40872 Federal Register / Vol. 62, No. 146 / Wednesday, July 30, 1997 / Notices

9 15 U.S.C. 78q–1(b).

10 15. U.S.C. 78q–1(b)(3).

11 17 CFR 200.30–3(a)(16).

1 15 U.S.C. 78s(b)(1).

2The Commission has modified the text of the

summaries prepared by DCC.

2Currently, 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.

4Paragraph 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.

receives permanent registration as a

clearing agency under Section 17A(b) of

the Act.9

In light of DCC’s past performance,

the Commission believes that DCC

complies with the statutory

prerequisites for registration as a

clearing agency contained in Section

17A(b)(3) of the Act except for the fair

representation requirement discussed

above.10 Therefore, the Commission

believes that DCC should continue to be

registered on a temporary basis.

Comments received during DCC’s

temporary registration will be

considered in determining whether DCC

should receive permanent registration as

a clearing agency.

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing

application. 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 application and all written

comments will be available for

inspection and copying at the

Commission’s Public Reference Room,

450 Fifth Street, N.W., Washington, D.C.

20549. All submissions should refer to

the File No. 600–24 and should be

submitted by August 29, 1997.

It is therefore ordered, pursuant to

Section 19(a) of the Act, that DCC’s

registration as a clearing agency (File

No. 600–24) be and hereby is

temporarily approved through July 31,

1998.

For the Commission by the Division of

Market Regulation pursuant to delegated

authority.11

Jonathan G. Katz,

Secretary.

[FR Doc. 97–20054 Filed 7–29–97; 8:45 am]

BILLING CODE 8010–01–M

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 MortgageBacked 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.

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

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.

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 mortgagebacked 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

DCC states that although most of the

primary dealer community is equipped

to effect repo transactions in mortgagebacked securities, there is a core group

of approximately twenty to twenty-five

primary dealers for whom mortgagebacked repo trading is considered to be

a core activity. Of the twenty to twentyfive 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
Federal Register / Vol. 62, No. 146 / Wednesday, July 30, 1997 / Notices 40873

5Areas 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).

6Authorized brokers are interdealer brokers that

have been specially authorized by DCC to offer their

services to DCC participants.

7For 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.

8These 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).

9Article 30 of DCC’s Procedures sets forth the

requirements regarding the reporting and

acceptance of trades.

10A participant’s exposure limit is the limit

prescribed for each participant by DCC based on the

incremental margin due to DCC by the participant.

effecting repo transactions in mortgagebacked 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.

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

1. The Clearing Process

As with repo transactions in Treasury

securities, mortgage-backed securities

repo transactions involve two settlement

dates. The first settlement date (‘‘ondate’’) 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 ondate 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

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

The trade reports for each mortgagebacked 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 mortgagebacked 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 mortgagebacked 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
40874 Federal Register / Vol. 62, No. 146 / Wednesday, July 30, 1997 / Notices

11Section 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.

13For the definitions of these terms, refer to

Schedule A.

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.

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 mortgagebacked securities repo transactions and

the purchasing participant on the offdate of a mortgage-backed securities

repo transaction must deliver mortgagebacked 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 mortgagebacked securities will be cleared on a

delivery versus payment basis.

Therefore, the delivery of mortgagebacked 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 offdate, 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-tomarket 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

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

A mortgage-backed security may be

either a fixed rate mortgage-backed

security or an adjustable rate mortgagebacked security. A fixed rate mortgagebacked 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 mortgagebacked 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.
Federal Register / Vol. 62, No. 146 / Wednesday, July 30, 1997 / Notices 40875

14The 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).

15Letter from Stephen K. Lynner, President, DCC

(July 16, 1997).

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 mortgagebacked 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 mortgagebacked 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.

For purposes of clauses (i) and (ii)

above, DCC proposes to look to Treasury

securities which are generally accepted

equivalents to the applicable mortgagebacked 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

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 mortgagebacked securities includes the maturity

date, the CUSIP number or numbers of

the mortgage-backed security, and for

each item of underlying collateral (a)
40876 Federal Register / Vol. 62, No. 146 / Wednesday, July 30, 1997 / Notices

16 15 U.S.C. 78q–1(b)(3)(F). 17 17 CFR 200.30–3(a)(12).

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 mortgagebacked 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.

(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

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