[Federal Register Volume 59, Number 133 (Wednesday, July 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16953]
[[Page Unknown]]
[Federal Register: July 13, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34324; File No. SR-MSTC-94-04]
Self-Regulatory Organizations; Midwest Securities Trust Company;
Order Approving a Proposed Rule Change Relating to Limited Purpose
Participants
July 6, 1994.
I. Introduction
On February 3, 1994, the Midwest Securities Trust Company
(``MSTC'') filed a proposed rule change (File No. SR-MSTC-94-04) with
the Securities and Exchange Commission (``Commission'') pursuant to
Section 19(b) of the Securities Exchange Act of 1934 (``Act'').\1\
Notice of the proposal was published in the Federal Register on April
1, 1994, to solicit comments from interested persons.\2\ No comments
were received. As discussed below, this order approves the proposal.
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\1\15 U.S.C. 78s(b) (1988).
\2\Securities Exchange Act Release No. 33820 (March 25, 1994),
59 FR 15469 (notice of filing of proposed rule change).
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II. Description of the Proposal
The purpose of the proposed rule change is to create a Limited
Purpose Participant Program. On October 8, 1993, the Commodity Futures
Trading Commission (``CFTC'') issued an order approving the Chicago
Mercantile Exchange's (``CME'') proposal to revise the program whereby
the CME accepts stock as clearing house performance bond margin. Under
the revised program, all stock pledged as performance bond margin is
maintained at MSTC.\3\ In order to carry out the revised program, the
CME became a pledgee participant at MSTC.\4\ Clearing members of the
CME that are also participants at MSTC have been able to take advantage
of this program by utilizing MSTC's existing Automated Pledge Loan
Program. Because futures commission merchants (``FCMs'') who are not
registered as broker-dealers (``BDs'') do not meet MSTC's existing
qualifications to be MSTC participants, they have been unable to
participate in the current CME program. MSTC is establishing the
Limited Purpose Participant Program to accommodate those CME clearing
members registered solely as FCMs.
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\3\Previously, CME clearing members who wished to use equity
securities to satisfy their performance bond margin requirements
deposited those securities with the CME's settlement banks or with
other qualified depositories selected by the CME.
\4\Pledgee participants under MSTC rules are participants who
maintain accounts established with MSTC to reflect such
participants' interest as a pledgee or holder of securities
transferred from one or more depository accounts.
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Limited purpose participants will be limited to FCMs that are
clearing members of a futures exchange. The activities at MSTC for
which a limited purpose participant will be eligible will be limited to
making or receiving free depository delivery instructions (``DDIs'') of
securities, maintaining segregated positions for the purpose of
effecting free pledges of securities to a specified pledgee participant
(i.e., the futures exchange of which they are a clearing member),
receiving a return of the securities from that pledgee participant, and
receiving credits from MSTC for any cash dividends received on those
securities. Limited purpose participants will not be able to make
physical deposits or physical withdrawals of securities. Limited
purpose participants will not be eligible for any other service offered
by MSTC.
In order to deposit securities in the limited purpose program,
custodial banks or broker-dealers, acting on behalf of limited purpose
participants, will transfer book-entry positions to the participants'
limited purpose accounts at MSTC. Movements of positions from limited
purpose accounts into the CME's pledge accounts will only occur by
order of the limited purpose participants, and only the CME may release
positions from its pledge accounts to the limited purpose accounts. If
limited purpose participants no longer wish to pledge securities held
in the limited purpose accounts, such participants will instruct MSTC
to move the positions out of their limited purpose accounts to their
designated bank or broker-dealer account at MSTC for further
disposition.
In creating the CME clearing member stock pledge program,\5\ CME
and MSTC entered into an agreement clarifying certain points not
covered in either MSTC's Automated Pledge Loan Program Agreement or in
MSTC's Rules.\6\ In general, MSTC acknowledges the following.
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\5\The CFTC approved CME stock pledge program will only permit
clearing members to deposit equity securities as performance bond
margin to meet a reserve requirement, an amount assessed in excess
of the ordinary prudential core margin requirement. The core
requirement is intended to cover at least 95% of all anticipated
one-day price moves in the applicable contract. Reserve requirements
likely will be set at levels that reflect those noneconomic factors
that the CME may determine are necessary. If the loss associated
with a clearing member default was expected to exceed the proceeds
that the CME would receive from the liquidation of core performance
bond assets, reserve performance bond assets would be liquidated and
applied against any such excess losses.
\6\Letter agreement between the CME and MSTC (October 5, 1993).
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(1) MSTC will comply with any instructions received from CME
related to the pledged securities, notwithstanding any conflicting
instructions received from any clearing member or in any pending
proceeding under the Bankruptcy Code except to the extent that there is
an effective written order issued by a court of competent jurisdiction.
(2) MSTC will not permit a limited purpose participant to pledge to
a CME pledge account (a) Any security not on the list of eligible
securities that CME will provide to MSTC; (b) any security whose
closing price on the day preceding the day of the attempted pledge was
not at least $10.00; (c) any security with respect to which MSTC has
actual knowledge of an existing encumbrance at the time of the
attempted pledge; or (d) any security against which MSTC may assert a
lien.
(3) MSTC has been advised by the CME that customer securities in
the CME pledge account are required to be segregated in accordance with
the provisions of the Commodity Exchange Act and that prior to the
first pledge of customer securities, MSTC will execute an agreement
that the funds and securities in the segregated customer pledge account
will not be subject to any lien or offset or liability owing to MSTC by
the CME or any other person and that such funds shall not be applied by
MSTC to any such indebtedness or liability.
(4) MSTC acknowledges the provisions dealing with MSTC's rights and
obligations set forth in CFTC's order approving the CME's stock pledge
program.
To accommodate the proposed rule change, MSTC added to Article I
(``Definitions and General Provisions'') of its rules definitions of
Limited Purpose Participants and Limited Purpose Account, added to
Article II (``Settlement Services'') Rule 7 which describes the Limited
Purpose Participant Program, and added to Article V (``Participants'')
Rule 1 (``Qualifications of Applicants to Become a Participant'')
paragraph (i) which sets forth the qualifications of a limited purpose
participant.
III. Discussion
The Commission believes the proposal is consistent with the
purposes and requirements of Section 17A of the Act.\7\ In particular,
the Commission believes the proposal meets the requirement of Sections
17A(b)(3) (A) and (F) that a clearing agency be organized and have the
capacity to safeguard securities and funds in its custody or control or
for which it is responsible.\8\
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\7\ 15 U.S.C. 78q-1 (1988).
\8\ 15 U.S.C. 78q-1(b)(3) (A) and (F) (1988).
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In approving MSTC's rule change creating a limited purpose
participant, the Commission recognizes the desire of market
participants, even in the CFTC regulated futures market, to meet their
margin requirements with assets other than cash or government
securities. The MSTC proposal extends the use of equity securities as
margin to FCM's that are also clearing members of a board of trade.\9\
MSTC has structured the proposal to limit the services available to
limited purpose participants so that only those services necessary to
pledge securities to CME's pledge account may be accessed. In addition,
the CME has agreed to indemnify MSTC for and from all claims, losses,
liabilities, and expenses arising from any actions MSTC takes or does
not take in accordance with the instructions received from CME.\10\
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\9\CME Rule 901 sets forth the requirements and obligations for
clearing member status at the CME. A clearing member must
demonstrate financial capitalization commensurate with the CME's
requirements, and a clearing member must continue to maintain such
financial requirements or suffer suspension and revocation of its
clearing house membership. If the CME were to revoke the clearing
membership of a FCM, that FCM will not be eligible for MSTC's
limited purpose program.
\10\Point 1 of letter agreement between CME and MSTC (October 5,
1993).
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The Commission believes that the structure of the program and the
safeguards that MSTC has built into the program should reduce the risk
to MSTC in holding securities pledged to CME. In light of the fact that
the CME clearing house, not MSTC, bears the risk of loss on the futures
positions creating the performance bond requirements, the Commission
believes the proposed rule change satisfies MSTC's obligation to
safeguard securities and funds in its custody or control or for which
it is responsible.
IV. Conclusion
For the reasons stated above, the Commission finds that MSTC's
proposal is consistent with Section 17A of the Act.\11\
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\11\ 15 U.S.C. 78q-1 (1988).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that MSTC's proposed rule change (File No. SR-MSTC-94-04) be,
and hereby is, approved.
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\12\ 15 U.S.C. 78s(b)(2) (1988).
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) (1992).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-16953 Filed 7-12-94; 8:45 am]
BILLING CODE 8010-01-M
