[Federal Register Volume 61, Number 173 (Thursday, September 5, 1996)]
[Notices]
[Pages 46885-46886]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22630]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37617; File No. SR-DTC-96-14]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing and Order Granting Accelerated Permanent Approval of a
Proposed Rule Change Relating to Procedures for Inter-Depository
Deliveries
August 29, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on August 11, 1996, The
Depository Trust Company (``DTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change (File No.
SR-DTC-96-14) as described in Items I and II below, which items have
been prepared primarily by DTC. The Commission is publishing this
notice and order to solicit comments from interested persons and to
grant permanent approval of the proposed rule change on an accelerated
basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change seeks permanent approval of DTC's existing
procedures for deliveries through the interface between DTC and the
Philadelphia Depository Trust Company (``Philadep''). The Commission
previously granted temporary approval to a proposed rule change
establishing DTC's procedures for inter-depository deliveries as part
of the conversion of DTC's money settlement system to an entirely same-
day funds settlement system.\2\
---------------------------------------------------------------------------
\2\ Securities Exchange Act Release No. 36861 (February 20,
1996), 61 FR 287 [File No. SR-DTC-95-21] (order granting temporary
approval of a proposed rule change on a temporary basis through
August 31, 1996).
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, DTC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments that it received on the proposed rule change.
The text of these statements may be examined at the places specified in
Item IV below. DTC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\3\
---------------------------------------------------------------------------
\3\ The Commission has modified the text of the summaries
submitted by DTC.
---------------------------------------------------------------------------
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The proposed rule change seeks permanent approval of the procedures
for deliveries through the interface between DTC and Philadep. The
Commission previously granted temporary approval of the inter-
depository delivery procedures to allow DTC to implement the procedure
so it could monitor and report to the Commission the number of inter-
depository reversals of deliveries that caused a DTC participant's net
debit cap to be exceeded.
When processing a participant's delivery to Philadep, DTC employs
an immediate update technique whereby the delivering participant's
security position, collateral, and settlement account are immediately
updated if the delivering participant has sufficient securities and
collateral to allow the delivery to be completed. The delivering
participant's position is reduced by the quantity of securities
delivered, its settlement account is credited for the settlement value
of the transaction, and its collateral monitor is increased by the
settlement credit incurred and is reduced by the collateral value of
the securities delivered (provided the securities being delivered are
part of the participant's collateral position).
Once the delivery satisfies risk management controls and completes
at DTC (i.e., the participant has sufficient securities to make the
delivery and the participant's collateral monitor will not become
negative because of the delivery), DTC sends the delivery to Philadep
where it is subject to Philadep's internal risk management controls. In
certain instances, Philadep's internal risk management controls will
prevent a delivery from completing (e.g., the receiving participant
does not have sufficient collateral or the receipt would cause the
participant to exceed its net debit cap) and will cause the delivery to
pend in Philadep's system. At the end of each processing day, Philadep
returns to DTC delivery orders that fail to complete in Philadep's
system, and DTC reverses the deliveries to the original delivering
participants.
Reversals from Philadep are processed at DTC until approximately
3:37 P.M. DTC's reversals are not subject to its Receiver-Authorized
Delivery (``RAD'') processing \4\ or other risk management
[[Page 46886]]
controls (i.e., net debit cap and collateral monitor).
---------------------------------------------------------------------------
\4\ RAD allows a participant to review and either approve or
cancel incoming deliveries before they are processed in DTC's
system. For a further discussion of DTC's RAD procedures, refer to
Securities Exchange Act Release No. 25886 (July 6, 1988), [File No.
SR-DTC-88-07] (notice of filing and immediate effectiveness of a
proposed rule change implementing DTC's RAD procedures).
---------------------------------------------------------------------------
As expected, the number of deliveries through the interface from
DTC to Philadep have been low. Consequently, the number of reversals to
such deliveries also have been low. During the five month period from
March 1, 1996, through July 31, 1996, there were an average of 5,706
deliveries (both valued deliveries and free deliveries) each day from
DTC to Philadep through the interface. During that five month period,
DTC reversed a total of twenty-three deliveries back to its
participants. Of those twenty-three reversals, the largest reversal had
a settlement value of $5,640,372, and the remaining twenty-two
reversals had an aggregate settlement value of $2,307,547. None of the
twenty-three reversals caused a DTC participant to violate its net
debit cap.
DTC believes the proposed rule change is consistent with Section
17A of the Act \5\ and the rules and regulations thereunder because the
proposed rule change will contribute to efficiencies in processing
deliveries in the interface between DTC and Philadep. DTC also believes
the proposed rule change will be implemented consistently with the
safeguarding of securities and funds in DTC's custody or control or for
which it is responsible because the proposed rule change has operated
safely pursuant to the Commission's temporary approval on February 20,
1996.
---------------------------------------------------------------------------
\5\ 15 U.S.C. Sec. 78q-1 (1988).
---------------------------------------------------------------------------
(B) Self-Regulatory Organization's Statement on Burden on Competition
DTC perceives no adverse impact on competition by reason of the
proposed rule change.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received from Members, Participants, or Others
All participants were informed of the proposed rule change by a DTC
Important Notice.\6\ Written comments from DTC's participants or others
have not been solicited or received on the proposed rule change.
---------------------------------------------------------------------------
\6\ DTC Important Notice (January 9, 1996).
---------------------------------------------------------------------------
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Section 17A(b)(3)(F) of the Act \7\ requires that the rules of a
clearing agency be designed to foster cooperation and coordination with
persons engaged in the clearance and settlement of securities
transactions. The Commission believes that DTC's proposed procedures
relating to inter-depository deliveries are consistent with DTC's
obligations under Section 17A(b)(3)(F) because the proposed rule change
establishes procedures for the processing of inter-depository
deliveries between DTC and Philadep.
---------------------------------------------------------------------------
\7\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
---------------------------------------------------------------------------
Under the proposed procedures, DTC will immediately update a
participant's account for deliver orders and payment orders sent to a
Philadep participant through the interface. In the event that the
delivery fails to complete at Philadep by the end of the day, the
procedures provide a mechanism by which DTC will reverse the
transaction to the original delivering participant without subjecting
that reversal to RAD or risk management controls.
Because the Commission was concerned that the inter-depository
delivery procedures could create the situation where an inter-
depository reversal arising from an uncompleted delivery at Philadep
would cause a DTC participant to violate its net debit cap at DTC near
the end of the day, the Commission previously approved the proposed
rule change on a temporary basis in order that the procedures and their
effects could be carefully monitored and modified if needed before they
were permanently approved. During the temporary approval period, there
were only twenty-three inter-depository deliveries reversed back to DTC
participants, and none of those twenty-three reversals caused a DTC
participant to violate its net debit cap. Therefore, the Commission is
permanently approving DTC's inter-depository delivery procedures.
However, the Commission continues to encourage DTC to examine and to
consider future enhancements to the interface to provide a mechanism
through which DTC participants can receive notification of transactions
pending at Philadep.\8\ In this regard, DTC must report to the
Commission on a quarterly basis the number and extent of inter-
depository reversals that caused DTC participants to violate their net
debit caps by $1 million or more.
---------------------------------------------------------------------------
\8\ The Commission understands that such enhancements were
considered but were not initiated because of the costs involved and
because of the low number of inter-depository reversals that were
expected. However, the Commission believes if the number of inter-
depository reversals substantially increases, DTC should implement
such enhancements or take other steps to control the risks created
by inter-depository reversals.
---------------------------------------------------------------------------
DTC has requested that the Commission find good cause for approving
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing. The Commission finds good cause for
approving the proposed rule change prior to the thirtieth day after the
date of publication of notice of filing because the Commission has
previously noticed the procedures without receiving any comment letters
and because accelerated approval will allow DTC to continue to utilize
the procedures for deliveries between DTC and Philadep participants
through the interface without any disruption when the current temporary
approval expires on August 31, 1996.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, 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. Sec. 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 filing will also be available
for inspection and copying at the principal office of DTC. All
submissions should refer to the file number SR-DTC-96-14 and should be
submitted by September 26, 1996.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-DTC-96-14) be, and hereby
is, permanently approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\9\
---------------------------------------------------------------------------
\9\ 17 CFR 200.30-3(a)(12) (1995).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-22630 Filed 9-4-96; 8:45 am]
BILLING CODE 8010-01-M
