[Federal Register Volume 59, Number 195 (Tuesday, October 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25002]
[[Page Unknown]]
[Federal Register: October 11, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34779; File No. SR-DTC-94-13]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing and Order Granting Accelerated Approval on a Temporary
Basis of Proposed Rule Change Implementing the Prime Broker Option in
the Institutional Delivery System
October 3, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on September 12, 1994, The
Depository Trust Company (``DTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change (File No.
SR-DTC-94-13) as described in Items I and II below, which Items have
been prepared primarily by DTC. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons and to grant accelerated approval of the proposed rule change
on a temporary basis through May 31, 1995.
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\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 involves the primary broker option in
DTC's Institutional Delivery (``ID'') system and will permit DTC's ID
system to be used for the confirmation and affirmation of trades which
are to be settled by prime brokers. The proposed rule change also
includes a procedure whereby prime brokers can disaffirm trades which
they previously had affirmed.
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 it received on the proposed rule change. The
text of these statements may be examined at the place 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.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its letter dated January 25, 1994, to the Prime Brokerage
Committee of the Securities Industry Association (``Prime Brokerage
Committee''), the Division of Market Regulation (``Division'')
specified certain conditions for providing prime brokerage services,
including requiring that the parties to a prime broker arrangement
utilize the facilities of a clearing agency registered pursuant Section
17A of the Act\2\ to confirm and affirm prime broker transactions.\3\
DTC is a clearing agency registered pursuant to Section 17A of the Act.
The proposed rule change contains procedures which will permit DTC's ID
system to be used to comply with the Division's prime broker letter and
to facilitate the option of settling affirmed prime broker trades
through the National Securities Clearing Corporation's (``NSCC'')
continuous net settlement (``CNS'') system.
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\2\15 U.S.C. 78q-1 (1988).
\3\Letter from Brandon Becker, Director, Division, Commission,
to Jeffrey Bernstein, Prime Broker Committee (January 25, 1994).
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A prime broker is a broker-dealer participating in the ID system
that provides a custodial facility for institutional customers. Under
the proposed rule change, broker-dealers that are members of both DTC
and the NSCC and that participate in DTC's ID system and NSCC's CNS
system, will have the option to settle affirmed prime broker trades
through the ID system or through NSCC's CNS system. A common member
executing trades on behalf of an institutional customer (``executing
broker'') will report trade details to DTC for initial processing
through the ID system. At the time of submission, the executing broker
will be required to determine whether a trade will settle on a trade-
for-trade basis through the ID system or through CNS. If the executing
brokers choose the former, the trade will settle through DTC's
customary ID procedures. If the executing brokers chooses to settle the
trade through CNS, they will submit a prime broker's CNS agent ID
number to DTC when reporting the details of the trade.\4\
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\4\Prime brokers are required to maintain two or more agent ID
numbers. One of these numbers will be reserved as a special number
to be used only for trades that are directed to settle through
NSCC's CNS system.
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After the executing broker reports a trade to DTC using a prime
broker's CNS number, DTC will complete its usual ID confirmation and
affirmation processing. Conformations will be issued by the morning of
the next business day after the trade date. The prime broker will
affirm the trade if their information matches the information received
from the executing brokers.\5\ The trades then will be submitted to
NSCC through CCF\6\ on the night of T+2 for clearance and settlement
following normal CNS settlement procedures.
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\5\Trades affirmed on T+3 revert to trade-for-trade settlement.
Trade-for-trade information appears on the ID system's cumulative
eligible trade reports which are available to the executing and
prime brokers.
\6\CCF is DTC's acronym for ``Computer to Computer Facility.''
CCF is used for direct computer to computer communication between
DTC and its participants' IBM mainframe computers.
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Trades entered into the CNS system will settle like routine CNS
trades. NSCC will combine prime brokers' and executing brokers'
positions with their other respective CNS positions in securities of
the same issue to arrive at a net deliver or net receive obligation for
each issue. After establishing such net deliver or net receive
obligations for the prime brokers and executing brokers, NSCC will
guarantee their respective obligations. Pursuant to NSCC's standard CNS
procedures, money settlement for these trades will occur at NSCC while
deliveries of securities will occur at DTC.
The proposed rule change also includes procedures whereby prime
brokers can disaffirm trades which they previously had affirmed. A
disaffirming prime broker will notify both DTC and the executing broker
within identified DTC established time frames through DTC's
participants terminal system that a previously affirmed ID prime broker
trade is being disaffirmed. The prime broker simultaneously must call a
director or vice president of DTC's ID department to alert DTC of the
disaffirmation. DTC will verify that each disaffirmation instruction
matches an existing ID trade, and on a ``best effort'' basis, DTC will
attempt to contact the executing broker by telephone to inform it of
the disaffirmation. DTC then will determine the settlement mode of the
trade to be disaffirmed (e.g., trade-for-trade or CNS). If the trades
to be disaffirmed are scheduled to settle trade-for-trade or outside
DTC and NSCC, DTC is not required to take further action. 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 DTC and NSCC, prime brokers will block settlement through their
agents or correspondents.
If the disaffirmed trades are scheduled to settle in CNS, DTC will
fax disaffirmation information to the proper department at NSCC, and
DTC will confirm the information with telephone calls to NSCC. NSCC
will acknowledge disaffirmation instructions in writing to DTC, and
NSCC will effect journal entries to reverse the settlement obligations
of the prime brokers and will reestablish the settlement obligations of
the executing brokers. On a best effort basis, NSCC will telephone the
executing brokers to advise them of the disaffirmation. Prior to the
June 1995 conversion to three business days as the standard settlement
period,\7\ DTC will develop an automated mechanism that prime brokers
can utilize to disaffirm previously affirmed trades.\8\
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\7\For a detailed description of the conversion to three
business day settlement, refer to Securities Exchange Act Release
No. 33023 (October 6, 1993) 58 FR 52891. (Order adopting Rule 15c6-
1)
\8\In early 1995, DTC expects to file a proposed rule change
with the Commission under Section 19(b)(1) of the Act to implement
as an optional enhancement to the ID system, an advice of correction
feature, which will enable the prime broker to ``DK'' a trade (i.e.,
to indicate to the executing broker that the prime broker does not
intend to clear and settle the trade).
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DTC believes the proposed rule change is consistent with the
requirements of Section 17A of the Act and the rules and regulations
thereunder applicable to DTC because the proposed rule change will
promote efficiencies in the clearance and settlement of prime broker
trades. The proposed rule change will be implemented consistently with
the safeguarding of securities and funds in DTC's custody or control or
for which it is responsible because the proposed rule change will be
implemented as an option in DTC's ID system.
(B) Self-Regulatory Organization's Statement on Burden on Competition
DTC perceives no impact on competition by reason of the proposed
rule change.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
The proposed rule change has been discussed with the Prime
Brokerage Committee. Written comments from DTC Participants or others
have not been solicited or received on the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Section 17A(a)(1)(C) of the Act sets forth Congress findings that
new data processing and communications techniques create the
opportunity for more efficient, effective, and safe procedures for
clearance and settlement.\9\ Section 17A(a)(2)(A)(ii) of the Act
directs the Commission to facilitate the establishment of linked or
coordinated facilities for the clearance and settlement of securities
transactions.\10\ The Commission believes the proposed rule change will
further these goals by facilitating the confirmation and affirmation of
prime broker transactions through DTC's ID system and by facilitating
the settlement of prime broker trades through either DTC or NSCC.
Section 17A(b)(3)(F) of the Act requires that rules of a clearing
agency promote the prompt and accurate clearance and settlement of
securities transactions and assure the safeguarding of securities and
funds which are in the custody or control of the clearing agency or for
which it is responsible.\11\ The Commission believes that the proposal
is consistent with DTC's responsibilities under Section 17A of the Act
because the proposal will facilitate the option of having prime broker
trades settled in NSCC's CNS system, which should promote efficiency by
having those trades netted with the prime brokers' and executing
brokers' other positions in the same security. The Commission further
believes that the proposal is consistent with DTC's responsibility to
safeguard securities and funds because utilizing the ID system for
confirming, affirming, and disaffirming prime broker trades should help
provide standardized procedures by which the respective parties can
perform their duties in settling prime broker transactions.
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\9\15 U.S.C. 78q-1(a)(1)(C).
\10\15 U.S.C. 78q-1(a)(2)(ii).
\11\15 U.S.C. 78q-1(b)(3)(F).
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DTC has requested that the Commission find good cause for approving
the proposed rule changes 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 because accelerated approval will
enable prime brokers and executing brokers to confirm and affirm prime
broker transactions through the ID system and to have the option to
settle these trades in CNS as soon as possible. Furthermore,
accelerated approval will allow the effective date of the temporary
approval of DTC's prime broker option to coincide with the effective
date of the prime broker letter issued by the Division.\12\ In
addition, the Commission previously published notice of a similar DTC
proposal\13\ that sought to establish the same prime broker option as
is the subject of this current filing; the earlier proposed rule change
did not generate any comment letters, and none are expected on DTC's
current proposal.
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\12\Letter from Michael A. Macchiaroli, Associate Director,
Division, Commission to Jeffrey C. Bernstein, Prime Broker
Committee, and to Seth J. Gersch, Committee of Executing Brokers
(July 18, 1994).
\13\Securities Exchange Act Release No. 28048 (May 18, 1994), 55
FR 22121 [File No. SR-DTC-90-05] (notice of proposed rule change).
On April 20, 1994, DTC withdrew File No. SR-DTC-90-05 from
consideration so that DTC could reevaluate the prime broker option
in light of the Division's letter dated January 25, 1994. Supra note
3. Letter from Carl H. Urist, Deputy General Counsel, DTC to Jerry
W. Carpenter, Branch Chief, Division, Commission (April 20, 1994).
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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, DC 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 DTC. All submissions should
refer to the File No. SR-DTC-94-13 and should be submitted by November
1, 1994.
It is Therefore Ordered, pursuant to section 19(b)(2) of the
Act,\14\ that the proposed rule change (File No.SR-DTC-94-13) be, and
hereby is approved on a temporary basis through May 31, 1995.
\14\15 U.S.C. 78s(b)(2).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\17 CFR 200.30-3(a)(12) (1994).
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[FR Doc. 94-25002 Filed 10-7-94; 8:45 am]
BILLING CODE 8010-01-M
