[Federal Register Volume 63, Number 171 (Thursday, September 3, 1998)]
[Notices]
[Pages 47057-47058]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23766]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40368; File No. SR-DTC-97-21]
Self-Regulatory Organizations; The Depository Trust Corporation;
Order Approving a Proposed Rule Change Relating to Modification of
Processing Bankers' Acceptances
August 26, 1998.
On October 14, 1997, The Depository Trust Corporation (``DTC'')
filed with the Securities and Exchange Commission (``Commission''), and
on November 6, 1997, and February 23, 1998, amended a proposed rule
change (File No. SR-DTC-97-21) pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal
was published in the Federal Register on April 21, 1998.\2\ No comment
letters were received. For the reasons below, the Commission is
approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 39861 (April 14, 1998),
63 FR 19772.
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I. Description
In 1994, the Commission approved an expansion of DTC's money market
instruments (``MMI'') settlement program to include, among other
things, BAs,\3\ which allowed DTC to process non-fungible BAs.\4\ The
purpose of the proposed rule change is to modify DTC's procedures to
allow an accepting bank, at its option, to assign one CUSIP number to a
bundle of its BAs that are issued at a discount and that have the same
maturity date. DTC will treat all such BAs assigned the same CUSIP
number as fungible.
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\3\ Securities Exchange Act Release Nos. 33958 (April 22, 1994),
59 FR 22879 (order approving proposal on temporary basis); and 35655
(April 28, 1995), 60 FR 22423 (extension of temporary approval).
\4\ Non-fungible BAs consist of those with only one underlying
customer, draft, and accepting bank. A CUSIP number is assigned to
each BA as opposed to a bundle of BAs, as is currently proposed by
the rule change.
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Under existing practices in the BA market, an issuing bank and an
investor may agree that a single issuance transaction can be settled by
the bank's delivery of a bundle of drafts, which may involve different
drawers, different underlying transactions, different goods, or
different countries of origin or destination, so long as each component
draft has been accepted by the issuing bank and has the same maturity
date. The program for processing BAs will reflect industry practice by
permitting an issuing bank to settle a single issuance transaction by
book-entry delivery of interests in a bundle of drafts accepted by the
bank, maturing on the same date, and identified by a single CUSIP
number.
Subsequent to the initial issuance of these fungible BAs, the
issuing bank may increase the total amount of the issue outstanding by
including additional accepted drafts of the same or longer tenure as
the other component drafts.\5\ Similarly, the issuing bank may
substitute for a component draft of an outstanding issue of fungible
BAs another accepted component draft having the same or longer maturity
date. DTC will make available to participants though its Participant
Terminal System information about the features (e.g., identity of
drawer, goods, country of origin, and destination) of each component
draft of fungible BAs that has been provided by the bank's issuing
agent as of the date of the inquiry.
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\5\ Where the component drafts have different maturity dates,
the bank issuing fungible BAs will be required to pay full maturity
on the earliest date that the component draft matures.
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Market participants will remain responsible for complying with
regulations of the U.S. Treasury Department's Office of Foreign Assets
Control (``OFAC'') as they pertain to DTC-eligible BAs. In providing
issuance instruction to DTC, the bank's issuing agent will be required
to acknowledge that the issuance complies with OFAC regulations. The
acknowledgement shall constitute a representation that the issuing
agent maintains an appropriate system for assuring compliance with OFAC
regulations and that the subject issuance complies with those
regulations.
The bank's issuing agent will also be required to indicate in the
issuance instructions whether or not the BAs being issued are eligible
for purchase and discount at a federal reserve bank. DTC will make the
information available to participants but will not verify the accuracy
of information provided by the issuing agent with respect to the BAs.
DTC will not be liable for any loss related to the accuracy or
completeness of information about BAs made available by it.
In the event of the accepting bank's insolvency, DTC's MMI program
procedures relating to MMI issuer insolvency will apply. Furthermore,
in order to put participants in a position to independently pursue
claims against the bank or any other party (e.g., the drawer of an
accepted draft), DTC will seek to have accepted drafts which had been
made payable or endorsed to DTC's nominee, Cede & Co., at the time the
BAs were first issued, exchanged for accepted drafts made payable or
endorsed to each participant having a position in each issue of the
bank's BAs.\6\ If DTC is unable to arrange for such exchanges, DTC will
act with respect to matters involving each issue of BAs (i.e., CUSIP)
in accordance with the written instructions of the participants having
sixty-six and two-thirds percent or more of the total position in that
issue.
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\6\ A participant having a position on DTC's books in an issue
of fungible BAs accepted by the insolvent bank would receive
component drafts with each draft in an amount proportional to the
participant's position in that issue.
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As with other types of financial instruments in DTC's MMI program,
BAs rated in one of the top two ratings categories by at least one of
the largest bank-debt rating agencies and investment grade or above by
other rating agencies will receive a two percent haircut from market
price for purposes of collateral valuation. BAs rated as investment
grade only by the ratings agencies will receive a five percent haircut
and all lower-rated or unrated BAs will receive a 100 percent haircut
(resulting in zero collateral value). BAs that are in default will not
be eligible for deposit at DTC.
II. Discussion
Section 17A(b)(3)(F) of the \7\ requires that the rules of a
clearing agency be designed to assure the safeguarding of securities
and funds in this custody or
[[Page 47058]]
control of the clearing agency or for which it is responsible. The
Commission believes that the proposed rule change is consistent with
DTC's obligations under Section 17A(b)(3)(F) because it provides a more
efficient manner in which industry participants may process BA
transactions while potentially reducing the risks associated with
current industry processing methods. Furthermore, DTC has put in place
sufficient safeguards to protect the interests of other DTC
participants engaged in the clearance and settlement of securities.\8\
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\7\ 15 U.S.C. 78sq-1(b)(3)(F).
\8\ DTC's BA program has been designed in consultation with and
with the approval of the Federal Reserve Bank of New York.
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The Commission previously examined the risk management features of
the MMI program when DTC proposed to add it to DTC's Same-Day Funds
Settlement system \9\ and when permanent approval was sought.\10\ At
those times, the Commission found and continues to believe that the
risk management controls adopted by DTC are sufficient to address the
risks associated with processing BAs. Furthermore, with the inclusion
of DTC's additional risk management efforts incorporated by this rule,
namely requiring OFAC compliance and establishing insolvency
procedures, the Commission believes that any additional risks that may
arise as a result of DTC processing fungible BAs are also sufficiently
addressed.
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\9\ Supra note 3.
\10\ Id.
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III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A 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 change (File No. SR-DTC-97-21) be and hereby is
approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-23766 Filed 9-2-98; 8:45 am]
BILLING CODE 8010-01-M
