos. SR-GSCC-2002-10 and MBSCC-2002-01).

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3.  Securities Exchange Act Release No. 45604 (March 20, 2002), 67 FR 14755.

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4.  The August 21, 2002, amendment modified the proposed rule change with respect to MBSCC's acceptance of financial statements prepared in accordance with a non-domestic participant's home country generally accepted accounting principles. This portion of the proposed rule change was subsequently withdrawn. See supra note 7.

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5.  The October 22, 2002, amendment made it clear that the requirement for participants to submit regulatory notices relating to declines in capital applies to all MBSCC members.

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6.  The proposed rule change as originally filed established a formal surveillance status mechanism. The amendment filed on February 25, 2003, withdrew that portion of the proposed rule change.

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7.  The amendment filed on April 10, 2003, withdrew the portion of the proposed rule change that would have allowed non-domestic participants to submit financial statements prepared in accordance with their home country generally accepted accounting principles.

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8.  In the amendment filed on October 10, 2003, MBSCC corrected the date the proposed rule change was approved by MBSCC's board of directors and changed the person to contact regarding questions and comments about the proposed rule change.

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9.  Republication of the notice is not necessary because the August 21, 2002, amendment made a change to the proposed rule change that was later withdrawn, the February 25, 2003, and April 10, 2003, amendments withdrew portions of the proposed rule change, the October 22, 2003, amendment made a change to clarify a portion of the proposed rule change, and the October 10, 2003, amendment made technical changes to the proposed rule change.

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10.  15 U.S.C. 78q-1(b)(3)(F).

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[FR Doc. 04-2555 Filed 2-5-04; 8:45 am]

BILLING CODE 8010-01-P