[Federal Register Volume 61, Number 232 (Monday, December 2, 1996)]
[Notices]
[Pages 63887-63888]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30614]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37976; File No. SR-NSCC-96-15]
November 25, 1996.
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving a Proposed Rule Change To Process
Corporate Reorganizations Involving Elections Through NSCC's Continuous
Net Settlement System
On August 7, 1996, the National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change (File No. SR-NSCC-96-15)
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'').\1\ On August 9, 1996, and October 1, 1996, NSCC amended the
proposed rule change.\2\ Notice of the proposal was published in the
Federal Register on October 21, 1996.\3\ No comment letters were
received. For the reasons discussed below, the Commission is granting
approval of the proposed rule change.
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\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ Letters from Julie Beyers, Associate Counsel, NSCC, to Jerry
Carpenter, Assistant Director, Division of Market Regulation,
Commission (August 8, 1996, and September 27, 1996, as revised
October 1, 1996).
\3\ Securities Exchange Act Release No. 37818 (October 11,
1996), 61 FR 54695.
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I. Description
Through its CNS Reorganization Processing System, NSCC offers its
members a service whereby they can process within NSCC's CNS system
transactions in certain securities undergoing corporate reorganizations
(hereinafter collectively referred to as ``tender offers''). With this
rule change, NSCC will expand this service to allow its members to
obtain a guarantee of performance pursuant to the terms of tender
offers which require shareholders to make an election between two types
of assets (e.g., stock or cash) through NSCC's CNS system.
Generally, a person who wishes to participate in a tender offer
must notify the tenderer of its decision prior to the expiration of the
tender offer. All shares to be exchanged in the tender offer must be
delivered to the tenderer prior to the end of the protect period, which
is typically three days after the end of the expiration of the
offer.\4\ However, participants with long positions at NSCC (``long
participants'') are dependent upon the delivery of the securities by
participants with short positions at NSCC (``short participants'')
prior to the end of the protect period. If short participants do not
deliver in time, the long participants are not able to participate in
the offer.
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\4\ The purpose of the protect period is to accommodate persons
who purchase securities on the expiration date with the intention of
participating in the tender offer. Such persons generally will not
receive the securities to forward to the tenderer until the
settlement date three business days later.
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Under its current service, NSCC guarantees to participants with
long positions in some securities subject to a tender offer the
delivery of funds or securities pursuant to the terms of the tender
offer. If a long participant has elected to use this service and to
have NSCC guarantee the delivery pursuant to the terms of the tender
offer, certain short participants will be liable for delivery to the
long participant of the consideration the long participant would have
received pursuant to the terms of the tender offer. The rule change
expands this service and provides members with long positions in
securities subject to a tender offer with an election as to
consideration to receive protection for receipt of the tender offer
consideration.
Once NSCC receives timely notification of a tender offer and
starting two business days prior to the expiration of an offer, long
participants and short participants with positions in the subject
security will receive information regarding the offer each business day
on the CNS reorganization information report. On the day prior to the
expiration of the protect period in a tender offer with an option as to
the consideration to be received, long participants will be permitted
to elect their preferences (e.g., cash or securities) by submitting
electronic instructions to NSCC through DTC's PTS Terminal system. Such
participants will receive a preliminary protection report. On the same
day, NSCC will issue a report to short participants advising them of
their potential liability in the security if delivery is not made by
the next business day.
If enough short participants deliver securities prior to the close
of business of the day the protect period expires, NSCC will redeliver
these securities to long participants. Such participants can then
participate in the tender offer outside the facilities of NSCC. If not
enough short participants deliver securities to meet all delivery
[[Page 63888]]
obligations to the long participants, NSCC will issue to the remaining
long participants a final protection report and will issue to the
remaining short participants a final liability report, both of which
will reflect open positions remaining as of the close of business of
that day.
At the expiration of the protect period, NSCC will establish two
CNS subaccounts representing the alternative forms of consideration for
each security subject to a tender offer. All open positions for which a
long participant has made an election will be moved into the
appropriate CNS reorganization subaccount. The short participants will
immediately be charged a mark based on the difference between the
market value of the subject securities and the consideration, and NSCC
will retain such funds.\5\ In addition, the long positions and short
positions will continue to be marked to the market daily. Positions in
a CNS subaccount will be frozen until the payable date for the tender
offer (i.e., short participants may not deliver in the securities).
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\5\ In the case of a long participant selecting cash as
consideration, the corresponding short participant will be charged
the difference between the cash offered in the tender offer and the
market price of the securities. In the case of a long participant
selecting securities as consideration, the corresponding short
participant will be charged the difference between the market value
of the subject securities and the market value of the consideration
securities.
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On payable date, the subaccounts will be closed. NSCC will credit
the general CNS account of long participants with either the securities
or cash that they have elected to receive. NSCC will debit the general
account of short participants with either the cash or securities they
have been assigned to deliver. NSCC also will credit the account of
short participants with the marks to the offer price being retained by
NSCC.
Some offers have limits on how many of the subject securities the
offeror will accept or what percentage of consideration will be paid in
cash or securities. At the end of the protect period of such offers,
the offeror will reject on a pro rata basis excess securities. NSCC
will similarly only hold short participants liable to the extent
securities would have been accepted by the tenderer.
II. Discussion
Section 17A(b)(3)(F) \6\ of the Act requires that the rules of a
clearing agency be designed to facilitate the prompt and accurate
settlement of securities transactions. The Commission believes that
NSCC's proposal is consistent with this goal because the proposal
provides an incentive to short participants to meet their settlement
obligations on a timely basis. Short participants that fail to meet
their delivery obligations as required become liable for the economic
benefits long participants lose in connection with tender offers.
Furthermore, by processing the deliver and receive obligations created
through the guarantee through NSCC's CNS system, the proposal will
allow such obligations to be netted against other obligations of the
participants. By reducing the number of settlement obligations through
the netting process, the proposal facilitates the prompt and accurate
settlement of securities transactions.
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\6\ 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
proposed rule change is consistent with the requirements of the Act and
in particular 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-NSCC-96-15) be and hereby is
approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-30614 Filed 11-29-96; 8:45 am]
BILLING CODE 8010-01-M
