[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