[Federal Register Volume 62, Number 146 (Wednesday, July 30, 1997)]
[Notices]
[Pages 40872-40876]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19965]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38868; File No. SR-DCC-97-06]


Self-Regulatory Organizations; Delta Clearing Corp.; Notice of 
Filing of a Proposed Rule Change Relating to the Clearance and 
Settlement of Mortgage-Backed Securities Repurchase Agreements

July 23, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 7, 1997, the Delta 
Clearing Corp. (``DCC'') filed with the Securities and Exchange 
Commission (``Commission'') and on May 12, May 29, June 18, and July 9, 
1997, amended the proposed rule change (File No. SR-DCC-97-06) as 
described in Items I, II, and III below, which items have been prepared 
primarily by DCC. 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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    DCC is proposing amendments to its Procedures for the Clearing of 
Securities and Financial Instrument Transactions (``Procedures'') that 
will establish procedures for the clearance and settlement of 
repurchase agreements and reverse repurchase agreements (``repos'') in 
which the underlying collateral is book-entry mortgage-backed 
securities issued by the Federal National Mortgage Association 
(``FNMA'') or the Federal Home Loan Mortgage Corporation (``FHLMC'').

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

    In its filing with the Commission, DCC 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. DCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by DCC.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    DCC proposes to revise its Procedures to permit it to clear and 
settle repo transactions on mortgage-backed securities.\3\ Under the 
proposal, DCC will limit its clearing activity to repos on mortgage-
backed securities which are issued or guaranteed directly by FNMA or 
FHLMC, secured by an underlying pool of mortgages, held in book-entry 
form, and transferable through the Federal Reserve System.
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    \2\ Currently, DCC has separate procedures for repo transactions 
and option transactions. DCC has filed a proposed rule change to 
combine the two sets of procedures into a single set of procedures 
[File No. SR-DCC-97-04]. While the combined procedures have not yet 
been approved by the Commission, this proposed rule change amends 
the procedures as combined.
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    According to DCC, the market for repo transactions in mortgage-
backed securities is estimated to be approximately 25% to 40% of the 
size of the market for repo transactions in U.S. Treasury securities. 
DCC states that this estimate suggests that the outstanding notional 
size of the market is between $250 billion to $400 billion with daily 
turnover at 10% of the notional size. DCC believes that the market in 
FNMA and FHLMC instruments that may be cleared and settled through DCC 
under its proposed Procedures is approximately 60% to 70% of the 
marketplace for repo transactions in mortgage-backed securities.
    The netting benefits which may accrue to participants effecting 
transactions through DCC's clearing system for mortgage-backed 
securities are twofold. First, participants will be able to net for 
balance sheet reporting purposes repo transactions in mortgage-backed 
securities pursuant to the provisions of FASB Interpretation No. 41 
(``FIN 41''). Such netting could have a positive and material effect on 
the participants' balance sheet. Second, also pursuant to the 
provisions of FIN 41, participants may be able to net repo transactions 
in Treasury securities cleared through DCC with repo transactions in 
mortgage-backed securities cleared through DCC. Thus, the opportunities 
for a positive impact on a participant's balance sheet is significantly 
enhanced. DCC does not believe that any changes are required to the 
structuring of its clearing system in order for the netting benefits 
described above to accrue to participants.\4\
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    \4\ Paragraph 3 of FIN 41 sets forth the conditions for the 
availability of offset for repo transactions. While paragraph 3 
requires that the counterparties and settlement date be the same for 
all transactions which are to be netted, there is no requirement 
that the securities be of the same type. Therefore, to the extent 
that offset was available for Treasury repo transactions, it should 
be available for transactions with mortgage-backed securities.
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    DCC states that although most of the primary dealer community is 
equipped to effect repo transactions in mortgage-backed securities, 
there is a core group of approximately twenty to twenty-five primary 
dealers for whom mortgage-backed repo trading is considered to be a 
core activity. Of the twenty to twenty-five active participants in the 
marketplace, approximately ten to fifteen consistently act as market 
makers in mortgage-backed repo instruments.
    According to DCC, the trading practices and protocols associated 
with

[[Page 40873]]

effecting repo transactions in mortgage-backed securities are similar 
in nature to those employed in connection with effecting repo 
transactions in Treasury securities.\5\ For example, the repos in 
mortgage-backed securities that DCC proposes to clear will be limited 
to those where the collateral consists of securities which are eligible 
for transfer through the FedWire. Therefore, participants to a 
transaction or authorized brokers \6\ will be required to report trades 
within the same time periods as for repo transactions in Treasury 
securities to permit DCC to process the trade before the closing of the 
Fed Wire.
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    \5\ Areas where market practices for repos in mortgage-backed 
securities differ from market practices for repos in Treasury 
securities include rights of substitution (Section 5 below) and 
principal payments (Section 7 below).
    \6\ Authorized brokers are interdealer brokers that have been 
specially authorized by DCC to offer their services to DCC 
participants.
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    DCC anticipates that the report structure currently employed for 
repo transactions in Treasury Securities is generally applicable and 
appropriate for mortgage-backed securities repo transactions. DCC 
believes only modest changes to the report structures are necessary to 
accommodate, for example, monthly principal and interest payment 
associated with mortgage-backed securities repo transactions. Other 
than these report and certain processing system enhancements, DCC 
believes its existing operating environment is generally able to 
accommodate the introduction of clearing services for mortgage-backed 
securities.\7\
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    \7\ For a description of DCC's current system for the clearance 
and settlement of repo transactions in Treasury securities, refer to 
Securities Exchange Act Release No. 36367 (October 13, 1995), 60 FR 
54095.
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1. The Clearing Process
    As with repo transactions in Treasury securities, mortgage-backed 
securities repo transactions involve two settlement dates. The first 
settlement date (``on-date'') is the date on which one participant 
(``selling participant'') delivers mortgage-backed securities to the 
other party (``purchasing participant'') in exchange for the delivery 
of cash (``delivery money'') by the purchasing participant to the 
selling participant. The second settlement date (``off-date'') is the 
date on which the purchasing participant returns to the selling 
participant the mortgage-backed securities delivered on the on-date in 
exchange for the return by the selling participant of the delivery 
money together with interest based upon a rate agreed to by the 
participants (``repo rate''). DCC generally clears both the on-date and 
off-date portion of a repo transaction. However, there may be certain 
repo transactions where DCC clears only the off-date portion of the 
transaction.\8\
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    \8\ These transactions are referred to in the procedures as 
novated repos. Securities Exchange Act Release No. 38736 (June 11, 
1997), 62 FR 33145 [File No. SR-DCC-97-03] (notice of filing of 
proposed rule change).
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    a. Execution and Reporting of Trades. As with repo transactions in 
Treasury securities, mortgage-backed securities repo transactions to be 
cleared by DCC may be entered into and reported to DCC in one of two 
ways: (i) They may be entered into directly between the two 
participants to a transaction and reported to DCC by the participants 
or (ii) they may be entered into between two participants through the 
facilities of an authorized broker and reported to DCC by the 
authorized broker.\9\
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    \9\ Article 30 of DCC's Procedures sets forth the requirements 
regarding the reporting and acceptance of trades.
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    The trade reports for each mortgage-backed securities repo 
transaction will need to set forth the identity of the parties to the 
transaction, including which party is the selling participant and which 
party is the purchasing participant; the CUSIP number or numbers for 
the mortgage-backed securities being delivered in connection with the 
repo transaction; the par amount of the securities being delivered; the 
delivery money being delivered by the purchasing participant; the trade 
date and time; the on-date and off-date for the transaction; and any 
details relating to any rights of substitution, including the number of 
rights of substitution to be permitted and any restrictions on rights 
of substitution.
    As with repo transactions in Treasury securities, the terms of the 
mortgage-backed securities repo transactions will be agreed to by the 
participants prior to the submission of trade reports to DCC. As 
indicated in the previous paragraph, these terms will include the CUSIP 
number or numbers and par amount or amounts of the collateral required 
to be delivered by the selling participant on the on-date. There is an 
existing practice among mortgage-backed security traders in which the 
parties to a transaction may agree to a trade amount subject to the 
right of the delivering party, based upon their inventory, to adjust 
the amount of the trade by over-delivering or under-delivering 
mortgage-backed security collateral within a specified percentage of 
the amount initially agreed to by the parties. DCC will require that 
such adjustments, commonly known as ``variances,'' be made prior to the 
submission of trade reports to DCC and reflected in the trade reports 
submitted to DCC. Therefore, such variances should not affect DCC's 
operations.
    Mortgage-backed securities repo transactions with an on-date later 
than the trade date will need to be reported to DCC prior to 6:00 p.m. 
on the trade date. Mortgage-backed securities repo transactions with an 
on-date on the trade date will need to be reported to DCC: (i) Within 
one-half hour after the transaction occurs, if the transaction occurs 
prior to 1:30 p.m.; (ii) within five minutes after the transaction 
occurs, if the transaction occurs between 1:30 p.m. and 2:15 p.m.; and 
(iii) as soon as possible but in no event later than five minutes after 
the transaction, if the transaction occurs after 2:15 p.m.
    With respect to mortgage-backed securities repo transactions 
entered into directly between two participants, each participant will 
forward a trade report to DCC. If DCC does not receive a trade report 
from one of the participants to the transaction, DCC will contact that 
participant within one half-hour of receipt of the trade report to 
confirm the terms of the trade reported by the other participant. When 
DCC receives trade reports from both participants, it will match the 
two trade reports. In order for a transaction to be accepted for 
clearance, the details of the trade reports for the transaction must 
agree. If the details of the trade reports do not match, DCC will 
contact the parties regarding the transaction. Matching of mortgage-
backed securities repo transactions will be done continuously 
throughout the day and at the close of each trading day at 2:30 p.m. 
All trade reports received through an authorized broker will be 
confirmed by DCC either orally or via facsimile with the participants 
to the transaction.
    b. Acceptance of Trades. DCC will be deemed to have accepted a 
transaction for clearance when DCC has matched and verified all the 
information on the trade reports. However, DCC may reject any 
transaction if it causes a participant to exceed its exposure limit 
\10\ or if the participant has been suspended from DCC's clearing 
system. If a transaction is accepted by DCC, DCC will interpose itself 
as the counterparty to both sides of the transaction. Therefore, for 
any mortgage-backed securities repo transactions, DCC will assume the 
position of the purchasing participant with respect to the selling 
participant and assume the position of the selling participant with 
respect to the

[[Page 40874]]

purchasing participant. Prior to 8:00 a.m. each business day, 
participants will receive a written activity report indicting such 
participant's transactions which were accepted by DCC the previous 
business day and indicating all transactions due to settle that day.
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    \10\ A participant's exposure limit is the limit prescribed for 
each participant by DCC based on the incremental margin due to DCC 
by the participant.
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    c. Clearing and Failures to Deliver or Receive. The details of each 
transaction accepted by DCC will be sent to DCC's clearing bank. Each 
participant will need to maintain a bank account in one or more 
correspondent banks for margin and trade settlements. Because the 
mortgage-backed securities which DCC proposes to clear must be 
maintained in book-entry accounts at Federal Reserve Banks and will be 
delivered through the FedWire, the selected correspondent bank must be 
a depository institution with access to the FedWire.
    DCC has established delivery cut-off times. For example, the 
selling participant on the on-date of a mortgage-backed securities repo 
transactions and the purchasing participant on the off-date of a 
mortgage-backed securities repo transaction must deliver mortgage-
backed securities to the clearing bank against payment no later than 
one minute prior to the close of the FedWire system for delivery of 
securities on the settlement date. The clearing bank will redeliver 
such securities to the purchasing participant on the on-date or the 
selling participant on the off-date. If the delivering participant 
fails to deliver mortgage-backed securities on the settlement date by 
one minute prior to the close of the FedWire system, DCC has the option 
to buy-in the securities with the cost of buy-in being charged to the 
defaulting delivering participant. If DCC effects a buy-in, DCC will 
give the defaulting delivering participant written notice of the buy-in 
which will describe the security, quantity, and price.
    If the receiving participant does not accept all of the mortgage-
backed securities on the settlement date by one half-hour after the 
close of the FedWire system, DCC may sell-out the securities with the 
cost of sell-out being charged to the defaulting receiving participant. 
After the sell-out, DCC will give the participant written notice of the 
sell-out which will describe the security, quantity, and the selling 
price.
    d. Netting of Deliveries. As a general rule, repo transactions in 
mortgage-backed securities will be cleared on a delivery versus payment 
basis. Therefore, the delivery of mortgage-backed securities will be 
required on settlement date. However, if a participant has a repo and 
reverse repo agreement with the same underlying collateral and the same 
on-date or off-date, as applicable, the participant's payment and 
delivery obligations with respect to such agreements will be netted. 
This means that if a participant is required to deliver $3 million par 
amount of a specified security on the off-date of a reverse repo and to 
receive on that same date $2 million par amount of the same security on 
the off-date of a repo, these obligations will be netted to a net 
delivery obligation of $1 million par amount. Payment obligations for 
such transactions including repo interest will also be netted.
    e. Margin. DCC will adapt its existing margining methodology for 
Treasury security repos to incorporate exposures from mortgage-backed 
securities repo transactions. Under DCC's current margin system,\11\ 
every participant is obligated to maintain a margin account for the 
benefit of DCC at DCC's clearing bank. Margin will be calculated every 
business day using a generally available source of mortgage-backed 
security prices. With respect to term repos, margin will be based on a 
mark-to-market amount and an amount based on an estimated shortfall 
from the liquidation of positions on the next day. For overnight repos, 
margin will be based on an intraday mark-to-market amount.\12\
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    \11\ Section 2201 of DCC's Procedures.
    \12\ In a bilateral repo transaction entered into outside of 
DCC's clearing system, the selling participant may be required to 
deliver additional collateral if the value of the underlying 
collateral decreases, and the purchasing participant may be required 
to return excess collateral if the value of the underlying 
collateral increases. Alternatively, a cash payment can be made by 
the selling participant to decrease the loan amount of the repo 
transaction, or a cash payment can be made by the purchasing 
participant to increase the loan amount of the repo agreement. 
However, these arrangements do not apply in connection with DCC's 
multilateral clearing and margin collection system where increases 
and decreases in the value of underlying collateral result in the 
delivery of additional margin by a participant or the return of 
margin to a participant based upon changes in the value of the 
participant's aggregate positions in the system.
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2. Definition of Mortgage-Backed Security
    Pursuant to DCC's Procedures, a mortgage-backed security is defined 
as a book-entry security directly issued by FNMA or FHLMC whose 
underlying value is represented by a pool of mortgages accumulated by 
FNMA or FHLMC through its mortgage origination program. Certain 
securities are excluded from the definition of mortgage-backed 
securities: (i) Securities which are issued in registered or bearer 
form and therefore cannot be transferred through FedWire, (ii) 
securities which are not issued or guaranteed directly by FNMA or 
FHLMC, (iii) securities for which the underlying assets are mortgage-
backed securities rather than a pool of mortgages, and (iv) notional, 
interest only, principal only, accrual, and partial accrual securities 
and floaters and inverse floaters.\13\
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    \13\ For the definitions of these terms, refer to Schedule A.
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    A mortgage-backed security may be either a fixed rate mortgage-
backed security or an adjustable rate mortgage-backed security. A fixed 
rate mortgage-backed security is defined as a mortgage-backed security 
whose coupon rate is a fixed rate of interest. An adjustable rate 
mortgage-backed security (``ARMS'') is defined as a mortgage-backed 
security whose coupon rate is a variable rate of interest consisting of 
an index and a spread to such index. Sample indices include: (i) The CD 
rate, which is the weekly average of secondary market interest rates on 
six month negotiable certificates of deposit as published by the 
Federal Reserve Board in its Statistical Release H.15(519), Selected 
Interest Rates; (ii) the LIBOR rate, which is a rate which banks charge 
other banks for U.S. dollar deposits outside the United States for a 
specified period; (iii) the 11th District cost of funds index, which is 
the index made available monthly by the Federal Home Loan Bank Board of 
the cost of funds to members of the Federal Home Loan Bank 11th 
District; and (iv) the Treasury index, which is the weekly average 
yield of the benchmark Treasury securities as published by the Federal 
Reserve Bank. A sample ARMS could bear interest at LIBOR plus 50 basis 
points with LIBOR adjusting periodically as specified by the terms of 
the security.
    ARMS differ from floaters and inverse floaters because of the 
underlying mortgages. The mortgage pools underlying ARMS consist of 
adjustable rate mortgages, and the indices and spreads on the ARMS 
parallel the indices and spreads on the underlying mortgages. In 
contrast, the mortgage pools underlying floaters and inverse floaters 
generally consist of fixed rate mortgages. Floaters and inverse 
floaters are generally issued in pairs or in a manner such that 
interest based upon an index which is paid on one security in a pool 
would be deducted from interest paid on another security in the pool. 
For example, if a floater of a specified principal amount bears 
interest at 4% plus LIBOR and LIBOR at issuance was 3.5%, the related 
inverse floater of the same principal amount would bear interest at 11% 
minus LIBOR.

[[Page 40875]]

3. Mortgage-Backed Securities as Underlying Collateral; Delivery and 
Payment Default
    The definition of underlying collateral in the Procedures will be 
revised to provide that with respect to repos underlying collateral 
includes either a Treasury security or a mortgage-backed security. With 
respect to options transactions, underlying collateral does not include 
mortgage-backed securities. Therefore, DCC would not have authority 
under the proposed rule change to clear options transactions in 
mortgage-backed securities.
    The terms ``delivery default'' and ``payment default'' will be 
revised to provide that the failure to deliver mortgage-backed 
securities or make payment against delivery of mortgage-backed 
securities constitutes a participant default. Similarly, the terms 
``nets par amount'' and ``delivery money'' relating to the delivery of 
securities and the payment for securities delivered in repo 
transactions will be revised to incorporate mortgage-backed securities 
in addition to Treasury securities.
4. Exposure Limits and MPSE for Mortgage-Backed Securities
    The definition of maximum potential system exposure (``MPSE'') will 
be revised to provide that with respect to positions in repo 
transactions, the MPSE for the DCC's clearance and settlement system 
shall include net exposure in mortgage-backed securities adjusted to 
reflect a hypothetical adverse movement in the aggregate of six 
standard deviations in market prices of mortgage-backed securities.\14\ 
For Treasury securities, the standard deviation is based upon the 
volatility during the 100 day period ending February 19, 1980, or any 
subsequent period of 100 days in which volatility was higher than the 
100 day period ending February 19, 1980. For mortgage-backed 
securities, DCC proposes that the standard deviation be based upon the 
volatility represented by the greatest of the following three amounts: 
(i) the standard deviation of equivalent Treasury securities for the 
period of 100 consecutive trading days ending on February 19, 1980, 
(ii) the standard deviation of equivalent Treasury securities for any 
subsequent period of 100 consecutive trading days, and (iii) the 
standard deviation of mortgage-backed securities during any period of 
100 consecutive trading days subsequent to January 1, 1990. DCC 
believes that because of the limited price history for mortgage-backed 
securities, the most conservative approach is to measure volatility for 
mortgage-backed securities based upon the volatility for Treasury 
securities for the period described in clause (i) above, which was a 
period of unusually high volatility. DCC believes that there has been 
generally a high correlation in historical volatility between Treasury 
securities and mortgage-backed securities (generally above 95%). DCC 
believes that volatility measures for mortgage-backed securities have 
become more reliable recently and, therefore, that the applicable 
volatility measure should be the greatest of the three standard 
deviation measures set forth above.
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    \14\ The MPSE is designed to establish the amount of liability 
that DCC is exposed to from the positions of all of its 
participants. Pursuant to DCC's rules, MPSE cannot exceed one third 
of the amount of DCC's credit enhancement facility. For a complete 
discussion of MPSE, refer to Securities Exchange Act Release No. 
38646 (May 15, 1997), 62 FR 28085 (order granting approval of 
proposed rule change relating to definitions of trading limits and 
MPSE).
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    For purposes of clauses (i) and (ii) above, DCC proposes to look to 
Treasury securities which are generally accepted equivalents to the 
applicable mortgage-backed securities. For example, DCC proposes to 
treat repo transaction in mortgage-backed securities where the 
underlying collateral are FNMA and FHLMC securities with original 
stated maturities of thirty years as equivalent to ten year Treasury 
securities. When the underlying collateral are FNMA and FHLMC 
securities with original stated maturities of fifteen years, DCC will 
treat these repo transactions as equivalent to five year Treasury 
securities. Finally, DCC will treat repo transaction in ARMS as 
equivalent to one year Treasury securities.\15\
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    \15\ Letter from Stephen K. Lynner, President, DCC (July 16, 
1997).
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5. Substitution of Mortgage-Backed Securities as Underlying Collateral
    The right of a selling participant to substitute underlying 
collateral is subject to various conditions and restrictions. One 
restriction relates to the type of security which may be delivered in 
substitution of another type of security. This restriction is different 
for repo transactions in Treasury securities and mortgage-backed 
securities repo transactions. For repo transactions in Treasury 
securities, the following requirements will apply: (i) A Treasury note 
or a Treasury bond may be substituted for another Treasury note or 
Treasury bond; (ii) a Treasury bill may be substituted for a Treasury 
bill; and (iii) a Treasury note or Treasury bond may not be substituted 
for a Treasury bill and a Treasury bill may not be substituted for a 
Treasury note or Treasury bond. For mortgage-backed securities repo 
transactions, the following requirements will apply: a fixed rate 
mortgage-backed security may be substituted for a fixed or floating 
rate mortgage-backed security, but a floating rate mortgage-backed 
security may only be substituted for a floating rate mortgage-backed 
security.
    In addition to the foregoing requirement, substitution is subject 
to any restrictions on substitution which have been agreed to by the 
parties at the time of the trade, including restrictions on the number 
of rights of substitution. The right of substitution is also subject to 
the agreement of DCC and the purchasing participant that the fair 
market value of the collateral which the selling participant proposes 
to provide in place of the existing underlying collateral for a 
transaction is at least equal to the fair market value of the existing 
underlying collateral for such transaction. In order to obtain the 
consent of the purchasing participant, DCC must notify the purchasing 
participant of all details of the proposed substitution prior to 12:15 
p.m. New York time on the day of the proposed substitution.
6. Variable Terms; Identification of Transaction
    Section 3002 of the Procedures provides that the acceptance of a 
repo transaction for clearance is subject to the condition that the 
trade reports of the participants to the trade agree as to various 
terms including the CUSIP number or numbers for the underlying 
collateral and the ``variable terms'' of the transaction. The mortgage-
backed securities to be cleared by DCC will all have CUSIP numbers 
indicating the series and class of mortgage-backed security being 
traded. Such CUSIP numbers will enable DCC to identify each mortgage-
backed security being traded. Because a transaction may involve the 
delivery of more than one mortgage-backed security, the definition of 
variable terms will be amended to allow for multiple CUSIP numbers.
    The definition of variable terms in the current Procedures provides 
that the variable terms of a Treasury Note or Treasury Bond includes 
its coupon rate. Because mortgage-backed securities may bear interest 
at adjustable rates, the definition of variable terms will be revised 
consistent with the discussion in Section 2 above to provide that the 
variable terms for a repo on mortgage-backed securities includes the 
maturity date, the CUSIP number or numbers of the mortgage-backed 
security, and for each item of underlying collateral (a)

[[Page 40876]]

whether the underlying collateral is a fixed rate mortgage-backed 
security or an ARMS and (b) whether the underlying collateral is a FNMA 
mortgage-backed security or a FHLMC mortgage-backed security. DCC will 
be able to derive the coupon of a fixed rate mortgage-backed security 
or in the case of ARMS the index upon which such rate is based and the 
spread to such index from the CUSIP number provided by the parties to 
the transaction.
7. Netting of Coupon and Principal Payments for Repo Transactions
    One difference between Treasury securities and mortgage-backed 
securities is that Treasury securities pay interest but not principal 
prior to the maturity date while mortgage-backed securities pay both 
interest and principal prior to the maturity date. Principal payments 
on mortgage-backed securities may be made on a monthly or other 
periodic basis prior to maturity.
    Under the proposed rule change, Section 2207 of DCC's Procedures 
will require the purchasing participant to forward coupon interest with 
respect to Treasury securities or mortgage-backed securities to DCC 
absent an agreement of the parties to the contrary, and upon receipt, 
DCC will forward the coupon interest to the selling participant. In the 
event that repo interest on a repo transaction is due from the selling 
participant on the same day that coupon interest with respect to the 
same transaction is required to be paid by the purchasing participant, 
such payments will be netted. If repo interest has accrued but is not 
yet due with respect to a transaction, payments of coupon interest 
which are received by the purchasing participant will not be netted 
against repo interest; instead, the coupon interest will be forwarded 
to DCC and then to the selling participant.
    As indicated above, mortgage-backed securities involve principal 
payments as well as payments of coupon interest. DCC's proposed 
Procedures provide that principal payments, like coupon payments, will 
be forwarded by the purchasing participant upon receipt to DCC and then 
forward by DCC to the selling participant. In the event that a 
principal payment on a mortgage-backed security is received by the 
purchasing participant on the same date on which a payment of repo 
interest is due from the selling participant with respect to a repo 
transaction on such mortgage-backed security, the principal payment and 
the repo interest payments will be netted.
    DCC believes that the proposed rule change is consistent with 
Section 17A(b)(3)(F) of the Act \16\ and the rules and regulations 
thereunder in that it will promote the prompt and accurate clearance 
and settlement of securities transactions, to safeguard funds and 
securities in DCC's possession and control, and to remove impediments 
to and perfect the mechanism of a national system for the prompt and 
accurate clearance and settlement of securities transactions.
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    \16\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    DCC 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

    DCC has not solicited and does not intend to solicit comments on 
this proposed rule change. DCC 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 of (ii) as to which DCC 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. 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 DCC. All submissions should 
refer to the file number SR-DCC-97-06 and should be submitted by August 
20, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.

Schedule A to Delta Clearing Corp.; Procedures for the Clearing of 
Securities and Financial Instrument Transactions

Excluded Classes of Mortgage Securities

    Notional--A class having no principal balance and bearing 
interest on the related notional principal balance.
    Interest Only--A class that receives some or all of the interest 
payments made on the underlying mortgage or other assets of a series 
trust and little or no principal. Interest only classes have either 
a nominal or a notional principal balance.
    Principal Only--A class that does not bear interest and is 
entitled to receive only payments of principal.
    Accrual--A class that accretes the amount of accrued interest 
otherwise distributable on such class, which amount will be added as 
principal to the principal balance of such class on each applicable 
distribution date. Such accretion may continue until some specified 
event has occurred or until such accrual class is retired.
    Partial Accrual--A class that accretes a portion of the amount 
of accrued interest thereon, which amount will be added to the 
principal balance of such class on each applicable distribution 
date, with the remainder of such accrued interest to be distributed 
currently as interest on such class. Such accretion may continue 
until a specified event has occurred or until such partial accrual 
class is retired.
    Floater--A class other than an adjustable rate mortgage security 
with an interest rate that resets periodically based upon a 
designated index and that varies directly with changes in such 
index.
    Inverse Floater--A class other than an adjustable rate mortgage 
security with an interest rate that resets periodically based upon a 
designated index and that varies inversely with changes in such 
index.

[FR Doc. 97-19965 Filed 7-29-97; 8:45 am]
BILLING CODE 8010-01-M