04-5654. 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.

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]

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 settlement services to an expanded pool of securities for its GCF Repo service.

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]

Jill M. Peterson,

Assistant Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  Securities Exchange Act Release No. 49113 (January 22, 2004), 69 FR 4193.

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.

6.  15 U.S.C. 78q-1(b)(3)(F).

7.  17 CFR 200.30-3(a)(12).