[Federal Register Volume 61, Number 213 (Friday, November 1, 1996)]
[Notices]
[Pages 56598-56599]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28001]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37869; File No. SR-PTC-96-04]
Self-Regulatory Organizations; Participants Trust Company; Order
Approving a Proposed Rule Change Relating to the Elimination of
Prefunding Requirements for Intraday Free Retransfers
October 25, 1996.
On July 2, 1996, the Participants Trust Company (``PTC'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change (File No. SR-PTC-96-04) pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ to eliminate prefunding
requirements for intraday free retransfers. Notice of the proposal was
published in the Federal Register on August 12, 1996.\2\ No comment
letters were received. For the reasons discussed below, the Commission
is approving the proposed rule change.
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\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ Securities Exchange Act Release No. 37523 (August 5, 1996),
61 FR 41816.
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I. Description
The rule change amends PTC's rules to eliminate the requirement
that participants must have cash on deposit (``optional deposits'')
with PTC equal to the original contract value for securities that are
received the same day versus payment prior to making an intraday free
redelivery of such securities. These optional deposits are commonly
referred to as ``prefundings.''
The requirement that participants prefund intraday free
redeliveries was added to PTC's rules by PTC's predecessor, MBS
Clearing Corporation (``MBSCC'').\3\ The purpose of the prefunding
requirement was to support the original deliverer's security interest
(``DSI'') and the default provisions which permitted PTC to reverse
(i.e., unwind) securities deliveries to achieve settlement, both of
which were added to PTC's rules at the same time.\4\ Both the DSI and
the unwind procedures subsequently have been eliminated from PTC's
rules and have been replaced with the participant's intraday collateral
lien (``PICL'').\5\
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\3\ In 1988, MBSCC proposed a rule change to require its
participants to prefund intraday free transfers. Securities Exchange
Act Release No. 26101 (September 22, 1988), 53 FR 37895 [File No.
SR-MBS-88-14] (notice of filing of proposed rule change).
Subsequently, the order granting PTC's registration as a clearing
agency incorporated the proposed rule change stating that PTC's
rules were essentially identical to MBSCC's rules including the most
recently proposed rule changes. Securities Exchange Act Release No.
26671 (March 31, 1989), 54 FR 13266, [File No. 600-25] (order
granting registration as a clearing agency and statement of
reasons).
\4\ PTC's rules originally provided that securities delivered
versus payment (i.e., held in a participant's transfer account) were
held by PTC pending settlement subject to the DSI granted to the
original delivering participant. If securities were thereafter
redelivered free from a transfer account, the secured party would
lose its collateral unless prefunding served as proceeds of that
collateral. Accordingly, participants that made a free delivery of
securities subject to a DSI were required to have cash at least
equal to the original contract value of the securities in the form
of an optional deposit to the participants fund.
\5\ For a more complete discussion of PTC's reasons for removing
the DSI and the unwind procedures, refer to Securities Exchange Act
Release No. 34701 (September 22, 1994), 59 FR 49730 [File No. SR-
PTC-94-03] (order approving proposed rule change).
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The PICL, which can be exercised only if PTC is insolvent and fails
to achieve settlement, is granted to those participants with a net
credit balance owed to them by PTC. Participants with a net credit
balance have a pro rata interest in a common pool of collateral that
consists of securities held in transfer accounts (i.e., intraday
deliveries versus payment) for which settlement has not yet occurred,
payments made by participants to satisfy net debit balances owed to
PTC, and prefunding payments made to support intraday free redeliveries
of securities from transfer accounts.
Prefunding intraday free redeliveries can impose a substantial
burden on participants. For example, if a participant receives a
security in a transaction versus payment through PTC and thereafter
redelivers it free, such participant usually will be receiving payment
for the free redelivery outside of PTC. Although the participant must
have sufficient Net Free Equity (``NFE'') \6\ for PTC to process the
transaction, the participant may not have the cash available until
after the funds are received from the party receiving the free
redelivery outside of PTC. In addition, the participant may be in a net
credit position at PTC when cash prefunding is required as a result of
other transactions which are processed through its account.
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\6\ NFE for a participant's account consists of, among other
things, the cash balances in the participant's account, the market
value of securities, net of applicable margin in the participant's
account or associated transfer account, a portion of the
participant's mandatory deposit to the participants fund, and the
participant's optional deposits to the participants fund including
prefunding. Additional components of NFE not relevant to this
analysis include reserve on gain, which operates to reduce NFE in
certain transactions, and excess proprietary NFE, a component of
supplemental processing collateral.
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II. Discussion
Section 17A(b)(3)(F) \7\ of the Act requires that the rules of a
clearing
[[Page 56599]]
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 PTC's proposed rule
change is consistent with PTC's obligations under the Section 17A of
the Act. Each transaction processed through the PTC system, including
both deliveries versus payment and free redeliveries, is tested to
ensure that both the delivering and receiving participant's accounts
will not have negative NFE after giving effect to the transaction.
PTC's NFE controls will block any free redelivery where the deduction
of the securities from the account of the delivering participant will
cause its NFE to be negative thereby reducing the risk that the amount
of collateral available with respect to a participant's account is not
sufficient to cover the participant's debit balance. The elimination of
cash prefunding will not diminish PTC's NFE controls. In addition, the
elimination of cash prefunding will release collateral previously
required by PTC which should increase participants' liquidity while PTC
should not incur any additional risks by such release.
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\7\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
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III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of 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-PTC-96-04) 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) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-28001 Filed 10-31-96; 8:45 am]
BILLING CODE 8010-01-M
