[Federal Register Volume 59, Number 179 (Friday, September 16, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-22915]


[[Page Unknown]]

[Federal Register: September 16, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34652; File No. SR-DTC-94-12] September 12, 1994.

 

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to DTC's Enhancement of its Repo Tracking System

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, as amended, (``Act'')\1\ notice is hereby given that on July 27, 
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 consists of two enhancements to DTC's Repo 
Tracking System (``RTS''). The first enhancement enables a participant 
of DTC to instruct DTC to eliminate that participant's obligation to 
DTC for a specific payment date on a CUSIP and to eliminate the 
corresponding entitlement of the participant's counterparty on that 
payment date. The second enhancement replaces the single ``catchall'' 
Repo position for each participant with a series of Repo position memo 
accounts, one for each counterparty of that participant.

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 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. 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

    The purpose of this proposed rule change is to provide a repo buyer 
an instruction to inform DTC to inhibit the buyer's debit for a 
specific income payment on a CUSIP and to inhibit the corresponding 
income payment to the counterparty. DTC's current RTS procedures 
include a Repo Deliver Order instruction (``DO'' with Reason Code 81), 
a Repo Reclaim instruction (also Reason Code 81), and a Repo Adjustment 
instruction.\2\ The first two instructions effect book-entry transfer 
of securities and also instruct DTC to adjust certain accounts, called 
``Repo positions,'' of participants. The third instruction, which can 
be issued only by a participant that is forfeiting the right to receive 
future distributions, instructs DTC to adjust Repo positions without 
effecting book-entry transfers of securities.
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    \2\For a detailed description of the Repo Deliver Order 
instruction, Repo Reclaim instruction, and Repo Adjustment 
instruction, refer to Securities Exchange Act Release No. 28579, 55 
FR 45896 [File No. SR-DTC-90-10] (order approving rule changes 
relating to procedures and processing repurchase transactions).
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    DTC's existing procedures provide for the participant obligated for 
future distributions (i.e., the repo buyer) to instruct DTC to negate 
that obligation.\3\ DTC will eliminate the participant's obligation on 
future distributions and the counterparty's (i.e., the repo seller) 
entitlement to the future distributions upon receipt of a letter of 
instruction in a prescribed form from the obligated participant. The 
proposed rule change provides that DTC will eliminate the participant's 
obligation on a specific distribution and the counterparty's 
corresponding entitlement to the specific distribution upon receipt of 
a letter of instruction in a prescribed form from the obligated 
participant.
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    \3\For a description of DTC's procedures, refer to Securities 
Exchange Act Release No. 3135 (November 30, 1992) 57 FR 57519 [File 
No. SR-DTC-92-18] (order approving rule changes relating to DTC's 
enhancement to its Repo Tracking System).
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    DTC will accept the instructions from two days before the 
distribution payment date until 11:30 a.m. (Eastern) on the 
distribution payment date. DTC will require the instructing participant 
to notify the counterparty participant, and the non-participant 
counterparty where applicable, of the instructions to DTC.
    After DTC receives an instruction, on distribution payment date it 
will process a cash adjustment offsetting the RTS entry through the 
cash adjustment (``CADJ'') function on participants terminal system 
(``PTS''). The repo seller will receive an unsolicited message 
describing the offsetting adjustment over the PTS network. This 
information also will be accessible through the CADJ inquiry 
capability. The repo buyer's daily settlement statement on payment date 
will show a debit automatically effected by RTS and a credit of equal 
amount effected by CADJ, and the repo seller's daily settlement 
statement on payment date will show an RTS credit offset by a CADJ 
debit. The CADJ adjustment will be final and will not be reversed if 
the repo seller fails to settle with DTC that day.\4\
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    \4\DTC's Rule 9, including the amendments made to Rule 9 by SR-
DTC-90-10, authorizes this procedure.
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    When DTC receives instructions to eliminate the obligated 
participant's obligation with respect to a specific distribution, DTC 
will implement the instructing participant's instructions without 
making any determination about the parties' legal obligations to each 
other. The parties to the repo transaction will then be responsible for 
settling that particular distribution payment outside of RTS. DTC will 
not be responsible for processing any further entries on the payment. 
The repo buyer's instructions will apply only to that particular 
distribution, and subsequent distributions will be tracked in RTS as 
usual.
    Currently, RTS has a single catchall repo position in which all of 
a participant's obligations and entitlements are aggregated. The 
proposed rule change will establish a separate repo position memo 
account for each participant with each of its counterparties. The 
purpose of the proposed rule change is to give participants easier 
access to information about their RTS obligation and entitlements.
    If any participant of DTC becomes insolvent or DTC ceases to act on 
its behalf, DTC's existing RTS procedures will unwind all of the 
participant's Repo positions to eliminate any DTC obligations to 
automatically allocate future distributions created by past RTS 
transactions with the terminated participant (without affecting the 
courterparties' legal obligations of right with respect to the 
terminated participant). Before permitting a participant to voluntarily 
retire, DTC will verify that the retiring participant has closed out 
all its entitlements and obligations for future distributions created 
by past Repo instructions.
    The proposed rule change is consistent with the requirements of the 
Act, specifically with section 17A of the Act, and the rules and 
regulations thereunder because it facilitates the prompt and accurate 
clearance and settlement of securities transactions by giving users of 
DTC's RTS the same degree of control over income on securities that 
they have outside DTC and by improving RTS users' access to information 
about their RTS obligations and entitlements.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.

(C) Shelf-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received from Members, Participants or Others

    DTC developed the specific payment date RTS inhibition in response 
to participants' requests to add this flexibility to existing RTS. 
Under the existing RTS, returns of principal on securities that return 
principal in periodic payments until maturity, such as collateralized 
mortgage obligations (CMOs), are paid to the repo sellers with the 
exception of the final payment at maturity. The final payment at 
maturity and redemption proceeds on other types of securities are paid 
to the repo buyers regardless of RTS status. In addition, a repo buyer 
may direct that all future distributions on a security be paid to it 
rather than the seller, consistent with the Master Repurchase Agreement 
of the Public Securities Association.
    However, participants perceived a need for specific single payment 
date RTS inhibition in cases such as when a CMO periodic payment before 
the final payment includes a principal component large enough to 
significantly affect the value of the collateral securing the repo. 
This can happen because of the volume of mortgage prepayments. For 
example, on a multi-tranche CMO a particular tranche might not be 
receiving any principal payments (with those payments allocated to 
earlier tranches), but then due to prepayments paying down the earlier 
tranches that tranche might suddenly receive a sizeable prepayment of 
principal. One participant reported incidents where the prepayment 
amounted to 50% or more of the value of the tranches. DTC's review of 
its records spotted numerous prepayments exceeding 10% of tranche value 
with some as high as 85%. Although the tranche remains outstanding, its 
value as repo collateral is dramatically decreased, and the repo buyer 
is exposed to significant credit risk until the mark-to-the-market 
payment is received.
    While a repo buyer faced with risk because of a large intermediate 
principal paydown could eliminate the risk by instructing DTC to 
redirect all future distributions on the CUSIP to the repo buyer 
instead of the repo seller,\5\ such action would deprive both the repo 
buyer and the repo seller of the advantages of RTS for future 
distributions on the CUSIP. Participants thus requested a more 
restricted method of inhibiting an RTS payout. The proposed rule change 
was developed after a number of conference with participants. DTC 
received a written comment from the Dividend Division of the Securities 
Industry Association supporting the proposed amendment to Repo 
tracking.\6\
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    \5\For a detailed description of redirecting future 
distributions, refer to Securities Exchange Act Release No. 32395 
(June 1, 1993), 58 FR 32162 [File No. SR-DTC-92-18] (order approving 
rule changes relating to DTC's enhancement of its Repo Tracking 
System).
    \6\Letter from Stephen Hopkins, President, Dividend Division of 
Securities Industry Association, to Donald Donahue, Operator and 
Reorganization Officer, DTC (January 17, 1994).
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    The software to support individual repo position memo accounts for 
each participant-counterparty combination was developed for stock loan 
income tracking, a proposed rule change that was filed separately.\7\ 
Once the programming was done, it was cost-effective to import it into 
RTS to improve participants's access to RTS information.
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    \7\Securities Exchange Act Release No. 34218 (June 15, 1994), 
[File No. SR-DTC-94-07] (notice of filing of a proposed rule change 
relating to the establishment of the stock loan income-tracking 
system).
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(iii) of the Act and Rule 19b-4(e)(4) thereunder because it 
effects a change in an existing service of DTC that does not adversely 
affect the safeguarding of securities or funds in the custody or 
control of DTC or for which DTC is responsible and does not 
significantly affect the respective rights or obligations of DTC or its 
participants. At any time within sixty days of the filing of such 
proposed rule change, the Commission may summarily abrogate such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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. Sec. 552, will be available for inspection and copying in 
the Commission's Public Reference Room at the address above.
    Copies of such filing also will be available for inspection and 
copying at the principal office of DTC. All submissions should refer to 
the file Number SR-DTC-94-12 and should be submitted by October 7, 
1994.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\17 CFR 200.30-3(a)(12) (1993).
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[FR Doc. 94-22915 Filed 9-15-94; 8:45 am]
BILLING CODE 8010-01-M