[Federal Register Volume 62, Number 124 (Friday, June 27, 1997)]
[Notices]
[Pages 34726-34729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-16918]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38753; File No. SR-PTC-97-02]


Self-Regulatory Organizations; Participants Trust Company; Notice 
of Filing of a Proposed Rule Change Relating to the Clearance and 
Settlement of Mortgage-Backed Securities Issued By the Federal Home 
Loan Mortgage Corporation and the Federal National Mortgage Association

June 20, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 2, 1997, the 
Participants Trust Company (``PTC'') filed with the Securities and 
Exchange Commission (``Commission'') and on May 6, 1997,\2\ and June 
12, 1997,\3\ amended the proposed rule change (File No. SR-PTC-97-02) 
as described in Items I, II, and III below, which items have been 
prepared primarily by PTC. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Letter from Leopold Rassnick, Senior Vice President, General 
Counsel, and Secretary, PTC, (May 6, 1997).
    \3\ Letter from Carol A. Jameson, Assistant Vice President and 
Assistant Counsel, PTC, (June 11, 1997).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change amends PTC's rules to permit PTC to 
process mortgage-backed securities guaranteed by the Federal Home Loan 
Mortgage Corporation (``FHLMC'') and the Federal National Mortgage 
Association (``FNMA''). The proposed rule change will revise PTC's 
rules to include the processing of ``Fed Securities,'' which is 
proposed to be defined as securities that are held on the books of a 
Federal Reserve Bank and which are designated as ``eligible 
securities'' pursuant to PTC's rules. FHLMC and FNMA guaranteed 
mortgage-backed securities will fall within the definition of Fed 
Securities.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, PTC 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. PTC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\4\
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    \4\ The Commission has modified the text of the summaries 
prepared by PTC.
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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 amend PTC's rules to 
permit PTC to process Fed Securities in its book-entry system. PTC 
currently acts as a depository and book-entry system for securities 
guaranteed by the Government National Mortgage Association (``GNMA''), 
the Department of Veterans Affairs (``VA''), and for certain multiclass 
securities collateralized by GNMA securities and guaranteed by FHLMC or 
FNMA, all of which are issued through PTC or are deposited with PTC in 
certificated form and thereafter are processed through PTC's book-entry 
system.\5\
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    \5\ Under the proposed rule change, securities which are issued 
through PTC or deposited at PTC in physical form and thereafter 
immobilized at PTC are defined under a new term, ``Depository 
Securities.'' However, for convenience of reference, all such 
securities are referred to herein as ``GNMA securities.''
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    Fed Securities will remain in the Federal Reserve's book-entry 
system. PTC participants that are Federal Reserve member banks will 
have a choice of whether to clear and settle Fed Securities through PTC 
or directly through the Federal Reserve's book-entry system. Dealers 
and non-Federal Reserve member banks that are PTC participants will 
have a choice of whether to clear and settle Fed Securities through PTC 
or through a clearing bank.
Benefits to Participants
    According to PTC, the proposed rule change was undertaken in 
response to participants' requests. Participants wanted to reduce 
overdraft and processing costs and to centralize processing of 
mortgage-backed securities at a single location. PTC views the 
expansion of its product line to include Fed Securities as an efficient

[[Page 34727]]

use of PTC's resources to utilize its infrastructure over an expanded 
product base of similar, mortgage-backed instruments. PTC's credit and 
risk management controls for securities currently cleared and settled 
on PTC's system, including PTC's pricing, margining, end-of-day 
borrowing facilities, and net debit monitoring level (``NDML'') and net 
free equity (``NFE'') controls are directly applicable to the clearance 
and settlement of other mortgage-backed instruments such as FHLMC and 
FNMA pass-throughs and REMICs.
Reduced Transaction Fees
    Since its inception, PTC has anticipated that it would be expanding 
the types of mortgage-backed securities that are eligible for clearance 
and settlement at PTC. PTC's certificate of incorporation covers asset-
backed securities, and its rules cover FHLMC and FNMA securities as 
well as GNMAs.
    According to PTC, by expanding its portfolio of eligible security 
types, PTC would be able to process its present GNMA securities and the 
new Fed Securities at a lower unit cost. PTC's computer systems and 
much of its resources are currently geared to handle the peak 
processing volumes experienced on the Public Securities Association 
(``PSA'') designated GNMA settlement dates. Because the bulk of Fed 
Securities settle on different dates, PTC anticipates processing the 
increased volume with a minimal increase in operating expenses. This is 
expected to reduce transaction fees for all PTC participants, including 
participants that utilize PTC's depository facilities for GNMA 
securities and elect not to use PTC as a depository for Fed Securities.
Participant Internal Savings
    PTC believes that its participants should expect internal savings 
in the areas of reduced fees and internal centralization of mortgage-
backed securities processing. Utilization of PTC's book-entry system 
will minimize Federal Reserve daylight overdraft fees with respect to 
Fed Securities transactions settled internally at PTC that would 
otherwise result in an overdraft on the Fedwire system. Centralizing 
the clearance and settlement of Fed Securities and GNMA securities at a 
single depository location is also expected to lead to more cost-
effective internal operations for participants.
Appointment of PTC Custodian for Fed Securities
    PTC has contracted with the Bank of New York (``BNY'') to serve as 
PTC's custodian for Fed Securities, to perform custodial services for 
PTC, and to maintain an account at the Federal Reserve Bank of New York 
(``FRBNY'') for the delivery and receipt of Fed Securities on behalf of 
PTC. Federal Reserve policy does not currently permit a limited purpose 
trust company such as PTC to incur an overdraft in its account at a 
Federal Reserve Bank. Therefore, the appointment of a custodian to 
maintain an account at a Federal Reserve Bank for Fed Securities 
maintained at PTC is necessary to enable PTC's participants to receive 
Fed Securities delivered versus payment through the Federal Reserve 
Bank's book-entry system into their accounts on PTC's book-entry 
system.
    BNY's role as custodian for the Fed Securities program will be 
similar to the role of PTC's present vault custodian for GNMA 
certificates. PTC immobilizes GNMAs in physical form in ``jumbo 
certificates'' with book-entry interests transferred on PTC's books. 
Similarly, Fed Securities will be held in custody by BNY. Transfers 
between PTC participants will be internal movements on the books of PTC 
and will require no activity on the part of the custodian bank other 
than in some instances that require the repositioning of Fed Securities 
between PTC's clearing account and PTC's segregated account at BNY as 
discussed in more detail below.
    BNY also will act as PTC's clearing bank for transactions involving 
the transfer of Fed Securities to or from a PTC participant and a non-
PTC participant. Such external transactions will result insecurities 
wire transfers over the Federal Reserve Bank's fedwire system using the 
custody bank interface. The bulk of PTC's rule changes contract 
provisions with BNY, and computer programming efforts are centered on 
the clearing aspects of the PTC-BNY and BNY-FRBNY relationships and the 
associated lien issues an computer interface requirements.
Receipt of Fed Securities over Fedwire
    Under the proposed rule change, BNY will receive on PTC's behalf 
Fed Securities delivered from a non-PTC participant to a PTC 
participant. The incoming receive will immediately be routed to PTC 
through an on-line computer interface with BNY. PTC will then 
automatically route the incoming receive to a participant account for 
review prior to crediting the participant's account or associated 
transfer account. Any transaction which fails PTC's NFE or NDML checks 
will be returned to BNY with instructions to return the securities to 
the originating party through the Federal Reserve's book-enty system. 
Receives passing PTC's NFE and NDML reviews will be posted to the 
participant's account (for free deliveries) or to the participant's 
transfer account (for deliveries versus payment).
Delivery of Fed Securities Over Fedwire
    Participants that want to deliver Fed Securities to either PTC 
participants or non-PTC participants will instruct PTC using 
essentially the same data-entry procedures as are currently used for 
GNMA securities transactions. As is currently the case for deliveries 
of GNMA securities between participants, all delivery instructions will 
remain subject to PTC's NFE check on the participant account from which 
the delivery is initiated. PTC will determine from the security type 
and contra party address whether the delivery is internal or external. 
Deliveries between PTC participants will require no update of BNY's 
records other than repositioning between accounts on BNY's books for 
certain transactions, as discussed in more detail below. PTC will 
instruct BNY to delivery securities to non-PTC participants using the 
Federal Reserve's book-entry system.
Receipt of Principal and Interest (``P&I'')
    P&I payments received by BNY from the FRBNY will be immediately 
forwarded by BNY to PTC's cash account with the FRNBY. PTC expects that 
upon receipt from BNY the funds will be immediately available to PTC 
participants. There will be no need to borrow funds for P&I 
disbursements on Fed Securities. PTC will only disburse P&I from the 
P&I funds that it receives.
Intraday and End-of-Day Credit
    BNY will extend credit to PTC intraday with rspect to Fed 
Securities received versus payment from non-PTC participants, and PTC 
will fully collateralize any debit balance resulting from such 
advances. Each participant maintaining Fed Securities in a PTC account 
will be subject to PTC's Fed Securities NFE credit check to insure 
adequate collateral for its obligations to PTC. BNY's intraday debit to 
the FRBNY will be collateralized by BNY in accordance with its standing 
arrangements with the FRBNY. PTC will not retain an overnight cash 
balance at BNY. Any funds due to or due from BNY will be settled prior 
to the close of business each day. However, BNY may

[[Page 34728]]

choose to extend end-of-day credit if PTC cannot settle its closing 
debit.
Maintenance of Clearing Account and Segregation Account
    BNY will maintain two accounts on behalf of PTC: (1) A clearing 
account containing securities and cash which are subject to the 
clearing bank's lien and (2) a segregation account containing 
securities and cash which are free of such lien. External deliveries of 
securities and cash will move into or out of the clearing account from/
to any other account on the books of BNY or the FRBNY. PTC may also 
direct BNY to transfer securities to non-PTC participants from PTC's 
segregation account. As required by BNY, incoming receives of Fed 
Securities from non-PTC participants will be posted to the clearing 
account. Securities may be transferred between the two accounts based 
on instructions from PTC.
Valuation of Collateral
    A net overdraft resulting from the receipt of securities versus 
payment in PTC's clearing account at BNY must be fully secured at all 
times. BNY and PTC will use the same prices and haircuts to value 
securities constituting such collateral. BNY will use these prices and 
margins to determine the value of the collateral that secures PTC's 
overdraft at BNY. PTC will have a separate NFE monitor for Fed 
Securities and will use these prices and margins to calculate a 
participant's Fed Securities NFE. If the receipt of Fed Securities 
versus payment would cause a collateral deficiency in the clearing 
account, BNY may at its option return the securities to the non-
participant sender or may afford PTC an opportunity to cure the 
deficiency. To cure the deficiency, PTC would contact its participant 
and use the resources of such participant.
BNY Lien on Fed Securities in the Clearing Account
    Securities in participant accounts on PTC's books which are subject 
to a PTC lien (i.e., proprietary and agency accounts) will be held in 
the BNY clearing account and will be subject to a BNY lien. Securities 
in participant accounts on PTC's books which are not subject to PTC's 
lien (i.e., segregated, pledgee, and limited purpose accounts) will be 
held in the BNY segregation account and will not be subject to a BNY 
lien.
    Securities received through BNY which a participant retransfers 
intraday to a lien-free account on PTC's books will be moved to the 
segregation account at BNY when the securities are transferred on PTC's 
books. If a participant has enough Fed Securities NFE at PTC to permit 
the transfer, BNY will similarly have sufficient collateral securing 
PTC's overdraft to permit the transfer of the securities from PTC's 
clearing account to its segregation account on BNY's books. If the 
participant does not have sufficient PTC NFE, then PTC will not permit 
the transfer of the Fed Securities to a lien-free account on PTC's 
books, and a segregation instruction will not be sent to BNY. Since 
PTC's NFE monitor ensures that participant obligations to PTC are fully 
collateralized at all times, the synchronization of movements between 
participant accounts on PTC's books and movements between PTC's 
accounts on the books of BNY will ensure that PTC's obligations to BNY 
are also fully collateralized at all times.
BNY Lien on Additional Collateral
    To secure its obligations to BNY, PTC grants BNY a first and prior 
lien on all securities and cash balances credited to the clearing 
account and to such additional property as may be mutually agreed.
    The proposed rule change provides that participants may designate 
specific GNMA securities which are subject to liens at PTC for pledge 
to BNY by using PTC's Collateral Loan Facility (``CLF''). BNY will be 
granted a senior security interest in GNMA securities so pledged, and 
PTC will retain a secondary lien. The collateral value (i.e., market 
value less haircut) of GNMA securities which have been designated by 
participants in this manner will be added to Fed Securities NFE and 
subtracted from GNMA securities NFE in the participant's account at 
PTC.
Release of BNY Lien
    In the event of a participant default, PTC's $2 billion committed 
line of credit provides a source of funds that may be applied to pay a 
BNY overdraft. However, the clearing agreement between PTC and BNY does 
provide the BNY at its option may lend PTC the amount of such shortfall 
secured by specific collateral designated by PTC with a value at least 
equal to the amount outstanding. Upon the identification of the 
designated collateral, BNY's lien would be released on all other 
collateral in the clearing account.
    PTC believes the procedures in the clearing agreement covering the 
designation of collateral are consistent with PTC's rules which provide 
for the use of the collateral in a defaulting participant's accounts to 
cover the participant's unpaid obligations to PTC. Accordingly, the 
defaulting participant's collateral would be designated as collateral 
to BNY thereby permitting the release of BNY's lien on the collateral 
of all other participants.
    PTC also is authorized to designate specific collateral in the 
amount of an unpaid end-of-day PTC overdraft even if BNY chooses not to 
lend to PTC. Collateral designation in this situation could be utilized 
to achieve settlement under PTC's rules and would leave the securities 
of the defaulting participant with BNY as designated collateral. PTC's 
default procedures would then be applied to obtain funds equal to the 
remaining unpaid balance owed to PTC by the defaulting participant. A 
collateral designation where BNY does not lend could also be utilized 
in the event of a PTC insolvency in order to permit the deliveries of 
securities required by the participants' intraday collateral lien 
(``PICL'') to participants with net credit balances at PTC or to 
participants which pay their net debit balances to PTC.
Limitation on BNY Lien
    The only PTC liability that will be secured by a BNY lien on 
participant securities and collateral is PTC's overdraft indebtedness 
to BNY caused by the receipt of Fed Securities versus payment through 
BNY. Fees and other BNY charges will be charged to a separate PTC cash 
charge account at BNY and are not secured by BNY's lien on Fed 
Securities or other collateral. The release of funds and securities 
from the clearing account is dependent solely upon the satisfaction by 
PTC of its overdraft indebtedness to BNY, except as otherwise provided 
with respect to the designation of collateral to secure such overdraft 
indebtedness.
Overdraft Fees
    PTC's arrangement with BNY requires that PTC pay overdraft fees 
when an overdraft exists in its account. Each participant will be 
allocated its pro rata share of BNY's overdraft charge to PTC based 
upon that participant's outstanding PTC debit balance associated with 
Fed Securities processing as a percentage of PTC's outstanding 
overdraft balance at the custody bank.
    Securities and cash in the segregation account will not be subject 
to BNY's lien. However, for purposes of calculating daylight overdraft 
fees, any cash credit balance in the segregation account will be used 
to reduce the amount of any FRBNY daylight overdraft obligation 
incurred by BNY on behalf of PTC.

[[Page 34729]]

Clearing Bank Default to PTC
    PTC may have a credit balance in its cash account at BNY arising 
from external deliveries of Fed Securities and prefunding deposits. If 
BNY defaulted on its payment of PTC's credit balance at BNY, PTC would 
be an unsecured creditor of BNY. Such a result would be basically the 
same as exists in the present structure of the marketplace where each 
securities dealer would also be an unsecured creditor of its clearing 
bank. PTC believes that its selection of a strong, money-center bank, 
such as BNY, to act as PTC's clearing bank reduces the potential for 
the clearing bank's default.
    Under the proposed rule change, in the event that BNY defaulted in 
its capacity as clearing bank and created a shortfall in the funds 
needed by PTC to pay participant credit balances at settlement, PTC 
would adjust participant Fed Securities cash balances by deducting the 
amount of the shortfall from participant cash balances as follows: 
first, pro rata from the cash balances of participants with net credits 
with respect to external deliveries and receives of Fed Securities with 
a maximum adjustment equal to the value of such net credits and second, 
pro rata from the cash balances of participants with remaining Fed 
Securities credit balances.
Participant Default
    In the event of a participant default, PTC would follow the 
procedures described in its current rules where the collateral of the 
defaulting participant is used to secure an advance from PTC or to 
borrow funds. The NFE computation should ensure that sufficient 
collateral value is available in the defaulting participant's account.
    If the default remedies in PTC's rules are insufficient to enable 
PTC to satisfy its overdraft indebtedness to BNY, PTC would require 
participants to settle separate cash balances for GNMA securities and 
Fed Securities. As a result of the separate settlements, some 
participants which had paid debit balances or have net credit balances 
would subsequently be required to remit payment to PTC for a debit 
balance with respect to either GNMA securities or Fed Securities (i.e., 
participants whose account cash balance reflected a debit balance with 
respect to Fed Securities and a credit balance with respect to GNMA 
Securities or vice versa). Failure to pay a debit balance with respect 
to either GNMA securities or Fed Securities resulting from the separate 
settlement would be a default to which the general default provisions 
of PTC's rules would apply. However, borrowings from participants which 
delivered to the defaulting participant would be applied to deliveries 
of GNMA securities or Fed Securities, as applicable, to reduce the 
debit balance.
    After the deadline set by PTC for participant payment of debit 
balances resulting from separate settlements, PTC would remit all Fed 
Securities debit balance payments to BNY. If a deficiency remained, PTC 
would designate the collateral of the participant which defaulted in 
payment of its Fed Securities debit balance to BNY in accordance with 
the clearing agreement between PTC and BNY thereby causing the release 
of BNY's lien on the remaining collateral belonging to other PTC 
participants.
    Once BNY's interest in participant collateral is released, PTC 
would proceed with the default remedies in PTC's rules which provides 
for loans from participants which delivered securities to a defaulting 
participant collateralized by securities of the defaulting participant. 
PTC would then settle the securities of participants with credit 
balances or which have paid their debit balances.
    PTC believes that the proposed rule change is consistent with 
Section 17A(b)(3)(F) of the Act \6\ and the rules and regulations 
thereunder in that it will assure the safeguarding of securities and 
funds which are in the custody or control of PTC or for which it is 
responsible, remove impediments to and perfect the mechanism of a 
national system for the prompt and accurate clearance and settlement of 
securities transactions, and foster cooperation and coordination with 
persons engaged in the clearance and settlement of securities 
transactions.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    PTC does not believe that the proposed rule change imposes any 
burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    PTC has not solicited and does not intend to solicit comments on 
this proposed rule change. PTC has not received any unsolicited written 
comments from participants or other interested parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which PTC consents, the Commission will:
    (A) By order approve such proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. 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 filing will also be available 
for inspection and copying at the principal office of PTC. All 
submissions should refer to the file number SR-PTC-97-02 and should be 
submitted by July 18, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-16918 Filed 6-26-97; 8:45 am]
BILLING CODE 8010-01-M