94-17160. Self-Regulatory Organizations; Midwest Clearing Corporation and Midwest Securities Trust Company; Order Approving Proposed Rule Changes Establishing More Definitive Standards for Retention of Participants Fund Deposits  

  • [Federal Register Volume 59, Number 135 (Friday, July 15, 1994)]
    [Unknown Section]
    [Page 0]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 94-17160]
    
    
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    [Federal Register: July 15, 1994]
    
    
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    SECURITIES AND EXCHANGE COMMISSION
    [Release No. 34-34333; File Nos. SR-MCC-94-03 and SR-MSTC-94-03]
    
     
    
    Self-Regulatory Organizations; Midwest Clearing Corporation and 
    Midwest Securities Trust Company; Order Approving Proposed Rule Changes 
    Establishing More Definitive Standards for Retention of Participants 
    Fund Deposits
    
    July 8, 1994.
        On January 31, 1994, and February 7, 1994, the Midwest Securities 
    Trust Company (``MSTC'') and the Midwest Clearing Corporation (``MCC'') 
    filed proposed rule changes (File Nos. SR-MSTC-94-03 and SR-MCC-94-03) 
    with the Securities and Exchange Commission (``Commission'') pursuant 
    to Section 19(b)(1) of the Securities Exchange Act of 1934 
    (``Act'').\1\ Notice of the proposals was published in the Federal 
    Register on May 18, 1994.\2\ No comments were received by the 
    Commission. This order approves the proposals.
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        \1\15 U.S.C. 78s(b)(1) (1988).
        \2\Securities Exchange Act Release No. 34041 (May 11, 1994), 59 
    FR 25977.
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    I. Description of the Proposals
    
        The proposed rule changes establish more definitive standards for 
    the retention of deposits to the MCC and MSTC participants funds when a 
    participant ceases to be a participant. Specifically, the proposals 
    modify Article IX (Property Held for Participants), Rule 2 
    (Participants' Fund), Section 11 (Ceasing To Be a Participant) of MCC 
    Rules and Article VI (Property Held for Participants), Rule 2 
    (Participants' Fund), Section 12 (Ceasing To Be a Participant) of MSTC 
    Rules.
        The proposals are designed to enable MCC and MSTC to retain in 
    their participants funds appropriate amounts of assets to protect 
    themselves from losses that arise from obligations of former 
    participants. For example, when the issuer of a security pays 
    dividends, MCC participants that have long positions in the security 
    are credited, and MCC participants that have short positions are 
    debited. Occasionally, however, an issuer will fail to disseminate 
    dividend information in a timely manner. When the dividend information 
    is ultimately disseminated, participants that had short positions on 
    the date the dividend amounts should have been debited are charged the 
    appropriate debits. If a participant that had such a short position has 
    ceased to be a participant, MCC has the right to collect the dividend 
    from the ex-participant because the dividend represents an amount 
    chargeable against the ex-participant's contributions as a result of 
    transactions conducted while it was an MCC participant. However, if MCC 
    has refunded all of the ex-participant's participants fund deposit, MCC 
    would have no direct access to funds of the ex-participant, and MCC 
    will be at risk.
        MSTC faces similar risks. For example, if a participant has on 
    deposit with MSTC a nontransferable security (e.g., a security of an 
    issuer in bankruptcy) that becomes transferable after the participant 
    has ceased to be an MSTC participant, MSTC could become obliged to 
    transfer the security to a third party transferee. If MSTC is not able 
    to make good delivery of the certificates and if MSTC already has 
    refunded all of the ex-participant's participants fund deposit, MSTC 
    will be at risk.
        Accordingly, if MCC and MSTC retain participants fund deposits, 
    obtain an appropriate guarantee, or have approved the substitution of 
    another participant to the ex-participant's obligations, MCC and MSTC 
    will reduce the risk from such occurrences as the late receipt of 
    dividend information or the conversion of a security from 
    nontransferable to transferable. At this time, however, there are no 
    specific provisions in MCC's or MSTC's rules relating to either the 
    length of time that MCC or MSTC may retain participants fund deposits 
    or the amount of participants fund deposits that MCC or MSTC may 
    retain. Based on their experiences, MCC and MSTC believe that absent an 
    acceptable guarantee or an approved substitution, it will be 
    appropriate for them to retain the greater of (1) 25% of the 
    participant's average participants fund requirement over the previous 
    twelve months or (2) $100,000 or the participant's entire deposit if 
    the participant has a participants fund deposit of less than $100,000. 
    Under the proposal, MCC and MSTC will be permitted to retain 
    participants fund deposits for up to four years.\3\
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        \3\The Commission has approved similar participants' fund 
    retention standards for the National Securities Clearing Corporation 
    (``NSCC''). Securities Exchange Act Release No. 32728 (August 10, 
    1993), 58 FR 43395 [File No. SR-NSCC-93-01] (order approving 
    proposed rule change).
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    II. Discussion
    
        The Commission believes that the proposals are consistent with the 
    Act and particularly with Section 17A of the Act.\4\ Section 
    17A(b)(3)(F) of the Act requires that the rules of clearing agencies be 
    designed, among other things, to assure the safeguarding of securities 
    and funds which are in the custody or control of the clearing agencies 
    or for which they are responsible.\5\ The Commission believes that the 
    proposed rule changes, which are modeled after the participants fund 
    retention rule of NSCC and which are designed to protect participants 
    fund deposits maintained by MCC and MSTC against losses related to 
    exparticipants obligations, will better enable MCC and MSTC to manage 
    such risks. Thus, the Commission believes that the rule changes are 
    consistent with MCC's and MSTC's statutory responsibilities under 
    Section 17A of the Act to safeguard securities and funds in their 
    possession or control.
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        \4\15 U.S.C. 78q-1 (1988).
        \5\15 U.S.C. 78q-1(b)(3)(F) (1988).
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    III. Conclusion
    
        For the reasons discussed above, the Commission believes that the 
    proposals are consistent with the requirements of the Act, particularly 
    with Section 17A of the Act, and the rules and regulations thereunder.
        It is therefore ordered, pursuant to Section 19(b)(2) of the 
    Act,\6\ that the above-mentioned proposed rule changes (File Nos. SR-
    MCC-94-03 and SR-MSTC-94-03) be, and hereby are, approved.
    
        \6\15 U.S.C. 78s(b)(2) (1988).
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        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) (1993).
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    Margaret H. McFarland,
    Deputy Secretary.
    [FR Doc. 94-17160 Filed 7-14-94; 8:45 am]
    BILLING CODE 8010-01-M
    
    
    

Document Information

Published:
07/15/1994
Department:
Securities and Exchange Commission
Entry Type:
Uncategorized Document
Document Number:
94-17160
Pages:
0-0 (1 pages)
Docket Numbers:
Federal Register: July 15, 1994, Release No. 34-34333, File Nos. SR-MCC-94-03 and SR-MSTC-94-03