[Federal Register Volume 59, Number 146 (Monday, August 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18584]
[[Page Unknown]]
[Federal Register: August 1, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34439; File No. SR-PTC-94-03]
Self-Regulatory Organizations; Participants Trust Company; Notice
of Filing of Proposed Rule Change Eliminating the Deliverer's Security
Interest and Adding a Participant's Intraday Collateral Lien
July 25, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on June 23, 1994, the
Participants Trust Company (``PTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change (File No.
SR-PTC-94-03) as described in Items I, II, and III below, which Items
have been prepared primarily by the self-regulatory organization. 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 amend PTC's Rules and Procedures by
deleting provisions providing a Deliverer's Security Interest (``DSI'')
and adding a new Section 2A to Rule 3 of Article II of PTC's Rules,
with conforming changes made elsewhere in PTC's Rules and Procedures,
providing for a Participants Intraday Collateral Lien (``PICL'').\2\
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\2\The text of the proposed new Section 2A to Rule 3 of Article
II of PTC's Rules is attached as Exhibit A.
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II. Self Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
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 the
Statutory Basis for, the Proposed Rule Change
The purpose of the proposed rule change is to amend PTC's Rules and
Procedures to eliminate the DSI and to add a PICL as described below.
Background
DSI was a basic element of PTC's clearing and settlement mechanism
as formulated by the Mortgage Backed Securities Clearing Corporation
(``MBSCC''), the predecessor to PTC.\3\ The DSI is in essence a lien on
securities which are transferred versus payment granted in favor of the
delivering participant.
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\3\PTC purchased the Depository Division of MBSCC from the
Midwest Stock Exchange in March 1989. See Securities Exchange Act
Release No. 26671 (March 31, 1989), 54 FR 13266 (order granting
registration as a clearing agency).
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The Board of Governors of the Federal Reserve System (``Fed''), the
Federal Reserve Bank of New York (``FRBNY''), and the Commission have
expressed reservations about DSI since PTC's inception. In its letter
of March 27, 1989, approving PTC's application for membership in the
Federal Reserve System, the Fed required as a condition of approval
that PTC undertake to ``(i) evaluate the impact of its DSI on its loss
allocation and netting policies and (ii) propose modifications to the
FRBNY to insure that the DSI does not impede the operation of these
policies or of the policies of the Board of Governors of the Federal
Reserve System concerning loss allocation and netting.''
In addition, the Commission in its order approving PTC as a
clearing agency under Section 17A of the Act stated, ``Furthermore, PTC
will make a number of operational and procedural changes. * * * [T]hose
changes include * * * eliminating the deliverer's security interest and
replacing it with a substitute * * * .''\4\
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\4\Id.
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PTC has been engaged in discussions with the staff of the FRBNY and
the Commission on the DSI issue since March 1989, and various proposals
for the modification or replacement of DSI have been made. The proposed
rule change is a result of the continued discussions with PTC's
regulators and is intended to address the concerns of the FRBNY and the
Commission.
Transfers Versus Payment in PTC's System
Each PTC Participant holds its securities on deposit at PTC in one
or more master accounts, each comprised of one or more processing
subaccounts. The subaccounts can include a proprietary account, a
proprietary seg account, an agency account, an agency seg account, a
pledgee account, and a limited purpose account. Each proprietary
account, agency account and pledgee processing account has a PTC
transfer account associated with it for the intraday receipt of
securities delivered or pledged versus payment pending transfer to the
intended receiving account at settlement. Securities in the transfer
account are owned by PTC intraday pending settlement and may be
liquidated or pledged by PTC if at settlement the intended recipient
defaults on the payment of its end-of-day debit balance.
Each processing account and associated transfer account has a
payment record (``cash balance'') associated with it to which debits
and credits are posted throughout the day. When securities are
transferred versus payment to the transfer account associated with the
account of the receiving participant, the contract price of the
securities is debited from the cash balance of the applicable account
of the receiving participant, and is credited to the cash balance of
the applicable account of the delivering participant.
Securities in the transfer account may be redelivered intraday by
the receiving participant or may be withdrawn. A redelivery versus
payment results in debits and credits to the appropriate accounts of
the new receiving participant and the redelivering participant,
respectively. A redelivery fee or a withdrawal of securities in the
transfer account by the initial receiving participant requires under
PTC's Rules that the participant ``prefund'' by depositing to PTC's
participant fund excess cash in the amount of the contract value of the
securities.
At the end of the processing day, participants wire the amount of
their debit balances to PTC's settlement account. From the settlement
account, PTC then wires funds due to participants having end-of-day
credit balances.
DSI
Under current PTC Rules, the delivering participant which delivers
or pledges securities versus payment from one of its processing
accounts (but not a redelivery from a transfer account associated with
a processing account) is granted a DSI in the securities. The DSI is
extinguished upon settlement at which time the securities are
transferred from the applicable transfer account to the receiving
account of the receiving participant.
The current PTC Rules provide that the DSI is extinguished with
respect to securities that are subsequently redelivered free or
withdrawn and continues in prefunding associated with the free
redelivery or withdrawal. With respect to securities that are
redelivered versus payment from a transfer account, the DSI continues
in favor of the initial delivering participant and the redelivering
participant is not granted a DSI and does not acquire any rights in the
securities other than the right to redirect their delivery subject to
PTC's Rules. The securities continue to be owned by PTC, subject to the
DSI, so long as they remain in a transfer account.
PICL
Under the proposed rule change, DSI will be eliminated. In order to
provide appropriate protection to participants with intraday credit
balances with respect to their intraday credit exposure, such
participants will be granted a security interest (i.e., the
``Participants Intraday Collateral Lien'' Or ``PICL'') in securities in
transfer accounts. PTC's granting of the PICL will be subject to
certain material restrictions on the exercise of the PICL and
limitations on the amount of collateral available to satisfy secured
claims, as described below.
Participants with intraday credit balances provide liquidity in
PTC's settlement system. For example, major clearing banks as triparty
custodians or as lenders utilize PTC's system to return collateral to
their dealer-customers early in the day. For such securities
deliveries, the delivering banks receive an intraday credit to their
cash balances pending payment in cash at PTC's end-of-day settlement.
This intraday credit exposure is inherent in PTC's system. The addition
of PICL is proposed to minimize the intraday credit risk to
participants with credit balances in a manner that is consistent with
the policies of the Fed.
Description of PICL
The PICL is restricted in application to PTC's failure to achieve
systemwide settlement and its insolvency or seizure by an order of a
regulatory agency or court. Under PTC's rules, insolvency requires the
determination of an appropriate regulatory agency or court and does not
permit PTC itself to trigger an insolvency proceeding.
The PICL terminates upon PTC's achieving settlement and with
respect to securities that are pledged to achieve settlement pursuant
to the procedures set forth in PTC's Rules and Procedures. In addition,
the PICL attaches to securities in the transfer accounts but terminates
with respect to any such securities that are transferred free or
withdrawn intraday or that are delivered to participants after an event
of default. In such situations, the PICL continues in prefunding or in
other amounts paid in connection therewith as proceeds.
The PICL secures a participant's PICL credit balance, which is the
amount by which its credit balances exceed its debit balances adjusted
to eliminate the amount of any credits made with respect to (i)
principal and interest payments and (ii) certain funds transfers
between participants made pursuant to Article II, Rule 15 (``Funds
Transfers'' of PTC's Rules.
The PICL is structured as a perfected security interest under
Sections 8-313(1)(i) and 8-321 of the New York Uniform Commercial
Code.\5\ For purposes of such perfected security interests, PTC's Rules
and Participants Agreements are the required security agreements, PTC's
records are the description of the collateral, and participants'
transfers of securities versus payment to the receivers' transfer
accounts or retransfers of securities out of transfer accounts against
a PTC credit constitute the value given by the secured party.
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\5\The PICL will have comparable results under the proposed
revisions to UCC Articles Eight and Nine as promulgated by the
National Conference of Commissioners on Uniform State Laws and The
American Law Institute.
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Application of PICL
Upon PTC's failure to settle and its insolvency or seizure by order
of a regulatory agency or court order (together, an event of default
under the proposed PICL rule), participants whose credit balances equal
or exceed their debit balances (``credit Ps'') will have an intraday
security interest in all securities in PTC transfer accounts in the
amount of their PICL credit balances (i.e., their net credit balance)
as such balance exists from time to time during the day. Participants
whose debit balances exceed their credit balances (``debit Ps'') are
credited with their security deliveries if they pay the amount of such
excess. If they do not so pay, such securities will remain in the
transfer accounts for the benefit of credit Ps. Credit Ps will receive:
(1) Their securities deliveries; and (2) their pro rata share of (a)
cash proceeds from Debit Ps which do pay their debits and prefunding
payments with respect to transfer account securities that were
transferred free or withdrawn intraday and (b) sales proceeds of the
transfer accounts securities (i.e, proceeds of securities of debit Ps
which do not pay their net debit to PTC). P&I will be distributed to
participants net of any debit balances owing to PTC.
Effect of PICL on PTC Settlement Procedures
The PICL will have no effect on PTC's settlement process. The PICL
will be extinguished upon settlement, which occurs upon the payment of
all debit balances by the applicable participants or in the event of
participant default in payment of debit balances, upon application of
the default provisions of Article II, Rule 6 (``Failure of Participants
to Meet Cash Settlement Obligations'') and Procedure IV of PTC's Rules
and Procedures (``Procedure for Financing Settlement Defaults''). PTC
maintains a committed line of credit in the amount of $2 billion for
the purpose of achieving settlement in the event of participant
default, and no participant is permitted to incur a net debit in excess
of its net debit monitoring level, which is an amount which is
calculated by reference to each participant's net capital but can never
exceed $2 billion.
The participant default procedures include a provision permitting
the pledge of certain securities in the transfer accounts for the
purpose of obtaining funds to achieve settlement. The PICL terminates
with respect to such securities upon such pledge.
PTC believes that because the proposed rule change provides for the
safeguarding of securities and funds in PTC's custody and control and,
in general, protects investors and the public interest it is consistent
with Section 17A of the Act and the rules and regulations thereunder
applicable to PTC.
B. Self-Regulatory Organization's Statement on Burden on Competition
PTC does not believe that the proposed rule change will impose any
burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
At this time, PTC has neither solicited nor received comments on
this proposed rule change. PTC, however, has issued an Administrative
Bulletin to Participants describing and soliciting comment on the
proposed rule change.
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 publishes its reasons for so
finding or (ii) as to which the self-regulatory organization consents,
the Commission will:
(A) By order approve such 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, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements 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, N.W.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of PTC. All
submissions should refer to file number SR-PTC-94-03 and should be
submitted by August 22, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
Exhibit A--Text of Proposed Rule Change
Section 2A of Rule 3 of Article II of PTC's Rules
Insert a new Section 2A of Rule 3 of Article II after Section 2
thereof, as follows:
Sec. 2A: Participants Intraday Collateral Lien
(a) Definitions. For purposes of this Section 2A:
(i) ``Event of Default'' means the concurrence of
(A) a failure of the Corporation to achieve the cash settlement
of all transactions processed through the Corporation pursuant to
Section 3 of Rule 2 of this Article II, and
(B) either of
(x) a determination by any governmental agency that regulates
the Corporation that the Corporation is insolvent and/or the
appointment of a receiver, liquidator, assignee, trustee,
sequestrator or similar official for the Corporation or for any
substantial part of its property, or
(y) the entry of a decree or order by a court having
jurisdiction in the premises adjudging the Corporation to be
insolvent or approving a petition filed by a party other than the
Corporation for reorganization, arrangement, adjustment or
composition with respect to the Corporation or any substantial part
of its property or ordering the winding up or liquidation of its
affairs.
(ii) ``Participants Intraday Collateral Lien'' (hereinafter
referred to as ``PICL'') means the security interest in Securities
and proceeds thereof granted by the Corporation pursuant to
Subsection (b) hereof.
(iii) ``PICL Credit Balance'' means
(A) the aggregate Credit Balances of the Accounts of a
Participant or Limited Purpose Participant, as such aggregate Credit
Balances exist from time to time, minus
(B) the aggregate Debit Balances of the Accounts of such
Participant as such aggregate Debit Balances exist from time to
time, minus
(C) the sum of:
(x) the aggregate amount of principal and interest payments
credited to the Cash Balances of all such Accounts pursuant to
Section 1 of Rule 2 of Article III; and
(y) the aggregate amount of funds transferred to the Cash
Balances of all such Accounts pursuant to Rule 15 of this Article
II, except funds transferred from one master account of a
Participant or Limited Purpose Participant to another Master Account
of such Participant or Limited Purpose Participant pursuant to such
Rule.
(iv) ``PICL Proceeds'' means the sum of
(A) amounts received pursuant to Section 1(b)(ii)(B) of Rule 13
of this Article II or Subsection (d)(i)(B) hereof, plus
(B) the proceeds received pursuant to Subsection (d)(ii) hereof
upon the liquidation of Securities then subject to PICL
(b) Grant of PICL.
(i) In consideration of
(A) the transfer of Securities Versus Payment by a Delivering
Participant or Limited Purpose Participant to the Corporation
pursuant to Section 1(b) of this Rule 3 and Section 1(a)(iii) of
Rule 13 of this Article II, and
(B) the transfer of Securities Versus Payment by the Corporation
and a Receiving Participant or Limited Purpose Participant to the
Transfer Account associated with the Account of another Participant
pursuant to Section 3(c) of this Rule 3 and Section 1(a)(iii) of
Rule 13 of this Article II; and
(ii) To secure
(A) to the extent of any PICL Credit Balance of a Participant or
Limited Purpose Participant the obligation of the Corporation to
make a payment to such Participant or Limited Purpose Participant
pursuant to Section 3 of Rule 2 of this Article II with respect to
transactions processed through the Corporation, and
(B) The obligation of the Corporation to deliver Securities to a
Participant pursuant to Subsection (d)(i)(A) or (B) hereof:
(iii) The Corporation hereby grants a PICL to each such
Delivering Participant or Limited Purpose Participant and each such
Receiving Participant or Limited Purpose Participant.
(iv) The PICL shall be granted pursuant to the UCC and, for
purposes thereof, these Rules and each Participants Agreement
together shall be a written security agreement, records generated by
the Corporation pursuant to these Rules and the Procedures
reflecting transfers of Securities Versus Payment shall be the
description of the Securities contained in such agreement, and the
consideration referred to in subsection (i) hereof shall constitute
the giving of value by Participants and Limited Purpose
Participants. The PICL of a Participant or Limited Purpose
Participant shall attach to Securities that are credited to Transfer
Accounts pursuant to Section 2 of this Rule 3 as and when and for so
long as a Participant has a PICL Credit Balance; provided, however,
that the PICL shall terminate in respect of Securities which are
withdrawn from a Transfer Account pursuant to Section 3(a) of this
Rule 3, transferred from a Transfer Account not Versus Payment
pursuant to Section 3(b) of this Rule 3, or delivered pursuant to
Subsection (d)(i)(A) or (B) hereof, but any prefunding or other
payments made in connection therewith pursuant to Section
1(b)(ii)(B) of Rule 13 of this Article II or Subsection (d)(i)(B)
hereof shall constitute ``proceeds'' within the meaning of the UCC
and the PICL shall continue in such proceeds pursuant to the UCC.
(c) Termination of PICL.
The PICL shall terminate in respect of:
(i) Securities and proceeds thereof which are pledged by the
Corporation pursuant to Section 1 of Rule 6 of this Article II and/
or Procedure IV of the Procedures to finance the cash settlement of
transactions processed through the Corporation pursuant to Section 3
of Rule 2 of this Article II;
(ii) Securities and proceeds thereof upon the cash settlement of
all transactions processed through the Corporation pursuant to
Section 3 of Rule 2 of this Article II; and
(iii) Securities which are withdrawn, transferred or delivered
pursuant to the proviso in the last sentence of Subsection (b)(iv)
hereof.
(d) Event of Default Procedure.
Upon an Event of Default:
(i) Notwithstanding the third paragraph of Section 3 of Rule 2
of this Article II and Section 3(d) of this Rule 3,
(A) Securities in Transfer Accounts associated with Accounts of
Participants whose aggregate Credit Balances equal or exceed their
aggregate Debit Balances shall be credited to the applicable
Accounts of such Participants;
(B) Securities in Transfer Accounts associated with Accounts of
Participants whose aggregate Debit Balances exceed their aggregate
Credit Balances shall be credited to the applicable Accounts of such
Participants upon and in respect of their payment to the Corporation
or its legal representative of the amount of such excess; and
(C) principal and interest received by the Corporation on behalf
of a Participant shall be distributed as promptly as possible by the
Corporation or its legal representative to the Participant, net of
any Debit Balances or other amounts due to the Corporation from the
Participant pursuant to these Rules and the Procedures.
(ii) The Corporation, or its legal representative, as agent for
Participants and Limited Purpose Participants with a PICL Credit
Balance, shall liquidate the Securities then subject to the PICL in
the manner provided in Section 4 of Rule 6 of this Article II; and
(iii) Each Participant and Limited Purpose Participant with a
PICL Credit Balance shall receive, in full satisfaction of its PICL,
its pro rata share of the PICL Proceeds based upon the proportion
that its PICL Credit Balance bears to the aggregate PICL Credit
Balances of all Participants and Limited Purpose Participants.
(e) Intraday transfers subject to PICL.
Notwithstanding anything else contained in these Rules, except
as described in Subsection (c) hereof, all transfers of Securities
from any Transfer Account shall be subject to the PICL.
[FR Doc. 94-18584 Filed 7-29-94; 8:45 am]
BILLING CODE 8010-01-M