[Federal Register Volume 59, Number 188 (Thursday, September 29, 1994)] [Unknown Section] [Page 0] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 94-24043] [[Page Unknown]] [Federal Register: September 29, 1994] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-34701; File No. SR-PTC-94-03] Self-Regulatory Organizations; Participants Trust Company; Order Approving Proposed Rule Change Eliminating Deliverer's Security Interest and Adding Participant's Intraday Collateral Lien September 22, 1994. On June 23, 1994, the Participants Trust Company (``PTC'') filed with the Securities and Exchange Commission (``Commission'') a proposed rule change (File No. SR-PTC-94-03) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ The proposed rule change amends PTC's rules and procedures to eliminate the Deliverer's Security Interest (``DSI'') and to add the Participant's Intraday Collateral Lien (``PICL''). The Commission published notice of the proposed rule change in the Federal Register on August 1, 1994.\2\ The Commission received one comment letter which supported the proposal.\3\ For the reasons discussed below, the Commission is approving the proposed rule change. --------------------------------------------------------------------------- \1\15 U.S.C. Sec. 78s(b)(1) (1988). \2\Securities Exchange Act Release No. 34439 (July 25, 1994), 59 FR 39004. \3\Letter from Allen B. Clark, Senior Vice President, Chemical Bank, to Jonathan G. Katz, Secretary, Commission (August 23, 1994). The comment letter is discussed in Section II of this order. --------------------------------------------------------------------------- I. Description The proposed rule change amends PTC's rules and procedures by deleting provisions providing for DSI and adding a new Section 2A to Rule 3 of Article II of PTC's rules providing for PICL. Under PTC's processing system, each participant holds its securities on deposit at PTC in one or more master accounts. Each master account is comprised of one or more processing subaccounts. The processing 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, agency, and pledgee processing subaccount has a PTC transfer account associated with it for the intraday receipt of securities delivered or pledged versus payment. Securities are held in the transfer accounts pending transfer to the intended receiving account at settlement. Securities in the transfer accounts 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. DSI was in essence a lien on securities which were transferred versus payment granted in favor of the delivering participant.\4\ The delivering participant which delivered or pledged securities versus payment from one of its processing accounts was granted a DSI in the securities.\5\ The DSI was extinguished upon settlement at which time the securities were transferred from the transfer account to the appropriate account of the receiving participant. --------------------------------------------------------------------------- \4\DSI was a basic element of PTC's clearing and settlement mechanism as formulated by the Mortgage Backed Securities Clearing Corporation (``MBSCC''), which was the predecessor of PTC. PTC purchased the Depository Division of MBSCC from the Midwest Stock Exchange in March 1989. Refer to Securities Exchange Act Release No. 26671 (March 31, 1989), 54 FR 13266 (order granting PTC temporary registration as a clearing agency). \5\A participant which redelivered securities from transfer accounts associated with processing accounts was not granted a DSI. --------------------------------------------------------------------------- The DSI also was extinguished with respect to securities that subsequently were redelivered free or were withdrawn but was not extinguished in prefundings associated with free redeliveries or withdrawals. With respect to securities that were redelivered versus payment from a transfer account, the DSI continued in favor of the initial delivering participant. The redelivering participant was not granted a DSI and did not acquire any rights in the securities other than the right to redirect their delivery subject to PTC's rules. The securities continued to be owned by PTC, subject to the delivering participant's DSI, so long as they remained in a transfer account. Under the proposed rule change, DSI has been eliminated. In order to provide appropriate protection to participants with intraday credit balances with respect to their intraday credit exposure, such participants now will be granted a security interest in securities in transfer accounts (i.e, ``PICL''). PICL secures a participant's PICL credit balance which is the amount by which the participant's credit balances exceed its debit balances adjusted to eliminate the amount of any credits made with respect to principal and interest payments and certain funds transfers. PICL is restricted in application to an ``event of default'' which is defined in PTC's rules as the concurrence of (1) PTC's failure to achieve the cash settlement of all transactions processed through PTC and (2) either (a) any government agency which regulates PTC determining that PTC is insolvent or (b) a court with competent jurisdiction entering an order or decree adjudging PTC to be insolvent, ordering the liquidation of PTC, or approving a petition filed by a party other than PTC for the reorganization of PTC. PTC's rules governing PICL do not permit PTC itself to trigger an insolvency proceeding. The PICL terminates upon PTC's achieving settlement which occurs upon the payment by a participant of all of its debit balance. PICL also terminates with respect to securities that are pledged pursuant to the procedures set forth in PTC's rules by PTC to finance the settlement of a defaulting participant. In addition, PICL terminates with respect to securities that are transferred free, are withdrawn intraday, or are delivered to participants after an event of default. In such situations, PICL continues in prefunding amounts or in other amounts paid in connection therewith as proceeds.\6\ --------------------------------------------------------------------------- \6\PICL is structured as a perfected security interest under Sections 8-313(1)(i) and 8-321 of the New York Uniform Commercial Code. 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. PICL will have comparable results under the revisions to UCC Articles Eight and Nine as promulgated by the National Conference of Commissioners on Uniform State Laws and the American Law Institute. --------------------------------------------------------------------------- Upon an event of default by PTC, 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 as such balances exist 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 pay their debits and prefunding payments with respect to securities which were in a transfer account and were transferred free or withdrawn intraday and (b) proceeds from the sale of securities in the transfer accounts (i.e., the proceeds of securities delivered to 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. II. Discussion The Commission believes that PTC's proposed rule change is consistent with Section 17A of the Act\7\ and in particular with Sections 17A(b) (A) and (F) of the Act.\8\ Sections 17A(b) (3) (A) and (F) require, among other things, that a clearing agency and its rules be designed to assure the safeguarding of securities and funds in its custody or control or for which it is responsible. The Commission believes that PTC's proposal to eliminate DSI and to add PICL is consistent with this obligation. --------------------------------------------------------------------------- \7\15 U.S.C. Sec. 78q-1 (1988). \8\15 U.S.C. Secs. 78q-1(b) (3) (A) and (F) (1988). --------------------------------------------------------------------------- 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 dated 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, in its order temporarily approving PTC as a clearing agency under Section 17A of the Act, the Commission stated, ``Furthermore, PTC will make a number of operational and procedural changed--[T]hose changes include--[e]liminating the deliverer's security interest and replacing it with a substitute--''\9\ --------------------------------------------------------------------------- \9\Securities Exchange Act Release No. 26671 (March 31, 1989), 54 FR 13266. --------------------------------------------------------------------------- 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. PICL is the result of the continued discussions between PTC and its regulators, and the Commission believes that PICL addresses the past concerns of the FRBNY and the Commission. As previously stated, under PICL, participants with credit balances will have a security interest in the securities in the PTC transfer accounts and upon an event of default by PTC will be able to receive their securities deliveries and certain proceeds from those deliveries. PICL will have no effect on PTC's settlement process. PICL will be extinguished upon a participant's settlement or upon application of the default provisions of PTC's rules in the event of a participant's default.\10\ --------------------------------------------------------------------------- \10\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''). --------------------------------------------------------------------------- PICL will allow PTC to protect the interest of participants receiving securities. In the event that PTC is unable to effect settlement, PICL will enable net credit participants to receive their securities deliveries and be secured for their net credit balances. This should allow PTC to minimize intraday credit risk which in turn facilitates PTC's safe operation. One comment letter was received with regard to the proposed rule change from Chemical Bank.\11\ In its letter supporting the proposed rule change, Chemical Bank stated that they consider PICL to be a suitable replacement for DSI and that PICL will provide appropriate protection to participants with intraday credit balances and to clearing banks providing intraday liquidity for the PTC system and its participants. --------------------------------------------------------------------------- \11\Letter from Allen B. Clark, Senior Vice President, Chemical Bank, to Jonathan G. Katz, Secretary, Commission (August 23, 1994). --------------------------------------------------------------------------- III. Conclusion On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the Act, and in particular with Section 17A of the Act, and with the rules and regulations thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\12\ that the proposed rule change (File No. SR-PTC-94-03) be, and hereby is, approved. \12\15 U.S.C. 78s(b)(2) (1988). --------------------------------------------------------------------------- For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\13\ --------------------------------------------------------------------------- \13\17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- [FR Doc. 94-24043 Filed 9-28-94; 8:45 am] BILLING CODE 8010-01-M