[Federal Register Volume 61, Number 156 (Monday, August 12, 1996)]
[Notices]
[Pages 41816-41817]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20399]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37523; File No. SR-PTC-96-04]
Self-Regulatory Organizations; The Participants Trust Company;
Notice of Filing of Proposed Rule Change Relating to the Elimination of
Prefunding Requirements for Intraday Free Retransfers
August 5, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on July 2, 1996, the
Participants Trust Company (``PTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change (File No.
SR-PTC-96-04) 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) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change will amend PTC's rules to eliminate the
requirement that participants prefund free redeliveries (``free
redeliveries'') involving securities that were received by a
participant versus payment that same day.
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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(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 amend PTC's rules to
eliminate the requirement that participants must have cash on deposit
(``optional deposits'') with PTC equal to the original contract value
for securities that are received the same day versus payment prior to
making an intraday free redelivery of such securities. These optional
deposits are commonly referred to as ``prefundings.''
The requirement that participants prefund intraday free
redeliveries was added to PTC's rules by MBS Clearing Corporation
(``MBSCC''), predecessor to PTC.\3\ The purpose of the prefunding
requirement was to support the original deliverer's security interest
(``DSI'') and the default provisions which permitted PTC to reverse
(i.e., unwind) securities deliveries to achieve settlement, both of
which were added to PTC's rules at the same time.\4\ Both the DSI and
the unwind procedures subsequently have been eliminated from the PTC
rules and have been replaced with the participant's intraday collateral
lien (``PICL'').\5\
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\3\ In 1988, MBSCC proposed a rule change to require its
participants to prefund intraday free transfers. Securities Exchange
Act Release No. 26101 (September 22, 1988), 53 FR 37895 [File No.
SR-MBS-88-14] (notice of filing of proposed rule change).
Subsequently, the order granting PTC's registration as a clearing
agency incorporated the proposed rule change stating that PTC's
rules were essentially identical to MBSCC's rules including the most
recently proposed rule changes. Securities Exchange Act Release No.
26671 (March 31, 1989), 54 FR 13266, [File No. 600-25] (order
granting registration as a clearing agency and statement of
reasons).
\4\ PTC's rules originally provided that securities delivered
versus payment (i.e., held in a participant's transfer account) were
held by PTC pending settlement subject to the DSI granted to the
original delivering participant. If securities were thereafter
redelivered free from a transfer account, the secured party would
lose its collateral unless prefunding served as proceeds of that
collateral. Accordingly, participants that made a free delivery of
securities subject to a DSI were required to have cash at least
equal to the original contract value of the securities in the form
of an optional deposit to the participants fund.
\5\ For a more complete discussion of PTC's reasons for removing
the DSI and the unwind procedures, refer to Securities Exchange Act
Release No. 34701 (September 22, 1994), 59 FR 49730 [File No. SR-
PTC-94-03] (order approving proposed rule change).
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The PICL, which can be exercised only if PTC is insolvent and fails
to achieve settlement, is granted to those participants with a net
credit balance
[[Page 41817]]
owed to them by PTC. Participants with a net credit balance have a pro
rata interest in a common pool of collateral that consists of
securities held in transfer accounts (i.e., intraday deliveries versus
payment) for which settlement has not yet occurred, payments made by
participants to satisfy net debit balances owed to PTC, and prefunding
payments made to support intraday free redeliveries of securities from
transfer accounts.
Prefunding intraday free redeliveries imposes a substantial burden
on participants. For example, if a participant receives a security in a
transaction versus payment through PTC and thereafter redelivers it
free, such participant usually will be receiving payment for the free
redelivery outside of PTC. Although the participant must have
sufficient Net Free Equity (``NFE'') \6\ for PTC to process the
transaction, the participant may not have the cash available until
after the funds are received from the party receiving the free
redelivery outside of PTC. In addition, the participant may be in a net
credit position at PTC when cash prefunding is required as a result of
other transactions which are processed through its account.
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\6\ NFE for a participant's account consists of, among other
things, the cash balances in the participant's account, the market
value of securities, net of applicable margin in the participant's
account or associated transfer account, a portion of the
participant's mandatory deposit to the participants fund, and the
participant's optional deposits to the participants fund including
prefunding. Additional components of NFE not relevant to this
analysis include reserve on gain, which operates to reduce NFE in
certain transactions, and excess proprietary NFE, a component of
supplemental processing collateral.
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PTC believes that the NFE controls applicable to participants will
adequately protect PTC and the settlement of its transactions if the
prefunding of intraday free redeliveries is eliminated. Every
transaction processed through the PTC system, including both deliveries
versus payment and free redeliveries, is tested to ensure that both the
delivering and receiving participant's accounts will not have negative
NFE after giving effect to the transaction.
PTC believes the NFE computation ensures that sufficient value is
available to PTC to collateralize a settlement advance if a participant
defaults on the payment of its debit balance. Under the proposed rule
change, a free redelivery will not require prefunding although the NFE
control will block any free redelivery where the deduction of the
securities from the account of the delivering participant will cause
its NFE to be negative. Accordingly, the elimination of cash prefunding
will not diminish this NFE control, which assures that the amount of
collateral available with respect to a participant's account is
sufficient to cover the participant's debit balance. Although
elimination of the prefunding requirement for intraday retransfers may
result in some reduction in the aggregate collateral pool available to
the PICL holders, PTC believes the magnitude of such reduction will not
be material.
PTC believes that the proposed rule change is consistent with
Section 17A of the Act \7\ and the rules and regulations thereunder
because it will facilitate the prompt and accurate clearance and
settlement of securities transactions and will provide for the
safeguarding of securities and funds in PTC's custody or control or for
which PTC is responsible.
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\7\ 15 U.S.C. 78q-1 (1988).
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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 not solicited nor has received any written comments on the
proposed rule change. PTC has discussed the proposed rule change with
its participants informally and at meeting of PTC's Operations
Committee which is composed of participant representatives. In the
course of these discussions, participants have indicated a particular
difficulty in complying with the prefunding requirement for free
redeliveries of securities that support the issuance of collateralized
mortgage obligation (``CMO'') securities. In these instances, a
participant, usually the underwriter, will incur a debit balance in its
PTC account as a result of the purchase of the securities while
subsequent redelivery of the securities to a PTC limited purpose
account is sent free pending issuance of the CMO. The primary source of
the cash necessary to comply with the prefunding requirement would be
the proceeds of the to be issued CMO.
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 within such longer period (i) as the
Commission may designate up to ninety days of such date if it finding
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 submission
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington D.C. 20549.
Copies of the submissions, 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. 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 filings will also be available for
inspection and copying at the principal office of PTC. All submissions
should refer to the file number SR-PTC-96-04 and should be submitted by
September 3, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12) (1995).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-20399 Filed 8-9-96; 8:45 am]
BILLING CODE 8010-01-M
