Self-Regulatory Organizations; Delta Clearing Corp.; Notice of Filing of a Proposed Rule Change to Permit the Use of Mortgage Backed Securities as Margin Collateral

[Federal Register Volume 63, Number 37 (Wednesday, February 25, 1998)]
[Notices]
[Pages 9621-9622]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4756]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39684; File No. SR-DCC-98-01]


Self-Regulatory Organizations; Delta Clearing Corp.; Notice of 
Filing of a Proposed Rule Change to Permit the Use of Mortgage Backed 
Securities as Margin Collateral

February 19, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on January 5, 1998, Delta 
Clearing Corp. (``Delta'') filed with the Securities Exchange 
Commission (``Commission'') the proposed rule change (File No. SR-DCC-
98-01) as described in Items I, II, and III below, which items have 
been prepared primarily by Delta. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Delta proposes to modify its procedures in order to accept mortgage 
backed securities as margin collateral.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Delta 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. Delta has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by Delta.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Currently, Delta only accepts federal funds \3\ or treasury 
securities as margin collateral. Delta proposes revisions to its 
procedures which would authorized Delta to accept mortgage backed 
securities as margin collateral.\4\
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    \3\ 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.
    \4\ Mortgage backed securities are defined in Delta's procedures 
as book entry securities directly issued by the Federal National 
Mortgage Association (``FNMA'') or the Federal Home Loan Mortgage 
Corporation (``FHLMC'') whose underlying value is represented by a 
pool of mortgages. These may be fixed rate or adjustable rate 
mortgage backed securities backed by fixed rate or adjustable rate 
mortgage loans, respectively. Such securities must be transferable 
through the federal reserve system. Delta is not authorized to clear 
mortgage backed securities that have underlying assets that are 
mortgage backed securities rather than a pool of mortgage loans. 
Delta also is not authorized to clear notional, interest only, 
principal only, accrual and partial accrual securities, or floaters 
and inverse floaters, as such terms are defined in Schedule A to 
Delta's procedures. Securities Exchange Act Release No. 39241 
(October 14, 1997), 62 FR 54663 (order approving proposed rule 
change authorizing Delta to clear mortgage repos).
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    Delta's participants may clear and settle repurchase and reverse 
repurchase agreements in treasury securities (``treasury repos'') and 
repurchase and reverse repurchase agreements in mortgage backed 
securities (``mortgage repos'') through Delta's system. Some 
participants have chosen to clear and to settle only mortgage repos 
through Delta. For those participants, there is an additional cost 
associated with obtaining treasury securities for purposes of supplying 
margin collateral. Because those participants already possess mortgage 
backed securities related to the transactions they are clearing through 
Delta, it is a more straightforward process for them to honor their 
margin obligations with these mortgage backed securities.
    Delta believes that, with the appropriate haircuts, the provision 
of margin in the form of mortgage backed securities poses no additional 
risk to the system. Delta notes that the Commission under its uniform 
net capital rule generally applies the same haircuts to treasury 
securities and mortgage backed securities.\5\ Consistent with Delta's 
treatment of treasury securities used for margin collateral, Delta 
proposes that mortgage backed securities should be valued in accordance 
with the schedule of applicable haircuts found in Rule 15c3-
1(c)(2)(vi)(A)(1) under the Act.\6\ Delta also notes that its clearing 
bank, The Bank of New York, will accept mortgage backed securities in 
accordance with Delta's proposal without further haircuts.
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    \5\ Rule 15c3-1(c)(2)(vi)(A)(1), 17 CFR 240.15c3-
1(c)(2)(vi)(A)(1).
    \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.
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    Delta believes the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to Delta and in particular with Section 17A(b)(3)(F) of the 
Act \7\ which requires that a clearing agency be organized and its 
rules be designed to promote the prompt and accurate clearance and 
settlement of securities transactions and to remove impediments to and 
perfect the mechanism of a national system for the prompt and accurate 
clearance and settlement of securities transactions. Delta believes the 
proposed rule changes will permit wider use of its system by providing 
participants with the opportunity to efficiently meet margin 
requirements consistent with Delta's obligation to safeguard funds and 
securities.
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    \7\ 15 U.S.C. 78q-1(b)(3)(F).

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[[Page 9622]]

(B) Self-Regulatory Organization's Statement on Burden on Competition

    Delta does not believe that the proposed rule change will impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    Comments were neither solicited nor received.

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 or (ii) as to which Delta 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, including whether the proposed rule 
change is consistent with the Act. 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 Delta. All submissions should 
refer to the file number SR-DCC-98-01 and should be submitted by March 
18, 1998.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-4756 Filed 2-24-98; 8:45 am]
BILLING CODE 8010-01-M