[Federal Register Volume 60, Number 231 (Friday, December 1, 1995)]
[Notices]
[Pages 61724-61725]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29322]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36510; File No. SR-MSTC-95-10]
Self-Regulatory Organizations; Midwest Securities Trust Company;
Notice of Filing of Proposed Rule Change Relating to Midwest Securities
Trust Company's Decision To Withdraw From the Securities Depository
Business
November 27, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on November 16, 1995, the
Midwest Securities Trust Company (``MSTC'') filed with the Securities
and Exchange Commission (``Commission'') the proposed rule change (File
No. SR-MSTC-95-10) as described in Items, I, II, and III below, which
items have been prepared primarily by MSTC. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
\1\ 15 U.S.C. Sec. 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 proposed arrangements relating to
a decision by the Chicago Stock Exchange, Incorporated (``CHX'') to
withdraw from the clearance and settlement, securities depository, and
branch receive businesses conducted through its subsidiaries, the
Midwest Clearing Corporation (``MCC''), MSTC, and the Securities Trust
Company of New Jersey (``STC/NJ'').\2\ Parties to the proposed
arrangements are The Depository Trust Company (``DTC''), CHX, MSTC, the
National Securities Clearance Corporation (``NSCC''), MCC, and STC/NJ.
The proposed arrangements as they relate to MSTC would provide for the
following:
\2\ STC/NJ is a wholly-owned subsidiary of CHX that currently
provides certain services, including a securities custody service.
STC/NJ is not a clearing agency as defined in the Act and therefore
is not required to register with the Commission.
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(1) MSTC would cease providing securities depository services by
January 15, 1996.
(2) DTC would offer sole MSTC participations an opportunity to
become DTC participants if they meet DTC's qualifications.
(3) DTC and MSTC would cooperate to assure the orderly transfer of
securities from the custody of MSTC to the custody of DTC for DTC
participants that authorize such transfers.
(4) DTC and NSCC would make certain payments to MSTC.
(5) In general, for a period of ten years MSTC would not engage in
the business from which it has decided to withdraw (i.e., the
securities depository business). However, MSTC would be free to provide
specified securities depository-related services and products to CHX
members and certain third-parties under certain circumstances.\3\
\3\ A more detailed description of these proposed arrangements
is contained in Exhibit 2 to the filing. A copy of the filing and
all exhibits is available for copying and inspection in the
Commission's Public Reference Room.
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The proposed rule change also seeks to modify MSTC's By-Laws to
reduce the size of its board of director.\4\
\4\ The text of these proposed changes is contained in Exhibit A
to the filing. A copy of the filing and all exhibits is available
for copying and inspection in the Commission's Public Reference
Room.
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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, MSTC 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. MSTC has prepared summaries, set forth in section (A),
(B), and (C) below, of the most significant aspects of such
statements.\5\
\5\ The Commission has modified the text of the summaries
prepared by MSTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
CHX has determined to close its clearance and settlement and
securities depository businesses it conducts through its subsidiaries
MCC, MSTC, and STC/NJ in order to focus its resources on the operations
of the exchange itself. The primary purpose of the proposed
arrangements is to permit CHX and MSTC to achieve this objective while
affording MSTC participants on opportunity to become DTC participants
and transfer their securities to DTC. MSTC participants, however, would
be free to utilize any other service provider of their choosing. This
is consistent with the industry's effort to eliminate redundant
infrastructure costs associated with operating separate organizations.
The timing of the proposal is related to the industry's planned
conversion to same-day funds settlement.\6\ Currently, transactions in
equities, corporate debt, and municipal debt are settled in next-day
funds.\7\ Transactions in commercial paper and other money market
instruments are settled in same-day funds. As the Commission is aware,
the registered clearing agencies have been working with the industry
over the last few years to develop a system that will provide for the
settlement of virtually all securities transactions in same-day funds.
These efforts have been encouraged by the Commission, the Board of
Governors of the Federal Reserve System, and the Federal Reserve Banks
of New York and Chicago, and these plans have been monitored by the
staffs of these
[[Page 61725]]
regulatory bodies.\8\ Under the conversion plan, all issues currently
settling in DTC's next-day funds settlement system will be transferred
to DTC's same-day funds settlement system on a single day. Several
months ago, an industry consensus was reached that the conversion date
will be February 22, 1996. As a result of this scheduled conversion
date, CHX and MSTC have determined to cease providing securities
depository services by January 15, 1996.
\6\ The term ``same-day funds'' refers to payment in funds that
are immediately available and generally are transferred by
electronic means.
\7\ The term ``next-day funds'' refers to payment by means of
certified check that is for value on the following day.
\8\ In approving certain modifications of DTC's existing system
in order to accommodate the overall conversion to same-day funds
settlement, the Commission stated that it ``believes that the
overall conversion to an SDFS system will help reduce systemic risk
by eliminating overnight credit risk. The SDFS system also will
reduce risk by achieving closer conformity with the payment methods
used in the derivatives markets, government securities markets and
other markets.'' Securities Exchange Act Release No. 35720 (May 16,
1995) 60 FR 27360 [File No. SR-DTC-95-06] (order granting
accelerated approval to proposed rule change modifying the same-day
funds settlement system).
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The proposed arrangements should result in substantial savings for
the securities industry. In connection with this proposal, former sole
MSTC participants may become DTC participants if they qualify or
utilize any other depository service provider. Moreover,
interdepository interfaces involve the maintenance of substantial
facilities, communications networks, and account and inventory
reconciliation mechanisms. As a result of the proposal, the substantial
costs incurred by both DTC and MSTC in operating an interface would be
eliminated.
Another purpose of the proposed rule change is to reduce the size
of MSTC's board of directors. This reduction conforms with the
simultaneous reductions in the size of the boards of directors of MCC
and CHX. Because of their withdrawal from the businesses described
above, CHX and MSTC no longer believe it is necessary to maintain such
a large board of directors. As a result, MSTC is eliminating four board
positions in conjunction with the CHX's elimination of the Participant
Governor positions. Those current board members whose slots have been
eliminated, however, may serve out the remainder of their terms.
MSTC 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 will facilitate the industry's
conversion to same-day funds settlement for virtually all securities
transactions and thereby facilitate the prompt and accurate clearance
and settlement of such transactions. The proposal will provide
qualified sole MSTC participants with access to DTC's facilities and
will be implemented consistently with the safeguarding of securities
and funds in MSTC's custody and control. In addition, it will foster
cooperation and coordination with persons engaged in the clearance and
settlement of securities transactions.
(B) Self-Regulatory Organization's Statement on Burden on Competition
MSTC believes the proposed arrangements will not impose any burden
or competition not necessary or appropriate in furtherance of the
purposes of the Act. Securities depositories registered under Section
17A of the Act are not conventional businesses but utilities created to
serve members of the securities industry for the purpose of providing
certain services that are ancillary to the businesses in which industry
members compete with one another. Operating a securities depository
requires a substantial and continuing investment in infrastructure,
including securities vaults, telecommunications links with users, data
centers, and disaster recovery facilities in order to meet the
increasing needs of participants and to respond to regulatory
requirements. Both the Boston Stock Exchange in 1982 and the Pacific
Stock Exchange in 1987 terminated the operation of their securities
depositories.
After consummation of the proposed arrangements, securities
industry members will continue to have access to high-quality, low-cost
depository services provided under the mandate of the Act. The overall
cost to the industry of having such services available will be reduced
thereby permitting a more efficient and productive allocation of
industry resources. Furthermore, because most of a depository's
interface costs must be mutualized, thereby requiring some participants
to subsidize costs incurred by others, CHX's and MSTC's withdrawal from
maintaining depository facilities will reduce costs to participants and
thereby remove impediments to competition. Finally, CHX's ability to
focus its resources on the operations of the exchange should help
enhance competition among securities markets.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
Written comments on the proposal have not been solicited or
received.
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 the self-regulatory organization 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 submission
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. Copies of such filing also will be available for inspection and
copying at the principal office of MSTC. All submissions should refer
to the file number SR-MSTC-95-10 and should be submitted by December
22, 1995.
For the Commission by the Division of Market Regulation, pursuant
to delegated authority.\9\
\9\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29322 Filed 11-30-95; 8:45 am]
BILLING CODE 8010-01-M
