[Federal Register Volume 59, Number 135 (Friday, July 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17160]


[[Page Unknown]]

[Federal Register: July 15, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34333; File Nos. SR-MCC-94-03 and SR-MSTC-94-03]

 

Self-Regulatory Organizations; Midwest Clearing Corporation and 
Midwest Securities Trust Company; Order Approving Proposed Rule Changes 
Establishing More Definitive Standards for Retention of Participants 
Fund Deposits

July 8, 1994.
    On January 31, 1994, and February 7, 1994, the Midwest Securities 
Trust Company (``MSTC'') and the Midwest Clearing Corporation (``MCC'') 
filed proposed rule changes (File Nos. SR-MSTC-94-03 and SR-MCC-94-03) 
with the Securities and Exchange Commission (``Commission'') pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ Notice of the proposals was published in the Federal 
Register on May 18, 1994.\2\ No comments were received by the 
Commission. This order approves the proposals.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\Securities Exchange Act Release No. 34041 (May 11, 1994), 59 
FR 25977.
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I. Description of the Proposals

    The proposed rule changes establish more definitive standards for 
the retention of deposits to the MCC and MSTC participants funds when a 
participant ceases to be a participant. Specifically, the proposals 
modify Article IX (Property Held for Participants), Rule 2 
(Participants' Fund), Section 11 (Ceasing To Be a Participant) of MCC 
Rules and Article VI (Property Held for Participants), Rule 2 
(Participants' Fund), Section 12 (Ceasing To Be a Participant) of MSTC 
Rules.
    The proposals are designed to enable MCC and MSTC to retain in 
their participants funds appropriate amounts of assets to protect 
themselves from losses that arise from obligations of former 
participants. For example, when the issuer of a security pays 
dividends, MCC participants that have long positions in the security 
are credited, and MCC participants that have short positions are 
debited. Occasionally, however, an issuer will fail to disseminate 
dividend information in a timely manner. When the dividend information 
is ultimately disseminated, participants that had short positions on 
the date the dividend amounts should have been debited are charged the 
appropriate debits. If a participant that had such a short position has 
ceased to be a participant, MCC has the right to collect the dividend 
from the ex-participant because the dividend represents an amount 
chargeable against the ex-participant's contributions as a result of 
transactions conducted while it was an MCC participant. However, if MCC 
has refunded all of the ex-participant's participants fund deposit, MCC 
would have no direct access to funds of the ex-participant, and MCC 
will be at risk.
    MSTC faces similar risks. For example, if a participant has on 
deposit with MSTC a nontransferable security (e.g., a security of an 
issuer in bankruptcy) that becomes transferable after the participant 
has ceased to be an MSTC participant, MSTC could become obliged to 
transfer the security to a third party transferee. If MSTC is not able 
to make good delivery of the certificates and if MSTC already has 
refunded all of the ex-participant's participants fund deposit, MSTC 
will be at risk.
    Accordingly, if MCC and MSTC retain participants fund deposits, 
obtain an appropriate guarantee, or have approved the substitution of 
another participant to the ex-participant's obligations, MCC and MSTC 
will reduce the risk from such occurrences as the late receipt of 
dividend information or the conversion of a security from 
nontransferable to transferable. At this time, however, there are no 
specific provisions in MCC's or MSTC's rules relating to either the 
length of time that MCC or MSTC may retain participants fund deposits 
or the amount of participants fund deposits that MCC or MSTC may 
retain. Based on their experiences, MCC and MSTC believe that absent an 
acceptable guarantee or an approved substitution, it will be 
appropriate for them to retain the greater of (1) 25% of the 
participant's average participants fund requirement over the previous 
twelve months or (2) $100,000 or the participant's entire deposit if 
the participant has a participants fund deposit of less than $100,000. 
Under the proposal, MCC and MSTC will be permitted to retain 
participants fund deposits for up to four years.\3\
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    \3\The Commission has approved similar participants' fund 
retention standards for the National Securities Clearing Corporation 
(``NSCC''). Securities Exchange Act Release No. 32728 (August 10, 
1993), 58 FR 43395 [File No. SR-NSCC-93-01] (order approving 
proposed rule change).
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II. Discussion

    The Commission believes that the proposals are consistent with the 
Act and particularly with Section 17A of the Act.\4\ Section 
17A(b)(3)(F) of the Act requires that the rules of clearing agencies be 
designed, among other things, to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agencies 
or for which they are responsible.\5\ The Commission believes that the 
proposed rule changes, which are modeled after the participants fund 
retention rule of NSCC and which are designed to protect participants 
fund deposits maintained by MCC and MSTC against losses related to 
exparticipants obligations, will better enable MCC and MSTC to manage 
such risks. Thus, the Commission believes that the rule changes are 
consistent with MCC's and MSTC's statutory responsibilities under 
Section 17A of the Act to safeguard securities and funds in their 
possession or control.
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    \4\15 U.S.C. 78q-1 (1988).
    \5\15 U.S.C. 78q-1(b)(3)(F) (1988).
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III. Conclusion

    For the reasons discussed above, the Commission believes that the 
proposals are consistent with the requirements of the Act, particularly 
with Section 17A of the Act, and the rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\6\ that the above-mentioned proposed rule changes (File Nos. SR-
MCC-94-03 and SR-MSTC-94-03) be, and hereby are, approved.

    \6\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17160 Filed 7-14-94; 8:45 am]
BILLING CODE 8010-01-M