[Federal Register Volume 60, Number 214 (Monday, November 6, 1995)]
[Notices]
[Pages 56078-56081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27426]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36436; File No. SR-DTC-95-14]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of a Proposed Rule Change Seeking Depository
Eligibility of Fractional Shares and Cent-Denominated Securities
October 30, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on August 4, 1995, The
Depository Trust Company (``DTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change (File No.
SR-DTC-95-14) as described in Items I, II, and III 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.
\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
DTC is filing the proposed rule change to make fractional shares
and cent-denominated securities eligible for book-entry delivery and
other DTC services.
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 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.\2\
\2\ The Commission has modified the text of the summaries
prepared 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 purpose of the proposed rule change is to make cent-denominated
securities and fractional shares eligible for book-entry delivery and
other DTC services. The proposal is being made in response to numerous
requests made by DTC participants.\3\ This proposal anticipates the
accelerated securities processing environment that will be triggered by
the conversion of DTC's money settlement system to an entirely same-day
funds settlement (``SDFS'') system. DTC is proposing to implement the
eligibility of fractional shares on a voluntary basis.\4\
\3\ In 1992, the results of a survey of DTC participants showed
that most responding participants wished to have certain types of
issues not then eligible for depository services made DTC-eligible
including cent-denominated securities and fractional shares.
\4\ Infra note 13.
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1. Cent-Denominated Securities
DTC estimates that approximately 6,000 cent-denominated issues
exist for which DTC eligibility will become possible if the Commission
approves DTC's proposed rule change. Of those 6,000 issues, DTC
estimates that 350 are treasury receipts.\5\
\5\ This estimate is based on information compiled by a DTC
participant. Treasury receipts are proprietary products of broker-
dealers created by stripping the coupons from U.S. Treasury
securities (``Treasuries'') with the resulting instrument
representing an interest in the stripped coupons or in the remaining
principal (i.e., zero coupon products). Subsequently, the U.S.
Treasury began issuing STRIPS (Separate Trading of Registered
Interest and Principle of Securities) bonds which essentially
replaced the Treasury receipt in function. The Treasury issues
STRIPS in a form that allows dealers to sell them immediately as
zero-coupon products and do not require the repackaging steps that
are necessary to transform straight Treasuries into zero-coupon
instruments. Other newly eligible issues will include church bonds
and various other securities types. Church bonds are securities
issued by a religious organization to finance building or renovation
projects. These securities typically are issued in small dollar
amounts within a confined geographical area.
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Under the proposed rule change, participants will deposit cent-
denominated securities at DTC by using DTC's Deposit Automation
Management (``DAM'') service. DTC will in turn submit such securities
to the appropriate transfer agent. However, the cents portion of the
aggregate dollar figure for the deposited securities will be
``truncated'' (i.e., cut off). Having eliminated the cents portion from
the position, DTC only will reflect the whole dollar amount of deposits
in the participant's account at DTC. For example, if a participant
deposits ten certificates at $1.15, $11.00 will credited to the
participant's DTC account, and the remaining fifty cents will be
truncated. All related services and transactions thereafter will be
effected in whole dollar increments, including principal and income
payments.
The truncated amounts will be collected in an internal DTC account.
The sum is not expected to be significant at first and therefore will
not warrant the expense of developing a complex system to credit the
truncated cents to each respective depositing participant as the
amounts accumulate. Instead, the cents and any income derived therefrom
will become part of DTC's general revenues. Because DTC refunds
revenues in excess of its costs to its participants, DTC in effect will
pass along the value of the truncated cents to participants as part of
DTC's general refund when and if refunds of excess revenues are
distributed.\6\ Participants also will forfeit any voting rights on
truncated cents. In time, depending on the size of the accumulated
truncated amounts, DTC may reconsider developing a tacking mechanism to
credit these amounts to the accounts of depositing participants.
\6\ Any refunds from the truncation program will be distributed
to all DTC participants not only those participants depositing cent-
denominated securities.
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DTC believes that the actual financial effect on its participants
of the cent truncation will be negligible and well within industry
practice for reconciling de minimis differences in such things as
deliveries and deposits. DTC estimates that if all cent-denominated
certificates held by its participants were deposited at DTC, the scale
of the financial impact of the cent truncation would be as set forth
below.
According to a 1992 survey, thirty-one DTC participants held cent-
denominated securities represented by 57,114 certificates and more than
8,000 CUSIP numbers. The value of these positions in 1992 was
approximately $37 million. Distributed among the DTC's entire
participant base, the total value of the truncated cents is estimated
to be less than $22,000. This figure is the result of three
calculations:
(i) The average number of certificates for a DTC registered deposit
is four; therefore, assuming that an average of four certificates is
included in each deposit, the estimated number of deposits for the
surveyed participants would be 14,278 (57,114 certificates 4
certificates per deposit).
(ii) Assuming that the average truncation for each deposit is fifty
cents,\7\ the aggregate value of the cents portion would be $7,139 for
the surveyed participants ($.50 x 14,278).
\7\ This is the median between the lowest possible truncation
amount (zero cents) and the highest possible truncation amount (99
cents).
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(iii) The surveyed participants represent approximately thirty-
three percent of DTC's monthly billing total. Extrapolating from this
percentage for all DTC participants depositing cent-denominated
securities into their DTC accounts, the estimated total truncated
portion of cents would be $21,631 ($7,139 x 3.03 [mathematical inverse
of thirty-three percent] = $21,631).
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If the $21,631 were distributed equally among all DTC participants
as part of a general refund, the following distributions can be
projected. DTC's last excess revenue refund to its participants was
$8,000,000, and the largest portion returned to a participant was
$372,876, which represented 4.7 percent of the total refund. The
smallest portion returned was $8, which represented .0001 percent of
the total refund. Using these percentages, the largest possible refund
would be $1,016 (4.7 percent of $21,631); the smallest possible refund
would be two cents (.0001 percent of $21,631); and the average refund
would be approximately $49 ($21,631 441 direct participants =
$49.05).\8\
\8\ Participants will also garner the benefit of administrative
efficiencies that will attend the elimination of pennies.
Specifically, fewer keystrokes will be required to enter penny
amounts, and less record surveillance will be required to account
for and reconcile penny amounts.
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2. Fractional Shares
DTC also wishes to make securities denominated in fractional shares
eligible for deposit.\9\ DTC proposes to carry the fractional portions
under a contra-CUSIP number, with full shares being reflected in the
primary CUSIP. Delivery orders and pledges will not initially be
permitted to be denominated in fractional shares.\10\ However, DTC
participants will have the option as the fractional shares accumulate
to full shares under the contra-CUSIP to add them to the preliminary
CUSIP where they will be eligible for all activities.\11\
Alternatively, the fractional shares can be left in the contra-CUSIP.
DTC also will provide enhanced physical processing so that deposits and
withdrawals-by-transfer containing both whole and fractional shares can
be combined, and DTC will handle the process of separating the whole
shares to the primary CUSIP and the fractional shares to the contra-
CUSIP.
\9\ A fractional share is a unit of stock less than one full
share.
\10\ DTC is also investigating the possibility of developing and
providing a limited delivery capability that would require receiver
authorization prior to a delivery being made.
\11\ DTC participants will also have the ability to break up
full shares under the primary CUSIP into fractional shares under the
contra-CUSIP although the resulting fractional shares will not be
initially eligible for deliver orders or for pledging purposes.
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DTC believes the proposed rule change is consistent with the
requirements of Section 17A(b)(3)(F) \12\ of the Act and the rules and
regulations thereunder applicable to DTC in that it promotes
efficiencies in the clearance and settlement of securities
transactions.
\12\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
DTC does not believe that the proposed rule change will impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received from Members, Participants, or Others
Responses to DTC's current proposal were generally favorable.
Participants that commented were pleased to learn of DTC's initiative
to extend depository services to fractional shares and cent-denominated
securities and indicated that the effort will be beneficial to their
individual firms as well as to the securities industry overall. They
indicated that they viewed the initiative as being consistent with the
industry's long-term goal of achieving a centralized processing
environment for physical securities, particularly with the goals of
DTC's DAM Program and the Vision 2000 Committee's recommendations.\13\
\13\ The Vision 2000 Committee is comprised of representatives
from the Boards of Directors of DTC and the National Securities
Clearing Corporation. Its focus is on the elimination of
inefficiencies and redundancies, the maximization of technology, and
the reduction in costs in the clearance and settlement industry both
within and without the United States. The Vision 2000 Committee's
recommendations are discussed in the Report of the Vision 2000
Committee (September, 1994).
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In August 1994, a memorandum detailing DTC's proposal for handling
cent-denominated securities was issued for participant comment.
Responding participants generally agreed with the proposal.
Participants attending a forum on this subject on August 18, 1994, were
also largely in agreement.
The current contra-CUSIP approach for fractional shares is a
realistic near-term improvement on the status quo.\14\ It enables DTC
to accommodate those participants that wish to reduce or eliminate
their vault holdings and permits DTC to provide at least limited
services for fractional shares. At the same time, participants choosing
not to use the service will not be obliged to make the substantial
system changes necessitated by the inauguration of a book-entry
delivery capability for these securities.\15\
\14\ DTC's initial proposal for handling fractional shares,
communicated to participants in August 1994, did not contemplate
implementing the contra-CUSIP approach on a voluntary basis.
Participants responding at that time expressed reservations about
anticipated difficulties in reconciliation as well as in providing
programming resources given that such resources were seen as already
fully committed to the upcoming change to a same-day funds
settlement system and to a T+3 settlement cycle. To address its
participants' concerns, DTC devised the current proposal that
provides for voluntary implementation. This newer, more flexible
approach was described to participants in a notice dated December
14, 1994.
\15\ Offering DTC participants the ability to make book-entry
deliveries of fractional shares will be the first step in the
development of processing capabilities for fractional shares. DTC
will continue to monitor its participants' need for book-entry
delivery as experience with this service is gained. The use of a
single, primary CUSIP for entire positions will also be explored.
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III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which DTC consents, the Commission will:
(a) By order approve such proposed rule change or
(b) Institute proceedings to determine whether the proposed rule
change should be disapproved.
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 number SR-DTC-95-14 and should be submitted by
November 27, 1995.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\16\
\16\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-27426 Filed 11-3-95; 8:45 am]
BILLING CODE 8010-01-M
