August 12, 2002

Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 5th Street, N.S.
Washington, D.C. 20549-0609

Ms. Jennifer J. Johnson
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551

Re:  Interagency White Paper on Structural Change in the Settlement of Government Securities: Issues and Option (File No. S7-15-02 (SEC) and Docket No. R-1122 (Fed)

Dear Mr. Katz and Ms. Johnson,

Federated Investment Management Company is a registered investment adviser which, with its affiliates, manages and advises mutual funds and other investment vehicles. On behalf of its clients and fund shareholders, Federated manages approximately $34.2 billion of U.S. Government securities and has daily outstanding repo exposure of approximately $49.7 billion collateralized by U.S. Government securities. As a significant participant in the government securities market, Federated is pleased to provide comment on the concept release issued by the Securities and Exchange Commission and the Board of Governors of the Federal Reserve System.


Federated endorses the comment letter on this subject submitted by the Investment Company Institute dated August 12, 2002. Federated is substantially in accord with the comments and suggestions expressed in such letter. Nevertheless, we are submitting this letter to highlight our serious reservations about abandoning the current system, which has served the market very well, and replacing it with a central utility, which may have neither the incentive nor the ability to serve as well.

Effectiveness of Current System

The current settlement system for the government securities market is very effective. Today, significant amounts of money and securities routinely flow between sellers, dealers and institutional investors without incident. We have found the system to be effective even in atypical situations such as the days immediately following September 11th, inasmuch as such system recovered strongly in a short time period.

Detrimental Aspects of Central Utility

We believe that the creation of a central utility could have serious detrimental effects on the financing market. We believe that competition has been key to the success of the financing market because it has promoted innovation and efficiency. There have been various circumstances in which one of the clearing banks has worked to solve a problem that was specific to us. For example, with the assistance of a clearing bank, we altered our trade communication process, which resulted in better communications with our custodian and enabled us to expedite the transaction requests of our shareholders. In another instance, we worked with a clearing bank to develop a multilateral netting system, which reduced our number of wires and effectively eliminated afternoon bottlenecks.

We believe that a central utility may not be able, or have the incentive, to provide creative solutions on a case-by-case basis. Instead, we believe that we would be forced to adopt the policies and procedures of the central utility, despite the impact on our operations. Although we would grant that such inflexibility would not be the inevitable result of the creation of a central utility, our concern is that it becomes much more likely when a monopoly position is created. In our view, any structure that might lead to a reduction in present levels of innovation and flexibility would not be in the interests of market participants.

We appreciate the opportunity to discuss these important issues. If you have any questions, or would like additional information, please contact the undersigned at 412-288-8481.


Deborah A. Cunningham