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94-39 Treasury Implements Buy-In Requirements For Government Securities

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Executive Summary

Effective April 29, 1994, the Department of the Treasury (Treasury) issued regulations under the Government Securities Act of 1986 (GSA) to require broker/dealers to initiate buy-in procedures for mortgage-backed securities that are in a fail-to-receive status for more than 60 calendar days. The amendments also implement buy-in requirements to complete a customer sell order if the government securities have not been received from the customer within 30 calendar days after settlement date. For mortgage-backed securities this time frame is 60 calendar days.

Background

Before these amendments, mortgage-backed securities were not subject to GSA's buy-in requirements. In addition, GSA regulations did not impose a buy-in requirement for customer sell orders where the broker/dealer had not obtained the securities from its customers.

In 1991, Treasury proposed rule changes to subject mortgage-backed securities in a fail-to-receive status to a buy-in requirement. The proposed time frame was 60 calendar days, rather than the existing 30 calendar days applicable to other government securities. Treasury proposed the longer time frame due to the unique nature of the mortgage-backed market, particularly the lengthy settlement cycle. The proposed rulemaking also included buy-in rules for customer sell orders that would apply to all government securities broker/dealers.

Treasury waited to finalize the proposed rules until its rulemaking authority under the GSA was permanently reauthorized on December 17, 1993.

Fail-To-Receive Buy-Ins

Treasury is now adopting without significant changes amendments to paragraphs 403.1,403.4(g), and 403.5(c)(1)(iii) that were proposed in 1991. These provisions require all government securities broker/dealers that are required to register or file notice pursuant to 15C(a)(1) of the Securities Exchange Act of 1934 to take prompt steps to obtain possession or control of mortgage-backed securities that are in a fail-to-receive status for more than 60 calendar days through a buy-in procedure or otherwise.

To avoid abnormal settlements, Treasury is advising that any buy-in accomplished pursuant to these rules would be allowed to settle on the next regularly scheduled settlement date for that particular class or pool of mortgage-backed securities.

Sell Order Buy-Ins

Treasury also is adding paragraphs 403.4(1) and 403.5(g) to the GSA regulations to require that government securities broker/dealers buy-in customer sell orders in cases where the broker/dealers have not obtained the government securities from the customer within 30 calendar days after settlement date. The 30-calendar-day requirement applies to all government securities, except mortgage-backed securities that must be bought-in within 60 calendar days.

The adopted rules permit the use of alternatives other than purchasing securities (e.g., securities may be borrowed, substituted, or bought back) in closing out orders. Also, the new rules provide an exemption for short sales.

Similar to buy-ins of mortgage-backed securities that are in a fail-to-receive status, broker/dealers will be allowed to effect buy-ins for customer sell orders of mortgage backed securities at the next regularly scheduled settlement cycle.

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Questions concerning this Notice may be directed to Janet Marsh, District Coordinator, Compliance Department, (202) 728-8228.


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