[Federal Register Volume 59, Number 181 (Tuesday, September 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23165]
[[Page Unknown]]
[Federal Register: September 20, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34665; File No. SR-DTC-94-07]
September 13, 1994.
Self-Regulatory Organization; the Depository Trust Company; Order
Approving Proposed Rule Change Establishing the Stock Loan Income-
Tracking System
On May 6, 1994, The Depository Trust Company (``DTC'') submitted a
proposed rule change (File No. SR-DTC-94-07) to the Securities and
Exchange Commission (``Commission'') pursuant to Section 19(b) of the
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal
appeared in the Federal Register on June 22, 1994, to solicit comment
from interest persons.\2\ This order approves the proposal.
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\1\15 U.S.C. Sec. 78s(b) (1988).
\2\Securities Exchange Act Release No. 34218 (June 15, 1994), 59
FR 32252 [File No. SR-DTC-94-07] (notice of proposed rule change).
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I. Description of the Proposal
The purpose of the proposed rule change is to establish the stock
loan income-tracking system that will eliminate the need for
participants to track income distributions on their securities that are
the subject of outstanding stock loans. The current DTC procedures
enable participants to identify stock loan related deliver orders
through the use of reason codes. Proper allocation of income payments
arising from the securities that are the subject of these loans
currently rests entirely with the lending and borrowing participants
because DTC allocates income to participants to whom the securities are
credited on the relevant entitlement date (i.e., the borrowing
participants). Lending participants recover income that DTC has
allocated to borrowing participants either through DTC's securities
payment order service or through some other mutually agreed upon
arrangement by the participants.
The proposed rule change will facilitate participants' processing
of income attributable to securities that are the subject of
outstanding stock loans. The proposed stock loan income-tracking system
will track and monitor participants' stock loan related deliver orders;
will net the share amounts by participant and CUSIP; and will
automatically credit income distributions to the proper participant on
income payment date. To execute these functions, DTC will create a
special stock loan memo account which will maintain a daily net balance
of loan obligations for each stock loan counterparty of each
participant.
The proposed rule change provides that a party from whom
distributions are due to be transferred may unilaterally halt all
future distribution transfers by giving a letter of instructions to DTC
two or more business days in advance and by giving a copy to the
counterparty. DTC will notify the counterparty participant of any
action taken by DTC based on the instructions. DTC will not assess the
parties legal obligations to each other.\3\
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\3\If the participant submitting the letter of instructions is
in fact still legally obligated, the noninstructuring counterparty
may seek to enforce its right to receive future distributions
outside of DTC.
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If a participant's account is being transferred to another
participant due to a merger or acquisition, DTC will move the
transferring participant's open stock loan positions to the transferee
participant.
If a participant is about to retire, DTC first will verify that the
participant has closed out all its entitlements and obligations for
future distributions created by stock loans. If DTC has ceased acting
on behalf of a participant, DTC will determine which other DTC
participants are stock loan counterparties and will adjust those
participants' stock loan memo account positions in order to balance the
elimination of DTC's obligations to and entitlements from the
terminated participant.
Before the stock loan income-tracking system is implemented, DTC
will provide a means for participants to load DTC's stock loan data
base with information about currently outstanding stock loans.
Deliveries with a stock loan reason code made after implementation will
automatically be added to this data base.
II. Discussion
The Commission believes that the proposal is consistent with the
Act and in particular Section 17A of the Act.\4\ Sections 17A (b)(3)(A)
and (F) of the Act\5\ require that each clearing agency be organized
and its rules be designed to assure the safeguarding of funds in the
custody or control of the clearing agency or for which it is
responsible. Moreover, in Section 17A(a)(1)(B) of the Act, Congress set
forth its findings that new data processing and communication
techniques create the opportunity for more efficient, effective, and
safe procedures for clearing and settlement.\6\
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\4\15 U.S.C. Sec. 78q-1 (1988).
\5\15 U.S.C. Sec. 78q-1(b)(3)(A) and (F) (1988).
\6\15 U.S.C. Sec. 78q-1(a)(1)(B) (1988).
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The stock loan income tracking system is an automated system which
will eliminate inefficient income processing by stock loan
counterparties. Because DTC receives data related to stock loan income
attributions in the normal course of its operations, DTC is in a good
position to process such data and to maintain appropriate records of
the rights and obligations of its participants to the income related to
stock loan activity. In addition to being well situated for the
centralized processing function, because DTC processes all data through
its automated facilities, there should be uniform treatment of the data
as opposed to the current system whereby stock loans income
attributions are handled differently by each involved DTC participants.
The Commission believes that the stock loan income tracking system
should improve the efficiency of the income transfer and record
keeping.
Additional, the stock loan income tracking system is being
implemented consistently with DTC's obligation to safeguard securities
and funds in its custody or control. In addition to DTC normal safety
measures, DTC has built into the system risk reduction measures such as
provisions for the termination of future DTC obligations upon a
participant's voluntary or involuntary termination of its membership.
III. Conclusion
For the reasons stated above, the Commission finds that DTC's
proposal is consistent with Section 17A of the Act.\7\
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\7\15 U.S.C. Sec. 78q-1 (1988).
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It is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\8\ that the proposed rule change (File No. SR-DTC-94-07) be, and
hereby is, approved.
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\8\15 U.S.C. Sec. 78s(b)(2) (1988).
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) (1992).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-23165 Filed 9-19-94; 8:45 am]
BILLING CODE 8010-01-M
