[Federal Register Volume 62, Number 18 (Tuesday, January 28, 1997)]
[Notices]
[Pages 4088-4089]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2011]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38186; File No. SR-DTC-96-21]
Self-Regulatory Organizations; The Depository Trust Company;
Order Granting Approval of a Proposed Rule Change Relating to the
Reversal of Reclamations by Issuing and Paying Agents
January 21, 1997.
On November 5, 1996, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change (File No. SR-DTC-96-21) pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ Notice of
the proposal was published in the Federal Register on December 6,
1996.\2\ No comment letters were received. For the reasons discussed
below, the Commission is granting approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 38007 (December 2,
1996), 61 FR 64774.
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I. Description
The rule change offers a new service that will allow issuing and
paying agents (``IPA'') to direct DTC to reverse all matched
reclamations for a particular program which are made after 3:00 p.m.
and which are attributable to issuer failure. Under DTC's money market
instruments (``MMIs'') program, IPAs act as agents for MMI issuers. As
such, IPAs issue MMIs on the issuers' behalf, and DTC automatically
processes income and maturity payments to the IPAs' accounts. Both the
credits generated from the issuances and the debits generated from
income and maturity payments are netted into the IPA's DTC settlement
obligation.
An IPA may issue MMIs and make periodic payments of income,
redemption, or other proceeds on MMIs upon presentment throughout the
day. An IPA is able to reverse issuances and payments for a particular
program in the event of an issuer's failure by giving notice to DTC by
3:00 p.m. of the IPA's refusal to pay. This reversal mechanism is
designed to make the MMI market more efficient by allowing IPAs to make
issuances and payments throughout the day with respect to a particular
MMI program while providing the IPAs with the protection of being able
to reverse until 3:00 p.m. these issuances and payments in the event
that it becomes apparent that an issuer will be unable to honor its
obligation under a particular MMI program.\3\ If this mechanism were
not in place, an IPA would have to wait until it received funds from an
issuer before making any payments to avoid taking the credit risk and
being potentially at risk for the funds it had distributed throughout
the day. This process permits participants having positions in the MMIs
to use credits for payments on the MMIs throughout the day.\4\
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\3\ The refusal to pay deadline was set at 3:00 p.m. by the
industry during the period when deliveries of MMIs were made
physically.
\4\ Currently, throughout the processing day a participant is
allowed to use all payment credits it has received that day in
connection with MMI programs, other than the single largest net
payment, in order to meet its net debit cap and collateral monitor
requirements.
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To facilitate the conversion to the same day funds settlement
(``SDFS''), DTC implemented a new processing schedule. As part of the
new processing schedule, DTC introduced an extended
[[Page 4089]]
reclamation period that allowed participants to reclaim deliveries
(i.e., return deliveries) until 3:30 p.m.\5\ The reclamation procedure
is designed to provide the recipient of a delivery with the opportunity
to reject the delivery.
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\5\ The end of the reclamation period is approximately 3:30, but
this deadline may vary slightly depending upon the timing of the
release of other DTC controls.
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Prior to this amendment, a participant could unwind through the
reclamation process issuances previously made by the IPA between 3:00
p.m. and 3:30 p.m., but an IPA was not able to unwind after 3:00 p.m.
income and maturity payments it had made. The rule change extends the
IPA's refusal to pay opportunity with respect to reclamations made to
its account between 3:00 p.m. and the end of the reclamation period.
The rule change allows IPAs to instruct DTC to reverse those reclaims
that are processed after 3:00 p.m. in the event that the IPA believes
the reclaims are associated with the issuer's insolvency. The IPA is
able to request the reversal of these reclamations by giving DTC oral
notice within fifteen minutes after the end of the reclamation period.
Within thirty minutes after the end of the reclamation period, the IPA
is required to provided DTC with written notice of the basis for which
DTC could treat the issuer as insolvent under its rules.\6\ A copy of
the IPA's written notice would then be provided to all participants.
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\6\ DTC's Rule 12 which governs insolvency provides: ``An issuer
of MMI securities subject of any transaction in the MMI Program
shall be treated by [DTC] in all respects as insolvent in the event
that the issuer is determined to be insolvent by any agency which
regulates such issuer or in the event of the entry of a decree or
order by a court having jurisdiction in the premises adjudging the
issuer a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or
composition of or in respect of the issuer under the Federal
Bankruptcy Code or any other applicable Federal or State law or
appointing a receiver, liquidator, assignee, trustee, sequester (or
other similar official) of the issuer or of any substantial part of
its property, or ordering the winding up or liquidation of its
affairs or the institution by the issuer of proceedings to be
adjudicated a bankrupt or insolvent or the consent by it to the
institution of bankruptcy or insolvency proceedings against it, or
the filing by it of a petition or answer or consent seeking
reorganization or relief under the Federal Bankruptcy Code or any
other applicable Federal or State law, or the consent by it to the
filing of any such petition or to the appointment of a receiver,
liquidator, assignee, trustee, sequester (or other similar official)
of the issuer or of any substantial part of its property, or the
admission by it in writing of its inability to pay its debts
generally as they become due, or the taking of corporate action by
the issuer in furtherance of any such action and, notwithstanding
the foregoing, upon the filing by the issuer of a petition seeking
reorganization, arrangement, adjustment or composition of or in
respect of the issuer under the Federal Bankruptcy Code or any other
applicable Federal or State law, or the filing against it or any
such petition, at any time [DTC] receives notice thereof, either
written or oral and from whatsoever source and, without awaiting any
further adjudication, consent thereto, acceptance or approval of
such filing, determines to its reasonable satisfaction that such has
occurred.''
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II. Discussion
Section 17A(b)(3)(F) provides that the rules of a clearing agency
must be designed to assure the safeguarding of securities and funds
which are in the custody or control of the clearing agency.\7\ The
Commission believes that the rule change is consistent with DTC's
obligations under the Act because it enables IPAs to make issuances and
payments with respect to a particular MMI program throughout the day
while still affording the IPAs certain protections in the event of an
issuer default. By extending IPA's ability to reverse payments in the
event of issuer default, the proposal should result at the end of the
day in a decrease in the number of money transfers that have been made
to participants but to which the participants are not entitled because
of issuer defaults while still providing for credits to be made
available to participants during the day. As a result, the proposal
should help facilitate the clearance and settlement of securities
transactions, while still providing for the safeguarding of securities
and funds which are in the custody or control of the clearing agency or
for which it is responsible.
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\7\ 15 U.S.C. 78q-1(b)(3)(F)
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III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
in particular Section 17A of the Act and the rules and regulations
thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-DTC-96-21) be and hereby is
approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-2011 Filed 1-27-97; 8:45 am]
BILLING CODE 8010-01-M
