SEC Division of Investment Management staff letter: J.P. Morgan Structured Obligations Corporation — SEC — US

2'1 JUl1994
Our Ref. No. 94-277-CC

J. P. Morgan Structured
RESPONSE OF THE DIVISION Obligations Corporation

OF INVESTMENT MANAGEMENT File No. 132-3

Your letter of April 15, 1994 requests assurance that the

Division of Investment Management would not recommend enforcement

action to the Securities and Exchange Commission if purchasers of

certain series of notes described below ("Notes") treat them as

instruments issued or guaranteed by the United States Government

or an agency thereof ("Government Securities") for purposes of

paragraph (d) (1) of Rule 2a-7 under the Investment Company Act of

Because we believe that the Notes present risks that are

significantly different from direct investments in Government

Securities, we decline to provide that assurance.

J. P. Morgan Structured Obligations Corporation (the "Company"), a wholly-owned subsidiary of J. P. Morgan & Co.

Incorporated, proposes to act as depositor for certain Delaware

business trusts (collectively, the "Trusts" and each a "Trust").

Each Trust will be formed by a trust agreement between the

Company, as seller, and the owner trustee. Each Trust will issue

separate series of asset-backed securities -- Notes and

Certificates (collectively, the "Securities"). The Notes of each

series will be issued and secured under an indenture to be

entered into between the owner trustee on behalf of each Trust

and an Indenture Trustee. Distributions on Certificates of a

series will be subordinated in priority to payments due on the related Notes. The Notes will be rated "AA" by at leas't one nationally recognized statistical rating organization.

The property of each Trust will include obligations issued

or guaranteed by the United States of America or an agency

thereof (including entities that have obtained or will obtain a

no-action letter to the effèct that they are agencies of the

United States for purposes of Section 2 (b) of the Act) ("Obligations"). In addition, each Trust will enter into an

interest rate and/ or currency exchange agreement (" Swap

Agreement") with Morgan Guaranty Trust Company of New York, a New

York bank under common control with the Company ("Swap

Counterparty"). Under the Swap Agreement, a Trust wi 1 1 exchange

certain payments due on the Obligations for payments from the

Swap Counterparty. The payments to be made by a Trust under the

Swap Agreement generally will be computed in a manner designed to

match related payments on the Obligations. Similarly, the

amounts to be received by a Trust under the Swap Agreement will

be computed in a manner designed to match distributions scheduled

to be made on the Securities of the related series of the Trust.

The Indenture Trustee, on behalf of the holders of the

Notes, will have a first priority perfected security interest in

the Obligations owned by the Trust. Each business day, as

specified in a security agreement among the Swap Counterparty,

the Indenture Trustee, and the Trust, the Swap Counterparty will

determine the current market value of the Obligations owned by

the Trust. (The calculation will be based on the prices at the

close of business on the preceding day.) If the Obligations'

market value that day does not exceed the outstanding principal

balance of the related Securities, plus accrued interest and

after taking into account any reasonably expected costs of

liquidating the Obligations, the Swap Counterparty will pledge

additional collateral consisting of Obligations to the Indenture

Trustee ("Additional Collateral") to secure payment" of the

amounts payable under the Swap Agreement. Upon such pledge, the

Indenture Trustee will have a first priority perfected security

interest in the Additional Collateral. As calculated by the Swap

Counterparty, the Additional Collateral will be in an 'amount

sufficient to assure that the liquidation value of the

Obligations and the Additional Collateral (based on the prices at

the close of business on the preceding day) is at least 102% of

the par amount' of the Notes, plus accrued interest.

The Company intends to market certain series of Notes to

money market funds. The final maturity of the Notes generally

will be between two and five years. The Notes will not have a

demand feature. You have asked us to assume that such Notes (i)

will be secured solely by the Obligations (and that the related

Indenture will provide for the prompt liquidation of the

Obligations in the event of a default of the Swap Counterparty, wi th the proceeds of such liquidation to be used to pay the holders of the Notes their principal amount plus accrued

interest), (ii) will bear interest at a variable rate that resets

no less frequently than yearly, (iii) will be denominated in

Uni ted States dollars, (i v) will provide for no caps on the

movement of the variable interest rates, and (v) based on a

representation of the Company, upon reset of the interest rate,

will reasonably be expected to have a market value that

approximates their par value. Based on these assumptions and

your analysis, you assert that for purposes of Rule 2a-7, it

would be appropriate for the maturity of a Note to be measured by

reference to the Note's next interest rate reset date.

Rule 2a-7 allows open-end investment companies to use the

amortized cost and penny-rounding methods of valuing their

portfolio securities if certain conditions regarding portfolio

credit quality, diversification, and maturity are met. Paragraph

(d) provides that the maturity of a portfolio instrument held by

a money market fund shall be deemed to be the period remaining

until the date on which the principal amount must be paid.

Paragraph (d) (1) provides an exception, stating that "(aJn

instrument that is issued or guaranteed by the United States

government or any agency thereof which has a variable rate of

interest readjusted no less frequently than every 762 days shall

be deemed to have a maturity equal to the period remaining until

the next readjustment of the interest rate."

You recognize that the Notes are not Government Securities.

You contend that it nevertheless would be appropriate for the

Division to provide assurance that it would not recommend

enforcement action against any investment company relying on Rule

2a-7 that treats the Notes as coming within paragraph (d) (1).

You state that the Notes will be collateralized fully, based

on daily calculations, so that if the Swap Counterparty defaults

on its obligations, the liquidation value of the Obligations and

Additional Collateral will be sufficient to pay Noteholders the

par amount of the Notes, plus any accrued interest. You also

argue that, in the event of the appointment under the Federal

Deposit Insurance Act of the Federal Deposit Insurance

corporation ("FDIC") as receiver or conservator of the Swap

Counterparty ("Swap Counterparty Insolvency"), the obligations

owned by the Trust would not be property of the Swap

Counterparty's receivership or conservatorship estate, and the

pledges of Additional Collateral would not be deemed avoidable

transfers (and thus would not be required to be returned to the

Swap Counterparty' s estate in a receivership or conservatorship).

Al though the risks presented by a Swap Counterparty

Insolvency may be mitigated by the treatment that you anticipate

the FDIC would afford the Obligations, we do not believe that, in

this context, such treatment makes investment in the Notes the

equi valent of an investment in a Government security. Any fund

investing in the Notes would be required, under Rule 2a-7, to

analyze the credit risks of investing in securities issued by a

Trust. Because of the risks presented, this analysis would be

significantly different from that required for a Government

Security. See Investment Company Act Release No. 18005 (February

20, 1991) at Part II.A. For example, a money market fund would

be required to look to the Swap Counterparty or one of its

affiliates to make payments due under the Swap Agreement, to

determine daily whether Additional Collateral is required, and to provide that Additional Collateral. You note that the Commission has treated repurchase agreements as involving the acquisition of the underlying securities for purposes of the portfolio diversification requirements of paragraph (c) (4) (i) of Rule 2a-7. You also note that the Division has said that funds may treat an investment in a municipal bond refunded with escrowed Government Securities as a direct investment in the Government Securities for purposes of the diversification requirement of section 5(b)(1) of the Act. See T. Rowe Price Tax Free Funds (pub. avail. June 24, 1993)., You argue that treating the Notes as obligations described in paragraph (d) (1) of Rule 2a-7 would be consistent with these two positions. We do not agree. The risks presented by the Notes, including the obligation of the Swap Counterparty to post

Additional Collateral, appear to be significantly different from

those presented by repurchase agreements and refunded municipal securities. Repurchase agreements are relatively standardized, widely-

accepted instruments that have a long history of use in the

short-term capital markets. Moreover, under paragraph (d) (5) of

Rule 2a-7, a repurchase agreement is deemed to have a maturity

equal to the period remaining until the date on which the

repurchase is scheduled, or, for an agreement subject to demand,

the notice period for such a demand. Thus, long-term repurchase

agreements do not meet the maturity requirements of Rule 2a-7.

When a municipal bond is refunded with Government

Securities, at the time of the refunding an independent third

party must verify that the scheduled payments on the Government

Securities are sufficient to satisfy all scheduled principal and

interest payments on the municipal bond. Thus, at the initial

deposi t investors are assured that, without any further action by

the issuer of the municipal bond, all principal and interest

payments may be met from the cash flow on the escrowed Government

Securi ties. In contrast, the purchasers of the Notes must look

to the obligation of the Swap Counterparty to make scheduled

payments under the Swap Agreement and to pledge Additional Collateral. In conclusion, we believe that the Notes present materially

different credit risks than do direct investments in Government

Securities. Thus, we decline to assure you that we would not

recommend enforcement action if purchasers of the Notes treated

them as instruments described in paragraph (d)(1) of Rule 2a-7.

~~
Kenneth J. Berman

Deputy Off ice Chief

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1940 Act/Rule 2a-7

AC' - 1: eii 1 ! t Cf()
SECnON _
RULE -1Q-7 PUBLIC
Office of the Chief Counsel AVAILABILIT:) -,2!7'1

Division of Investment Management Securities and Exchange Commission 450 Fifth Street, N. W. Mail Stop 10 - 6 Washington, DC 20549

Attention: Matthew A. Chamers

Associate Director

Re: J. P. Morgan Structured Obligations Corporation - - Investment Company Act

of 1940, Rule 2a-7

Dear Mr. Chambers:

On behalf of our client, J.P. Morgan Securities Inc.

( "JPMSI"), we request your concurrence that the staff of the

Division of Investment Management ( the "Division") of the

Securities and Exchange Commission (the "Commission") will not

recommend any enforcement action to the Commission under Rule 2a-7

under the Investment Company Act of 1940, as amended (the "1940

Act"), if the purchasers of certain series of the Notes described

below, which series have been tailored for purchase by money market

funds, treat such Notes as instruments described in Rule 2a-7 (d) (1) under the circumstances described below.

Background
J.P. Morgan Structured Obligations Corporation (the

"Company"), a Delaware corporation and an affiliate of JPMSI,

proposes to act as depositor for certain trusts created to issue

separate series of asset-backed securities rated investment grade

which will be registered on Form S-3 under the Securities Act of

1933, as amended (the "1933 Act"). The Company is an indirect

wholly- owned subsidiary of J. P. Morgan & Co. Incorporated ("J. P. Morgan") . NYl-33792.7 599 Lengtn Avenue . New York New York 10022

Telephone 212 326 88 · Facsimile 212 326 890

San Francisco '115 392 1122 · Los Aneles 213 629 2020 . Sacrento 916 #7 9200 . Wihingion, D.c. 202 628 '1700

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General Description of Securities to be Issued.

Notes and certificates of each series (the "Notes" and

"Certificates," respectively) will be issued by a Delaware business

trust (each, a "Trust") to be formed with respect to each such

series. For purposes of this request, you may assume that the

property of each Trust will include only securities ("Obligations")

that are either (i) issued or guaranteed by the United States of

America or an agency thereof, or (ii) issued by the Student Loan

Marketing Association ("SLMA"), a Federal Home Loan Bank (a

"FHLB"), the Federal Housing Finance Board ("FHFB") as the joint

and several obligations of all the FHLBs, the Resolution Funding

Corporation ("REFCORP"), the Federal National Mortgage Corporation

("FNM"), the Federal Home Loan Mortgage Corporation ("FHLMC"), or

any other entity which has obtained or obtains a no-action letter

to the effect that it is an agency of the United States for

purposes of Section 2 (b) of the 1940 Act, Rule 2a-7 (d) (1) or both such provisions .11

lI The Division has previously found that money market funds

may treat SLMA and individual FHLBs as agencies of the United

States government for purposes of Rule 2a-7 (d) (1) . See Student Loan Marketing Association (available January 18, 1989); Merrill

Lynch, Pierce, Fenner & Smith Incorporated (available November 5,

1984) (money market funds could treat FHLB of San Francisco and

other FHLBs as agencies of the United States government for

purposes of Rule 2a-7 (d) (1)). Because all the FHLBs are jointly

and severally liable for consolidated obligations of the FHFB, it

necessarily follows from the Merrill Lynch no action letter that

such FHFB obligations are agency obligations for purposes of Rule 2a-7 (d) (1) . The Division has found that REFCORP is an instrumentality or agency of the United States for purposes of the

1940 Act. See Resolution Funding Corporation (available October 20, 1989). Finally, while not specifically using the term "agency," the Division has found that FNM and FHLMC, like REFCORP, are excluded from the 1940 Act under Section 2 (b) thereof, as instrumentalities of the United States. Federal National Mortgage

Corporation (available May 25, 1988); Federal Home Loan Mortgaqe

Corporation (available July 24, 1971).

(continued. . . )
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In addition, each Trust will enter into an interest rate

and/or currency exchange agreement to be described in the related

Prospectus Supplement (the "Swap Agreement") with Morgan Guaranty

Trust Company of New York, a New York bank and the principal asset

of J. P. Morgan (the "Swap' Counterparty"), pursuant to which such

Trust will exchange certain payments due on the Obligations for

payments from the Swap Counterparty. The payment obligations of

the Trust under the Swap Agreement will generally be computed in a

manner, and paid on dates, designed to match related payments

scheduled to be received on the Obligations. Similarly, the

amounts to be received by the Trust under the Swap Agreement and

paid by the Trust to investors will be computed in a manner

designed to match distributions scheduled to be made on the Notes and Certificates (collectively, the "Securities") of the related series. The final payment due under the Swap Agreement will be

payable on the maturity date of the Securities. The maturity date

of the Securities may either be the same as, or earlier than, the

maturi ty date of the Obligations owned by the Trust. In the former

case, on the maturity date of the Securities, the principal payment

received on the Obligations by the Trust will be used to pay the

principal due on the Securities. In the latter case, the

Obligations will be liquidated and the proceeds will be used by the

Trust to pay principal due on the Securities. If such liquidation

proceeds are less than the full amount of principal due on the

Securities, under the Swap Agreement the Swap Counterparty will be

obligated to pay the Trust an amount equal to the amount of such difference.Y As explained in more detail below, this obligation 11 ( . . . continued) Other Trusts may be created by the deposit of securities

issued by other federal or federal government-sponsored entities so long as such entities have an implied or actual "AA" credit rating from at least one nationally recognized statistical rating organization. However, the Notes issued by such Trusts would, not

be covered by the no-action position requested in this letter.

~I If such liquidation proceeds exceed the full amount of

principal due on the Securities, under the Swap Agreement the Trust

(continued. . . )
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of the Swap Counterparty will be collateralized by the posting of

Additional Collateral (as defined below). The Trust will then use

the liquidation proceeds and the payment received by it from the

Swap Counterparty to retire the Securities on their scheduled maturity date. In addition, the Trust will be obligated to pay to the

Swap Counterparty an amount equal to accrued interest on the

Obligations owned by the Trust, and the Swap Counterparty will be

obligated to pay the Trust an amount equal to accrued interest on

the Securities. If the obligations of the Trust and the Swap

Counterparty under the Swap Agreement are denominated in the same

currency, such obligations will be settled on a net basis in

accordance with the customary practice in the swap market. The

maturity of the Notes may vary, but is expected to fall most often

within the range of two to five years. The Notes will not have any

demand features.

The Trusts are intended to be exempt from registration

under the 1940 Act by virtue of Rule 3a-7 thereunder, and an opinion of counsel will be obtained to such effect. The Notes and Certificates may be denominated in United

States dollars or in one or more other currencies and may have

payments of principal and/or interest determined by an index or

formula or may be dual currency Securities. Securities will bear

interest at fixed rates or at floating rates determined by

reference to one or more base rates, which may be adjusted by a

spread, a multiple of a spread-adjusted rate, or a spread

adjustment formula, and which may be subject to a maximum interest

rate and/or a minimum interest rate. The base rate may be the

certificate of deposit rate, the commercial paper rate, the federal

funds rate, LIBOR, the prime rate, a Treasury rate or any other specified rate. The Notes will be issued in minimum denominations of

$250,000 and will be rated "AA" by at least one nationally

~I ( . . . continued) will be obligated to pay the Swap Counterparty an amount equal to

the amount of such excess.

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recognized statistical rating organization (the "Rating Agency") ,

based on the security provided by the pledged Obligations and on

the "AA" rating of the Swap Counterparty by the Rating Agency.

Each Trust will be formed pursuant to a Trust Agreement

to be entered into between the Company, as seller, and the Owner

Trustee specified in the related Prospectus Supplement. The Notes

of each series will be issued and secured pursuant to an Indenture

to be entered into between the Owner Trustee on behalf of each

Trust and the Indenture Trustee specified in the related Prospectus Supplement. Distributions on Certificates of a Series will be subordinated in priority to payments due on the related Notes. The

Certificates of each series will represent fractional undivided

interests in the related Trust.

The Indenture Trustee, on behalf of the holders of the

Notes, will have a first priority perfected security interest in

the Obligations owned by the Trust. On each business day, as

specified in the related Swap Agreement, the Indenture Trustee or

its agent (which may be an affiliate of the Indenture Trustee or

the Swap Counterparty) (the "Calculation Agent") will dete,rmine the current market value of the Obligations owned by the Trust. If the

current market value of such Obligations on such day does not

exceed by a positive margin the outstanding principal balance of

the related Notes and Certificates, plus accrued interest and after

taking into account any reasonably expected costs of liquidating

the collateral ,on such day the Swap Counterparty will, pursuant to

the terms of the Swap Agreement, pledge additional collateral

consisting of Obligations to the Indenture Trustee (the "Additional

Collateral") to secure payment of the amounts payable by the Swap

Counterparty under the Swap Agreement. Upon such pledge, the

Indenture Trustee, on behalf of the holders of the Notes and

Certificates, will have a first priority perfected security

interest in such Additional Collateral. The Additional Collateral

so pledged will be in an amount sufficient to assure that the

current market value, as determined by the Calculation Agent, of

the sum of (a) the Obligations owned by the Trust and pledged as

security for the related Notes and (b) the Additional Collateral,

exceeds by a positive margin the outstanding principal balance of

the Notes and Certificates of such series plus accrued interest

thereon, after taking into account any reasonably expected costs of

liquidating the collateral. The Additional Collateral will not be

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property of the Trust, and will be owned by the Swap Counterparty,

subj ect to the first priority perfected security interest in the

Additional Collateral granted to the Indenture Trustee.

Treatment by Federal Reserve Board for Risk-Based Capital

Purposes.
We have confirmed with the Board of Governors of the

Federal Reserve System (the "Federal Reserve Board") that Notes

issued and secured in the manner described above would be assigned

to the zero (0) percent risk weight category, if the Obligations

are issued or guaranteed by the United States of America, and to

the twenty (20) percent risk weight category, if the Obligations

are issued by SLMA, the FHFB, REFCORP, FNM or FHLMC, under the

capital adequacy guidelines for bank holding companies and state

member banks. This treatment arises because the Notes are required

to be marked to market daily and a positive margin of collateral is required to be maintained. The zero (0) percent risk weight

category is applicable to, among other things, debt obligations

which are collateralized by securities issued or guaranteed by the

United States of America for which a positive margin of collateral

is maintained on a daily basis, fully taking into account any

change in the market value of the collateral which secures such

debt obligation. 12 C.F.R. Part 225, Appendix A, Section III (C) (1) . The twenty (20) percent risk weight category is applicable to, among other things, debt obligations which are

collateralized by securities issued or guaranteed by the United

States government-sponsored agencies (such as SLMA, the FHFB,

REFCORP, FNM and FHLMC). 12 C.F.R. Part 225, Appendix A, Section

III(C) (2).
Description of Notes Intended for Money Market Funds.

JPMSI intends to market certain series of Notes to money

market funds. For purposes of this letter, you may assume that all

Notes intended to be covered by the no-action position requested

(i) will be secured solely by Obligations, (ii) will bear interest

at a variable rate which resets no less frequently than yearly,

(iii) will be denominated in United States dollars, (iv) will

provide for no caps, upward or downward, on the movement of the

variable interest rate, (v) based on a representation of JPMSI,

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upon reset of the interest rate, will reasonably be expected to have a market value that approximates their par value~, and (vi) will provide, in the related Indenture, that the Indenture Trustee

must promptly liquidate the deposited Obligations and the

Additional Collateral pledged to secure the Notes and use the

proceeds to pay the holders thereof the par amount of the Notes

plus interest accrued to the date of liquidation upon any default

by the Swap Counterparty in its obligation to make payments under

the Swap Agreement or to post Additional Collateral thereunder.

Hereinafter in this letter, the term "Notes" shall be deemed to

refer solely to series of Notes intended to be marketed to money

~ We understand the Notes must be reasonably expected to

have a market value upon reset of the variable interest rate that

approximates their par value as a prerequisite to reliance upon

paragraph (d) (1), in light of the staff's position in Morgan Keegan

& Company, Inc. (publicly available July 24, 1992). While the

language in paragraph (d) (1) does not explicitly provide that the

instruments covered by that paragraph must have a market v~lue that

approximates their par value upon the readjustment of the interest rate, this requirement is implicit in the rule. Id. at n. 7. This requirement is based upon the purpose of Rule 2a-7,

which "is designed to limit the permissible portfolio instruments

of a money market fund ... to those instruments that have a low

level of volatility and thus will provide greater assurance that

the money market fund will continue to be able to maintain a stable

price per share that fairly reflects the current net asset value

per share of the fund." 1940 Act Release No. 13380 (July 8,1983),

quoted ide at n.7. See also Letters dated June 16, 1993, and

June 25, 1993 from Robert E. Plaze, Assistant Director, Division of

Investment Management to Investment Company Institute concerning

Applicability of Rule 2a-7 to Certain Capped Floating and Variable

Rate Instruments.
As described above, the nature of the variable rate on

each series of Notes will be such that they can reasonably be

expected to have a market value that upon reset of the variable

interest rate approximates their par value. JPMSI will make a

representation to this effect with respect to each series of Notes

intended to be marketed to money market funds.

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market funds which have the characteristics described in clauses

(i) - (vi) above.
Analysis
Rule 2a-7 under the 1940 Act governs money market funds.

Paragraph (d) thereof provides that the maturity of a portfolio

instrument held by a money market fund shall be deemed to be the

period remaining until the date noted on the face of the instrument

as the date on which the principal amount must be paid, subj ect to

certain exceptions.

One such exception is set forth in paragraph (d) (1) of Rule 2a-7. Paragraph (d) (1) provides that" (aJn instrument that is issued or guaranteed by the United States government or any agency

thereof which has a variable rate of interest readj usted no less

frequently than every 762 days shall be deemed to have a maturity

equal to the period remaining until the next readjustment of the interest rate." If the Notes are deemed to be instruments described in

paragraph (d) (1), then they may be purchased by money market funds

without violating paragraph (c) (2) (i), which prohibits money market

funds from purchasing any instrument with a remaining maturity of

greater than 397 calendar days. If the Notes are not deemed to be instruments described in paragraph (d) (1), then, because they do not contain demand features which might make them eligible for

purchase under paragraph (d) (3), they may not be purchased at all if their stated final maturity exceeds 397 days.~

Notwithstanding that the Notes are not Obligations, we believe that because the Notes are fully collateralized by Obligations as described below, it would be appropriate for the

staff to agree that it would not take any enforcement action if a

~I If their stated final maturity is 397 days or less, then

the Notes would constitute Variable Rate Instruments and be deemed

to have a maturity equal to the period remaining until the next

readjustment of the interest rate under paragraph (d) (2). However,

the Company does not propose to cause Notes with an original stated

maturity of 397 days or less to be issued in the normal course.

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money market fund acquiring a Note covered by this request treats

such Note as an instrument described in Rule 2a-7 (d) (1) . Notes fully collateralized. The Notes will be fully

collateralized, as calculated daily, during their entire term by

Obligations consisting either of Obligations owned by the Trust or

of Additional Collateral in a manner such that, upon any default by

the Swap Counterparty in its obligation to make payments under the

Swap Agreement or to post Additional Collateral, the liquidation

value of such Obligations and Additional Collateral on such date

will be sufficient to pay the holders thereof the par amount of

such Notes plus interest accrued to such date, taking into account

any reasonably expected cost of liquidating the collateral)/

~ The obligation of the Swap Counterparty to pledge

Additional Collateral will be set forth in a Security Agreement

(the "Security Agreement" ) among the Swap Counterparty, the

Indenture Trustee and the Trust. The Security Agreement will

require that the Swap Counterparty pledge Additional Coll~teral to

the Indenture Trustee on each day in an amount which, when added to

the Obligations owned by the Trust, will cause the combined

liquidation value thereof (based on prices at the close of business

on the preceding business day) to be greater than or equal to 102%

of the par amount of the Notes, plus accrued interest, on such day.

The Swap Counterparty will use daily quotations provided by

Interactive Data Services Inc. ("IDSI"), an independent vendor, to

determine the liquidation value of the Obligations and Additional Collateral. The mechanics of this process are as follows. A computer

tape containing closing prices for the business day just ended will

be delivered by IDSI to the Swap Counterparty after the close of

business in New York on a daily basis. The Swap Counterparty will

use the computer tape to calculate the value of the Obligations

based on the mid-point (the "mid-market") between bid and ask

prices. To expedite processing, at the open of business in London,

the Swap Counterparty's London branch will determine, in light of

the previous day's New York closing prices, whether more Additional

Collateral must be pledged, and if so, it will arrange for the Swap

Counterparty to deliver the Additional Collateral to the Indenture

(continued. . . )
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Moreover, upon any such defaul t, under the Indenture. the Indenture

Trustee will be required to promptly liquidate the pledged

Obligations and Additional Collateral and, payoff the Notes,

without the consent of or consultation with holders or any other

delay. The Indenture Trustee has confirmed to us that upon any

such default, it would liquidate the securities which make up the

Obligations and Additional Collateral on a "next day settlement"

basis, so that liquidation proceeds would be received by the

Indenture Trustee and' sent to holders in accordance with the

Indenture on the first business day following the Indenture Trustee

obtaining actual knowledge of the default.

Risk of Swap Counterparty insolvency. In the event of the appointment under the Federal Deposit Insurance Act (the "FDIA") of the FDIC as receiver or conservator of the Swap

Counterparty (which is not bankruptcy-eligible), the Obligations

owned by the Trust would not be property of the Swap Counterparty's

receivership or conservatorship estate, and thus the Obligations

would be available to make payments to holders of the Notes. I n

addition, pledges of Additional Collateral by the Swap Counterparty

to the Indenture Trustee would not be deemed avoidable transfers in

such a receivership or conservatorship of the Swap Counterparty

under the FDIA, and under FDIC policy, the Indenture Trustee would

be permitted to foreclose on the Additional Collateral in the event

of a default by the Swap Counterparty in its obligation to make

payments under the Swap Agreement or to post Additional Collateral,

notwithstanding such a receivership or conservatorship. In

connection with each issuance of Notes, the Company will obtain an opinion of counsel to the foregoing effect. Thus, it appears that the holding of the Notes by money

market funds would not be inconsistent with the public policy

S-l ( . . . continued)
Trustee at the open of business in New York.

If more Additional Collateral than necessary has been

pledged, upon the request of the Swap Counterparty, the Indenture

Trustee will release collateral to the Swap Counterparty sufficient

to reduce total coverage to 102% of the par amount of the Notes, plus accrued interest. NYl-33792.7

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underlying Rule 2a-7, to avoid liquidation of money rrarket funds at

a net asset value of less than 100% ("breaking the dollar"). See

Morgan Keegan, supra.
Moreover, treating the Notes as obligations described in

paragraph (d) (1) would be consistent with the approach the

Commission and the staff, respectively, have taken in two other

similar contexts under the 1940 Act. In each case, a "lookthrough" approach was employed to treat ownership of obligations

fully secured by Government securities as equivalent to a direct

investment in such Government securities.

Repurchase Agreements under Rul e 2 a - 7 ( c) (4) (i) . The Commission has taken a "look through" approach to

repurchase agreements collateralized by Government securities (and

certain other high credit quality instruments). Under paragraph

(c) (4) (i) of Rule 2a-7, a money market fund may not invest more than 5% of its total assets in securities of a single issuer.

Government securities2/, however, are not subj ect to this limit.

A repurchase agreement is deemed to be an acquisitio;i of the

underlying securities if the obligation of the seller to repurchase

the securities from the money market fund is collateralized fully.

The effect of this provision is to treat repurchase agreements

secured by Government securities as direct ownership of such

securities for purposes of paragraph (c) (4) (i) (A). See Investment

Company Act Release No. 18005, (1990-1991 Transfer Binder) Fed.

Sec. L. Rep. (CCH) , 84,710, at 81,322-23 (February 20, 1991) (the

"Release") .
Refunded Municipal Securities.

The staff has also taken a "look through" approach in the

context of refunded municipal securities. In T. Rowe Price Tax Free Funds (available June 24, 1993), the Division took the position that funds may treat an investment in a municipal bond

refunded with escrowed Government securities as a direct investment

21 The definition of "Government security" is contained in
Section 2 (a) (16) of the 1940 Act and includes all Obligations, as
such term is used in this letter.

NYl-33792.7

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in the Government securities for purposes of the djversification

requirements of Section 5 (b) (1) of the 1940 Act.Y Standard for Determining That Notes Are Collateralized

Fully.
In our view, the Notes should be deemed to be collateralized fully if the structure of the transaction satisfies requirements equivalent to those required for repurchase agreements. Under paragraph (a) (3) , a repurchase agreement is "Collateralized Fully" if (i) the value of the securities

collateralizing the repurchase agreement

(reduced by the transaction costs (including

loss of interest) that the money market fund

reasonably could expect to incur if the seller

defaults) is, and during the entire term of

the repurchase agreement remains, at least

equal to the resale price provided in the

agreement; ,and
(ii) the money market fund or its custodian either has actual physical

possession of the collateral or, in the case

of a security registered on a book entry

system, the book entry is maintained in the

name of the money market fund or its

custodian; and

Y Section 5 (b) (1) of the 1940 Act requires, in order for an investment company to be considered a diversified company under the

1940 Act, that at least 75% of the value of its total assets must

be represented by cash and cash items, Government securities,

securities of other investment companies and other securities for the purposes of the calculation limited in respect of anyone issuer to an amount not greater in value than 5% of the value of

the total assets of such investment company.

NYl-33792.7

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(iii) the money market fund retains an

unqualified right to possess and sell the

collateral in the event of a default by the

seller; and

(i v) the collateral consists entirely of Government securities or securities that, at

the time the repurchase agreement is entered

into, are rated in the highest rating category

by the Requisite NRSROs.

Here, the Notes have been structured to satisfy requirements which are equivalent to those required for repurchase

agreements under Rule 2a-7(c) (4) (i).
First, as stated above, the value of the Obligations collateralizing the Notes will initially be, and in light of the

obligation of the Swap Counterparty to post Additional Collateral

will remain during the entire term of the Notes, at least equal to

the par amount of the Notes plus accrued interest to the date of

liquidation, taking into account any transaction costs which the

Indenture Trustee reasonably could expect to incur in liquidating

the pledged Obligations.
Second, the Indenture Trustee, on behalf of the money

market funds owning the Notes, will have a first priority perfected

security interest in the Obligations collateralizing the Notes.

Because the Obligations are registered on a book entry system, the

security interest of the Indenture Trustee will be evidenced by

maintaining the book entry in the name of the Indenture Trustee,

who will hold such Obligations and Additional Collateral in book-

entry form as secured party for the benefit of the holders of the

Notes.
Third, the Indenture Trustee will possess the collateral

(by book- entry transfer) and will be required under the Indenture

to sell the collateral and payoff the Notes in the event of any

defaul t by the Swap Counterparty.

Fourth, the collateral will consist entirely of

Obligations, which are included in the definition of Government securities. NYl-33792.7

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Request
In view of the foregoing, we respectfully request that

the Division of Investment Management agree that it will not

recommend any enforcement action to the Commission if money market

fund purchasers of Notes having the characteristics described in

this letter treat such Notes as instruments described in

Rule 2a-7 (d) (1) for purposes of Rule 2a-7.
In accordance with Securities Act Release No. 6269 (December 5, 1980), seven additional copies of this letter are enclosed. If the staff is inclined to refuse to take a no-action

position, we would appreciate the opportunity to discuss this

matter with you further before any adverse written response to this

letter. If you have any questions concerning the foregoing or

require any additional information or clarification, please feel

free to call me at (212) 326-8819 or Cameron Cowan of this firm at

(202) 463-3404.

ai1Y~
Adam W. Glass

AWG: al

Enclosures
NY 1-33792.7