[Federal Register Volume 59, Number 119 (Wednesday, June 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15142]


[[Page Unknown]]

[Federal Register: June 22, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34218; File No. SR-DTC-94-07]
June 15, 1994.

 

Self-Regulatory Organizations; the Depository Trust Company; 
Notice of Filing of a Proposed Rule Change Relating to Establishment if 
the Stock Loan Income-Tracking System

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 6, 1994, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
primarily by DTC. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The proposed rule change will 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.

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. 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.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Participants have informed DTC that pursuant to the terms of stock 
loan agreements, the borrower must promptly pass to the lender 
distributions received on the borrowed securities during the period 
that the loan is outstanding. Stock loan activity among participants is 
a high-volume business, and there usually are many outstanding loans in 
DTC's system at any one time. Because the underlying collateral 
involved in these loans constantly changes, careful record keeping of 
loan activity for the purpose of determining the proper allocation of 
income distributions is important.
    While existing DTC procedures enable participants to identify stock 
loan-related deliver orders (``DOs'') through the use of reason codes, 
proper allocation of income payments arising from these loans currently 
rests entirely with the lending and borrowing participants because DTC 
currently allocates such income to participants to whom the securities 
are credited on the relevant date (i.e., generally the record date). 
Lending participants recover income that DTC has allocated to borrowers 
of securities either through DTC's securities payment order (``SPO'') 
service or through some other mechanism upon which the participants 
mutually agree.
    The proposed stock loan income-tracking system will facilitate 
participants' processing of income attributable to securities that are 
the subject of outstanding stock loans.\2\ The proposed system will 
track and monitor participants' stock loan-related DOs; will net the 
share amounts by participant, CUSIP, and transaction type; and will 
automatically credit income distributions to the proper participant on 
income payment date. To accomplish this, 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.
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    \2\The term stock loan is used in the securities industry to 
describe loans of both debt and equity securities. DTC's proposed 
system will track income attributable to both debt and equity 
securities.
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    Should a stock loan memo position not balance with a participant's 
records (e.g., because of a DO processed with an incorrect reason 
code), either the lending or borrowing participant can adjust the stock 
loan memo account position through the participant terminal system 
(``PTS''). Any such adjustments will be subject to affirmation by the 
counterparty participant.
    In addition, the proposed rule change will provide 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 DTC takes based on the instructions. DTC will implement the 
directions contained in the letter of instructions without making any 
determination about the parties' legal obligations to each other. If 
the participant submitting the letter of instructions is in fact still 
legally obligated, the noninstructing counterparty may seek to enforce 
its right to receive future distributions outside of DTC.
    If by reason of merger, acquisition, or the like, one participant's 
accounts are being transferred to another participant, DTC also will 
transfer the transferring participant's open stock loan positions to 
the transferee participant.
    Before permitting a participant to retire, DTC will verify that the 
participant has closed out all its entitlements and obligations for 
future distributions created by stock loans. If DTC ceases to act for 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 and rights to or from the terminated participant. The 
counterparties' legal obligations or rights with respect to the 
terminated participant will not be changed DTC's action. However, 
because DTC will cease allocating distributions attributable to the 
terminated participant's transactions, remaining counterparty 
participants will have to make arrangements outside DTC to receive or 
pay future distributions on any stock loans with the terminated 
participant that remains open after DTC has ceased to act.
    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 made after implementation with a stock loan reason code will 
automatically be added to this data base.
    The proposed rule change is consistent with the requirements of 
Section 17A of the Act and the rules and regulations thereunder because 
it is an automated procedure that will eliminate inefficient income 
processing by stock loan counterparties. The proposed rule change also 
is consistent with DTC's obligation under Section 17A to safeguard 
securities and funds in its custody or control or for which it is 
responsible because the proposal provides reports and inquiry functions 
to participants for their review and reconciliation and provides for 
the termination of future DTC obligations upon a participants's 
voluntary or involuntary termination of its membership.

B. Self-Regulatory Organization's Statement on Burden on Competition

    DTC perceives no 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

    DTC's plan to investigate the automation of stock loan income 
processing was announced to participants in the 1991 DTC Program Agenda 
which described a stock loan tracking system, similar to DTC's 
repurchase agreement tracking, that would monitor participant stock 
loan positions and automatically credit the lender instead of the 
borrower with dividends or interest due. The system was also noted in 
the 1992 and 1993 Program Agendas. DTC held a series of meetings with 
approximately ten broker and bank participants to solicit their 
comments on plans for the stock loan income-tracking system. These 
comments were incorporated into the final design of the proposed 
system.
    Written comments received on the 1991 Program Agenda included 
comments from thirteen participants and others on stock loan income-
tracking system. (No comments were received on either the 1992 or 1993 
Program Agenda entry.)\3\ Two of those comments raised issues to which 
responses follow. In its November 27, 1991, comment letter, the 
Securities Industry Association asked whether DTC could assist 
participants with the monitoring of substitute payments by a special 
report. In response, DTC notes that in the proposed system income 
payments will be coded as stock loan payments on DTC's reports to 
participants, and the participant will have the ability to identify 
stock loan income payments on electronic files. In its December 18, 
1991, comment letter, the New York Clearing House recommended that DTC 
develop access to the stock loan income-tracking service through DTC's 
computer-to-computer facility and mainframe dual host as well as 
through PTS. In response, DTC notes that the reason codes on DOs that 
will trigger stock loan income-tracking are accepted by all three means 
of DO input.
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    \3\These comment letters, all of which were favorable, are cited 
in Exhibit 5 to the filing.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and published its reasons for so 
finding or (ii) as to which the self-regulatory organization consents, 
the Commission will:
    (A) By order approve the proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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, NW., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statement, 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. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-referenced 
self-regulatory organization. All submission should refer to File No. 
SR-DTC-94-07 and should be submitted by July 13, 1994.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-15142 Filed 6-21-94; 8:45 am]
BILLING CODE 8010-01-M