The Secretary of HUD's Regulation of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac): Book-Entry Procedures

SUMMARY: This interim rule revises procedures that govern the issuance,

recordation, and transfer of Federal National Mortgage Association

(``Fannie Mae'') and Federal Home Loan Mortgage Corporation (``Freddie

Mac'') (collectively ``Government-Sponsored Enterprises'' or ``GSEs'')

Securities in the Book-entry System. The rule modifies HUD's current

book-entry procedures for Fannie Mae to bring them into accord with the

revised book-entry procedures of the Department of Treasury

(``Treasury'') published in the Federal Register on August 23, 1996 (61

FR 43626). This rule also extends these revised book-entry procedures

to Freddie Mac and supersedes Freddie Mac's current book-entry

regulations.

In accordance with Treasury's revised book-entry procedures, this

rule incorporates recent significant changes in commercial and property

law, including changes concerning the holding of securities through

financial intermediaries. This rule replaces existing regulations that

contain outdated legal concepts. This rule applies to outstanding

securities.

DATES: Effective date: January 1, 1997.

Comment due date: Comments must be submitted by January 31, 1997.

ADDRESSES: Interested persons are invited to submit comments regarding

this rule to the Office of the General Counsel, Rules Docket Clerk,

room 10276, Department of Housing and Urban Development, 451 Seventh

Street, SW, Washington, DC 20410-0500. Comments should refer to the

above docket number and title of the rule. Facsimile (FAX) comments are

not acceptable. A copy of each communication submitted will be

available for public inspection and copying during regular business

hours (weekdays 7:30 a.m. to 5:30 p.m. Eastern time) at the above

address.

FOR FURTHER INFORMATION CONTACT: Janet Tasker, Director, Office of

Government-Sponsored Enterprises, Room 6154, telephone (202) 708-2224;

or, for legal questions, Kenneth A. Markison, Assistant General Counsel

for Government Sponsored Enterprises/RESPA, Office of the General

Counsel, Room 9262, telephone (202) 708-3137. The address for both of

these persons is: Department of Housing and Urban Development, 451

Seventh Street, SW, Washington, DC 20410. A telecommunications device

for deaf persons (TTY) is available at (202) 708-9300. (The telephone

numbers are not toll-free.)

SUPPLEMENTARY INFORMATION:

I. Background

Both Fannie Mae and Freddie Mac use the Book-entry System of the

Federal Reserve Banks to issue, record, and transfer ownership of

certain of their respective securities. Although the Book-entry System

was originally designed for Treasury securities, both GSEs have used

this system under separate sets of regulations dating back to the late

1970s. Treasury regulations govern the Book-entry System, known as the

commercial book-entry system, when it is used to issue, record,

transfer and maintain Treasury securities. Recently, Treasury

substantially modified its regulations governing Treasury securities

held in this system to reflect contemporary legal development of the

Uniform Commercial Code (``UCC''). This regulation conforms the book-

entry regulations applicable to GSE securities to the changes made in

Treasury's regulations (tailoring the changes to differences in the

GSEs and GSE Securities), and combines the book-entry regulations

applicable to both GSEs into a single set of regulations.

This rule furthers a rulemaking regarding book-entry procedures

begun with the publication of HUD's proposed rule, 60 FR 9154 (Feb. 16,

1995), to implement the Federal Housing Enterprises Financial Safety

and Soundness Act of 1992 (``FHEFSSA''). As part of that rulemaking,

HUD proposed to revise the book-entry procedures applicable to Fannie

Mae, and make the procedures applicable to both GSEs. In comments on

the proposed rule, however, the GSEs and the Book-Entry Treasury

Regulations Task Force of the Investment Securities Subcommittee of the

UCC Committee of the Business Law Section of the American Bar

Association (``ABA Task Force'') stated that HUD should not revise the

book-entry procedures in the form proposed in light of continuing work

on a comprehensive revision of the Treasury's book-entry regulations.

They urged HUD to wait until Treasury adopted revised book-entry

regulations, and then to adopt consistent regulations for Book-entry

GSE Securities. Treasury was, at that time, in the process of

completing its revision of its book-entry regulations to reflect a

major revision to Article 8 of the UCC. (Treasury had withdrawn

proposed changes to its own regulations pending the completion of the

revisions to Article 8 and conforming revisions to Article 9 of the

UCC. See 57 FR 12244 (April 9, 1992) and 58 FR 59972 (November 12,

1993).) The Federal Reserve Bank of New York also urged HUD to delay

implementation of new book-entry provisions, await Treasury's adoption

of revised book-entry regulations, and then promulgate consistent

regulations.

As indicated in the preamble to HUD's final rule implementing other

matters pursuant to FHEFSSA, 60 FR 61846, 61885 (December 1, 1995), the

Secretary decided to postpone making significant revisions to the book-

entry regulations for the GSEs, including establishing uniform book-

entry procedures for both GSEs, pending completion of the revised

Treasury book-entry regulations. Based on the comments received, the

Secretary determined that for HUD to act at that time to finalize a

complete set of regulations for both GSEs, and then shortly to revise

them, would be inefficient and lead to confusion. In the final rule,

HUD announced its intention to adopt revised regulations simultaneous

with Treasury's adoption of a final rule revising its book-entry

procedures and to make HUD's regulations consistent with Treasury's at

that time.

On March 4, 1996 (61 FR 8420), Treasury's Bureau of the Public Debt

proposed revisions to its book-entry regulations. The purposes of

Treasury's changes, like the purposes of the changes to HUD's rule

announced today, were to incorporate recent and significant changes in

commercial law addressing the holding of securities in book-entry form

through securities intermediaries and to replace existing regulations

that contain outdated legal concepts. Treasury received eleven comments

on its proposed rule. Based on Treasury's proposal, the comments

received in response, and Treasury's approach to addressing the

comments in Treasury's August 23, 1996 final rule, and HUD's previously

announced determination, based on the comments received, to issue

revised book-entry regulations consistent with Treasury's

[[Page 63945]]

once those were promulgated, HUD developed this interim rule. HUD

considered Treasury's proposal, the comments received in response

thereto, and Treasury's final rule as relevant to this interim rule,

since this rule is closely modelled on Treasury's rule--except

differences necessitated by distinctions in the GSEs and their GSE

Securities--and will become effective simultaneously with Treasury's

rule. In light of the public comments on HUD's February 16, 1995

proposed revisions to the book-entry procedures and in light of

Treasury's notice and comment rulemaking and HUD's adaptation of

Treasury's rule to GSE Securities, HUD is issuing its revisions as an

interim rule to accompany Treasury's final rule previously published in

the Federal Register.

The book-entry rule announced today is identical for both GSEs and

provides a level playing field for both GSE's securities. To this end,

this regulation supersedes not only HUD's current book-entry regulation

for Fannie Mae contained in 24 CFR part 81, subpart H, but also

supersedes Freddie Mac's current book-entry regulation, codified at 1

CFR part 462.

II. Analysis of Revisions to Book-Entry Procedures

Except as is necessary because of differences between the GSEs and

their securities and Treasury and Treasury securities, HUD's revisions

to the book-entry procedures applicable to GSEs follow the revisions

Treasury is making to its book-entry procedures in a final rule

previously published in the Federal Register. HUD adopts, to the extent

relevant, the substance of the analysis contained in the commentary to

Treasury's final rule, which will be codified at 31 CFR Part 357,

Appendix B of Treasury's regulations. It is HUD's intent that the book-

entry procedures announced today will be interpreted in a manner fully

consistent and uniform with Treasury's revised book-entry procedures

and the commentary to Treasury's final rule, except to the extent that

HUD's rule diverges from Treasury's rule due to the unique nature of

the GSEs and their securities.

The book-entry regulation promulgated today shares many major

similarities with Treasury's regulation of the Treasury/Reserve

Automated Debt Entry System (``TRADES''). Three of the similarities

worthy of note are:

Under both the book-entry regulations applicable to GSE

securities and Treasury's TRADES regulation, there is federal

preemption of state law with respect to the rights and obligations of

the United States and the Federal Reserve Banks. (Additionally, HUD's

rule provides for federal preemption of state law with respect to the

rights and obligations of the GSEs.)

Other than as expressly stated in the rule, no duty exists

on the part of Treasury, Freddie Mac, Fannie Mae, or the Federal

Reserve to holders of GSE securities indirectly or through a securities

intermediary.

Book-entry GSE Securities may be converted to definitive

securities only when so permitted in the documents establishing the

terms of the securities.

Four significant areas in which HUD's rule differs from Treasury's

rule, however, are the following:

Under Treasury regulations, Treasury securities may be

maintained in either of two book-entry systems--TRADES or TREASURY

DIRECT. Inasmuch as there is no direct registration and holding of GSE

Securities at this time, this rule does not establish a system

analogous to TREASURY DIRECT for GSE Securities.

The GSEs issue a wide variety of securities, some of which

are not maintained by the Federal Reserve Banks. GSE Securities not

maintained by a Federal Reserve Bank are not subject to this book-entry

regulation and there is no federal preemption by these subpart H

regulations for such securities. Furthermore, the book-entry regulation

in this subpart H applies only for so long as the GSE security is

actually on the Book-entry System; this regulation does not apply to

GSE securities initially issued on the records of a Federal Reserve

Bank when those securities are taken off the book-entry system and

converted to definitive form.

The book-entry regulation applicable to the GSEs

recognizes that there are variations in documentation that a GSE uses

depending upon the type of security issued.

Unlike Treasury securities, GSE Securities may contain an

express choice of law provision, under which state law is chosen to

govern the rights and obligations of the GSEs. To the extent the state

law chosen in the Security Documentation conflicts with the state law

that would govern under these regulations, the state law selected in

accordance with this regulation will prevail.

III. Section-by-Section Comparison With Treasury's Model

This section notes in a section-by-section comparison, other

differences between this book-entry regulation and Treasury's TRADES

regulation.

Revisions to 81.2 Definitions

The rule adds some definitions to Sec. 81.2. These definitions

correspond to definitions in 31 CFR 357.2, but are tailored to apply to

the GSEs and their securities. It should be noted that HUD's rule uses

the terminology ``Book-entry System'' rather than ``TRADES,'' because

TRADES is Treasury's unique terminology for the system as applied to

Treasury securities.

HUD's definition of ``person'' makes clear that it excludes the

GSEs. In addition, HUD's rule provides a definition of ``Securities

Documentation.'' Further, HUD intends that the rule's definitions of

``Book-entry GSE Security'' and ``GSE Security'' refer to the wide

array of securities and obligations that the GSEs issue.

The definitions added to Sec. 81.2 are supplemented by a general

provision, Sec. 81.2(c), which indicates that terms used in subpart H

that are not defined in part 81 have the meanings set forth in 31 CFR

357.2. This provision reflects HUD's determination that it is

unnecessary to define certain terms used in subpart H or used in a

section of Treasury's rule adopted by cross-reference in subpart H,

even though those terms are not defined in part 81, because the

definitions in the Treasury rule are adequate (e.g., ``Security

Entitlement'').

This rule also eliminates an outdated provision that formerly

appeared in the definition of ``Fannie Mae security,'' which excluded

short-term discount notes and obligations convertible into shares of

common stock.

Section 81.91

This section, addressing maintenance of GSE Securities, is modelled

after 31 CFR 357.0, but is custom-tailored to GSE Securities to reflect

that GSE Securities need not be maintained in the Book-entry System.

Some GSE Securities are held in definitive form, either indirectly

through depositories or intermediaries or directly by the investor in

TREASURY DIRECT. No system currently exists for GSE Securities that is

analogous to TREASURY DIRECT.

Section 81.92

This section, addressing the law governing the rights and

obligations of the United States, the Federal Reserve Banks, and the

GSEs, and other interests, is modelled after 31 CFR 357.10 and 357.11.

One difference between HUD's and Treasury's provisions is that HUD's

rule recognizes that the GSEs use various forms of documentation to

establish the terms of

[[Page 63946]]

GSE Securities, depending upon the type of security issued. HUD's rule

makes clear the way in which such documentation applies to the GSEs and

their securities.

Section 81.93

This section, addressing security entitlements and interests, is

modelled after 31 CFR 357.12. HUD's rule applies these provisions to

the GSEs and their securities.

Section 81.94

This section, addressing obligations of GSEs, is modelled after 31

CFR 357.13. HUD's rule accounts for the possibility that the GSEs could

make payments with respect to Book-entry GSE Securities that might be

characterized as other than principal or interest payments.

Section 81.95

This section, addressing the authority of the Federal Reserve

Banks, is modelled after 31 CFR 357.14. HUD's rule specifically

authorizes each Federal Reserve Bank to effect conversions between

Book-entry GSE Securities and Definitive GSE Securities where

conversion rights are available pursuant to the applicable Securities

Documentation.

Section 81.96

This section, addressing withdrawal of Book-entry GSE Securities

eligible for conversion to definitive form, is modelled after 31 CFR

306.117. HUD's rule highlights the requirement that conversion must be

consistent with the Securities Documentation.

Section 81.97

This section, addressing waiver of regulations, is modelled after

31 CFR 357.41. HUD's rule makes clear that the Secretary of HUD may

waive these regulations. HUD traditionally has consulted with the GSEs

in the waiver process. In accordance with section 106 of the Department

of Housing and Urban Development Reform Act of 1989 (42 U.S.C.

3535(q)), HUD publishes a notice each quarter indicating the waivers of

regulations granted during that quarter.

Section 81.98

This section, addressing liability of GSEs and Federal Reserve

Banks, is modelled after 31 CFR 357.42. HUD's rule reflects that some

terms such as ``tender'' and ``transactions request form'' used in

Treasury's rule do not apply to Book-entry GSE Securities.

Section 81.99

This section is modelled after two Treasury regulations. Subsection

(a) on additional requirements is modelled after 31 CFR 357.40.

Subsection (b) on notice of attachment for GSE Securities is modelled

after 31 CFR 357.44.

Removal of 1 CFR part 462

Freddie Mac's current book-entry regulation is codified at 1 CFR

part 462. This regulation was promulgated prior to the Financial

Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L.

101-73, (August 9, 1989). Section 731(c) of FIRREA accorded the

Secretary of HUD general regulatory power over Freddie Mac. The

Secretary's general regulatory power over Freddie Mac is currently

codified in section 1321 of FHEFSSA (12 U.S.C. 4541).

Since this regulation applies to both GSEs, it supersedes Freddie

Mac's current book-entry regulation codified at 1 CFR Part 462. Thus,

HUD's rule removes Freddie Mac's current book-entry regulation from the

CFR pursuant to the Secretary's general regulatory power over Freddie

Mac.

Findings and Certifications

Public Reporting Burden

This interim rule contains no new information collection

requirements that would require review by the Office of Management and

Budget under the Paperwork Reduction Act of 1995 (42 U.S.C. 3501-3520).

Justification for Interim Rule

As discussed above in the Background section, this rule is

published as an interim rule based not only on the previous proposed

rule issued by HUD on February 16, 1995, but also on the proposed and

final rules issued by Treasury. Treasury's final rule, published on

August 23, 1996, needed relatively minor adaptations to apply

appropriately to Fannie Mae and Freddie Mac. This interim rule makes

those necessary changes.

The Department generally publishes a rule for public comment before

issuing a rule for effect, in accordance with its regulations on

rulemaking in 24 CFR part 10. However, prior public procedure may be

omitted if HUD determines that it is ``impracticable, unnecessary, or

contrary to the public interest.'' (24 CFR 10.1) The essence of this

rule has been the subject of notice and comment in the form of the

Treasury proposed rule, and comments on HUD's proposed rule recommended

that HUD's rule follow Treasury's rule. To avoid dislocation in the

securities market, it is imperative that these regulations take effect

at the same time as Treasury's final rule, on January 1, 1997. Given

that Treasury's rule was not published until August 23, 1996, there

would not have been sufficient time for HUD to go through notice and

comment rulemaking and then proceed to publish a final rule with a

January 1, 1997 effective date. Therefore, the Department has

determined that it is unnecessary and contrary to the public interest

to undergo separate notice and comment rulemaking on the specifics of

this adaptation of the Treasury rule before making this rule effective.

As a result, in accordance with 24 CFR part 10, HUD is publishing this

interim rule for effect.

In the interest of obtaining the fullest participation possible in

determining that the adaptation of Treasury's rule is appropriate, the

Department does invite public comment on the rule. The comments

received within the 60-day comment period will be considered during

development of a final rule that will supersede this interim rule.

Impact on Small Entities

The Secretary, in accordance with the Regulatory Flexibility Act (5

U.S.C. 605(b)), has reviewed and approved this interim rule, and in so

doing certifies that this interim rule will not have a significant

economic impact on a substantial number of small entities. This interim

rule affects the operation of two entities, Fannie Mae and Freddie Mac,

neither of which is a small entity.

Environmental Impact

This interim rule is exempt from the requirement for an

environmental assessment under section 102(2)(C) of the National

Environmental Policy Act of 1969 (42 U.S.C. 4332), in accordance with

HUD regulations at 24 CFR 50.19(c)(1), as revised by a final rule on

September 27, 1996 (61 FR 50919). In accordance with 24 CFR 50.19(a),

other Federal environmental laws, as described in 24 CFR 50.4, are not

applicable to this interim rule.

Federalism Impact

The General Counsel, as the Designated Official under section 6(a)

of Executive Order 12612, Federalism, has determined that this interim

rule's preemption of State law to the extent that it applies the newly

revised Article 8 of the Uniform Commercial Code has sufficient effect

on States to require consideration of the impact of the rule under the

Order. The General Counsel has assessed this preemption in light of the

principles, criteria, and requirements of the Executive Order and

determined that it is not inconsistent with them. The policy does not

impose additional costs or burdens on the States

[[Page 63947]]

and it does not affect the States' ability to discharge traditional

State governmental functions.

This rule makes explicit the preemption applicable to the rights

and obligations of the United States, the Federal Reserve Banks, and

the GSEs that was implicit under the prior rule. The rule continues to

accommodate State law, to the maximum extent possible, given market

methodologies. Ultimately, as States proceed to adopt the revised

Article 8, the rule will provide no greater preemption of State law

than under the prior rule.

The rule is justified, despite the preemption it effects, by the

fact that the preemption is no greater than necessary to accommodate

the nationwide application of the rule and the nationwide market for

the GSE Securities, as was the preemption under the book-entry rules

this rule replaces. It should be noted that section 304(d) of the

Fannie Mae Charter Act (12 U.S.C. 1719(d)) and section 306(g) of the

Freddie Mac Act (12 U.S.C. 1455(f)) specifically provide for the

exemption of GSE securities from State securities registration

requirements (as well as the registration requirements of the

Securities and Exchange Commission). See also 15 U.S.C. 77r-1.

Executive Order 12606, the Family

The General Counsel, as the Designated Official under Executive

Order 12606, The Family, has determined that this interim rule does not

have potential for significant impact on family formation, maintenance,

and general well-being, and, thus, is not subject to review under the

order. No significant change in existing HUD policies or programs will

result from promulgation of this rule, as those policies and programs

relate to family concerns.

Unfunded Mandates Reform Act

The Secretary, in accordance with the Unfunded Mandates Reform Act

of 1995, 2 U.S.C. 1532, has reviewed this interim rule before

publication and by approving it certifies that this interim rule does

not impose a Federal mandate that will result in the expenditure by

State, local, and tribal governments, in the aggregate, or by the

private sector, of $100 million or more in any one year.

Catalog

There is no Catalog of Federal Domestic Assistance number for the

program affected by this interim rule.

List of Subjects

1 CFR Part 462

Accounting, Banks, Banking, Securities.

24 CFR Part 81

Accounting, Federal Reserve System, Mortgages, Reporting and

recordkeeping requirements, Securities.

Accordingly, for the reasons set out in the preamble, under the

authority of 42 U.S.C. 3535(d), part 462 of title 1 of the Code of

Federal Regulations and part 81 of title 24 of the Code of Federal

Regulations are amended as follows:

TITLE 1--GENERAL PROVISIONS

CHAPTER IV--MISCELLANEOUS AGENCIES

PART 462--FEDERAL HOME LOAN MORTGAGE CORPORATION (BOOK-ENTRY

REGULATIONS)

1. 1 CFR part 462 is removed.

TITLE 24--DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

PART 81--THE SECRETARY OF HUD'S REGULATION OF THE FEDERAL NATIONAL

MORTGAGE ASSOCIATION (FANNIE MAE) AND THE FEDERAL HOME LOAN

MORTGAGE CORPORATION (FREDDIE MAC)

2. The authority citation for Part 81 continues to read as follows:

Authority: 12 U.S.C. 1451 et seq., 1716-1723h, and 4501-4641; 42

U.S.C. 3535(d) and 3601-3619.

3. In Sec. 81.2, paragraph (b) is amended by adding the following

definitions, in appropriate alphabetical order location, and by adding

a new paragraph (c), to read as follows:

Sec. 81.2 Definitions.

* * * * *

Book-entry GSE Security means a GSE Security issued or maintained

in the Book-entry System.

Book-entry System means the automated book-entry system operated by

the Federal Reserve Banks acting as the fiscal agent for the GSEs, on

which Book-entry GSE Securities are issued, recorded, transferred and

maintained in book-entry form.

* * * * *

Definitive GSE Security means a GSE Security in engraved or printed

form, or that is otherwise represented by a certificate.

* * * * *

Eligible Book-entry GSE Security means a Book-entry GSE Security

issued or maintained in the Book-entry System which by the terms of its

Security Documentation is available in either definitive or book-entry

form.

Entitlement Holder means a Person to whose account an interest in a

Book-entry GSE Security is credited on the records of a Securities

Intermediary.

* * * * *

Federal Reserve Bank Operating Circular means the publication

issued by each Federal Reserve Bank that sets forth the terms and

conditions under which the Reserve Bank maintains book-entry Securities

accounts (including Book-entry GSE Securities) and transfers book-entry

Securities (including Book-entry GSE Securities).

* * * * *

GSE Security means any security or obligation of Fannie Mae or

Freddie Mac issued under its respective Charter Act in the form of a

Definitive GSE Security or a Book-entry GSE Security.

* * * * *

Person, as used in subpart H, means and includes an individual,

corporation, company, governmental entity, association, firm,

partnership, trust, estate, representative, and any other similar

organization, but does not mean or include the United States, a GSE, or

a Federal Reserve Bank.

Revised Article 8 has the same meaning as in 31 CFR 357.2.

* * * * *

Security means any mortgage participation certificate, note, bond,

debenture, evidence of indebtedness, collateral-trust certificate,

transferable share, certificate of deposit for a security, or, in

general, any interest or instrument commonly known as a ``security.''

Securities documentation means the applicable statement of terms,

trust indenture, securities agreement or other documents establishing

the terms of a Book-entry GSE Security.

* * * * *

Transfer message means an instruction of a Participant to a Federal

Reserve Bank to effect a transfer of a Book-entry Security (including a

Book-entry GSE Security) maintained in the Book-entry System, as set

forth in Federal Reserve Bank Operating Circulars.

* * * * *

(c) Subpart H terms. Unless the context requires otherwise, terms

used in subpart H of this part that are not defined in this part, have

the meanings as set forth in 31 CFR 357.2. Definitions and terms used

in 31 CFR part 357 should read as though modified to effectuate their

application to the GSEs.

4. Subpart H is revised to read as follows:

[[Page 63948]]

Subpart H--Book-Entry Procedures

Sec.

81.91 Maintenance of GSE Securities.

81.92 Law governing rights and obligations of United States,

Federal Reserve Banks, and GSEs; rights of any Person against United

States, Federal Reserve Banks, and GSEs; Law governing other

interests.

81.93 Creation of Participant's Security Entitlement; security

interests.

81.94 Obligations of GSEs; no adverse claims.

81.95 Authority of Federal Reserve Banks.

81.96 Withdrawal of Eligible Book-entry GSE Securities for

conversion to definitive form.

81.97 Waiver of regulations.

81.98 Liability of GSEs and Federal Reserve Banks.

81.99 Additional provisions.

Subpart H--Book-Entry Procedures

Sec. 81.91 Maintenance of GSE Securities.

A GSE Security may be maintained in the form of a Definitive GSE

Security or a Book-entry GSE Security. A Book-entry GSE Security shall

be maintained in the Book-entry System.

Sec. 81.92 Law governing rights and obligations of United States,

Federal Reserve Banks, and GSEs; rights of any Person against United

States, Federal Reserve Banks, and GSEs; Law governing other interests.

(a) Except as provided in paragraph (b) of this section, the

following rights and obligations are governed solely by the Book-entry

regulations contained in this subpart H, the Securities Documentation

(but not including any choice of law provisions in such documentation),

and Federal Reserve Bank Operating Circulars:

(1) The rights and obligations of the United States, a GSE and the

Federal Reserve Banks with respect to:

(i) A Book-entry GSE Security or Security Entitlement; and

(ii) The operation of the Book-entry System as it applies to GSE

Securities; and

(2) The rights of any Person, including a Participant, against the

United States, a GSE and the Federal Reserve Banks with respect to:

(i) A Book-entry GSE Security or Security Entitlement; and

(ii) The operation of the Book-entry System applicable to GSE

Securities;

(b) A security interest in a Security Entitlement that is in favor

of a Federal Reserve Bank from a Participant and that is not recorded

on the books of a Federal Reserve Bank pursuant to Sec. 81.93(c)(1), is

governed by the law (not including the conflict-of-law rules) of the

jurisdiction where the head office of the Federal Reserve Bank

maintaining the Participant's Securities Account is located. A security

interest in a Security Entitlement that is in favor of a Federal

Reserve Bank from a Person that is not a Participant, and that is not

recorded on the books of a Federal Reserve Bank pursuant to

Sec. 81.93(c)(1), is governed by the law determined in the manner

specified in paragraph (d) of this section.

(c) If the jurisdiction specified in the first sentence of

paragraph (b) of this section is a State that has not adopted Revised

Article 8, then the law specified in paragraph (b) of this section

shall be the law of that State as though Revised Article 8 had been

adopted by that State.

(d) To the extent not otherwise inconsistent with this subpart H,

and notwithstanding any provision in the Security Documentation setting

forth a choice of law, the provisions set forth in 31 CFR 357.11

regarding law governing other interests apply and shall be read as

though modified to effectuate the application of 31 CFR 357.11 to the

GSEs.

Sec. 81.93 Creation of Participant's Security Entitlement; security

interests.

(a) A Participant's Security Entitlement is created when a Federal

Reserve Bank indicates by book-entry that a Book-entry GSE Security has

been credited to a Participant's Securities Account.

(b) A security interest in a Security Entitlement of a Participant

in favor of the United States to secure deposits of public money,

including without limitation deposits to the Treasury tax and loan

accounts, or other security interest in favor of the United States that

is required by Federal statute, regulation, or agreement, and that is

marked on the books of a Federal Reserve Bank is thereby effected and

perfected, and has priority over any other interest in the securities.

Where a security interest in favor of the United States in a Security

Entitlement of a Participant is marked on the books of a Federal

Reserve Bank, such Reserve Bank may rely, and is protected in relying,

exclusively on the order of an authorized representative of the United

States directing the transfer of the security. For purposes of this

paragraph, an ``authorized representative of the United States'' is the

official designated in the applicable regulations or agreement to which

a Federal Reserve Bank is a party, governing the security interest.

(c)(1) A GSE, the United States, and the Federal Reserve Banks have

no obligation to agree to act on behalf of any Person or to recognize

the interest of any transferee of a security interest or other limited

interest in favor of any Person except to the extent of any specific

requirement of Federal law or regulation or to the extent set forth in

any specific agreement with the Federal Reserve Bank on whose books the

interest of the Participant is recorded. To the extent required by such

law or regulation or set forth in an agreement with a Federal Reserve

Bank, or the Federal Reserve Bank Operating Circular, a security

interest in a Security Entitlement that is in favor of a Federal

Reserve Bank, a GSE, or a Person may be created and perfected by a

Federal Reserve Bank marking its books to record the security interest.

Except as provided in paragraph (b) of this section, a security

interest in a Security Entitlement marked on the books of a Federal

Reserve Bank shall have priority over any other interest in the

securities.

(2) In addition to the method provided in paragraph (c)(1) of this

section, a security interest, including a security interest in favor of

a Federal Reserve Bank, may be perfected by any method by which a

security interest may be perfected under applicable law as described in

Sec. 81.92(b) or (d). The perfection, effect of perfection or non-

perfection and priority of a security interest are governed by such

applicable law. A security interest in favor of a Federal Reserve Bank

shall be treated as a security interest in favor of a clearing

corporation in all respects under such law, including with respect to

the effect of perfection and priority of such security interest. A

Federal Reserve Bank Operating Circular shall be treated as a rule

adopted by a clearing corporation for such purposes.

Sec. 81.94 Obligations of GSEs; no adverse claims.

(a) Except in the case of a security interest in favor of the

United States or a Federal Reserve Bank or otherwise as provided in

Sec. 81.93(c)(1), for the purposes of this subpart H, the GSE and the

Federal Reserve Banks shall treat the Participant to whose Securities

Account an interest in a Book-entry GSE Security has been credited as

the person exclusively entitled to issue a Transfer Message, to receive

interest and other payments with respect thereof and otherwise to

exercise all the rights and powers with respect to such Security,

notwithstanding any information or notice to the contrary. Neither the

Federal Reserve Banks, the United States, nor a GSE is liable to a

Person asserting or having an adverse claim to a Security Entitlement

or to a Book-entry GSE Security in a Participant's Securities Account,

including any such claim arising as a result of the transfer

[[Page 63949]]

or disposition of a Book-entry GSE Security by a Federal Reserve Bank

pursuant to a Transfer Message that the Federal Reserve Bank reasonably

believes to be genuine.

(b) The obligation of the GSE to make payments (including payments

of interest and principal) with respect to Book-entry GSE Securities is

discharged at the time payment in the appropriate amount is made as

follows:

(1) Interest or other payments on Book-entry GSE Securities is

either credited by a Federal Reserve Bank to a Funds Account maintained

at such Bank or otherwise paid as directed by the Participant.

(2) Book-entry GSE Securities are redeemed in accordance with their

terms by a Federal Reserve Bank withdrawing the securities from the

Participant's Securities Account in which they are maintained and by

either crediting the amount of the redemption proceeds, including both

principal and interest, where applicable, to a Funds Account at such

Bank or otherwise paying such principal and interest as directed by the

Participant. No action by the Participant ordinarily is required in

connection with the redemption of a Book-entry GSE Security.

Sec. 81.95 Authority of Federal Reserve Banks.

(a) Each Federal Reserve Bank is hereby authorized as fiscal agent

of the GSEs to perform the following functions with respect to the

issuance of Book-entry GSE Securities offered and sold by a GSE to

which this subpart H applies, in accordance with the Securities

Documentation, Federal Reserve Bank Operating Circulars, this subpart

H, and procedures established by the Secretary consistent with these

authorities:

(1) To service and maintain Book-entry GSE Securities in accounts

established for such purposes;

(2) To make payments with respect to such securities, as directed

by the GSE;

(3) To effect transfer of Book-entry GSE Securities between

Participants' Securities Accounts as directed by the Participants;

(4) To effect conversions between Book-entry GSE Securities and

Definitive GSE Securities with respect to those securities as to which

conversion rights are available pursuant to the applicable Securities

Documentation; and

(5) To perform such other duties as fiscal agent as may be

requested by the GSE.

(b) Each Federal Reserve Bank may issue Operating Circulars not

inconsistent with this subpart H, governing the details of its handling

of Book-entry GSE Securities, Security Entitlements, and the operation

of the book-entry system under this subpart H.

Sec. 81.96 Withdrawal of Eligible Book-entry GSE Securities for

conversion to definitive form.

(a) Eligible Book-entry GSE Securities may be withdrawn from the

Book-entry System by requesting delivery of like Definitive GSE

Securities.

(b) A Reserve bank shall, upon receipt of appropriate instructions

to withdraw Eligible Book-entry GSE Securities from book-entry in the

Book-entry System, convert such securities into Definitive GSE

Securities and deliver them in accordance with such instructions. No

such conversion shall affect existing interests in such GSE Securities.

(c) All requests for withdrawal of Eligible Book-entry GSE

Securities must be made prior to the maturity or date of call of the

securities.

(d) GSE Securities which are to be delivered upon withdrawal may be

issued in either registered or bearer form, to the extent permitted by

the applicable offering circular.

Sec. 81.97 Waiver of regulations.

The Secretary reserves the right in the Secretary's discretion, to

waive any provision(s) of these regulations in any case or class of

cases for the convenience of a GSE, the United States, or in order to

relieve any person(s) of unnecessary hardship, if such action is not

inconsistent with law, does not adversely affect any substantial

existing rights, and the Secretary is satisfied that such action will

not subject a GSE or the United States to any substantial expense or

liability.

Sec. 81.98 Liability of GSEs and Federal Reserve Banks.

A GSE and the Federal Reserve Banks may rely on the information

provided in a Transfer Message, and are not required to verify the

information. A GSE and the Federal Reserve Banks shall not be liable

for any action taken in accordance with the information set out in a

Transfer Message, or evidence submitted in support thereof.

Sec. 81.99 Additional provisions.

(a) Additional requirements. In any case or any class of cases

arising under these regulations, a GSE may require such additional

evidence and a bond of indemnity, with or without surety, as may in the

judgment of the GSE be necessary for the protection of the interests of

the GSE.

(b) Notice of attachment for GSE Securities in Book-entry system.

The interest of a debtor in a Security Entitlement may be reached by a

creditor only by legal process upon the Securities Intermediary with

whom the debtor's securities account is maintained, except where a

Security Entitlement is maintained in the name of a secured party, in

which case the debtor's interest may be reached by legal process upon

the secured party. These regulations do not purport to establish

whether a Federal Reserve Bank is required to honor an order or other

notice of attachment in any particular case or class of cases.

Dated: November 6, 1996.

Henry G. Cisneros,

Secretary.

[FR Doc. 96-30499 Filed 11-29-96; 8:45 am]

BILLING CODE 4210-32-P