[Federal Register Volume 59, Number 111 (Friday, June 10, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: X94-10610]


[[Page Unknown]]

[Federal Register: June 10, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34154; File No. SR-PTCV-94-01]

 

Self-Regulatory Organizations; Participants Trust Company; Order 
Approving Proposed Rule Change Relating to the Eligibility of Certain 
Securities Guaranteed by the Government National Mortgage Association

June 3, 1994.
    On April 4 1994, the Participants Trust Company (``PTC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-PTC-94-01) pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ The proposed rule change 
allows PTC to designate certain securities guaranteed by the Government 
National Mortgage Association (``GNMA'')\2\ as ``eligible securities'' 
as permitted by PTC's Rules. The Commission published notice of the 
proposed rule change in the Federal Register on April 26, 1994.\3\ No 
comments were received. For the reasons discussed below, the Commission 
is approving the proposed rule change.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\GNMA is a wholly-owned corporate instrumentality of the 
United States within the Department of Housing and Urban Development 
(``HUD''). Through its single-class GNMA I and GNMA II mortgage-
backed securities (``MBS'') programs, GNMA guarantees the timely 
payment of principal and interest on securities issued by private 
institutions and backed by pools of federally insured or guaranteed 
mortgage loans. The GNMA guarantee is backed by the full faith and 
credit of the United States.
    \3\Securities Exchange Act Release No. 33927 (April 19, 1994), 
59 FR 21794.
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I. Description

    The proposed rule change allows PTC to designate certain securities 
guaranteed by GNMA and eligible securities as permitted by Article I, 
Rule 2 of PTC's Rules. PTC currently acts as depository for single-
class GNMA I and GNMA II MBS and REMIC securities\4\ guaranteed by the 
Department of Veterans Affairs (``VA'').\5\
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    \4\REMIC is an acronym for ``real estate mortgage investment 
conduit,'' as pass-through vehicle created under the Tax Reform Act 
of 1986 to issue multiclass mortgage-backed securities.
    \5\As of December 31, 1993, PTC had approximately 260,000 pools 
of GNMA single-class securities on deposit, representing $850 
billion in par value (95% of total GNMA single-class securities par 
value outstanding), and 71 tranches of VA REMIC securities, 
representing $4.6 billion in par value, from a total of 5 REMIC 
transactions (100% of all VA REMIC par value outstanding).
    For a more detailed description of PTC's VA REMIC program, see 
Securities Exchange Act Release Nos. 30792 (June 10, 1992), 57 FR 
27495, and 31914 (February 24, 1993), 58 FR 12295.
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    GNMA is now establishing a GNMA REMIC program under which GNMA will 
guarantee multi-class securities issued by REMIC trusts. The GNMA REMIC 
securities will be issued through single-purpose trusts created by 
GNMA-approved sponsors which will assemble GNMA-guaranteed single-class 
mortgage-backed securities to constitute the corpus of the REMIC trust. 
The sponsors will be private-sector entities such as investment 
bankers. Upon issuance, the General Counsel of HUD will render an 
opinion that GNMA's obligations under the GNMA guarantee of its REMIC 
securities will constitute absolute and unconditional general 
obligations of the United States, for which the full faith and credit 
of the United States is pledged.
    The authorizing Federal statute\6\ provides that the GNMA REMIC 
program be implemented by GNMA's publication of a notice in the Federal 
Register, and that GNMA subsequently publish regulations within twelve 
moths of the publication of the initial notice, based upon the comments 
received and the experience of GNMA in carrying out the program.
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    \6\Section 306(g) of the National Housing Act, 12 U.S.C. 
1721(g), as amended by sec. 3004 of the Omnibus Budget 
Reconciliation Act of 1993, 107 Stat. 339.
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    GNMA will implement its REMIC program in two stages. During the 
initial stage, GNMA will restrict participation in the REMIC program to 
a small number of participants (consisting of sponsors, co-sponsors, 
trustees, trust counsel, and accounting firms) and a limited number of 
REMIC issuances. The initial stage will commence upon the closing of 
the first transaction, after publication of the notice in the Federal 
Register, and is expected to last several months, during which time 
GNMA will establish standard documentation, and guidelines and 
procedures applicable to the full implementation of the REMIC 
program.\7\
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    \7\GNMA has not yet announced the date on which the initial 
stage of the REMIC program will commence.
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    While GNMA has not yet determined the characteristics of the GNMA 
REMIC tranches, for processing purposes it is assumed that the GNMA 
REMIC classes will have the same basic processing requirements as the 
VA REMICs, which PTC has had on deposit for approximately the last two 
years. It is assumed that, as in the case with the VA REMIC securities, 
all classes of the GNMA REMIC securities except the residual class will 
be established and maintained in book-entry form through the facilities 
of PRTC, although holders will have the right to request certificated 
securities.

II. Discussion

    The Commission believes that PTC's proposed rule change is 
consistent with section 17A of the Act,\8\ and in particular, section 
17A(b)(3)(F) of the Act. Section 17A(b)(3)(F) requires that the rules 
of a clearing agency be designed to remove impediments to and perfect 
the mechanism of a national system for the prompt and accurate 
clearance and settlement of securities transactions. The Commission 
believes that PTC's proposal to designate certain securities guaranteed 
by GNMA as eligible securities for deposit with PTC is consistent with 
this goal.
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    \8\15 U.S.C. 78q-1 (1988).
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    As previously stated, REMIC issuances will be limited during the 
initial stage of the program. Once the REMIC program is fully 
established, however, GNMA anticipates that a substantial percentage of 
its annual production of GNMA single-class securities will be 
securitized in GNMA REMICs. GNMA has stated they anticipate 
approximately $75 billion is the average deal size, this will result in 
approximately 150 REMIC deals issued each year.
    It is anticipated that each class of the GNMA REMIC securities will 
be issued initially in the form of one or more physical certificates 
registered in the name of MBSCC & Co., nominee for PTC, and held in 
physical form by PTC's custodian, with participants receiving and 
delivering REMIC securities by book-entry on PTC's books. REMIC 
securities may be held subsequent to original issuance in either 
certificated form, outside of PTC, or on PTC's book-entry system, as is 
currently the case with the GNMA I and GNMA II single-class MBS and the 
VA REMIC securities on deposit at PTC. PTC's current custody agreement 
with its custodian, Chemical Bank, accommodates the deposit of GMNA 
REMIC securities with the custodian.
    The REMIC securities will be supported entirely by the cash flows 
on the underlying GMA-guaranteed GNMA I MBS. REMIC trustees will be 
required to pay principal and interest (``P&I'') on the REMIC 
securities in same day funds on the 16th day of the month, or the first 
business day thereafter if the 16th is not a business day. REMIC P&I 
will therefore be paid to REMIC holders on the same day that the PSI on 
the underlying MBS is paid to MBS holders. PTC will pass through the 
REMIC payment on the same day as received.
    Not later than the 14th day of each month, the trustee will deliver 
to PTC and Chemical Bank the factor information for payment on the 
REMIC securities. PTC will follow the instructions from the trustee for 
disbursement of funds received on the GNMA MBS collateralizing the 
REMIC trust.
    The volume of the GNMA REMIC securities initially deposited at FTC 
will be modest compared to the total face amount of GNMA securities now 
on deposit at FTC and is expected to have a comparably small impact on 
FTC's overall transaction volume.\9\ GNMA I's that constitute the 
corpus of a GNMA REMIC trust will remain immobilized at FTC and, 
therefore, will be removed from FTC's transaction volume after the 
creation of the REMIC.
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    \9\The total face amount of GNMA securities now on deposit at 
FTC is approximately $880 billion.
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    It is expected that FTC will utilize pricing sources and the 
methodology employed for the VA REMIC pricing at FTC for the GNMA REMIC 
product.\10\ As an eligible security, functionally and legally 
comparable to GNMA single-class and VA REMIC securities, PTC's Rules 
and procedures are currently consistent with, and govern PTC's and it's 
participants' rights and obligations with respect to, the GNMA REMIC 
securities. PTC end of day borrowing agreements also currently apply to 
GNMA REMIC securities without the change. Finally, PTC anticipates that 
the fees imposed by PTC for providing depository services for GNMA 
REMIC securities will be the same as those in effect for GNMA MBS.
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    \10\For further information regarding the pricing sources and 
methodology employed by PTC, see Securities Exchange Act Release No. 
34017 (May 5, 1994) 59 FR 24495.
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    PTC has gained almost six years of experience with GNMAs. The 
Commission believes that PTC's experience with GNMAs serves as a good 
foundation for continuing to handle REMICs. In addition, PTC has been 
accepting VA REMICS for deposit for almost two years. PTC's experience 
with the VA REMIC program has provided a basis for determining the 
depository services which will be required for the GNMA REMIC. The 
Commission therefore believes that this proposal furthers the 
perfection of the national system for the clearance and settlement of 
securities transactions becuase GNMA REMIC will be processed within a 
centralized, electronic book-entry environment.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the Act, and in particular with 
section 17A of the act, and with the rules and regulations thereunder.
    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-PTC-94-01) be, and 
hereby is, approved.

    \11\15 CFR 78s(b)(12) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\17 CFR 200.30(a)(12).
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Jonathan G. Katz,
Secretary.
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