[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]


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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.
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    \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.
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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.
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    \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.
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    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\
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    \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.
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    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.
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    \7\15 U.S.C. Sec. 78q-1 (1988).
    \8\15 U.S.C. Secs. 78q-1(b) (3) (A) and (F) (1988).
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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 
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\
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    \9\Securities Exchange Act Release No. 26671 (March 31, 1989), 
54 FR 13266.
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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. 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\
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    \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'').
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    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.
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    \11\Letter from Allen B. Clark, Senior Vice President, Chemical 
Bank, to Jonathan G. Katz, Secretary, Commission (August 23, 1994).
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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).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\17 CFR 200.30-3(a)(12).
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[FR Doc. 94-24043 Filed 9-28-94; 8:45 am]
BILLING CODE 8010-01-M