[Federal Register Volume 61, Number 39 (Tuesday, February 27, 1996)]
[Notices]
[Pages 7288-7290]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4350]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36867; File No. SR-DTC-96-06]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing and Order Granting Accelerated Approval of a Proposed
Rule Change Amending Rules and Cross-Guarantee Agreement to Accommodate
Same-Day Funds Settlement
February 21, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on February 2, 1996, The
Depository Trust Company (``DTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change (File No.
SR-DTC-96-06) as described in Items I and II below, which items have
been prepared primarily by DTC. The Commission is publishing this
notice and order to solicit comments from interested persons and to
grant accelerated approval of the proposed rule change.
\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The purpose of the proposed rule change is to amend DTC's rules and
to amend the current Netting Contract and Limited Cross-Guarantee
agreement between the National Securities Clearing Corporation
(``NSCC'') and DTC (``NSCC/DTC Agreement'') to accommodate the
conversion of DTC's money settlement system entirely to a same-day
funds settlement (``SDFS'') system.
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 that it received on the proposed rule change.
The text of these statements may be examined at the
[[Page 7289]]
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
submitted by DTC.
---------------------------------------------------------------------------
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
On February 22, 1996, DTC plans to combine its next-day funds
settlement (``NDFS'') system and its SDFS system into a single SDFS
system, which will be based on the design of the current SDFS system
with some modifications. The conversion was described in three
memoranda issued jointly by NSCC and DTC\3\ and was discussed in a DTC
proposed rule change approved by the Commission on May 16, 1995.\4\
\3\ The Depository Trust Company and National Securities
Clearing Corporation, Memorandum (July 1, 1992; July 26, 1993; and
July 29, 1994).
\4\ For additional information regarding DTC's SDFS system,
refer to Securities Exchange Act Release No. 35720 (May 16, 1995),
60 FR 27360 [File No. SR-DTC-95-06] (order granting accelerated
approval of a proposed rule change modifying the SDFS system).
---------------------------------------------------------------------------
In order to assure an efficient conversion, some of the
modifications to the current SDFS system were implemented at various
times during 1995. The amendments which are the subject of this
proposal to DTC's rules are technical changes and are mainly concerned
with the elimination of provisions relating to the NDFS system. Certain
amendments to the rules are being made for purposes of clarity and
consistency of style.\5\
\5\ The specific changes to DTC's rules are attached as Exhibit
2(a) to DTC's proposed rule change and is available in the
Commission's Public Reference Room or through DTC.
---------------------------------------------------------------------------
The conversion also requires DTC to make certain amendments to the
current NSCC/DTC Agreement.\6\ The current NSCC/DTC Agreement provides
that with respect to participants common to both entities (``common
members''), DTC and NSCC agree to net daily a common member's final net
settlement debit or credit at one entity with the common member's final
net settlement credit or debit at the other entity. In most instances,
the result will be either one net debit obligation payable to either
DTC or NSCC or one net credit receivable from either DTC or NSCC.\7\ In
the event of a default of a common member, the current NSCC/DTC
Agreement also provides that any resources remaining after the failed
common member's obligations to the guaranteeing clearing agency have
been satisfied will be made available to the other clearing agency. The
guarantee is not absolute but rather is limited to the extent of the
resources relative to the failed member remaining at the guaranteeing
clearing agency. The principal resources will be the failed member's
settlement net credit balances and its deposits to the clearing
agencies' clearing funds.\8\
\6\ The cross-guarantees were described in the joint memorandum
dated July 29, 1994, supara note 3.
\7\ If a common member has either a net settlement debit at both
DTC and NSCC or a net settlement credit at both DTC and NSCC, the
common member will make payments to both DTC and NSCC or receive
payments from both DTC and NSCC.
\8\ For a complete description of DTC's and NSCC's agreement,
refer to Securities Exchange Act Release No. 33548 (January 31,
1994), 59 FR 5638 [File Nos. SR-DTC-93-08 and SR-NSCC-93-07] (order
approving proposed rule change).
---------------------------------------------------------------------------
The proposed rule change amends the current NSCC/DTC Agreement to
include cross-guarantees of NSCC and DTC arising from transactions
effected through NSCC's continuous net settlement (``CNS'') system.
NSCC's CNS system continually nets all trades due to settle the next
day against each other and against prior days' unsettled long and short
positions in the same securities. NSCC is the contra-party to each CNS
transaction. Thus, NSCC participants obligated to deliver securities
will deliver the securities to NSCC as free book-entry movements at DTC
(``short covers''). NSCC participants obligated to receive securities
will receive the securities from NSCC as free book-entry movements at
DTC (``long allocation'').
Certain cross-guarantees between NSCC and DTC are being established
to permit transactions to flow smoothly between DTC's system and the
CNS system in a collateralized SDFS environment. DTC will provide a
guarantee to NSCC of all long allocations, and NSCC will provide a
guarantee to DTC for all short covers. The guarantees provided in the
amended NSCC/DTC Agreement, among other things, will ensure that debits
created in DTC's system will continue to be collateralized when the
securities serving as collateral are delivered into the CNS system as
short covers. The guarantees also will reduce risk at NSCC by ensuring
that long allocations or the approximate value of long allocations will
be made available to NSCC to cover certain exposures.
When securities that are received versus payment in DTC's system
are turned into CNS short covers, NSCC will provide a guarantee to DTC
equal to the prior day's closing price of the securities.\9\ If CNS
short covers are satisfied from securities that were not received
versus payment in DTC's system, NSCC will provide a guarantee to DTC
equal to the prior day's closing market value less an applicable
haircut. DTC will take this guarantee into account for collateral
monitor purposes.
\9\ The guarantee from NSCC to DTC is calculated on a per share
basis.
---------------------------------------------------------------------------
When long allocations to participants are redelivered in DTC's
system, DTC will provide a guarantee to NSCC equal to the prior day's
closing price of the long allocations less an applicable haircut. The
guarantee will serve as a collateral substitute for long allocations
and only will be called on to the extent a participant fails to settle
due to insolvency and NSCC's own internal close-out procedures result
in a net loss to NSCC. DTC will apply its normal collateralization
controls to the value of its guarantee to NSCC to ensure that it has
sufficient collateral to cover potential guarantee obligations to NSCC
as the result of a participant redelivering CNS long allocations in
DTC's system.
DTC believes the proposed rule change is consistent with Section
17A of the Act \10\ and the rules and regulations thereunder because
the conversion entirely to an SDFS system will promote efficiency and
safety in the clearance and settlement of securities transactions. DTC
also believes the proposed rule change will be implemented consistently
with the safeguarding of securities and funds in DTC's custody or
control or for which it is responsible because the proposal modifies
DTC's current SDFS system.
\10\ 15 U.S.C. Sec. 78q-1 (1988).
---------------------------------------------------------------------------
(B) Self-Regulatory Organization's Statement on Burden on Competition
DTC perceives no impact on competition by reason of the proposed
rule change.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received from Members, Participants, or Others
The conversion plans were described in detail in the three joint
memoranda referred to above and have been discussed extensively with
participants and securities industry organizations. The 1994 memorandum
described changes in the conversion plans as a result of those
discussions. Since the distribution of the 1994 memorandum, written
comments from DTC participants or others have not been solicited or
received on the amendments to DTC's rules and the amendments to the
NSCC/DTC Agreement which are the subject of the proposed rule change.
[[Page 7290]]
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Section 17A(b)(3)(F) of the Act \11\ requires that the rules of a
clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions, 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, and to
foster cooperation and coordination with persons engaged in the
clearance and settlement of securities transactions.
\11\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
---------------------------------------------------------------------------
The Commission believes that DTC's proposed rule change is
consistent with DTC's obligations under Section 17A(b)(3)(F) to
facilitate the prompt and accurate clearance and settlement of
securities transactions because the proposed rule change should
facilitate DTC's conversion entirely to an SDFS system by eliminating
provisions in DTC's rules relating to an NDFS system. The overall
conversion to a SDFS system should help reduce systemic risk by, among
other things, eliminating overnight credit risk. The SDFS system also
should reduce risk by achieving closer conformity with the payment
methods used in the derivatives markets, government securities markets,
and other markets.
The Commission also believes the proposal is consistent with DTC's
obligations to assure the safeguarding of securities and funds in its
custody or control and to foster cooperation and coordination with
persons engaged in the clearance and settlement of securities
transactions because the proposed rule change should further reduce
DTC's and NSCC's risk exposure by amending the NSCC/DTC Agreement to
include cross-guarantees for transactions effected through NSCC's CNS
system. The guarantees, among other things, should ensure that debits
created in DTC's system will continue to be collateralized when the
securities serving as collateral are delivered into the CNS system as
short covers. Additionally, the guarantees also should reduce risk at
NSCC by ensuring that long allocations or the approximate value of long
allocations will be available to NSCC to cover certain exposures.
DTC has requested that the Commission find good cause for approving
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing. The Commission finds good cause for so
approving the proposed rule change because the proposed rule change
modifies DTC's rules and the NSCC/DTC Agreement in anticipation of
DTC's conversion to an SDFS system on February 22, 1996. Accelerated
approval of the proposal will allow DTC to effect the conversion and to
implement the safeguards provided under the NSCC/DTC Agreement on that
date.
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 DTC. All
submissions should refer to the file number SR-DTC-96-06 and should be
submitted by March 19, 1996.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-DTC-96-06) be, and hereby
is, approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\12\
\12\ 17 CFR 200.30-3(a)(12) (1995).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-4350 Filed 2-26-96; 8:45 am]
BILLING CODE 8010-01-M
