[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