The Vision to Expand

---

The Vision to Expand, 1"he Strength to Succeed

mbs clearing cOijXlration

Introduction

1

To Our Participants & Colleagues

2

Our Clearing Services

4

Working With The Industry

6

EPN-Electronic Pool Notification

8

Audited Financial Statements

10

MBSCC Participants

16

Board of Directors

inside back cover

the vision to expand, the

strength

to

succeed

MBS Clearing Corporation (MBSCC) IS the sole provider of autoillated trade cOlllparison, confirrTlatlon, risk Illanageillent. netting and electronic pool rotlflcatlon services to participants in the rnortgagebacked securities Illarket. These SeCUrities, bougilt and sold In tile over-lhecOLmter casll. forvvard and options Illarkets, are backed by the Governllleill Natio!lal Mortgage Associatiorl (GNMA), tile Federal Home Loan Mortgage Corporation (FHLMC) and Fannie Mae, The key participants In thiS Illarket -- tile !lations oldesl secorldary market for loan assets -- are Illortgage Orlgl!lators, governillent -sponsored erlterdealers, illter-dealer brokers alld irlstltutional Investor flrrns, MBSCC, establlslled in 1979, IS a clearing agency registered with the United States Securities and Excrlallge Conmilsslon 81ld is 8ffillated With the National Securities Clearing Corpor8tlon IS ITIC1JOrity-owlled by its Partlclpan:s,

MBSCC

-

to our participants and colleagues

Before looking ahead, let's close the books on 1999, a year in which MBSCC welcomed 34 new Participants to our Clearing and Electronic Pool Notification (EPN) services. We are proud

W

__ ..

hile the world counted down to the new millennium, MBS Clearing Corporation

(MBSCC) posted another year of solid results.

strong financial results, expanding our Participant base, navigating the millennium rollover and taking definitive steps to position our organization for the challenges ahead.

associated with trading In the mortgage-backed securities market remains constant. Yet the services needed to execute our mission are changing as our customer base evolves. services industry, the

Clearing System volurne totaled more than $12 trillion for the second consecutive year while EPN volume increased to $4.38 trillion, a 29 percent

driven

breakneck speed

Clearing System To Be Announced (TBA) netting services eliminated 87 percent of the settlement value of trades entered for netting, more than $8.8 trillion In par, saving Participants an estimated $184 million.

by

globalization, the desire to realize straight through and

Option Trade Recording Services.

Increase over 1998.

Our mission of reducing the costs and risks

processing

million of which was retumed to our PartiCipants In the form of fee discounts for Settlement Balance Order (SBO), Trade-for-Trade and

MBSCC celebrated its 20th year by recording

The financial

to report record revenues of $18.5 million, $7.8

of

technology innovation, is increasingly tuming to

Some of the other major highlights from 1999 included:

• We Implemented the Bond Market

organizations such as ours to provide innovative

Association's recommended reduction in

solutions that satisfy common goals.

trade variance guidelines for TBA pass-

The changing marketplace of the late 20th

variance gives the industry greater liquidity,

through transactions. The new trade century also prompted action in Washington,

reduces the nurnber of fails and allows for

D.C., as Congress passed, by sizable majorities,

the quicker movement of pool information.

The FinanCial Services Modernization Act of 1999. The PreSident Signed the measure Into law in November and rnost industry observers antiCipate that banks, Insurers, and securities firms will now enter businesses and markets that were previously unavailable to them under the provisions of the Glass Steagall Act of 1933.

• We dedicated significant resources and personnel during 1999 to ensure a smooth transition to '00' from '99' for our PartiCipants. The successful Y2K date rollover was preceded by years of preparation culrninatlng with MBSCC hosting over 600 tests with PartiCipants In

The expanded opportunities afforded by this legislation will undoubtedly promote fiercer competition for key players in the mortgagebacked securities market and heighten demand for organizations such as MBSCC to continue

1999. The intense review of our systems also provided us with the opportunity to strengthen our overall business continUity plans. • We strengthened our risk management

offering cost -efficient and innovative processing

process through implementation of net and

solutions. The need for MBSCC to stay ahead of

net -out position components to our Margin

the curve when it comes to IntrodUCing new

Requirement, which assesses and

products

and

highest priority.

services

is

perhaps

our

benchmarks Participant net and net-out position volatility. This new component increases the certainty that adequate

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• \Ve seEilTllessiy

tldllslllc,,~eci

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p

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SC'\/ices to lilt=:' 1-1t=?\lvly tc,("t

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T".I5: Sc ([)TCC, Tlpse

,ld,Ic.iEe: Fllkln:},'" Illtell-',J~ ALI~II:,

'C'J:lIJI11g ildclltllJ' lui hel-Ie"!!:" DII iT:I'c:l! [i-liD'

CJLit

C)LII Pillt"';II;d' Its

lolcllllYlSll

WI:'l [) ICC

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lile

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LIS

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tl'ee I'Clv'e

IJ(CIllct t

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11'81'

aceulTulcl:eLi WlsdUI)"

ewe

the CII[{!Wlljl?') 11:'l1

C!Dse '-,UI 1811el Icy '8Ci)Ii'I~1 Ill';

(11 0'18 of

"si '8,1 pasl Bc{,r-ci

mCI"lbels, ROI1Cllci Ke8r:En,

IJclciseci

2,1,[icie:I-ly "I 1 g~JCJ, 1'1 13st y8ClI'S AIJ l llal R8p::,rMr 1<88:

'ell'

'JfldIU(J 1I-,(;S(3 olJservatul 'is

I111 KNE111V8 50Il.I:'Clr1;3 01' IX\5IS. MBSCC I

1-)8CCllle OIIC ill H-e 1I10Sl

,IIC,)I 8i81[1el',Is 0; 'I-.f; 'lIJI-'~JC'igP S8~urlt!C5 IKirke:

III Iry vew, MBSCC's

Old Cl,slulrelS C'inj tile IJlISlllr,,;So IS .1"11111-' IFX)

sta'f

Ronald A Stewart

Frank J, DeCongelio

Pres,dent and Cllief Executive Officer

Chairman of the Board

our clearing services

Corooratlon (MBSCC) IS the

BS

M

sale

cf

orov,der

•

of JIle

1~leed

10 exchange pap8'

basecl trade coni 'rrallor~s arid CO"lmllment

lrade

automated

EIInlII~,alloll

riSK I-na'lagement. trade

letters.

and electronic pooi Ilol'frcatlon Ser\/lces Securrtles

to the Industry MBSCCs a

MBS)

•

ve anC!

~1I1It(JYIT,

rrsk mal-age'llerll

to ,'lcrease certar'lty of

agB'lcy reglstereo

With llle United States Securrtles and

contra-side perior'IV311ce 01' trade

Ccmmlsslon.

allei rnnlll'ze 111 e porelltlal for fWlancla loss II', the event 01 norl-oer'CJIITldl'ce

Oli' Partclpants Include comm8'clal

ba:~lks.

gover'l111elll sponsored e'lterpnses. Inst lL,llo'lal I:westors, nSIJailCe

compal~lles,

Inlematonal

olganlzatlons. Inve81me'lt I'la'lagers. Illter-cieclier ifokers. n lOIigage 1'1

1I'e

olig'la~ors,

Goverwnent

private ,0vestl118'lt

recluctrol'l of PWllorpal c ; COStS and mdlcpowe:' reqLllre::1er'lls appl,catlon of a soprllstcacecj trarJe 11e[tl1g cElpat'lll:y tYPloally

iJy 8::5-90% tl1e

broker/dealers aO:lve

qUEl'lUy

Nallol-Ia'

'lotl:'';atlorr Ellici subseql_,erlt sf;1Ie1lelll

Assoolatlon. Federal HOl::e LDan ar'd Fam e Mae MBS malkets MBSCC operates "NO iJllmary Dusiliess _rllts 02allng Services alld Electronic Pool f'.JollTlcat em (EPN) Selvlces

Clearing Services MBSCCs wiH lrade terms, rrsk manageme'lt S8'Vlces Il,crease ene alld trade Ilerting serv'ces to reciuce Hie overall qual:tlty of fvlBS recelve/clelver oiJ'lgatolls and 111eir atlellOal-c oosls Benefits Services lilclucie Of Iv1BS TBA trade terms

• Trade

•

• Eary 1l0HOat OI'1 of lralje iJreaks allei tne r

to aVOid tails.

MBS TBA pElr requ.nng 000:

"MBSCC is attracting new Participants because its focus is not only on serving the broker/dealer community, but anyone with a need for their services,such as institutional investors. Indeed, non-dealers are the ones who are increasingly drawn to the company's EPN and comparison services." Edward F. Watts, Jr. Managing Director, Goldman, Sachs & Co.

The Effect of Netting $10.1 trillion par value went into the netting system in 1999

MBSCC nets or reduces the total number of financial obligations requiring settlement

87% Netting Factor I $1.3 trillion net financial obligation

working with the industry

_ -===,,;c--c

r

:"P"tl

1\/1F::,SC~(~ In~I()I~rT2'

1_,r-:rl:J C;,T

'Til 'H-, ,VPI' '91-'IIS

Itecj :\ Scr\/'~'C's

te,

L='

.31-,.:1 s~-rr?ty

;' ,'Ilel • II

st.C:·{iC:lclzec: :il Ihe B"'lCl lviellv:?t TBA',LIS val13lT=e !"[IJ!sr :-Si,tScJ

Inat

"Iii.'?'

Pclr-liJU811t

• We also to improvs the risk' Ilcll'li'1[18Ir elll : )IOCe';,; the creatiol'

:-1

1111"1111'1111'"

IJenchrl;JI" for Il8t and net cut lI'e

Ciclnf'(:,JTIOII

of the types of

pUSlkJ11

tllat are eligible to become acJoption of

a Uniform

Letter

'Isk.

(X(JcHIILeltIO'IS

thc ()i

C'(ut

the

strengthening of financial repcrtllg requirements for Participants Of greater significance is '~l? SVCl lJ(1;'Cm ot JUI Clearing Service co'e CCri11:'er?I-CreS ;'1"t we completecJ ill 1999.

TI-,.:'; ,eva Ji1]C!-' ,ccnt,fxi

those areas that liECC

,

"

Ie' 80 tns

Clearing System Volume

4th Quarter 3rdQuarter 2nd Quarter 1st Quarter

_ _ _

Total Par Values of Compared Trade Sides (in trillions)

Working wltll tile IncJustry, we analyzecJ our core business processes to cJetern~llne COlllrnOll functions that we coulcJ uncJertake to to

straight

tllrougll

$3.07

cOI~ltribute

processillg,

recJuce

~$3.33

~ ~

Pal'tlclpant costs ancJ Illcrease Illarketplace certainty, • Towarcl that encJ, III 1999 we PUollsllecJ a concept cJoculllellt cJlSCUSSlng tile risk recJuctlon and execution IJenelits to be

~

~

1998

galnecJ by matciling tracJes in real time, OUI

1999

Participants' response to tile benefits of real tlille services has been overwhelmingly allalYZillg every element of OUI Risk

favorable,

Management Practices towards Im[JroVlrlg tile structure wrl8re deslratJie for the Ilext

• We also publlshecJ a concept cJocument

millellillulTI, TillS ambitiOUS undertakllig

the benefits of automating the manual pair-off process occurring between

resultecJ In the publication of a White Paper

Dealers, Investment Managers, Investillent

requesting II'idustry feecJback

PortfoliOS ancJ their CUStOcJl8rl Banks, The

of Initiatives

automation strategy outllnecJ In the cJoculllent

Mal'k-to,Malket,

011

a numbo!

the vlablilty of a Cash the Ilear elimination

has been broacJly encJorsecJ by Dealers,

of delivery vallance, alld the enhallceillent oj

Investment Managers ancJ CustocJ!ans as a

the current methocJ of l!qulcJatlllg POSitions

llletllocJ to IIlcrease the certainty of

of a

settleillellt ancJ recJuce the human resource

trade par voluilles ancJ nUITIlJer of executions.

glverl tile ever Increasing

costs ncurl'ecJ tOcJay, We look fOlward to • Our Risk Management Committee uncJertook the ambitiOUS task of comprehenSively

our work With tile

IncJustry on these IIllportant Initiatives towarcJs further

recJuctlon

of

the

costs

alld

risks

assOCiated With trading MBS,

"The strong accomplishments during 1999 have accelerated the interest of large buyside firms in participating in the Clearing Services of the MBSCC thus improving the overall efficiency and integrity of the U.S. mortgage securities market." Stephen Casper Chief Financial Officer/Managing Director, Fischer Francis Trees & Watts, Inc,

•••

EPNelectronic pool notification ..... :. . . . :.i?'~:.;.~?~~~~. ~~_~.. :..::.: . . '.::......:. ...

,cpr~

IS ar- e!ectrorlc

~allowrng

COIT,r;-I,~rlr:;at

Pact r;rpants 10

01-, ,-,et'Nock

tea~sl-'t/rell'eve Iv1BS

pOOl idOl'mslnn \'Ia stanoaldlzecl n-,sssaQs for'T'ills Inlo JQ'l Ire

Epr~

rr:essage S'-I,'rtcr,

PartlC!par,ls way DDt to COnYnUI-lsate wltr, [PI,j via hosl, to-rlOs~ EPr\j

tasilitres. I~iessages

ard

eel ItS

PC l'laseo and

va10ates

POOl

a robust aecay of al'c 3L}]lt trails

repcrt,ng tlmeiness.

,r:ks or

accuea-c'y ancl laold de

'-1essages Beneqs Partlc pants cb;e n by 'JSII-C]

Epr~

Services InClxls:

•

recJ',CI,C)r, of errors eiiTIlI~al!or

of milrll,al pilper bssecJ metrncs

Face Value of EPN Messages (in billions)

_ _ _

4th Quarter 3rdQuarter 2nd Quarter 1st Quarter

$1,133

0$1.211

"During my years on the MBSCC Board of Directors, I always took great pride in the way the company evolved to meet the demands of their customers in the mortgage-backed securities markets, including the institutional buy-side. MBSCC has rightfully earned its outstanding reputation." David M. Kelly President, National Securities Clearing Corporation

tu IJe rclleel out ovel tI~e Il8X:

EPI\]

• Ile aIJ!I.ty to Ic?ffect pUr;1 n'JtIfi::ctlIOI'1

several yi3ars nclucJe:

II1ij8pel,cJer-;! of l~rJ'ltI3-SICilCj ciVC1I!C1bl!rty since i:1:1 COflll"I'lnl r :cllICJlS C8'ltrallze,j'l\IrtriWI EPf'1

• IntroducllD'l of Intel net ane! \//130 lJased

leC!'l:loiogles • Al;~mnatloll 01 Cancel ancl Correct Processln~J pOOl

EPI'-J 'vVC1S IIl\rudLlcecl '11 tl,e Ir,cl,1990s C11l0 since tI-lal l,!TIe, IvlGSCC 11C1S sue:-,t IllcIC-:-r et'url n Its

JP 1!le user inElse of EPN al'(j

• DeVelOpmi3l1! 0 1 a central taer!lty to enarJie:

envlrolllTlenl.

EP~~

11-, 1l'iese If]'.'! sr:oit yeals, l:P~,1 1-:dS CleCOllie tile

slanc:Ja(cJ 1-[:1

~~OIYIITrIllcclti(-),-1

pnc)1

11"lfDr~llatl()I"1

Particlpanls to Illore

resume:

jJlClcessiIlg of Dool not:ircatlon

\Ile

facllt:os eli EP~·J to IJCllslel Illtellia l

p:ans. s8ttlemel,: IX'Jcess. ,IIIC] uvollltl()l-l of MBS III

Wi3 l;i3l18Vi3 the --1/, ,,,,,', II c-,-V" ,

{j the esser-,tl)11 TJIE the1; EPI\] IJiays

tile U.S, cille to strato[Jles

ill IvlBS settlernerl; 11-, COI-'IU'IcIIOll WI"', IvlBSCC. tl',8 BmcJ !vldrket /\ssOC!atlol-, WI 1cJ9D rnoc.llflixlliS le'~olnrnellCli3j Clit off tmes

rornEllrl committed 10 alld

IlctlilCC11ro r l oj

nonl Irlinln:atro'l III tl-i3 8\'ent

ci iJLISIIless

lor

SDilll1011S

te)

corllirion 11l(lustlY needs tl-Iat Will ellal)lc (Jllr

rnlllsrllli'"Jl The clelrnllstl- clt8C1 SUClless of [I'N (-OI!!)lec1 '.fjltl! clelT'3110S

Wi?

SYllCygles ar III

customers IrJ (110'1\1 allel prospel III t!le IIUW

cirsruptlnn c;f The EPI~ SEYVlce.

Irlcreasdlg

i\llel WI!: r;ontlllllP

el i l':l f3'lilY.

Our

cic-?cilcatllllJ

irJIIUVJllion will allo\\1 MBSCC to C:Oflt::I'_JC

II]

hFl all

II Jte(ljl'Cli l.klrl III IIT'IJI UVIIIIJ tire MBS r1-ldrkc-;tjJlwJ;

tilrClugrl iJl'(ICi3SS:IIQ c,IKI tllC aV8,laLilllly ::A 1~lure rotJust

IJloV'cJecl li;l

I,

IS "le ')Dpo~IUI illY illal-,t tJ!,l'e

• • • •

-

Ii

balance sheets

Decem ber 31 ,

1998

1999

Assets Cash and cash equivalents

$

Accounts receivable

6,499

$

6,215

1,077

893

714,867

1,043,740

811

596

1,176

538

$724,430

$1,051,982

Participants' deposits Fixed assets, less accumulated depreCiation of $1 ,685,000 and

$1,221,000 at December 31, 1999 and 1998, respectively Other assets Total assets

Liabilities and Stockholders' Equity Liabilities: Accounts payable and accrued liabilities Participants' deposits Total liabilities

$

4,563

$

3,242

714,867

1,043,740

719,430

1.046,982

Stockholders' equity Common stock, no par value: Class A: 50,500 shares authorized, 38,346 shares Issued and outstanding at December 31, 1999 and 1998

1

Class B 5,000 shares authorized, 4,260 shares issued and outstanding at December 31, 1999 and 1998

432

432

4,567

4,567

5,000

5,000

$724,430

$1.051,982

Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

The accompanying notes are an integral part of these statements.

statements of income and retained earnings

For the Ye [\ r E Ii d e dOe C 8

IT! [) e I

31,

1999

1998

$18,468

$17,737

(7,833)

(9,385)

Revenue: Operations Discount to participants Net revenue from operations Illterest income

10,635 408

1,140

11,043

9,492

Employee compensation

5,359

4,058

Systems and related support

2,863

2,524

273

195

1,263

1,576

General and administrative

821

706

Depreciatioll

464

433

11,043

9,492

Current

289

71

Deferred

(289)

(71)

Total revenue Expense:

Rent, maintenance and utilities Professional and other services

Total expense Income before income taxes Income tax provision:

Total income tax provision Net income Retained earnings, beginning of year

Retained earnings, end of year

Tile accompanying notes are an IIltegral part of these statements.

4,567

4,567

$ 4,567

$ 4,567

ali 11

or p 0

i

Il

statements of cash flows

For the Year Ended December 31.

1999

1998

Cash flows from operating activities:

$

Net income

$

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation

464

433

Accounts receivable

(184)

(98)

Other assets

(638)

(336)

Increase in operating assets:

Increase in operating liabilities and accrued liabilities

accounts payable

1,321

813

Net cash provided by operating activities

963

812

Cash flows from investing activity -

(679)

(138)

284

674

6,215

5,541

Cash and cash equivalents, end of year

$6,499

$6,215

Supplementary disclosures -

$

($ 163)

purchase of fixed assets

Net increase in cash and cash equivalents Cash and cash equivalents, beginning of year

net income taxes paid (refunded)

The accompanying notes are an integral part of these statements.

86

; ill

01

I ,J ,-10;1

notes to financial statements Note 1 Organization and Operations MBS Clearing Corporation (MBSCC), a clearing agency registered with the Securities and Exchange Commission, provides trade comparison, confirmation, risk management, netting and electrollic pool notification services to partlc~ Ipants in the mortgage~backed securities market. MBSCC provides discounts on ItS billing to participants based UpOil the amount of eamings to be retained in a given year with due regard to current and anticipated needs, as determined by its independent user Board of Directors.

Note 2 Summary of Significant Accounting Policies Cash Equivalents: MBSCC Invests funds In ovemight reverse repurchase agreements, which are considered cash equivalents. Such agreements provide for MBSCC's delivery of cash in exchange for securities haVing a market value which is at least 102% of the amount of the agreement. An independent custodian designated by MBSCC takes

pos~

session of the securities. Ovemight reverse repurchase agreements are recorded at the contract amounts and totaled $6,215,000 at December 31, 1998. At December 31, 1998, one major financial institution was counterparty to this agreement. There were no Investments in these agreements at December 31. 1999

Fixed Assets: Fixed assets consist primarily of computer Ilardware which IS depreciated on a straight ~Iine basis over three or five years. The AICPA has issued Statement of Position No. 98~ 1. "Accounting for the Costs of Computer Software Developed or Obtained For Intemal Use." effective for fiscal years beginning after December 15, 1998, which requires that certain costs incurred in the development of software be capitalized During 1999, MBSCC adopt~ ed this pronouncement prospectively; no amoullts were capitalized in 1999.

Income Taxes: Deferred tax assets and liabilities are provided for the expected future tax consequences of

tempo~

rary differences between the carrying amount and tax basis of assets and liabilities.

Financial Instruments: Management believes that the carrying value of finanCial Instruments approxrmates market value.

Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates alld assumptions that affect the reported amounts of assets and liabilities and disclosure of cOiltingent assets and liabilities at the date of finanCial statements and the reported amounts of

rev~

enues and expenses during Ule reporting period. Actual results could differ from those estrmates.

Note 3 Participants' Deposits The rules of MBSCC require its particlpallts to mailltain a minimum deposit in cash and to make additional deposits to cover market differentials to secure participants' obligations. Additional amounts may be assessed against

partici~

pants in accordarlce with MBSCC's rules. Participants' deposits consist of cash, securities issued or guaranteed by the U.S. Govemment, or its agencies. and letters of credit. A summary of the deposits Ileid at December 31, 1999 alld 1998 fOllows:

Casrl

1999

1998

$20,620,000

$21,532,000

694,247,000

1,022,208,000

662,769,000

377.930,000

Securities issued or guaranteed by the U.S. Govemment or ItS agencies, at market Letters of credit

MBSCC has entered into a limited cross~guaranty agreement separately with National Securities Clearing Corporatiorl (NSCC) and Govemment Securities Clearing Corporation under which these entities have agreed to make payment to each other for any remaining unsatisfied obligations of a common defaulting participant to the extent that these ties have excess resources of the defaulting participant.

enti~

Note 4 Transactions with Related Parties NSCC, a minority shareholder of MBSCC, provides various support services and office facilities to MBSCC. The costs of providing tllese services are charged to MBSCC In accordance with the proviSions of a service agreement The agreement continues in effect uiliess callceled by either party UpOil six months prior written notice, Cilarges to MBSCC pursuallt to thiS agreemellt totaled approximately $958,000 in 1999 and $862,000 In 1998, Amounts payable to NSCC at December 31, 1999 alld 1998 were $198,000 alld $738,000, respectively, MBSCC is contingently liable, ullder a service agreemellt for a portion of NSCC's office lease which expires orl December 31, 2012, At December 31, 1999, tile cOlltlllgellt commitment of MBSCC for the remaining lease period is approximately $2,438,000

Note 5 Income Taxes MBSCC files Federal, New York State, New York City and IllillOis Ilicome tax returns, The tax effect on temporary dlfferellces that give rise to significant portions of deferred tax assets COliSISt primarily of depreCiation and employee bellefit costs,

Note 6 Post-Retirement Benefit Plans All eligible employees of MBSCC participate in NSCC's trusteed, 1I0ncontrrbutory defined benefit penSIOIl plan, In addition, MBSCC also partiCipates in NSCC's noncontributory supplemental executive retirement alld benefit restoration plans which provide for certaill b8lleflts to Identified executives of MBSCC upon retirement. Further, MBSCC also partiCipates In NSCC's life Insurance program which provides payment of death belleflts to benefiCiaries of eligible retired employees alld NSCC's health Insurance program which prOVides benefits to eligible retired employees In

1999, costs for these plans aggregated $337,000 arld were determilled based upon an actualial calculatiOil using information related to all eligible MBSCC employees Disclosure of post-retlrem8llt bellefit obligations, expense components and actuarial assumptlollS for tile NSCC plalls are Iliciuded ill NSCC's 1999 financial statements,

report of independent accountants

In our opinion, the accompanying balance sheets and the related statements of Ilicome and retained earnings and of cash flows present fairly, in all material respects, tile [Inarlclal positlOil of MBS Clearrrlg CorporatlOl1 at December 31, 1999 and

1998, and the results of ItS operations and ItS cash flows for tile years then ended Irl conformity wltrl accountllig prillclples generally accepted in the United States, These financial statemel-lts are the responsibility of the Company's management; our responsibility is to express an opinion on these flnallCial statements iJased on our audits, We conducted our audits of these statements In accordallce with auditing standards generally accepted In the Uilited States which require that we plan alld perform the audit to obtain reasonable assurance about whether tile finallcial statements are free of material misstatement. An audit Includes examinillg,

011

a test baSIS, eVidence supporting the amounts and disclosures In tile financial statements,

assessing the accounting prinCiples used and Significant estimates made by mallagement. and evaluating the overall finanCial statement presentation, We believe that our audits provide a reasorlable basis for the opinion expressed above,

PricewaterhouseCoopers LLP 11 77 Avenue of the Americas New York, NY 10036

______ ~tmana~em e nt~ s _r e pOLl on Jesp on sib ilLly for internal control over financial reporting To the Board of Directors and Stockholders of MBS Clearing Corporation

February 9, 2000

MBS Clearing Corporation (MBSCC) maintains a system of intemal control over financial reporting which is designed to provide reasonable assurance regarding the preparation of reliable published financial statements. The system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified. Even an effective internal control system, no matter how well designed, has inherent limitations trols -

including the possibility of the circumvention or overriding of con-

and therefore can provide only reasonable assurance with respect to financial statement preparation. Further, because

of changes in conditions, internal control system effectiveness may vary over time. MBSCC's management assessed its intemal control over financial reporting as of December 31, 1999, in relation to criteria for effective internal control described in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, MBSCC believes that, as of December 31, 1999, its system of internal control over financial reporting met those criteria.

;lJ~

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Ronald A. Stewart

Richard R. Macek

President and Chief

Chief Financial Officer

Executive Officer

and Treasurer

[JRICEWATERHOUSE(roPERS

I

. --JLe.p.orL..aJ_ind_e.p.endent_acCOlJntants _on_ internal control over financial reporting To The Board of Directors and Stockholders of MBS Clearing Corporation

February 9, 2000

We have examined management's assertion that MBS Clearing Corporation (MBSCC) maintained effective internal control over financial reporting as of December 31, 1999 which is Included in the accompanying Management's Report on Responsibility for Internal Control Over Financial Reporting. Our examination was made in accordance with standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an understanding of the internal control over financial reporting, testing, and evaluating the design and operating effectiveness of the internal control, and such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. Because of inherent limitations in any internal control, errors or irregularities may occur and not be detected. Also, prOjections of any evaluation of the internal control over financial reporting to future periods are subject to the risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assertion that MBSCC maintained effective internal control over financial reporting as of December 31, 1999 is fairly stated, in all material respects, based upon criteria established in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission.

~iLfJ PricewaterhouseCoopers LLP 11 77 Avenue of the Americas New York, NY 10036

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mbs clearing corporation

Frank J. DeCongelio Chall man of tile Board

CI-I!\IfC:f:ll111

Frank DeCongelio Millldu,ng DlreC/OI ClTDII

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I-IRC;T t:'lJE: I ml

Ronald A. Stewart Proslcien/ and Chief Executive Officer

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Edward Almeida Seiliol Managing {)Irec/or HI IIrI '; n /\111\1:,;

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Robert S. Bennett Assistant Treasurer

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Joseph P. Bzezinski Managillg Director

Anthony H. Davidson Managing Director: Secretary and General Counsel

I!L.J ,:I. CUI"I] 11'.'; C( II 1F'CJI'jt;f]()11

Stephen Casper Cillet Ilflarlclni Offlcel/Managing 11'(;c1HI HIM,II

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Lynn Douglas Managing Director and Chief Opera ling Officer 011 ector

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Patricia Dodson Serllm Vice Preslciel II

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Steven Greenberg Vice Preslclenl, Mari
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Virginia Hanson ManaglllQ Dllector Infonnallon Tecliliolof-]Y

David M. Kelly PresiclelJl

David F. Hoyt ASSIstant Secretary

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Richard R. Macek Iredsurer anel Cilief FIlIi-llioal Officer

Laura E. LoCosa nlllOpal IMf-'NI'r

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Stephen Patriarco SRr Jlur Director 1\llft:1 ill I. I_YI-KII

• Edwin F. Payne Ulluct()r 111'11 I: 1'( HleC

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Ernest A. Pittarelli Manaqinci ()lrtJc/ur: Oporatlons, No/itJ /\mcllca \'!/\I:I
Thomas Sakaris SWI/ur Vice Preslcien! JIc11 JI'I : )1\;111 H H/II:I"[ ( II III

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Edward F. Watts, Jr. Mill If-] Dllu;lor y, ( '( )

Dennis Paganucci {)Ir ectCJr: Mwketln[} & Sales George Parasole VICC' Preslcient MemlJur Services &

mbs clearing corporation

55 Water Street

New York, NY 10041-0082 http://www.mbscc.com

tel 212.412.8770 fax 212.412.8783