[Federal Register Volume 61, Number 249 (Thursday, December 26, 1996)]
[Notices]
[Pages 68087-68089]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32771]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38059; File No. SR-PTC-96-07]
Self-Regulatory Organizations; Participants Trust Company; Notice
of Filing of Proposed Rule Change Relating to the Right of Set-off Upon
the Default of a Participant
December 19, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on December 2, 1996, the
Participants Trust Company (``PTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change (File No.
SR-PTC-96-07) as described in Items I, II, and III below, which items
have been prepared primarily by PTC. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The proposed rule change relates to PTC's right to set-off credit
balances in an account of a defaulting participant against an unpaid
debit balance of the defaulting participant.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, PTC 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. PTC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\2\
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\2\ The Commission has modified the text of the summaries
prepared by PTC.
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[[Page 68088]]
(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 (1) make explicit
PTC's right to set-off credit balances in any proprietary account,
agency account, or pledge account of a defaulting participant, against
an unpaid debit balance in any other account of the defaulting
participant and to establish a priority for application thereof; (2)
grant PTC a right of set-off against the agency seg credit balances of
a defaulting participant and to include the agency seg credit balance
in a participant's Net Debit Monitoring Level (``NDML'') calculation;
(3) clarify that in addition to the present representation that
securities are deposited in conformity with the terms of any applicable
customer agreement, each participant represents and warrants to PTC
that securities and other property (including credit balances) held by
PTC in an account maintained by such participant are, by reason of
these applicable customer agreements, subject to clearing agency rules;
and (4) make miscellaneous conforming and technical changes to certain
provisions of PTC's rules.
Background
Account Structure
Participants maintain their securities positions at PTC in one or
more master account, each of which is comprised of one or more accounts
of the following types: proprietary accounts for securities that are
held by the participant as principal; agency accounts for securities
that are held by the participant as agent; pledgee accounts for
securities that are held by the participant as pledgee or pursuant to
financing arrangements; and various seg and hold-in-custody accounts
associated with the proprietary and agency accounts for purposes of
segregation.
Cash Balance Structure
Each Proprietary account, agency account, and pledgee account has a
cash balance associated with it against which credits and debits are
posted, including amounts owing with respect to securities delivered
versus payment intraday to the transfer account associated with the
account. Each cash balance is either a credit balance or debit balance
depending on whether the participant is in a net funds credit position
or debit position with respect to the applicable account to which the
cash balance relates at the time the determination is made.
NDML
PTC restricts the net debit amount each participant may owe PTC by
imposing a net debit cap by means of the NDML.\3\ A participant's NDML
is compared to the total of the net cash balances in its proprietary
account, agency account, and pledgee account. PTC will not process a
transaction that will result in a net debit balance that exceeds a
participant's NDML. If a participant is at its NDML limit, it must take
steps to reduce the net debit balance. Such a participant may prefund
the payment of its debit balance by means of making optional deposits
of cash to the participants fund by wiring funds to PTC intraday. A
participant may also deliver securities versus payment through PTC's
system which will generate a credit to the cash balance of the account
from which the securities are transferred and will result in a
reduction of the debit balance of that account.
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\3\ The maximum NDML for any participant is the amount of PTC's
committed line of credit for settlement, which is currently $2
billion. This maximum is imposed in compliance with the Federal
Reserve Policy Statement on Payments System Risk, as amended
effective April 13, 1995, which requires private delivery-against-
payment securities systems to ``have sufficient safeguards so that
it will be able to settle on time if any one of its major
participants defaults.''
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Set-off in the NDML Structure
The ability to apply a defaulting participant's proprietary,
agency, and pledgee credit balances against its unpaid settlement
obligations is implicit in the NDML structure to assure that the
failure of a single participant is covered by PTC's committed line of
credit for settlement. It is also implicit in other provisions of
PTC's.\4\ Participant responsibility for the total amount of its PTC
obligations, as monitored by its NDML, also is consistent with PTC's
applicant review process in which PTC verifies that a participant has
sufficient financial resources to satisfy its total obligations to PTC
by assessing the capital and financial resources of the prospective
participant without regard to the resources or capital of the customers
of the participant.
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\4\ For example, provisions of PTC's rules that require payment
of all debit balances by a participant and prohibit a participant
from asserting set-offs or defenses against payment of its debit
balances and that grant PTC a lien in cash and property of a
participant.
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However, PTC's rules are silent on the aplication of pledgee and
agency credit balances in the event a participant does not make
complete payment of all account obligations at settlement. In addition,
PTC's ``default rule'' states that PTC will set-off any credit balance
in a proprietary account of a defaulting participant against an unpaid
debit balance in another account. This rule does not make reference to
PTC's right to set-off against agency and pledgee credit balance of a
defaulting participant.
Proposed amendments
Set-off upon Participant Default
The proposed rule change will clarify that upon a particpant's
default in payment of a debit balance PTC will apply any credit
balances in the participant's proprietary accounts, pledgee accounts,
and agency accounts to reduce the unpaid obligation of the participant
consistent with the other provisions of PTC's rules mentioned above.
The proposed rule change also will extend PTC'S right of set-off in the
event of a participant's default to include any agency seg credit
balances of the defaulting participant.
Set-off Priority
The set-off priority will be applied in the same order as governs
in the event of a participant default. Specifically, the proposed set-
off priority will enable PTC to apply credit balances of a defaulting
participant to reduce the participant's unpaid debit balances in the
following priority: first, by application of any credit balance in its
proprietary account(s); second, in its pledge account(s); third, in its
agency account(s); and lastly, in its agency seg account. These credit
balance(s) are applied toward payment of unpaid debit balances in the
following priority: first, to any agency debit balance(s); \5\ second,
toward payment of any pledgee debit balance(s); and lastly, toward
payment of any proprietary debit balance(s).
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\5\ Under PTC's rules, the agency seg account may not have a
debit balance.
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Inclusion of Agency Seg Credit Balance
The proposed rule change will modify the NDML calculation to
include agency seg credit balances and will give PTC a lien in the
agency seg credit balance and a right to set-off against agency seg
credit balances in the event a participant defaults in the payment of
its other debit balances. The inclusion of agency seg credit balances
in the NDML calculation will allow a participant to have the benefit of
these credits in calculating its net obligation to PTC.
Agency seg accounts are not permitted to incur a debit balance and
may not receive securities subject to a transfer versus payment.
Therefore, PTC does not have a lien on securities in an agency seg
account. The securities in
[[Page 68089]]
the agency seg account will remain free of PTC's lien consistence with
current rules and the regulatory obligations of the participants with
respect to such customer securities that are held in agency seg
accounts.
Clarification of Participant Representations and Warranties
The proposed rule change also will clarify that all securities,
funds, and other property maintained or transferred to an account at
PTC are issued, deposited, transferred, or otherwise applied in
conformity with the terms of any applicable customer, pledge, or
financing agreement and are by reason of the applicable customer
agreements subject to clearing agency rules.
Technical Amendments to PTC's Rules
PTC also is proposing to make certain technical changes to several
sections of its rules to conform them to the present rule change. In
particular, the definition of NDML will be amended to delete the
provision that PTC will require a participant to confirm its ability to
pay its debit balance when the NDML is reached. As changed, the
definition will conform to the actual NDML procedure applied by PTC and
to the substantive provisions of PTC's rules which govern and describe
PTC's Net Debit Monitoring procedure.
PTC's rules also will be amended to state that PTC will not process
a transaction that causes a debit balance in any single account of a
participant to exceed that participant's NDML. This conforms to PTC's
current actual procedural control which imposes this additional credit
check (in addition to capping a participant's net obligation at the
master account level at its NDML) that is not reflected in the current
NDML rule.
PTC believes the proposed rule change is consistent with the
requirements of Section 17(b)(3)(F) of the Act \6\ and the rules and
regulations promulgated thereunder because it will facilitate the
prompt and accurate clearance and settlement of securities transactions
and the safeguarding of securities and funds in PTC's custody and
control or for which it is responsible.
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\6\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Self-Regulatory Organization's Statement on Burden on Competition
PTC does not believe that the proposed rule change imposes any
burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants or Others
PTC has neither solicited nor received comments on this proposed
rule change.
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 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 PTC 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, N.W., Washington, D.C. 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. Sec. 552, will be available for inspection and copying in
the Commission's Public Reference Room, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of PTC. All
submissions should refer to the file number SR-PTC-96-07 and should be
submitted by January 16, 1997.
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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-32771 Filed 12-24-96; 8:45 am]
BILLING CODE 8010-01-M
