[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]
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 39684 (February 19,
1998), 63 FR 9621.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\8\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Jonathan G. Katz,
Secretary.
[FR Doc. 98-11653 Filed 4-30-98; 8:45 am]
BILLING CODE 8010-01-M