Federal Register / Vol. 62, No. 203 / Tuesday, October 21, 1997 / Notices 54661

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

2Securities Exchange Act Release No. 38971

(August 26, 1997), 62 FR 46530.

3The Combined Procedures also provide for more

uniform use of the terms ‘‘repo’’ and ‘‘repurchase

agreement.’’

4Both the exposure limit and MPSE are designed

to limit Delta’s uncollateralized exposure to each

participant.

5The Combined Procedures contain a new term,

‘‘participant default,’’ which means a payment

default, a delivery default, a premium default, or a

margin default.

the Reorganization Plan provides that

each Portfolio will bear any expenses it

has incurred incidental to the

preparation and carrying out of the

Reorganization Plan.

14. A registration statement on Form

N–14 containing a combined

prospectus/proxy statement has been

filed with the SEC. Applicants expect to

send the prospectus/proxy statement to

shareholders of the Acquired Portfolio

in October 1997 for their approval at a

meeting of shareholders scheduled to be

held on or about November 21, 1997.

15. The consummation of the

Reorganization is subject to the

following conditions set forth in the

Reorganization Plan: (a) the

shareholders of the Acquired Portfolio

will have approved the Reorganization

Plan; and (b) the parties will have

received exemptive relief from the SEC

with respect to the issues that are the

subject of the application. Applicants

agree not to make any material changes

to the Reorganization Plan that affect the

application without prior SEC approval.

Applicants’ Legal Analysis

1. Section 17(a) of the Act generally

prohibits an affiliated person of a

registered investment company, or any

affiliated person of such a person, acting

as principal, from selling any security

to, or purchasing any security from the

company. Section 2(a)(3) of the Act

defines an ‘‘affiliated person’’ of another

person to include any person that owns

5% or more of the outstanding voting

securities of such other person and any

person directly or indirectly controlling,

controlled by, or under common control

with such other person; or, if the other

person is an investment company, any

investment adviser of the investment

company.

2. Rule 17a–8 under the Act exempts

from the prohibitions of section 17(a)

mergers, consolidations, or purchasers

or sales of substantially all of the assets

of registered investment companies that

are affiliated persons solely by reason of

having a common investment adviser,

common directors/trustees, and/or

common officers, provided that certain

conditions are satisfied.

3. Applicants believe that they may

not rely upon rule 17a–8 because the

Portfolios may be affiliated for reasons

other than those set forth in the rule.

Smith Barney owns 5% or more of the

outstanding voting securities of the

Acquired Portfolio. Because of this

ownership, the Acquiring Portfolio may

be deemed an affiliated person of an

affiliated person of the Acquired

Portfolio, and vice versa, for reasons not

based solely on their common adviser.

Consequently, applicants are requesting

an order pursuant to section 17(b) of the

Act exempting them from section 17(a)

to the extent necessary to consummate

the Reorganization.

4. Section 17(b) of the Act provides

that the SEC may exempt a transaction

from the provisions of section 17(a) if

the terms of the proposed transaction,

including the consideration to be paid

or received, are reasonable and fair and

do not involve overreaching on the part

of any person concerned; the proposed

transaction is consistent with the policy

of each registered investment company

concerned; and the proposed

transaction is consistent with the

general purposes of the Act.

5. Applicants submit that the terms of

the Reorganization satisfy the standards

set forth in section 17(b), in that the

terms are fair and reasonable and do not

involve overreaching on the part of any

person concerned. Applicants note that

the Board, including the disinterested

trustees, has reviewed the terms of the

Reorganization as set forth in the

Reorganization Plan, including the

consideration to be paid or received,

and has found that participation in the

Reorganization is the best interests of

each Portfolio and that the interests of

the existing shareholders of each

Portfolio will not be diluted as a result

of the Reorganization. Applicants also

note that the exchange of the Acquired

Portfolio’s assets and certain liabilities

for the Acquiring Portfolio shares will

be based on the Portfolio’s relative net

asset values.

For the SEC, by the Division of Investment

Management, under delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–27761 Filed 10–20–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39236; File No. SR–DCC–

97–04]

Self-Regulatory Organizations; Delta

Clearing Corp.; Order Granting

Approval of a Proposed Rule Change

Relating to the Combining of Options

and Repo Procedures

October 14, 1997.

On March 17, 1997, Delta Clearing

Corp. (‘‘Delta’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’) a proposed rule change

(File No. SR–DCC–97–04) pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’).1 Delta

amended the proposed rule change on

May 7, 1997, and May 29, 1997. Notice

of the proposal was published in the

Federal Register on September 3, 1997.2

No comment letters were received. For

the reasons discussed below, the

Commission is approving the proposed

rule change.

I. Description

The proposal combines Delta’s

procedures for the clearance and

settlement of options trades (‘‘Options

Procedures’’) and Delta’s procedures for

the clearance and settlement of

repurchase and reverse repurchase

(‘‘repo’’) agreement transactions (‘‘Repo

Procedures’’) into one set of procedures

entitled the Procedures for the Clearing

of Securities and Financial Instrument

Transactions (‘‘Combined Procedures’’).

The Combined Procedures allow Delta

to integrate the processing of options

and repo transactions. For example, the

Combined Procedures consolidate the

definitions of many terms (e.g., contract,

position, and holder) to make these

terms applicable to both option and

repos.3 The Combined Procedures also

clarify that calculations of a

participant’s exposure limit and the

maximum potential system exposure

(‘‘MPSE’’) are determined on an

aggregate system-wide basis by

providing for a single uniform definition

of these terms and by providing in

Section 204 of the Combined Procedures

that each participant agrees to conduct

all transactions cleared through the

system within such participant’s

exposure limit.4

Similarly, Section 307 of the

Combined Procedures provides that

Delta has a security interest in all

money and securities of a participant as

security for payment of any liability of

such participant to Delta arising from

participation in the system. Upon the

occurrence of a participant default,5

Delta may liquidate all of a participant’s

repo and options positions contained in

the defaulting participant’s account

through one liquidating settlement

account established for such participant.

The Combined Procedures combine the

margin provisions for repos and options

to clarify that a participant is required

to deposit margin based upon its
54662 Federal Register / Vol. 62, No. 203 / Tuesday, October 21, 1997 / Notices

6Section 602 of the Options Procedures required

the deposit of margin other than intraday additional

margin at or before the settlement time on each

business day. Section 2602.1 of the Repo

Procedures provided for the deposit of margin other

than supplemental or intraday additional margin at

or before 11:00 a.m.

7Such provisions establish qualification

requirements for interdealer brokers, including

compliance with Rule 17a–23 under the Act,

maintenance of books and records, and necessary

operational capacity.

8Securities Exchange Act Release No. 37639

(September 4, 1996), 61 FR 48186 (File No. SR–

DCC–96–09) (order granting approval of proposed

rule change relating to acceptable forms of

collateral).

9Section 602 of the Options Procedures provided

that deposits of additional margin with respect to

margin deficits shown on the daily margin report

are not required if the amount to be deposited by

the participant is $5,000 or less. The Repo

Procedures in Section 2602.1 provided that deposits

are not required if such amount is $50,000 or less.

10The Repo Procedures in various places used the

terms ‘‘central bank funds’’ and ‘‘central bank wire

system.’’ The use of these terms was intended to

cover the situation where Delta had received

authorization to clear trades to be effected by

participants through central banks other than the

Federal Reserve.

11The Repo Procedures provided that the

suspension or termination of the operation of the

system will not affect the terms of any existing repo

agreement.

12Performance margin represents an estimate of

the net shortfall from the liquidation of a

participant’s positions at the close of the next

business day. 13 15 U.S.C. 78q–1(b)(3)(F).

aggregate net exposure on its options

positions and its term repo positions.

The Combined Procedures conform the

Options Procedures and Repo

Procedures by providing that margin

deficits shown on the daily margin

report must be deposited at or before the

later of 11:00 a.m. or the earliest time

practicable following the opening of the

Federal Reserve System.6

In many places, the Options

Procedures and Repo Procedures had

inconsistent provisions. The Combined

Procedures provide uniform rules for

both transactions. For example, the

proposed rule change extends certain

requirements placed on interdealer

brokers for options to interdealer

brokers for repos,7 and the trade

reporting method for options is made

applicable to repos. Section 2202 of the

Combined Procedures also incorporates

for options transactions the recently

approved rule change 8 to the Repo

Procedures permitting participants to

deposit treasury notes and treasury

bonds as margin and incorporating the

schedule of applicable haircuts found in

Rule 15c3–1(c)(2)(vi)(A)(1) under the

Act. Section 2204 of the Combined

Procedures provides that deposits are

not required if the margin deficit shown

on the daily margin report is $50,000 or

less.9

The Combined Procedures adopt the

definition of business day previously

applicable to options transactions,

which excludes Saturday, Sunday, a day

on which banking institutions in New

York City are authorized by law to close,

and any day on which government

securities dealers in New York City are

not open for business. The Repo

Procedures did not exclude days on

which government securities dealers are

closed.

The Combined Procedures adopt the

graduated fine schedule of the Options

Procedures which provide for sanctions

of $100 for the first filing of a late trade

report, $200 for any second violation

occurring within three months of the

first violation, and $300 for any

subsequent violation occurring within

three months of a prior violation.

Section 3301 of the Repo Procedures

provided that the sanction for filing a

late trade report was an amount not to

exceed $500.

The Combined Procedures use the

terms ‘‘Fed Funds’’ and ‘‘Federal

Reserve System’’ instead of the terms

‘‘central bank funds’’ and ‘‘central bank

wire system’’ used in the Repo

Procedures.10 Like the Options

Procedures, the Combined Procedures

provide that the suspension or

termination of Delta’s system will not

affect the terms of any existing contract

absent the consent of the participant

which is party to such contract.11 As

currently applicable for repo

participants, Section 213 of the

Combined Procedures provides that

Delta will on an annual basis send a list

of current repo and options participants

in Delta’s system to all participants.

Under the Combined Procedures, a

participant may borrow from Delta on

an overnight basis up to 35% of the

participant’s net positive exposure on

its options positions and positions in

term repos adjusted for performance

margin.12 Previously, participants could

only borrow against their exposure on

options. Under Section 2212, if the daily

margin report shows that the participant

has a net positive exposure after

adjustment for performance margin, the

participant may request on or before

11:00 a.m. of the morning on which the

report is sent that Delta lend to it on an

overnight basis cash or treasury

securities to the extent available to Delta

with a value of not more than 35% of

the participant’s net positive exposure

after adjustment for performance

margin. In order to make such overnight

loans, Delta will generally transmit

securities by 3:00 p.m. that day or will

transmit funds by 5:00 p.m. that day.

Some provisions are revised from

both the Options Procedures and the

Repo Procedures. For example, the

waiver of suspension provisions of

Section 401 are revised to provide that

suspension may be deferred not more

than two hours in the event of a margin,

premium, or payment default and for

such period as Delta determines

appropriate in the event of a delivery

default if Delta determines that the

participant required to make delivery

has been unable to obtain the security

required to be delivered after a good

faith effort and that such failure to

deliver is not the result of a change in

the participant’s financial condition.

Section 206 of the Combined

Procedures eliminates the requirement

that participants deliver audited reports

of their internal accounting controls.

Participants will continue to be

obligated to deliver to Delta annual

audited financial statements.

Under the Combined Procedures,

Delta, rather than its clearing bank,

assumes the authority and obligation to

receive, compare, and transmit trade

reports and other reports (Articles 23

and 30); to accent trades for clearance

(Sections 2303 and 3003); to provide

system software (Section 303); to

calculate and maintain margin (Article

22); to transmit, receive, and assign

exercise notices and to accept exercise

notices for clearance (Article 28); and to

reconcile differences with participants

(Sections 2303 and 3003).

Section 304 of the Combined

Procedures provides that inspection by

Delta of participants’ records will be at

such time as may be reasonably

requested by Delta and that the scope of

such inspections will be limited to

matters related to Delta’s procedures,

the participant’s transactions in Delta’s

system, and other matters related to

Delta’s business. Previously, Delta’s

right of inspection of a participant’s

books and records was not limited to

any subject matter.

II. Discussion

Section 17A(b)(3)(F) of the Act13

requires that the rules of a clearing

agency be designed to assure the

safeguarding of securities and funds

which are in the custody or control of

the clearing agency or for which it is

responsible. The Commission believes

that the rule change is consistent with

Delta’s obligations under the Act. By

combining its Options Procedures and

Repo Procedures into a single Combined

Procedures manual, this rule change,

among other things, clarifies that Delta’s

risk management procedures apply to

options and repos on an aggregate basis.

For example, the Combined Procedures
Federal Register / Vol. 62, No. 203 / Tuesday, October 21, 1997 / Notices 54663

14 17 CFR 200.30–3(a)(12).

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

2Securities Exchange Act Release No. 38868 (July

23, 1997), 62 FR 40872.

3According to DCC, the market for repo

transactions in mortgage-backed securities is

estimated to be approximately 25% to 40% of the

size of of the market for repo transactions in

Treasury securities. DCC also 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. For a description of DCC’s procedures

regarding the clearance and settlement of repos on

Treasury securities, refer to Securities Exchange Act

Release No. 36367 (October 13, 1997), 60 FR 54095

[File No. SR–DGOC–94–06] (order approving

implementation of new procedures allowing for the

clearance and settlement of repos on Treasury

Securities).

4The Procedures refer to mortgage-backed

securities as ‘‘mortgage securities.’’

5For the definitions of these terms, refer to

Schedule A of DCC’s filing which is attached as

Exhibit A.

6Sample indices include: (1) 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 others 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.

7These transactions are referred to the Procedures

as novated repos. Securities Exchange Act Release

No. 39065 (September 12, 1997), 62 FR 49547 [File

No. SR–DCC–97–03] (order approving proposed

rule change).

provide that calculations of exposure

limit and MPSE are to be determined on

an aggregate system-wide basis and that

liquidation of a participant’s positions

will be conducted through one account.

By ensuring that Delta has access to all

of a participant’s assets held at Delta,

the proposed rule change assists Delta

in the safeguarding of securities and

funds which are in Delta’s control or for

which it is responsible.

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, pursuant to

Section 19(b)(2) of the Act, the proposed

rule change (File No. SR–DCC–97–04)

be and hereby is approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.14

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–27756 Filed 10–20–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39241; File No. SR–DCC–

97–06]

Self-Regulatory Organizations; Delta

Clearing Corp.; Order Approving a

Proposed Rule Change Relating to the

Clearance and Settlement of MortgageBacked Securities Repurchase

Agreements

October 14, 1997.

On April 7, 1997, the Delta Clearing

Corp. (‘‘DCC’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’) the proposed rule

change (File No. SR–DCC–97–06)

pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’).1 On May 12, May 29, June 18,

and July 9, 1997, DCC amended the

proposed rule change. Notice of the

proposal was published in the Federal

Register on July 30, 1997.2 No comment

letters were received. For the reasons

discussed below, the Commission is

approving the proposed rule change.

I. Description

The proposal amends DCC’s

Procedures for the Clearing of Securities

and Financial Instrument Transactions

(‘‘Procedures’’) to allow DCC to clear

and settle repurchase agreements and

reverse repurchase agreements (‘‘repos’’)

in which the underlying collateral is

book-entry, mortgage-based securities

issued by the Federal National Mortgage

Association (‘‘FNMA’’) or the Federal

Home Loan Mortgage Corporation

(‘‘FHLMC’’). Currently, DCC provides

clearance and settlement services for

repos in which the underlying collateral

is a U.S. Treasury security.3

A. Definition of Mortgage-Backed

Security

Under the rule change, a mortgagebacked security 4 is defined as a bookentry security which is directly issued

by FNMA or FHLMC and whose

underlying value is represented by a

pool of mortgages accumulated by

FNMA or FHLMC through its mortgage

origination program and which is

designed to receive principal payments

using a predetermined principal balance

schedule. In addition, the following

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 the Board

of Governors of the Federal Reserve

System’s FedWire communication

system, (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.5

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-based 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 and

whose underlying collateral consists of

adjustable rate mortgages with indices

and spreads that parallel those of the

ARMS.6

B. The Clearing Process

Mortgage-backed securities repo

transactions involve two settlement

dates. The first settlement date (‘‘ondate’’) is the date on which one

participant (‘‘selling participant’’)

delivers participant’’) in exchange for

the delivery of cash (‘‘delivery money’’)

by the purchasing participants 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 on-date 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.7

1. Execution and Reporting of Trades

Mortgage-backed securities repo

transactions to be cleared by DCC may

be entered into directly between the two

participants to a transaction and

reported to DCC by the participants, or

they may be entered into between two

participants through the facilities of an

authorized broker and reported to DCC

by the authorized broker. The terms of

the mortgage-backed securities repo

transactions will be agreed to by the

participants prior to the submission of