[Federal Register Volume 61, Number 4 (Friday, January 5, 1996)]
[Notices]
[Pages 429-430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-166]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36651; File No. SR-DTC-95-21]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing and Order Granting Accelerated Permanent Approval of a
Proposed Rule Change Concerning Short Position Reclamation Procedures
December 28, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on November 9, 1995, The
Depository Trust Company (``DTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change (File No.
SR-DTC-95-21) as described in Items I and II below, which items have
been prepared primarily by DTC. The Commission is publishing this
notice and order to solicit comments on the proposed rule change from
interested persons and to grant permanent approval of the proposed rule
change on an accelerated basis.
\1\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change seeks permanent approval of DTC's existing
procedures for the recall of securities deliveries that have created
short positions as a result of call lotteries or rejected deposits. The
Commission previously granted temporary approval to proposed rule
changes establishing DTC's procedures for the recall of certain
deliveries which have created short positions as a result of call
lotteries or rejected deposits.\2\
\2\ For a complete description and discussion of the procedures
designed to eliminate short positions caused by call lotteries or
rejected deposits, refer to Securities Exchange Act Release Nos.
30552 (April 2, 1992), 57 FR 12352 [File No. SR-DTC-90-02] (order
granting temporary approval through April 1, 1994, of DTC's
procedures to recall certain deliveries that have created short
positions as a result of call lotteries); 35034 (November 30, 1994),
59 FR 63396 [File Nos. SR-DTC-94-08 and SR-DTC-94-09] (ordering
granting temporary approval through May 1, 1995, of DTC's procedures
to recall certain deliveries that have created short positions as a
result of call lotteries and rejected deposits); and 35940 (July 6,
1995), 60 FR 36318 [File No. SR-DTC-95-07] (order granting temporary
approval through December 31, 1995, of DTC's procedures to recall
certain deliveries that have created short positions as a result of
call lotteries and rejected deposits).
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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, DTC 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. DTC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\3\
\3\ The Commission has modified the text of the summaries
submitted by DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The proposed rule change seeks permanent approval of procedures
that (1) enable a participant to recall book-entry deliveries of
callable securities \4\ if the participant's account becomes short as a
result of deliveries made between the call publication date \5\ and the
date of DTC's call lottery \6\ and (2) enable a participant to recall
securities deliveries that have created short positions as a result of
rejected deposits.\7\ The proposed rule change is part of a program
that is being implemented at the request of participants and securities
industry groups to eliminate short positions.
\4\ Callable securities are either preferred stock or bonds
which the issuer is permitted or required to redeem before the
stated maturity date at a specified price.
\5\ The call publication date is the date on which the issuer
gives notice of redemption.
\6\ DTC has established a lottery process to allocate called
securities in a partially called issue among participants having
positions in the issue. DTC allocates the called securities among
participants that had positions in the issue on the call publication
date rather than on the day when the lottery is held. For a
description of DTC's lottery processing procedures, refer to
Securities Exchange Act Release No. 21523 (November 27, 1984), 49 FR
47352 [File No. SR-DTC-84-09].
\7\ Under DTC procedures, a participant depositing securities
receives immediate credit in its securities account (i.e., before
the certificates are sent to the transfer agent for transfer and
registration in DTC's nominee name). Once the participant's account
is credited, the securities are available to the depositing
participant for deliveries, withdrawals, and pledges. If the
transfer agent rejects a deposit after the depositing participant
has made a book-entry delivery of the credited securities,
elimination of the credit from the participant's account may create
a short position.
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Pursuant to DTC's proposal, a participant with a short position
created either because of a delivery made between the call publication
date and the date of DTC's lottery or because of a rejected deposit may
initiate the recall process within ten business days of the creation of
the short position by sending a broadcast message directly to the
receiver of the book-entry delivery.\8\ Participants are able to
transmit this message through DTC's Participant Terminal System
network. The receiving participant will have five business days to
comply with the recall request if it has a position in that security at
DTC. If the receiving participant no longer has such a position at DTC,
it must comply with the recall request within fifteen business days. If
the short position is less than the amount of the delivery, the
receiver has the option to return the entire delivery or just a portion
equal to the delivering participant's short position. If the receiving
participant does not comply with the recall request within the
applicable time, the recalling participant may request DTC's
intervention.\9\ Recalls will reverse only the book-entry delivery
while the original transaction still must be settled by the delivering
and receiving participants (i.e., the delivering participant still must
deliver securities to the receiving participant).
\8\ If the securities are rejected by the transfer agent after
ninety days of the deposit for registered securities and after nine
months for bearer securities, the participant will not be able to
recall the book-entry delivery and the participant's account will
remain short.
\9\ The intervention request must be submitted to DTC no later
than twenty-five days after the original reclamation request was
made.
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DTC believes that the reclamation procedures have been effective in
reducing short positions caused by call lotteries and rejected
deposits. Through September 1995, a total of 287 short positions valued
at $54,289,000 have been eliminated through the use of the reclamation
procedures.
DTC believes the proposed rule change is consistent with the
requirements of Section 17A of the Act and the rules and regulations
thereunder because the rule proposal seeks to make permanent procedures
that should help reduce the number of short positions created either by
call lotteries or by rejected deposits and thus should assure the
safeguarding of securities and funds which are in the custody and
control of DTC or for which DTC is responsible.
(B) Self-Regulatory Organization's Statement on Burden on Competition
DTC does not believe that the proposed rule change will impact or
impose a burden on competition.
[[Page 430]]
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
No written comments have been solicited or received. DTC will
notify the Commission of any written comments received by DTC.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Section 17A(b)(3)(F) of the Act \10\ requires that the rules of a
clearing agency be designed to assure the safeguarding of securities
and funds which are in the custody or control of the clearing agency or
for which it is responsible. The Commission believes that DTC's short
position reclamation procedures are consistent with DTC's obligations
under Section 17A(b)(3)(F) because the proposed procedures should help
DTC assure the safeguarding of securities and funds by reducing the
number of outstanding short positions at DTC created either by call
lotteries or by rejected deposits.
\10\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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Under the DTC's procedures, participants are obligated to cover
their short positions immediately. As an incentive to cover a short
position as soon as possible and as a cushion to protect DTC in the
event of a sharp rise in the market price of the security, DTC
participants are assessed a daily charge of 130% of the market value of
each security for which the participant has a short position at
DTC.\11\ With this rule change, DTC should further reduce its risk of
loss by allowing DTC participants to recall certain deliveries which
have resulted in short positions which should further reduce the total
number of outstanding short positions. Thus, the proposal is consistent
with Section 17A(b)(3)(F) \12\ of the Act in that it should help DTC to
reduce its risk of loss and thereby should enhance DTC's ability to
safeguard securities and funds under its control.
\11\ Securities Exchange Act Release No. 26896 (June 5, 1989),
54 FR 25185 [File No. SR-DTC-89-07] (order approving a proposed rule
change concerning invitations to tender to cover short positions).
\12\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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Because the Commission was concerned that the proposed reclamation
procedures could inadvertently cause broker-dealers to create
possession or control deficits,\13\ the Commission previously approved
the proposed rule change on a temporary basis in order that the
reclamation procedures could be carefully monitored before they were
approved permanently. The Commission is now permanently approving the
reclamation procedures because during the temporary approval period the
Commission has not received any reports of possession or control
deficit problems caused by the procedures.
\13\ The Commission was concerned with the proposal's impact on
broker-dealers' compliance with Rule 15c3-3 under the Act [17 CFR
240.15c3-3]. This rule requires broker-dealers to obtain and
thereafter to maintain physical possession or control of fully-paid
securities and excess margin securities carried by a broker-dealer
for the account of a customer [17 CFR 240.15c3-3(b)(1)]. If as a
result of a recall procedure, DTC reverses the delivery of a
security that is a fully-paid or excess margin security at the
receiving broker-dealer participant, the participant could incur a
deficit in the number of securities that should be under its
physical possession or control.
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DTC 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 filing. The Commission finds good cause for so
approving the proposed rule change because the Commission has noticed
the procedures on several separate occasions without receiving any
comment letters and because accelerated approval will allow DTC
participants to continue to utilize the procedures without any
disruption when the current temporary approval expires.
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, N.W., 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 Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of DTC. All
submissions should refer to the file number SR-DTC-95-21 and should be
submitted by January 26, 1996.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-DTC-95-21) be, and hereby
is, permanently approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\14\
\14\ 17 CFR 200.30-3(a)(12) (1994).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-166 Filed 1-4-96; 8:45 am]
BILLING CODE 8010-01-M
