[Federal Register Volume 59, Number 111 (Friday, June 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: X94-10610]
[[Page Unknown]]
[Federal Register: June 10, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34154; File No. SR-PTCV-94-01]
Self-Regulatory Organizations; Participants Trust Company; Order
Approving Proposed Rule Change Relating to the Eligibility of Certain
Securities Guaranteed by the Government National Mortgage Association
June 3, 1994.
On April 4 1994, the Participants Trust Company (``PTC'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change (File No. SR-PTC-94-01) pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'').\1\ The proposed rule change
allows PTC to designate certain securities guaranteed by the Government
National Mortgage Association (``GNMA'')\2\ as ``eligible securities''
as permitted by PTC's Rules. The Commission published notice of the
proposed rule change in the Federal Register on April 26, 1994.\3\ No
comments 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) (1988).
\2\GNMA is a wholly-owned corporate instrumentality of the
United States within the Department of Housing and Urban Development
(``HUD''). Through its single-class GNMA I and GNMA II mortgage-
backed securities (``MBS'') programs, GNMA guarantees the timely
payment of principal and interest on securities issued by private
institutions and backed by pools of federally insured or guaranteed
mortgage loans. The GNMA guarantee is backed by the full faith and
credit of the United States.
\3\Securities Exchange Act Release No. 33927 (April 19, 1994),
59 FR 21794.
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I. Description
The proposed rule change allows PTC to designate certain securities
guaranteed by GNMA and eligible securities as permitted by Article I,
Rule 2 of PTC's Rules. PTC currently acts as depository for single-
class GNMA I and GNMA II MBS and REMIC securities\4\ guaranteed by the
Department of Veterans Affairs (``VA'').\5\
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\4\REMIC is an acronym for ``real estate mortgage investment
conduit,'' as pass-through vehicle created under the Tax Reform Act
of 1986 to issue multiclass mortgage-backed securities.
\5\As of December 31, 1993, PTC had approximately 260,000 pools
of GNMA single-class securities on deposit, representing $850
billion in par value (95% of total GNMA single-class securities par
value outstanding), and 71 tranches of VA REMIC securities,
representing $4.6 billion in par value, from a total of 5 REMIC
transactions (100% of all VA REMIC par value outstanding).
For a more detailed description of PTC's VA REMIC program, see
Securities Exchange Act Release Nos. 30792 (June 10, 1992), 57 FR
27495, and 31914 (February 24, 1993), 58 FR 12295.
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GNMA is now establishing a GNMA REMIC program under which GNMA will
guarantee multi-class securities issued by REMIC trusts. The GNMA REMIC
securities will be issued through single-purpose trusts created by
GNMA-approved sponsors which will assemble GNMA-guaranteed single-class
mortgage-backed securities to constitute the corpus of the REMIC trust.
The sponsors will be private-sector entities such as investment
bankers. Upon issuance, the General Counsel of HUD will render an
opinion that GNMA's obligations under the GNMA guarantee of its REMIC
securities will constitute absolute and unconditional general
obligations of the United States, for which the full faith and credit
of the United States is pledged.
The authorizing Federal statute\6\ provides that the GNMA REMIC
program be implemented by GNMA's publication of a notice in the Federal
Register, and that GNMA subsequently publish regulations within twelve
moths of the publication of the initial notice, based upon the comments
received and the experience of GNMA in carrying out the program.
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\6\Section 306(g) of the National Housing Act, 12 U.S.C.
1721(g), as amended by sec. 3004 of the Omnibus Budget
Reconciliation Act of 1993, 107 Stat. 339.
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GNMA will implement its REMIC program in two stages. During the
initial stage, GNMA will restrict participation in the REMIC program to
a small number of participants (consisting of sponsors, co-sponsors,
trustees, trust counsel, and accounting firms) and a limited number of
REMIC issuances. The initial stage will commence upon the closing of
the first transaction, after publication of the notice in the Federal
Register, and is expected to last several months, during which time
GNMA will establish standard documentation, and guidelines and
procedures applicable to the full implementation of the REMIC
program.\7\
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\7\GNMA has not yet announced the date on which the initial
stage of the REMIC program will commence.
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While GNMA has not yet determined the characteristics of the GNMA
REMIC tranches, for processing purposes it is assumed that the GNMA
REMIC classes will have the same basic processing requirements as the
VA REMICs, which PTC has had on deposit for approximately the last two
years. It is assumed that, as in the case with the VA REMIC securities,
all classes of the GNMA REMIC securities except the residual class will
be established and maintained in book-entry form through the facilities
of PRTC, although holders will have the right to request certificated
securities.
II. Discussion
The Commission believes that PTC's proposed rule change is
consistent with section 17A of the Act,\8\ and in particular, section
17A(b)(3)(F) of the Act. Section 17A(b)(3)(F) requires that the rules
of a clearing agency be designed to remove impediments to and perfect
the mechanism of a national system for the prompt and accurate
clearance and settlement of securities transactions. The Commission
believes that PTC's proposal to designate certain securities guaranteed
by GNMA as eligible securities for deposit with PTC is consistent with
this goal.
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\8\15 U.S.C. 78q-1 (1988).
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As previously stated, REMIC issuances will be limited during the
initial stage of the program. Once the REMIC program is fully
established, however, GNMA anticipates that a substantial percentage of
its annual production of GNMA single-class securities will be
securitized in GNMA REMICs. GNMA has stated they anticipate
approximately $75 billion is the average deal size, this will result in
approximately 150 REMIC deals issued each year.
It is anticipated that each class of the GNMA REMIC securities will
be issued initially in the form of one or more physical certificates
registered in the name of MBSCC & Co., nominee for PTC, and held in
physical form by PTC's custodian, with participants receiving and
delivering REMIC securities by book-entry on PTC's books. REMIC
securities may be held subsequent to original issuance in either
certificated form, outside of PTC, or on PTC's book-entry system, as is
currently the case with the GNMA I and GNMA II single-class MBS and the
VA REMIC securities on deposit at PTC. PTC's current custody agreement
with its custodian, Chemical Bank, accommodates the deposit of GMNA
REMIC securities with the custodian.
The REMIC securities will be supported entirely by the cash flows
on the underlying GMA-guaranteed GNMA I MBS. REMIC trustees will be
required to pay principal and interest (``P&I'') on the REMIC
securities in same day funds on the 16th day of the month, or the first
business day thereafter if the 16th is not a business day. REMIC P&I
will therefore be paid to REMIC holders on the same day that the PSI on
the underlying MBS is paid to MBS holders. PTC will pass through the
REMIC payment on the same day as received.
Not later than the 14th day of each month, the trustee will deliver
to PTC and Chemical Bank the factor information for payment on the
REMIC securities. PTC will follow the instructions from the trustee for
disbursement of funds received on the GNMA MBS collateralizing the
REMIC trust.
The volume of the GNMA REMIC securities initially deposited at FTC
will be modest compared to the total face amount of GNMA securities now
on deposit at FTC and is expected to have a comparably small impact on
FTC's overall transaction volume.\9\ GNMA I's that constitute the
corpus of a GNMA REMIC trust will remain immobilized at FTC and,
therefore, will be removed from FTC's transaction volume after the
creation of the REMIC.
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\9\The total face amount of GNMA securities now on deposit at
FTC is approximately $880 billion.
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It is expected that FTC will utilize pricing sources and the
methodology employed for the VA REMIC pricing at FTC for the GNMA REMIC
product.\10\ As an eligible security, functionally and legally
comparable to GNMA single-class and VA REMIC securities, PTC's Rules
and procedures are currently consistent with, and govern PTC's and it's
participants' rights and obligations with respect to, the GNMA REMIC
securities. PTC end of day borrowing agreements also currently apply to
GNMA REMIC securities without the change. Finally, PTC anticipates that
the fees imposed by PTC for providing depository services for GNMA
REMIC securities will be the same as those in effect for GNMA MBS.
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\10\For further information regarding the pricing sources and
methodology employed by PTC, see Securities Exchange Act Release No.
34017 (May 5, 1994) 59 FR 24495.
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PTC has gained almost six years of experience with GNMAs. The
Commission believes that PTC's experience with GNMAs serves as a good
foundation for continuing to handle REMICs. In addition, PTC has been
accepting VA REMICS for deposit for almost two years. PTC's experience
with the VA REMIC program has provided a basis for determining the
depository services which will be required for the GNMA REMIC. The
Commission therefore believes that this proposal furthers the
perfection of the national system for the clearance and settlement of
securities transactions becuase GNMA REMIC will be processed within a
centralized, electronic book-entry environment.
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the Act, and in particular with
section 17A of the act, and with the rules and regulations thereunder.
It Is Therefore Ordered, pursuant to section 19(b)(2) of the
Act,\11\ that the proposed rule change (File No. SR-PTC-94-01) be, and
hereby is, approved.
\11\15 CFR 78s(b)(12) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\17 CFR 200.30(a)(12).
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Jonathan G. Katz,
Secretary.
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