[Federal Register Volume 67, Number 135 (Monday, July 15, 2002)]
[Notices]
[Pages 46553-46555]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-17679]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46166; File No. SR-DTC-2001-14]


Self-Regulatory Organizations; the Depository Trust Company; 
Order Approving a Proposed Rule Change Relating to the Closing of the 
Mortgage-Backed Securities Division of the Depository Trust Company

July 3, 2002.
    On July 24, 2001, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') a proposed rule 
change pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act''). Notice of the proposal was published in the Federal 
Register on

[[Page 46554]]

December 17, 2001.\1\ Three comment letters were received.\2\ For the 
reasons discussed below, the Commission is approving the proposed rule 
change.
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    \1\ Securities Exchange Act Release No. 45146 (Dec. 10, 2001), 
66 FR 65014.
    \2\ Letters from Daniel L. Goelzer, Baker & McKenzie on behalf 
of State Street Bank and Trust Company (Dec. 14, 2001); Paul 
Saltzman, Executive Vice President and General Counsel, The Bond 
Market Association (Jan. 7, 2001); and Daniel L. Goelzer, Baker & 
McKenzie on behalf of State Street (Mar. 13, 2002).
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I. Description

    The rule change enables DTC to close its Mortgage Backed Securities 
Division (``MBS Division''). Among other things, the MBS Division 
provided the facilities for the issuance, immobilization, clearance, 
and settlement of mortgage-backed securities guaranteed by the 
Government National Mortgage Association (``GNMA''). However, in May 
2000 GNMA publicly announced its decision to utilize the Fedwire system 
\3\ of the Board of Governors of the Federal Reserve System (``Fed'') 
for the clearance and settlement of these mortgage-backed 
securities.\4\ On March 23, 2002, the conversion of GNMA securities 
from the MBS Division to the Federal Reserve Banks was completed.
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    \3\ The Fedwire system is currently used for, among other 
things, the issuance and settlement of U.S. Treasury securities and 
mortgage-backed securities guaranteed by the Federal Home Loan 
Mortgage Corporation (``FHLMC'') and the Federal National Mortgage 
Association (``FNMA'').
    \4\ See 66 FR 44258 (Aug. 22, 2001) (issuance of final rule by 
GNMA governing payments of book-entry securities).
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    Prior to GNMA's announcement of its decision to move its securities 
from the MBS Division to the Federal Reserve Banks, the Ginnie Mae 
Settlement Task Force was organized by The Bond Market Association 
(``TBMA'') to assess the feasibility of the transfer. That task force 
consisted of representatives from broker-dealers, custodial banks, 
clearing banks, GNMA, the Federal Reserve Banks, the Mortgage Bankers 
Association, DTC, and TBMA. Followiing GNMA's announcement, the task 
force formed the Ginnie Mae Conversion Subcommittee to develop a 
conversion plan setting forth conversion details and an implementation 
schedule. The conversion subcommittee was comprised of representatives 
from broker-dealers, GNMA, the Federal Reserve Banks, DTC, clearing 
banks, and custodial banks. In February 2001, the subcommittee issued 
its Conversion Plan.\5\
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    \5\ The Conversion Plan is available online at 
<www.frbservices.org and at <www.bondmarkets.com/regulatory. A copy of the Conversion Plan is also 
attached as Exhibit 2 of DTC's filing [DTC Important Notice No. 1483 
(Feb. 15, 2001)], which is available through the Commission's Public 
Reference Section or through DTC.
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    The conversion took place in phases over a series of weekends 
beginning October 6, 2001, and ending March 23, 2002. During the 
conversion, different classes of GNMA securities were moved 
electronically from the MBS Division to the Federal Reserve Banks in 
accordance with delivery instructions provided to the MBS Division by 
the MBS Division's participants. Other securities issued through and 
settled at the MBS Division, namely securities guaranteed by the 
Department of Veterans Affairs and a limited number of FNMA and FHLMC 
securities that are collateralized by GNMA securities, were also moved 
to Federal Reserve Banks during the conversion.
    Shortly after the completion of the payment of principal and 
interest with respect to securities last converted, DTC closed the 
transaction processing system of the MBS Division and returned the MBS 
Division participant fund deposits to the MBS Division's participants. 
DTC will now delete from its rules the rules that applied to the MBS 
Division.
    Although DTC will close its MBS Division, GNMA securities remain 
eligible for processing at DTC and can be processed at DTC in the same 
manner as are other Fedwire-eligible securities. Fedwire-eligible 
securities processed at DTC are deposited and withdrawn free of payment 
to and from DTC's Fedwire account. Once deposited into DTC's Fedwire 
account, Fedwire-eligible securities are processed at DTC among DTC 
participants subject to DTC's rules and procedures applicable to other 
DTC-eligible fixed income securities.
    In connection with the conversion of GNMA securities to the Federal 
Reserve Banks, DTC considered expanding its processing to permit GNMA 
securities to be delivered against payment into and from DTC's Fedwire 
account. DTC solicited comments from its participants, but fewer than a 
dozen participants expressed an interest in using such a service. In 
light of the development costs involved and the limited interest 
expressed by its participants, DTC's Board of Directors concluded that 
DTC's resources would be better applied to projects that serve a wider 
participant base.

II. Comments

    The Commission received three comment letters. One commenter, 
Daniel L. Goelzer on behalf of State Street Bank and Trust Company, 
stated that the transfer of settlement responsibility for GNMA 
mortgage-backed securities from DTC to the Fedwire system would foster 
unfair discrimination among participants because securities settled in 
the Fedwire system are subject to a practice known as ``dealer time'' 
\6\ that does not exist in DTC's MBS Division's settlement 
environment.\7\ The commenter requested that the Commission institute 
proceedings under Section 19(b)(2)(B) to determine if DTC's proposed 
rule change should be disapproved.
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    \6\ ``Dealer time is a 15-minute window at the end of the Fed's 
book-entry security processing day during which dealers may make 
deliveries of securities to customers, but customers may not make 
deliveries to dealers. As a result of dealer time, institutional 
clients are unable to make deliveries during the last 15 minutes of 
the delivery day and are therefore forced to hold positions 
overnight and to incur significant financing costs. In contrast, 
dealer participants in the Fedwire system can effect delivery to 
non-dealers during this 15 minute period, while simultaneously 
enjoying protection from having to accept delivery. Just as dealer 
time imposes overnight financing costs on non-dealers, it afford 
dealers a privileged opportunity to avoid these costs by protecting 
dealers from receiving positions for which payment would have to be 
made.'' State Street letter (Dec. 14, 2000) at page 2.
    \7\ [7]: The purpose of the second State Street letter was to 
submit a letter dated March 1, 2002, from the New York Clearing 
House Association, the Boston Clearing House Association, and the 
Bank Depository Users Group to the TBMA, requesting that TBMA 
rescind its dealer-to-customer good delivery (i.e. dealer time) 
guidelines.
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    Another comment letter submitted by TBMA in response to the State 
Street letter strongly supported the transfer of GNMA settlement to the 
Federal Reserve Banks and the subsequent closure of DTC's MBS Division. 
TBMA argued, among other things, that the proposed rule filing ``will 
promote the effective clearance and settlement of those securities on a 
basis comparable to mortgage-backed securities of other U.S. 
government-sponsored enterprises.'' \8\ TBMA also stated that the 
dealer time guidelines are recommended, voluntary industry practices 
and are not relevant to the merits of the proposed rule change.
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    \8\ TBMA letter at page 1.
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the Act's requirements and the rules and regulations thereunder 
and particularly with the requirements of Section 17A(b)(3)(F) of the 
Act.\9\ Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions. Given the decision 
by GNMA to move its securities to the Federal Reserve Banks and use 
Fedwire for clearing its mortgage-backed securities, there is no reason 
for DTC to

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keep its MBS Division open. Accordingly, the proposed rule change 
should enable DTC to eliminate unproductive expenditures and use its 
resources in a more efficient manner to promote the prompt and accurate 
clearance and settlement of securities transactions.
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    The concern raised in the State Street letter regarding dealer time 
concerns an industry practice relating to the settlement of Fedwire-
eligible securities and is not the subject of this proposed rule 
change.\10\ Furthermore, the Fed addressed this issue in a 1995 release 
adopting new closing times for the Fedwire securities transfer 
system.\11\ Responding to State Street's suggestion that the Fed also 
review the need for a dealer turnaround deadline, the Fed stated that 
``[d]ealer-turnaround time was established by the PSA [the previous 
name of the BMA] as an industry guideline to promote the smooth 
functioning of the government securities market'' and that ``[t]he 
dealer-turnaround deadline had been reflected in the Federal Reserve 
Banks'' operating circulars; however, the Reserve Banks do not police 
participant activity with respect to this time.'' The Fed concluded 
that their action (i.e., adopting new closing times) did ``not preclude 
the continuation of an industry standard for a dealer-turnaround time 
if the industry believes it is needed.'' Therefore, because GNMA 
securities will now be cleared and settled through the Fedwire system, 
commenters should direct their concerns regarding Fedwire rules to the 
Fed.
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    \10\ The first State Street letter acknowledged this by 
recognizing ``that disapproval of the DTC rule proposal * * * might 
not necessarily prevent the transfer of GNMA securities to the 
Fedwire system or compel the abolition of dealer time.'' Goelzer 
letter (Dec. 14, 2000) at page 7, fn 10.
    \11\ 60 FR 42410 (Aug. 15, 1995).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-2001-14) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-17679 Filed 7-12-02; 8:45 am]
BILLING CODE 8010-01-P