[Federal Register Volume 59, Number 25 (Monday, February 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2725]
[[Page Unknown]]
[Federal Register: February 7, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33548; File Nos. SR-DTC-93-08 and SR-NSCC-93-07]
Self-Regulatory Organizations; The Depository Trust Company et
al.; Order Approving a Proposed Rule Change Relating to a Netting
Contract and Limited Cross-Guaranty Agreement
January 31, 1994.
On July 8, 1993, and June 2, 1993, The Depository Trust Company
(``DTC'') and the National Securities Clearing Corporation (``NSCC''),
respectively, filed with the Securities and Exchange Commission
(``Commission'') proposed rule changes (File Nos. SR-DTC-93-08 and SR-
NSCC-93-07) under Section 19(b)(1) of the Securities Exchange Act of
1934 (``Act'')\1\ to establish a Netting Contract and Limited Cross-
Guaranty Agreement between DTC and NSCC (``DTC/NSCC Agreement'')\2\
Notice of the proposal was published in the Federal Register on
November 10, 1993.\3\ No comment letters were received. For the reasons
discussed below, the Commission is approving the proposed rule changes.
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\1\15 U.S.C. 78(b)(1) (1988).
\2\NSCC's Rules refer to the agreement as the Clearing Agency
Cross-Guaranty Agreement.
\3\Securities Exchange Act Release No. 33145 (November 3, 1993),
58 FR 59766.
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I. Description
A. Netting
Many participants of DTC are also members of NSCC (``common
members''), and NSCC itself is a DTC participant. For many years, DTC
and NSCC have provided for a consenting common member's credit balance
in DTC's Next-Day Funds Settlement (``NDFS'') system or a credit
balance at NSCC to be applied to its debit balance at the other
clearing agency. In practice, a common member's daily settlement credit
at one of the clearing agencies serves to reduce or eliminate any daily
settlement debit of that common member at the other organization.\4\
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\4\This procedure is commonly referred to as cross-endorsement
because originally the crediting clearing agency's check or draft
payable to the common member was endorsed to the debiting clearing
agency. Over 90% of common members have consented to this procedure.
Under the procedure, which is now automated, computer programs
determine which consenting members have a credit balance at one
clearing agency and a debit balance at the other. The programs then
aggregate for each clearing agency the applicable portions of all
the credit balances of common members with debit balances at the
other clearing agency. These aggregate amounts are then paid by each
clearing agency to the other with corresponding payment entries
being reflected in each common member's DTC and NSCC settlement
statements.
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The Federal Deposit Insurance Corporation Improvement Act of 1991
(``FDICIA'') validates netting contracts that provide for the netting
of payment obligations and payment entitlements between and among
clearing organizations and their members.\5\ Under FDICIA, a payment
under a netting contract is not subject to disaffirmance by the
receiver or trustee in a subsequent insolvency proceeding. The netting
provisions of FDICIA were designed to reduce systemic risk to the
financial markets.
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\5\12 U.S.C. 4401-4407 (1991).
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The purpose of the netting provision of the DTC/NSCC Agreement is
to establish a netting contract that meets the standards for FDICIA
protection. The netting provision provides that on each common business
day that any common member has a credit balance at one clearing agency
and a debit balance at the other, the two balances will be netted, and
the following payments will be made: (1) Each common member with a net
debit amount will pay that amount to the clearing agency with the net
debit amount; (2) a clearing agency with a net credit amount with
respect to a common member shall pay that amount to the common member;
and (3) for each common member with a credit balance that equals its
debit balance, the clearing agency with the credit balance shall pay
that amount to the clearing agency with the debit balance.
The balances covered under the netting provision that will be
available to NSCC will be only those in DTC's NDFS system. DTC will
have the right, however, to use a NDFS credit balance to offset an open
debit balance in DTC's Same-Day Funds Settlement (``SDFS'') system
before applying the remainder, if any, to a debit balance at NSCC.
B. Limited Guaranty
The DTC/NSCC Agreement also contains a provision limiting the
guaranty from each clearing agency to the other clearing agency that
will be invoked when a common member fails. Any resources remaining
after a failed common member's obligations to the guaranteeing clearing
agency have been satisfied, including at DTC that common member's SDFS
obligations, will be made available to the other clearing agency. The
guaranty is not absolute but rather is limited to the extent of the
resources relative to the failed member remaining at the guaranteeing
clearing agency. The principal resources will be settlement net credit
balances, including in certain cases a common member's SDFS net credit
balance at DTC, and the failed member's deposits to the clearing
agencies' clearing funds.
For example, if a common member has a DTC NDFS net debit balance
that exceeds its credit balance at NSCC, the operation of the netting
provision will reduce that net debit balance by the amount of the NSCC
credit. If that common member then fails, DTC will apply the member's
DTC participants fund deposit to the remaining net debit balance and to
any SDFS net debit balance. If the participants fund deposit is
insufficient to satisfy completely all DTC net debit balances, the
limited guaranty provision will enable DTC to look to NSCC to pay any
deficiency but only if and to the extent that the NSCC resources
attributable to the common member exceed the common member's
obligations to NSCC. Similarly, NSCC will be able to look to DTC if the
common member has a NSCC net debit balance.
There can be situations where a failed common member still owes
money either to DTC or to NSCC after netting and after payment of the
guaranty. However, the exposure to DTC's or NSCC's other participants
or members will be reduced by the operation of the DTC/NSCC Agreement.
C. Changes to DTC's and NSCC's Rules
In connection with the implementation of the DTC/NSCC Agreement,
DTC is amending its Rules 1, 2, 4, and 9 and NSCC is amending its Rules
1, 4, 12, and 31. The modifications will incorporate the netting
provision into DTC's and NSCC's Rules so that DTC's participants and
NSCC's members become parties to and are bound by the netting provision
of the DTC/NSCC Agreement. The modifications to DTC's and NSCC's Rules
also will incorporate the limited guaranty provision so that a failed
common member is obligated to DTC or NSCC to the extent that DTC or
NSCC is obligated to the other clearing agency under the limited
guaranty provision.\6\
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\6\For a detailed discussion of the specific amendments DTC and
NSCC are making to their rules, refer to Securities Exchange Act
Release No. 33145, supra note 3.
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II. Discussion
Section 17A(a)(2)(A) of the Act directs the Commission to
facilitate the establishment of a national system for the prompt and
accurate clearance and settlement of securities transactions and to
facilitate the establishment of linked or coordinated facilities for
clearance and settlement of transactions.\7\ The Commission believes
that the DTC/NSCC Agreement is an important step towards achieving such
a national system because the DTC/NSCC Agreement mandates netting of a
common member's settlement obligations at each of the clearing
corporations.
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\7\15 U.S.C. 78q-1(a)(2)(A).
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Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency be designed to assure the safeguarding of securities
and funds which are in its custody or control or for which it is
responsible.\8\ DTC, NSCC, and their participants and members should
gain protection from the netting and guarantee provisions of the DTC/
NSCC Agreement because a common member's credit balance at one clearing
agency will be paid to the other clearing agency, if the common member
has a debit balance at that clearing agency, instead of to the common
member. This should reduce the risk that a common member will fail to
fulfill its settlement obligation at one clearing corporation but still
collect a credit from the other clearing corporation. If a common
member fails, the limited guarantee will be invoked so that remaining
resources attributable to the common member at one clearing agency will
be available to fulfill the common member's obligation at the other
clearing agency.
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\8\15 U.S.C. 78q-1(b)(3)(F).
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The same section of the Act also requires that a clearing agency's
rules be designed to foster cooperation and coordination with persons
engaged in the clearance and settlement of securities transactions. The
Commission believes that the DTC/NSCC Agreement fosters such
cooperation and coordination as evidenced by the risk reduction and
payment efficiencies that should be experienced by DTC, NSCC, and
common members upon implementation of the agreement.
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule changes are 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,\9\ that the proposed rule changes (File Nos. SR-DTC-93-08 and SR-
NSCC-93-97) be, and hereby are, approved.
\9\15 U.S.C. 78s(b)(2).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\17 CFR 200.3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-2725 Filed 2-4-94; 8:45 am]
BILLING CODE 8010-01-M