[Federal Register Volume 69, Number 49 (Friday, March 12, 2004)]
[Notices]
[Pages 11922-11923]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-5654]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49372; File No. SR-FICC-2003-08]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change To Add Adjustable-Rate Mortgage 
Pass-Through Securities to the GCF Repo Service Repurchase Service

March 5, 2004.

I. Introduction

    On August 11, 2003, the Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-FICC-2003-08 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 January 
28, 2004.\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. 49113 (January 22, 
2004), 69 FR 4193.
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II. Description

    FICC is adding adjustable-rate mortgage pass-through securities 
(``ARMS'') \3\ to the GCF Repo service.\4\ The Government Securities 
Division (``GSD'') of FICC currently accepts Fannie Mae (``FNMA''), 
Freddie Mac (``FHLMC''), and Ginnie Mae (``GNMA'') fixed-rate mortgage 
pass-through securities (``FRMs'') as repurchase agreement collateral 
in its GCF Repo service. The GSD is adding ARMS to the GCF Repo service 
and amending the GSD Rules to include the appropriate schedules of 
margin factors, offset classes, and disallowances as they pertain to 
ARMS.\5\
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    \3\ ARMS are mortgage loans in which the contract rates are 
reset periodically at a predetermined spread (or margin) over a 
specified reference index (such as the one-year Constance Maturity 
Treasury or 6 month LIBOR).
    \4\ The GSD's GCF Repo service enables dealer members to freely 
and actively transact GCF Repos throughout the day without requiring 
intraday, trade-for-trade settlement on a delivery-versus-payment 
basis.
    \5\ The GSD is also proposing to make technical corrections to 
the relevant schedules to remove references to ``GSCC'' or to 
replace them with references to the Government Securities Division 
as appropriate.
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    The GSD believes that ARMS make a logical addition to the 
categories of securities currently processed in the GCF Repo service 
for several reasons. ARMS are generally less risky to FICC and 
investors than FRMs due to their rate reset feature and faster 
prepayment rates. Both of these factors contribute to shorter effective 
duration and price fluctuations that results in lower margin factors as 
compared to FRMs. In addition, the correlation factors between ARMS and 
Treasuries are generally higher than those between FRMs and Treasuries 
because the adjustable rate mortgage pass-through securities reflect 
more of the current rate conditions than the fixed rate mortgage pass-
through securities. Thus, the disallowance factors of ARMS versus 
Treasuries are smaller than those of FRMs versus Treasuries.

III. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to perfect the mechanism of a national 
system for the prompt and accurate clearance and settlement of 
securities transactions.\6\ The Commission finds that FICC's proposed 
rule change is consistent with this requirement because it will promote 
the prompt and accurate clearance and settlement of securities 
transactions by enabling the GSD to provide the benefits of its 
netting, risk management, and

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settlement services to an expanded pool of securities for its GCF Repo 
service.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. 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, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-FICC-2003-08) be and hereby 
is approved.

    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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-5654 Filed 3-11-04; 8:45 am]
BILLING CODE 8010-01-P