[Federal Register Volume 63, Number 84 (Friday, May 1, 1998)]
[Notices]
[Page 24201]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-11653]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39920; File No. SR-DCC-98-01]


Self-Regulatory Organizations; Delta Clearing Corp.; Order 
Granting Approval of a Proposed Rule Change to Permit the Use of 
Mortgage Backed Securities as Margin Collateral

April 27, 1998.
    On January 5, 1998, Delta Clearing Corp. (``Delta'') filed with the 
Securities and Exchange Commission (``Commission'') a proposed rule 
change (File No. SR-DCC-98-01) pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal 
was published in the Federal Register on February 25, 1998.\2\ No 
comment letters 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).
    \2\ Securities Exchange Act Release No. 39684 (February 19, 
1998), 63 FR 9621.
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I. Description

    Delta's participants may clear and settle repurchase and reverse 
repurchase agreements in both treasury securities \3\ (``treasury 
repos'') and in mortgage backed securities \4\ (``mortgage backed 
repos'') through Delta's system. Some participants only clear and 
settle mortgage backed repos through Delta. Because Delta currently 
only accepts federal funds \5\ or treasury securities as margin 
collateral, these participants incur an additional cost associated with 
obtaining treasury securities for purposes of supplying margin 
collateral. Because these participants already possess mortgage backed 
securities related to the transactions they are clearing through Delta, 
it would be a more straightforward process for them to honor their 
margin obligations with these mortgage backed securities.
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    \3\ Treasury securities are defined in Delta's procedures as a 
treasury bill, treasury bond or treasury note issued by the United 
States Department of the Treasury.
    \4\ Mortgage backed securities are defined in Delta's procedures 
as book entry securities directly issued by the Federal National 
Mortgage Association (``FNMA'') or Federal Home Loan Mortgage 
Corporation (``FHLMC''), as applicable, through its mortgage 
origination program, and which is designed to receive principal 
payments using a predetermined principal balance schedule. A 
mortgage security may either be a fixed rate mortgage security or an 
adjustable rage mortgage security. All of the following securities 
are excluded from the definition of mortgage securities: (i) 
securities which are issued in registered or bearer form, (ii) 
securities which are not transferable through the Federal Reserve 
System, (iii) securities which are not issued or guaranteed directly 
by FNMA or FHLMC, (iv) securities where the underlying assets are 
mortgage backed securities, rather than a pool of mortgages, and (v) 
notional, interest only, principal only, accrual and partial accrual 
securities, and floaters and inverse floaters.
    \5\ Federal funds are defined in Delta's procedures as cash 
balances available for immediate withdrawal in accounts maintained 
at banks that are members of the Federal Reserve system.
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    Delta has stated its belief that with appropriate haircuts, the 
acceptance of margin in the form of mortgage backed securities should 
pose no additional risk to the system. Delta notes that the Commission 
under its net capital rule generally applies the same haircuts to 
treasury securities and mortgage backed securities.\6\ Consistent with 
Delta's treatment of treasury securities used for margin collateral, 
Delta will value mortgage backed securities in accordance with the 
schedule of applicable haircuts found in the Commission's uniform net 
capital rule.\7\ Furthermore, Delta notes that its clearing bank, The 
Bank of New York, will accept mortgage backed securities from Delta 
without further haircuts.
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    \6\ Section 3(a)(42)(B) of the Act defines government securities 
to include securities which are issued or guaranteed by corporations 
in which the United States has a direct or indirect interest and 
which are designated by the Secretary of the Treasury for exemption 
as necessary or appropriate in the public interest or for the 
protection of investors. The Department of Treasury has designated 
securities issued by FNMA and by FHLMC as exempt. Notice issued by 
the Department of Treasury (October 7, 1987), 52 FR 38559.
    \7\ Rule 15c3-1(c)(2)(vi)(A)(1), 17 CFR 240.15c3-
1(c)(2)(vi)(A)(1).
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II. Discussion

    Section 17A(b)(3)(F) of the Act \8\ requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions. The Commission 
believes that the rule change is consistent with Delta's obligations 
under the Act. The rule change should encourage wider use of Delta's 
system by providing participants with the ability to more efficiently 
and more economically meet their margin requirements. The revised 
margin collateral procedures should especially encourage more use of 
Delta's system by those participants that only clear and settle 
mortgage backed repos by allowing these participants to honor their 
margin obligations with mortgage backed securities they possess. Wider 
use of Delta's system should assist Delta in promoting the prompt and 
accurate clearance and settlement of securities transactions.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 17A of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, prusuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DCC-98-01) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-11653 Filed 4-30-98; 8:45 am]
BILLING CODE 8010-01-M