[Federal Register Volume 59, Number 181 (Tuesday, September 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23165]


[[Page Unknown]]

[Federal Register: September 20, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34665; File No. SR-DTC-94-07]
September 13, 1994.

 

Self-Regulatory Organization; the Depository Trust Company; Order 
Approving Proposed Rule Change Establishing the Stock Loan Income-
Tracking System

    On May 6, 1994, The Depository Trust Company (``DTC'') submitted a 
proposed rule change (File No. SR-DTC-94-07) to the Securities and 
Exchange Commission (``Commission'') pursuant to Section 19(b) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal 
appeared in the Federal Register on June 22, 1994, to solicit comment 
from interest persons.\2\ This order approves the proposal.
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    \1\15 U.S.C. Sec. 78s(b) (1988).
    \2\Securities Exchange Act Release No. 34218 (June 15, 1994), 59 
FR 32252 [File No. SR-DTC-94-07] (notice of proposed rule change).
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I. Description of the Proposal

    The purpose of the proposed rule change is to establish the stock 
loan income-tracking system that will eliminate the need for 
participants to track income distributions on their securities that are 
the subject of outstanding stock loans. The current DTC procedures 
enable participants to identify stock loan related deliver orders 
through the use of reason codes. Proper allocation of income payments 
arising from the securities that are the subject of these loans 
currently rests entirely with the lending and borrowing participants 
because DTC allocates income to participants to whom the securities are 
credited on the relevant entitlement date (i.e., the borrowing 
participants). Lending participants recover income that DTC has 
allocated to borrowing participants either through DTC's securities 
payment order service or through some other mutually agreed upon 
arrangement by the participants.
    The proposed rule change will facilitate participants' processing 
of income attributable to securities that are the subject of 
outstanding stock loans. The proposed stock loan income-tracking system 
will track and monitor participants' stock loan related deliver orders; 
will net the share amounts by participant and CUSIP; and will 
automatically credit income distributions to the proper participant on 
income payment date. To execute these functions, DTC will create a 
special stock loan memo account which will maintain a daily net balance 
of loan obligations for each stock loan counterparty of each 
participant.
    The proposed rule change provides that a party from whom 
distributions are due to be transferred may unilaterally halt all 
future distribution transfers by giving a letter of instructions to DTC 
two or more business days in advance and by giving a copy to the 
counterparty. DTC will notify the counterparty participant of any 
action taken by DTC based on the instructions. DTC will not assess the 
parties legal obligations to each other.\3\
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    \3\If the participant submitting the letter of instructions is 
in fact still legally obligated, the noninstructuring counterparty 
may seek to enforce its right to receive future distributions 
outside of DTC.
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    If a participant's account is being transferred to another 
participant due to a merger or acquisition, DTC will move the 
transferring participant's open stock loan positions to the transferee 
participant.
    If a participant is about to retire, DTC first will verify that the 
participant has closed out all its entitlements and obligations for 
future distributions created by stock loans. If DTC has ceased acting 
on behalf of a participant, DTC will determine which other DTC 
participants are stock loan counterparties and will adjust those 
participants' stock loan memo account positions in order to balance the 
elimination of DTC's obligations to and entitlements from the 
terminated participant.
    Before the stock loan income-tracking system is implemented, DTC 
will provide a means for participants to load DTC's stock loan data 
base with information about currently outstanding stock loans. 
Deliveries with a stock loan reason code made after implementation will 
automatically be added to this data base.

II. Discussion

    The Commission believes that the proposal is consistent with the 
Act and in particular Section 17A of the Act.\4\ Sections 17A (b)(3)(A) 
and (F) of the Act\5\ require that each clearing agency be organized 
and its rules be designed to assure the safeguarding of funds in the 
custody or control of the clearing agency or for which it is 
responsible. Moreover, in Section 17A(a)(1)(B) of the Act, Congress set 
forth its findings that new data processing and communication 
techniques create the opportunity for more efficient, effective, and 
safe procedures for clearing and settlement.\6\
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    \4\15 U.S.C. Sec. 78q-1 (1988).
    \5\15 U.S.C. Sec. 78q-1(b)(3)(A) and (F) (1988).
    \6\15 U.S.C. Sec. 78q-1(a)(1)(B) (1988).
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    The stock loan income tracking system is an automated system which 
will eliminate inefficient income processing by stock loan 
counterparties. Because DTC receives data related to stock loan income 
attributions in the normal course of its operations, DTC is in a good 
position to process such data and to maintain appropriate records of 
the rights and obligations of its participants to the income related to 
stock loan activity. In addition to being well situated for the 
centralized processing function, because DTC processes all data through 
its automated facilities, there should be uniform treatment of the data 
as opposed to the current system whereby stock loans income 
attributions are handled differently by each involved DTC participants. 
The Commission believes that the stock loan income tracking system 
should improve the efficiency of the income transfer and record 
keeping.
    Additional, the stock loan income tracking system is being 
implemented consistently with DTC's obligation to safeguard securities 
and funds in its custody or control. In addition to DTC normal safety 
measures, DTC has built into the system risk reduction measures such as 
provisions for the termination of future DTC obligations upon a 
participant's voluntary or involuntary termination of its membership.

III. Conclusion

    For the reasons stated above, the Commission finds that DTC's 
proposal is consistent with Section 17A of the Act.\7\
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    \7\15 U.S.C. Sec. 78q-1 (1988).
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    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (File No. SR-DTC-94-07) be, and 
hereby is, approved.
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    \8\15 U.S.C. Sec. 78s(b)(2) (1988).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\17 CFR 200.30-3(a)(12) (1992).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-23165 Filed 9-19-94; 8:45 am]
BILLING CODE 8010-01-M