[Federal Register Volume 59, Number 47 (Thursday, March 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5479]
[[Page Unknown]]
[Federal Register: March 10, 1994]
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SECURITIES AND EXCHANGE COMMISSION
Self-Regulatory Organizations; The Depository Trust Company;
Order Approving a Proposed Rule Change Relating to the Pledge of
Government Securities as Collateral
[Release No. 34-33709; File No. SR-DTC-94-02]
March 3, 1994.
On January 26, 1994, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change pursuant to Section 19(b)(1) of the Securities Exchange Act
of 1934 (``Act''), \1\ that would allow participants to pledge
government securities to DTC as collateral to cover outstanding short
positions. On February 15, 1994, the Commission published notice of the
proposed rule change in the Federal Register.\2\ No comments were
received. This order approves the proposal.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\Securities Exchange Act Release No. 33602 (February 8, 1994),
59 FR 7273.
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I. Description
The proposed rule change provides for a procedure to allow
participants to pledge government securities to DTC as collateral to
cover outstanding Next-Day Funds Settlement (``NDFS'') short
positions.\3\ Only short positions aged thirty calendar days or more
will be eligible for collateralization.\4\
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\3\The proposed rule change contemplates pledges of the type
described in DTC Rule 4, Section 1 relating to DTC's Participant's
Fund. DTC rule 4, Section 1. Letter from Karen G. Lind, Associate
Counsel, DTC, to Sonia G. Burnett, Attorney-Advisor, Commission
(February 23, 1994).
\4\The procedure is available for positions that are aged thirty
days or more because many short positions that are due to
administerial errors are cleared up in the first thirty days. The
new procedure is designed to be utilized in the case of short
positions that are difficult to cover because the securities are
thinly traded. Letter from Karen G. Lind to Sonia Burnett, supra.
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DTC imposes a cash penalty of 130% of the market value of the aged
short position (``short position penalty'').\5\ The rule change
provides an alternate means for participants to satisfy their
obligation to provide DTC with a short position penalty. Participants
also may continue to make cash deposits.
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\5\The cash DTC receives is invested and earns interest. The
interest earned is returned to participants at periodic intervals
during the year as part of the general refund. The general refund
allocates back to participants excess operating revenues and
interest earned calculated by activity levels.
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Under the proposal, participants may pledge government securities
residing in their DTC ``free'' accounts.\6\ Initially only DTC-eligible
U.S. Treasury issues (Treasury bills, bonds, and notes) which are fully
guaranteed by the U.S. Government will be accepted as collateral. There
are no plans to expand the program beyond government securities at the
present time, however, DTC may include other securities as collateral
in the future.\7\
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\6\Each participant's DTC ``free'' account contains securities
that are available for transfer or pledge. other securities, such as
those that are segregated for customers or pledged to pledgee banks
do not reside in the ``free'' account. Letter from Karen G. Lind to
Sonia G. Burnett, note 3 supra.
\7\Letter from Karen G. Lind to Sonia G. Burnett, note 3 supra.
In order to expand the types of eligible collateral to include
securities other than Treasury bonds, notes, and bills, DTC will
file a proposed rule change with the Commission under Section
19(b)(2) of the Act and Rule 19b-4 thereunder.
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Each day, DTC will inform each participant of its short positions
aged thirty days or older as of the close of business on the previous
day. The participant can then enter a request over DTC's Participant
Terminal System (``PTS'') to pledge government securities. The pledge
system will verify that the securities being pledged are eligible for
collateralization before the pledge is allowed to update into DTC's
system.
DTC will establish a special account on its books that will be used
to receive book-entry pledges. The government securities will remain in
DTC's account at the Federal Reserve Bank of New York.\8\ DTC will
accept partial pledges that do not cover the entire amount of the short
position penalty.
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\8\Letter from Karen G. Lind to Sonia G. Burnett, note 3 supra.
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The value of a participant's securities short positions and pledged
securities\9\ will be marked to the market on a daily basis, and short
charges will be adjusted accordingly. Participants may pledge
additional securities to cover an increase in their aggregate short
charges or request a release of pledged securities which are no longer
needed to cover their aggregate short charges. If the value of the
pledged position is greater than the short position penalty, the excess
will not be returned to the participant unless the participant requests
it.\10\
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\9\The pledged securities will be valued at full market value.
DTC will not impose a haircut on the pledged securities but will
require a short position penalty of 130% of the market value of the
short position.
\10\Letter from Karen G. Lind to Sonia G. Burnett, note 3 supra.
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A participant may substitute pledged securities or request a
complete release of collateral. In the former instance, after inputting
the new pledge and the release request, the participant would contact
the Reconciliation Department prior to 12:30 p.m. to request a release
approval. The substitution will be made upon approval of the release
request. In the event the participant requests a release of collateral
without requesting to pledge substitute collateral, the pledged
securities would be returned to the ``free'' account at the end of the
processing day and the short charges would be reinstated the following
day.
If pledged securities are redeemed, DTC will hold the redemption
proceeds in a suspense account until the pledged securities are
released and moved to the participant's ``free'' account. At that time,
the redemption proceeds would be credited to the participant's
settlement account. If pledged government securities are called for
redemption, the participant must release the pledge and move the
securities to a ``free'' account. Interest earned on pledged securities
will be automatically credited to the participant's account.
II. Discussion
The Commission believes DTC's proposal is consistent with the Act
and particularly with sections 17A(b)(3)(A) and (F) of the Act.\12\
Those sections require that a clearing agency be organized and its
rules be designed to promote the prompt and accurate clearance and
settlement of securities transactions and to assure the safeguarding of
securities and funds which are in its custody or control or for which
it is responsible.
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\12\15 U.S.C. 78q-1(b)(3) (A) and (F) (1988).
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The proposed rule change will give DTC participants greater
flexibility in collateralizing their short positions. By allowing
participants to pledge government securities to DTC to replace cash
deposits, the proposed rule change will improve participants' cash
management abilities and liquidity.
At the same time, the proposal will continue to provide DTC with
high quality collateral for short positions, mitigating the risk
involved in uncovered short positions.\13\ DTC will accept only
Treasury notes, bonds, and bills which are backed by the full faith and
credit of the U.S. Government. DTC therefore will not be subject to the
credit risk of the obligor. Because the market for Treasury bills is
extremely large and relatively liquid, DTC believes its liquidation
risk will be minimal. Furthermore, DTC will employ its usual internal
controls to segregate pledged positions within the pledge account and
to minimize the risk of double pledging. By permitting DTC to minimize
its credit and liquidation risk, the proposal promotes the safeguarding
of securities and funds in DTC's custody or under its control.
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\13\Credit risk is the risk that the counterparty to a
transaction will not fulfill its obligation. Market risk is the risk
associated with adverse changes in the market price of a security.
Liquidation risk is the risk that the full value of collateral will
not be realized upon liquidation of such collateral.
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III. Conclusion
For the reasons stated above, the Commission finds that the
proposed rule change (File No. SR-DTC-94-02) is consistent with section
17A of the Act.
It is therefore ordered, Pursuant to section 19(b)(2) of the Act,
that the proposed rule change (SR-DTC-94-02) be, and hereby is
approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\17 CFR 200.30-3(a)(12) (1990).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-5479 Filed 3-9-94; 8:45 am]
BILLING CODE 8010-01-M