[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