[Federal Register Volume 61, Number 215 (Tuesday, November 5, 1996)]
[Notices]
[Pages 56990-56991]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28309]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37882; File No. SR-PHILADEP-96-10]
Self-Regulatory Organizations; Philadelphia Depository Trust
Company; Notice of Filing and Order Granting Accelerated Approval of
Proposed Rule Change Regarding Use of the Institutional Delivery System
for Prime Brokers Transactions
October 28, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on June 28, 1996 the
Philadelphia Depository Trust Company (``Philadep'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change (File No. SR-PHILADEP-96-10) as described in Items I and II
below, which Items have been prepared primarily by Philadep. On
September 16, 1996, Philadep filed an amendment to the proposed rule
change.\2\ The Commission is publishing this notice and order to
solicit comments from interested persons and to grant accelerated
approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ Letter from J. Keith Kessel, Compliance Officer, Philadep,
to Jerry W. Carpenter, Assistant Director, Division of Market
Regulation, Commission (September 13, 1996).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Philadep proposes to allow its participants to utilize its links
with the Depository Trust Company's (``DTC'') Institutional Delivery
(``ID'') system for the confirmation and affirmation of securities
transactions that are to be settled by prime brokers.\3\
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\3\ For a complete description of DTC's ID system, refer to
Securities Exchange Act Release No. 34779 (October 3, 1994), 59 FR
51465 [File No. SR-DTC-94-13] (notice of filing and order granting
accelerated approval on a temporary basis of the ID system).
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, Philadep included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments that it received on the proposed rule change.
The text of these statements may be examined at the places specified in
Item IV below. Philadep has prepared summaries, set forth in sections
(A), (B), and (C) below, of the most significant aspects of such
statements.\4\
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\4\ The Commission has modified the text of the summaries
submitted by Philadep.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
Philadep proposes to allow its participants to utilize the ID
system for the confirmation and affirmation of trades that are to be
settled by prime brokers.\5\ Under the proposed rule, Philadep
participants may elect to use a prime broker option on the ID system to
accommodate requests from their customers to send certain orders to
another broker for execution. Although these orders will be executed by
another broker, all such orders subsequently will settle at the prime
broker.
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\5\ Prime brokers are ID participating broker-dealers that
settle, clear, and finance trades and provide custodial facilities
for institutional customers.
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Prime broker arrangements typically are designed by full service
firms to facilitate the clearance and settlement of securities trades
for retail and institutional investors that are active market
participants. The prime broker arrangement involves the prime broker,
the executing broker, and the institutional customer. The prime broker
must be a registered broker-dealer that clears and finances customer
trades executed by one or more other broker-dealers (``executing
brokers'') on behalf of the customer. Customers place orders with an
executing broker. The executing broker maintains an account in the name
of the prime broker for the benefit of the customer to accommodate such
customer orders. The customer maintains its funds and securities in an
account with the prime broker.
When a customer places a trade order, the executing broker buys or
sells securities. On the same day (i.e., trade date), the customer will
notify the prime broker of the trade made by the executing broker. The
prime broker records the customer's order in its books and records and
issues a confirmation to the customer. The executing broker will
utilize the ID system to confirm the transaction with the prime broker.
The prime broker will affirm the trade through the ID system if the
trade information submitted by the customer matches the information
received from
[[Page 56991]]
the executing broker. Subsequently, the prime broker settles with the
executing broker and the customer according to normal settlement
procedures.
Prime broker participants also will have the option to disaffirm
trades. Disaffirmation involves the reversal of an affirmed
confirmation back to an unaffirmed confirmation status. A disaffirming
prime broker will notify both Philadep and the executing broker through
Philadep's terminal system, Philanet, that a previously affirmed ID
prime broker trade is being disaffirmed. Philadep will verify that each
disaffirmation instruction matches an existing ID trade, and on a
``best efforts'' basis, Philadep will attempt to contact the executing
broker by telephone to inform it of the disaffirmation. Philadep then
will determine the settlement mode of the disaffirmed trade (e.g.,
trade-for-trade or continuous net settlement [``CNS'']). If a
disaffirmed trade is scheduled to settle trade-for-trade or outside
Philadep, Philadep will not take any further action.\6\
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\6\ For trade-for-trade settlement, prime brokers will not
deliver on the sell side or will reclaim the transaction on the buy
side. For trades settling outside Philadep, prime brokers will block
settlement through their agents or correspondents.
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If a disaffirmed trade is scheduled to settle in CNS, Philadep will
provide information to the appropriate clearing corporation so that the
clearing corporation can effect journal entries to reverse the
settlement obligations of the prime brokers. This reversal will
reestablish the settlement obligations of the executing brokers. On a
best efforts basis, the clearing corporation will telephone the
executing brokers to advise them of the disaffirmation.
Philadep believes that it will need to make minimal changes to its
current system to accommodate this business. Most notably, Philadep
will establish two account numbers that will serve to segregate the
prime broker activity of its ID participants from other types of
activity.
Philadep believes that the proposed change is consistent with
Section 17A of Act \7\ because it promotes the prompt and accurate
clearance and settlement of securities transactions and safeguards
securities and funds in Philadep's custody or control.
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\7\ 15 U.S.C. 78q-1 (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
Philadep does not believe that the proposed rule change will impose
any inappropriate burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
No written comments relating to the proposed rule change have been
received. Philadep will notify the Commission of any written comments
received by Philadep.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Section 17A(b)(3)(F) of the Act \8\ requires the rules of a
clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions. Additionally,
Section 17A(a)(2)(ii) of the Act \9\ directs the Commission to
facilitate the linked or coordinated facilities for the clearance and
settlement of securities transactions. The Commission believes that the
proposed rule change is consistent with Philadep's obligations under
the Act because the proposal permits Philadep participants to utilize
DTC's ID system to settle prime broker trades which should promote the
prompt and accurate clearance and settlement of securities transactions
whether such trades settle through CNS (i.e., thereby netting prime
brokers' and executing brokers' other positions in the same security)
or trade for trade through the existing ID system. Furthermore, the
Commission believes that the proposed rule change enhances the ID
linkage between DTC and Philadep through which Philadep participants
will be able to settle prime broker trades.
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\8\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
\9\ 15 U.S.C. 78q-1(a)(2)(ii) (1988).
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Philadep has requested that the Commission find good cause for
approving the proposed rule change prior to the thirtieth day after the
date of publication of notice of the filing. The Commission finds good
cause for so approving the proposed rule change because accelerated
approval will permit Philadep participants to immediately utilize the
ID system for prime broker securities transactions. Furthermore,
approval of the proposed rule change will allow Philadep to enhance its
existing ID linkage with DTC, whose prime brokerage service has already
been subject to notice and comment.\10\ Although the Commission has
received one comment letter supporting the rule proposal, the
Commission does not expect to receive additional comment letters on the
proposal.\11\
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\10\ Supra note 3.
\11\ In that letter, the commenter asserted that it will be
competitively disadvantaged if Philadep is unable to offer prime
broker services to its participants. Letter from Robert B. Kaplan,
Vice President, BHC Securities, Inc., to Larry E. Bergmann, Senior
Associate Director, Division, Commission (July 30, 1996).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room, 450 Fifth Street, NW., Washington,
DC 20549. Copies of such filing will also be available for inspection
and copying at the principal office of Philadep. All submissions should
refer to the file number SR-PHILADEP-96-10 and should be submitted by
November 26, 1996.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (File No. SR-PHILADEP-96-10) be
and hereby is approved.
\12\ 15 U.S.C. 78s(b) (2)(1988).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-28309 Filed 11-4-96; 8:45 am]
BILLING CODE 8010-01-M
