[Federal Register Volume 61, Number 161 (Monday, August 19, 1996)]
[Notices]
[Pages 42929-42930]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21052]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37554; File Nos. SR-SCCP-96-03 and SR-Philadep-96-07]
Self-Regulatory Organizations; Stock Clearing Corporation of
Philadelphia and Philadelphia Depository Trust Company; Order Granting
Temporary Approval of Proposed Rule Changes To Establish Separate
Participant Categories for Inactive Accounts
August 9, 1996.
On May 8, 1996, the Stock Clearing Corporation of Philadelphia
(``SCCP'') and the Philadelphia Depository Trust Company (``Philadep'')
filed with the Securities and Exchange Commission (``Commission'')
proposed rule changes (File Nos. SR-SCCP-96-03 and SR-Philadep-96-07)
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'').\1\ Notice of the proposals were published in the Federal
Register on May 31, 1996.\2\ No comment letters were received. For the
reasons discussed below, the Commission is approving the proposed rule
changes through December 31, 1996.
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\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ Securities Exchange Act Releases No. 37244 (May 24, 1996),
61 FR 27377 and 37245 (May 24, 1996), 61 FR 27379.
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I. Description of the Proposals
SCCP and Philadep are establishing separate participant categories
for inactive accounts and are amending their respective participants
fund formulas with respect to such inactive accounts. Pursuant to the
rule changes, SCCP and Philadep are defining in their rules ``inactive
account(s)'' as an account in which a participant conducts de minimis
activity, which will be established as twenty or fewer trades per month
for SCCP participants and less than $100 in monthly billing activities
for Philadep participants. SCCP and Philadep propose to decrease the
required contribution to the participants fund for inactive accounts
from $10,000 to $5,000. SCCP and Philadep believe that inactive
accounts pose virtually no risk to the clearing corporation or the
depository as long as they remain inactive.
SCCP and Philadep have established procedures to detect a change in
the status of a participant's account from inactive to active and to
immediately collect additional required participants fund contributions
at such time. Following the admission of a participant, SCCP and
Philadep monitor participants' account activities to assure that the
proper participants fund contribution is being collected.
With respect to inactive accounts, SCCP's and Philadep's Finance
and Administration Departments will identify for SCCP and Philadep the
specific accounts that are currently inactive. Thereafter, SCCP's
Operations Department will monitor on a daily basis purchase and sale
blotters for each inactive account. Trade activity detected from
inactive accounts will be compiled on a separate report identifying
cumulative activity in each inactive account during a monthly billing
cycle.\3\ In the event that activity in an inactive account exceeds ten
trades but is fewer than twenty-one trades for a particular month,
SCCP's Operations Department will immediately notify SCCP's Finance and
Administrative Department and SCCP's compliance officer.
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\3\ This report will be distributed on a daily basis to SCCP
management and SCCP's compliance officer.
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Similarly, Philadep's Operations Department will monitor daily
deposit, transfer, and miscellaneous deliver order (``MDO'') activity
of each inactive account. The Operations Department will generate a
report that maintains a cumulative total of deposits, transfers, and
MDOs occurring in each inactive account for each monthly billing
cycle.\4\ If the cumulative total exceeds forty transfers, deposits,
and MDOs but is less than seventy-five for any inactive account in any
given month, Philadep's Operations Department will immediately notify
Philadep's Finance and Administration Department and Philadep's
compliance officer.\5\
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\4\ This report will be distributed on a daily basis to Philadep
management and Philadep's compliance officer.
\5\ The seventy-five transaction threshold serves as a reliable
proxy to determine when a participant's account has incurred $100 of
billing activity. Pursuant to Philadep's fee schedule, the most
expensive activity among deposits, transfers, and MDOs multiplied by
75 typically generates less than $100 in monthly billings.
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Once a SCCP or Philadep inactive participant exceeds the respective
thresholds described above, the respective Finance and Administration
Departments will verify the activity, immediately call the participant,
and send a letter to the participant requesting that the participant
wire additional funds to meet the new required participants fund
contribution associated with an active account. In order for the
participant to conduct further account activity, the required funds
must be wired to SCCP or Philadep (depending on whether the inactive
account is at SCCP or Philadep) by the next business day. If the
participant does not wire the required participants fund contributions
by the next business day, the participant's account will be suspended
on the business day after the additional contribution was due to
prevent any further activity in the account. A participant's failure to
timely wire the required participants fund contributions also will
subject the participant to a $500 fine for the first offense and a
$2,000 fine for the second offense during a calendar year.\6\
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\6\ An offense refers to the number of times that the account
was suspended from conducting any further business for failure to
furnish SCCP or Philadep with the required participants fund
contribution.
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When an inactive account becomes active, the account will be
subject to the normal monthly review and update process, and the
respective Finance and Administration Departments will recalculate each
participant's required deposit using the applicable participants fund
formulas.
II. Discussion
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing
[[Page 42930]]
agency be designed 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.\7\ The Commission believes the proposed rule changes
are consistent with SCCP's and Philadep's obligations under Section
17A(b)(3)(F) because the proposals establish separate participant
categories designed for participants that conduct limited activity
while providing procedures that identify and monitor the activity in
those participant accounts to assure that the activity remains limited.
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\7\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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On February 22, 1996, the Commission temporarily approved through
August 31, 1996, portions of SCCP's and Philadep's proposed rule
changes to implement their conversion to a same-day funds settlement
system.\8\ The Commission granted temporary approval to components of
SCCP's and Philadep's proposed rule changes relating to their
participants fund formulas because Commission staff was concerned about
the adequacy of SCCP's and Philadep's participants fund formulas to
provide a sufficient source of cash liquidity. The Commission continues
to be concerned about the liquidity provided by SCCP's and Philadep's
formulas and believes that lowering the required deposits on any
category of participants may inhibit SCCP's and Philadep's ability to
protect themselves and their participants from settlement failures and
participant defaults.
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\8\ Securities Exchange Act Release Nos. 36857 (February 22,
1996), 61 FR 7846 [SR-SCCP-95-06] and 36876 (February 22, 1996), 61
FR 7841 [SR-Philadep-95-08] (orders granting partial temporary
approval and partial permanent approval of proposed rule changes).
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In addition to establishing new categories and participants fund
requirements for inactive participants, SCCP and Philadep are
establishing new surveillance procedures to monitor inactive
participants' accounts to ensure that inactive participants are not
able to conduct levels of activity above the inactive account
thresholds without depositing additional funds. Therefore, the
Commission believes that it is appropriate to grant temporary approval
of the proposals in order that the Commission, SCCP, and Philadep have
the opportunity to review and monitor SCCP's and Philadep's
administration of these new categories of participants and the
effectiveness of the surveillance procedures established under these
proposed rule changes before the proposal receives permanent approval.
Therefore, the Commission is temporarily approving the proposed rule
change through December 31, 1996.
During the period of temporary approval, the Commission will
continue to monitor and to analyze the adequacy of the participants
fund formulas associated with inactive accounts. In this regard, the
Commission requests that SCCP and Philadep submit on a monthly basis
reports detailing the number of inactive participants, the value of
their participants fund deposits, the total activity in each inactive
account for the prior month, and the steps taken in the event that an
inactive participant became active.
III. Conclusion
On the basis of the foregoing the Commission finds that the
proposals are consistent with the requirements of Section 17A(b)(3)(F)
of the Act and the rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule changes (File Nos. SR-SCCP-96-03 and SR-
Philadep-96-07) be, and hereby are, temporarily approved through
December 31, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-21052 Filed 8-16-96; 8:45 am]
BILLING CODE 8010-01-M
