[Federal Register Volume 59, Number 235 (Thursday, December 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30130]
[[Page Unknown]]
[Federal Register: December 8, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35034; File Nos. SR-DTC-94-08 and SR-DTC-94-09]
Self-Regulatory Organization; the Depository Trust Company; Order
Granting Temporary Approval of Proposed Rule Changes To Establish
Procedures To Recall Certain Deliveries Which Have Created Short
Positions as a Result of Call Lotteries and Rejected Deposits
November 30, 1994.
On May 23, 1994, The Depository Trust Company (``DTC'') filed with
the Securities and Exchange Commission (``Commission'') proposed rule
changes (File Nos. SR-DTC-94-08 and SR-DTC-94-09) under Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'')\1\ seeking
permanent approval of certain procedures and seeking to establish
certain new procedures to eliminate short positions. Notice of the
proposals was published in the Federal Register on August 24, 1994.\2\
For the reasons discussed below, the Commission is temporarily
approving the proposed rule changes through May 1, 1995.
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\1\15 U.S.C. Section 78(b)(1) (1998).
\2\Securities Exchange Act Release No. 34561 (August 19, 1994),
59 FR 44441.
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I. Description
Collectively, the proposed rule changes seek (1) permanent approval
of DTC's existing procedures to recall securities deliveries which have
created short positions as a result of call lotteries and (2) to expand
the procedures to recall securities deliveries which have created short
positions as a result of rejected deposits. The Commission previously
granted temporary approval to the procedures relating to recall of
short positions created as a result of call lotteries.\3\
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\3\For a complete description and discussion of the procedures
designed to help eliminate short positions caused by call lotteries,
refer to Securities Exchange Act Release No. 30552 (April 2, 1992),
57 FR 12352 [File No. SR-DTC-90-02] (order approving proposed rule)
change on a temporary basis until April 1, 1994).
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File No. SR-DTC-94-08 seeks permanent approval of the procedures
that enable participants to recall book-entry deliveries of callable
securities\4\ if the participants' accounts become short as a result of
deliveries made between the call publication date\5\ and the date of
DTC's call lottery.\6\ File No. SR-DTC-94-09 seeks to expand the
procedures to allow participants to recall book-entry deliveries of
securities if the participants' accounts become short because
securities previously deposited at DTC are rejected by the transfer
agent within ninety days of deposit for registered securities and
within nine months for bearer securities.\7\ If securities are rejected
by the transfer agent after ninety days or nine months from the date of
deposit at DTC, participants will not be able to recall the book-entry
delivery, and therefore, their accounts will remain short.
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\4\A callable security is either preferred stock or bonds which
the issuer is permitted or required to redeem.
\5\The call publication date is the date on which the issuer
gives notice of redemption.
\6\DTC has established a lottery process to allocate securities
in a partially called issue among participants having positions in
the issue. DTC allocates the called securities among participants
that had positions in the issue on the call publication date rather
than on the day when the lottery was held. Securities Exchange Act
Release No. 21523 (November 27, 1984), 49 FR 47352 [File No. SR-DTC-
84-09] (notice of filing and immediate effectiveness of proposed
rule change).
\7\Under DTC procedures, a participant depositing securities
receives immediate credit in its securities account (i.e., before
the certificates are sent to the transfer agent for transfer and
registration in the name of DTC's nominee). Once the participant's
account is credited, the securities are available to the depositing
participant for deliveries, withdrawals, and pledges. If the
transfer agent rejects a transfer after the depositing participant
has made a book-entry delivery of the credited securities,
elimination of the credit from the participant's account may create
a short position. The proposed rule change will enable the
depositing participant to reclaim the securities from the
participant that received the book-entry delivery.
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The procedures will allow a participant with a short position to
initiate the recall process within ten business days of the short
position being created by sending a broadcast message directly to the
receiver of the book-entry delivery. Participants will be able to
transmit this message through DTC's Participant Terminal System
network. The receiving participant will have five business days to
comply with the recall request if the participant has a position in
that security at DTC. If the receiving participant no longer has such a
position at DTC, it must comply with the recall request within fifteen
business days.\8\ If the short position is less than the amount of the
delivery, the receiver has the option to return the entire delivery or
just the portion which is short. If the receiving participant does no
comply with the recall request within the applicable time, the
recalling participant may request DTC's intervention.\9\ Recalls will
only reverse the book-entry delivery; the original transaction still
must be settled by the delivering and receiving participants (i.e., the
delivering participant must deliver securities to the receiving
participant).
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\8\A reclamation can create a short position in the receiving
participant's account if the securities already have been delivered
to another party or withdrawn, from DTC. In the event of further
redeliveries, each redelivering participant also will have ten
business days from the time its account is driven short to recall
the securities in order to eliminate its respective short position.
\9\The intervention request must be submitted to DTC no later
than twenty-five days after the original reclamation request was
made.
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II. Discussion
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency, such as DTC, be designed to promote the prompt and
accurate clearance and settlement of securities transactions and 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.\10\ The Commission believes that the proposals are
consistent with DTC's obligations under Section 17A(b)(3)(F) because
the proposed procedures should help reduce the number of short
positions created either by call lotteries or rejected deposits. In
addition, although DTC participants are generally aware that due to the
existence of short positions DTC may not have access to physical
securities corresponding to participants' long positions and even
though participants with short positions are required to deposit with
DTC 130% of the positions' market value, the Commission believes that
DTC's procedures are desirable because by reducing the number of short
positions DTC better protects itself and its participants against
market risk associated with the short positions.
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\10\15 U.S.C. Section 78q-1(b)(3)(F).
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However, the Commission realizes that the proposed reclamation
procedures could cause broker-dealers inadvertently to create
possession or control deficits.\11\ Therefore, the Commission believes
that the proposed rule changes should be carefully monitored before the
procedures become permanent. For this reason the Commission is
temporarily approving the proposed rule changes through May 1, 1995.
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\11\The Commission is concerned with the proposals' impact on
Rule 15c3-3 under the Act [17 CFR 240.15c3-3]. This rule requires
broker-dealers to obtain and thereafter maintain physical possession
or control of fully-paid securities and excess margin securities
carried by a broker-dealer for the account of a customer [17 CFR
240.15c3-3(b)(1)]. If as a result of a recall procedure, DTC
reverses the delivery of a security that is a fully-paid or excess
margin security, the participant could incur a deficit in the number
of securities that should be under its physical possession or
control.
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III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule changes are 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,\12\ that the proposed rule changes (File Nos. SR-DTC-94-08 and SR-
DTC-94-09) be, and hereby are, approved through May 1, 1995.
\12\15 U.S.C. Section 78s(b)(2).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-30130 Filed 12-7-94; 8:45 am]
BILLING CODE 8010-01-M
