[Federal Register Volume 59, Number 195 (Tuesday, October 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25002]


[[Page Unknown]]

[Federal Register: October 11, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34779; File No. SR-DTC-94-13]

 

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Order Granting Accelerated Approval on a Temporary 
Basis of Proposed Rule Change Implementing the Prime Broker Option in 
the Institutional Delivery System

October 3, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 12, 1994, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-DTC-94-13) as described in Items I and II 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 and to grant accelerated approval of the proposed rule change 
on a temporary basis through May 31, 1995.
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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 involves the primary broker option in 
DTC's Institutional Delivery (``ID'') system and will permit DTC's ID 
system to be used for the confirmation and affirmation of trades which 
are to be settled by prime brokers. The proposed rule change also 
includes a procedure whereby prime brokers can disaffirm trades which 
they previously had affirmed.

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 place 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

    In its letter dated January 25, 1994, to the Prime Brokerage 
Committee of the Securities Industry Association (``Prime Brokerage 
Committee''), the Division of Market Regulation (``Division'') 
specified certain conditions for providing prime brokerage services, 
including requiring that the parties to a prime broker arrangement 
utilize the facilities of a clearing agency registered pursuant Section 
17A of the Act\2\ to confirm and affirm prime broker transactions.\3\ 
DTC is a clearing agency registered pursuant to Section 17A of the Act. 
The proposed rule change contains procedures which will permit DTC's ID 
system to be used to comply with the Division's prime broker letter and 
to facilitate the option of settling affirmed prime broker trades 
through the National Securities Clearing Corporation's (``NSCC'') 
continuous net settlement (``CNS'') system.
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    \2\15 U.S.C. 78q-1 (1988).
    \3\Letter from Brandon Becker, Director, Division, Commission, 
to Jeffrey Bernstein, Prime Broker Committee (January 25, 1994).
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    A prime broker is a broker-dealer participating in the ID system 
that provides a custodial facility for institutional customers. Under 
the proposed rule change, broker-dealers that are members of both DTC 
and the NSCC and that participate in DTC's ID system and NSCC's CNS 
system, will have the option to settle affirmed prime broker trades 
through the ID system or through NSCC's CNS system. A common member 
executing trades on behalf of an institutional customer (``executing 
broker'') will report trade details to DTC for initial processing 
through the ID system. At the time of submission, the executing broker 
will be required to determine whether a trade will settle on a trade-
for-trade basis through the ID system or through CNS. If the executing 
brokers choose the former, the trade will settle through DTC's 
customary ID procedures. If the executing brokers chooses to settle the 
trade through CNS, they will submit a prime broker's CNS agent ID 
number to DTC when reporting the details of the trade.\4\
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    \4\Prime brokers are required to maintain two or more agent ID 
numbers. One of these numbers will be reserved as a special number 
to be used only for trades that are directed to settle through 
NSCC's CNS system.
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    After the executing broker reports a trade to DTC using a prime 
broker's CNS number, DTC will complete its usual ID confirmation and 
affirmation processing. Conformations will be issued by the morning of 
the next business day after the trade date. The prime broker will 
affirm the trade if their information matches the information received 
from the executing brokers.\5\ The trades then will be submitted to 
NSCC through CCF\6\ on the night of T+2 for clearance and settlement 
following normal CNS settlement procedures.
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    \5\Trades affirmed on T+3 revert to trade-for-trade settlement. 
Trade-for-trade information appears on the ID system's cumulative 
eligible trade reports which are available to the executing and 
prime brokers.
    \6\CCF is DTC's acronym for ``Computer to Computer Facility.'' 
CCF is used for direct computer to computer communication between 
DTC and its participants' IBM mainframe computers.
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    Trades entered into the CNS system will settle like routine CNS 
trades. NSCC will combine prime brokers' and executing brokers' 
positions with their other respective CNS positions in securities of 
the same issue to arrive at a net deliver or net receive obligation for 
each issue. After establishing such net deliver or net receive 
obligations for the prime brokers and executing brokers, NSCC will 
guarantee their respective obligations. Pursuant to NSCC's standard CNS 
procedures, money settlement for these trades will occur at NSCC while 
deliveries of securities will occur at DTC.
    The proposed rule change also includes procedures whereby prime 
brokers can disaffirm trades which they previously had affirmed. A 
disaffirming prime broker will notify both DTC and the executing broker 
within identified DTC established time frames through DTC's 
participants terminal system that a previously affirmed ID prime broker 
trade is being disaffirmed. The prime broker simultaneously must call a 
director or vice president of DTC's ID department to alert DTC of the 
disaffirmation. DTC will verify that each disaffirmation instruction 
matches an existing ID trade, and on a ``best effort'' basis, DTC will 
attempt to contact the executing broker by telephone to inform it of 
the disaffirmation. DTC then will determine the settlement mode of the 
trade to be disaffirmed (e.g., trade-for-trade or CNS). If the trades 
to be disaffirmed are scheduled to settle trade-for-trade or outside 
DTC and NSCC, DTC is not required to take further action. For trade-
for-trade settlement, prime brokers will not deliver on the sell side 
or will reclaim the transaction on the buy side. For trades settling 
outside DTC and NSCC, prime brokers will block settlement through their 
agents or correspondents.
    If the disaffirmed trades are scheduled to settle in CNS, DTC will 
fax disaffirmation information to the proper department at NSCC, and 
DTC will confirm the information with telephone calls to NSCC. NSCC 
will acknowledge disaffirmation instructions in writing to DTC, and 
NSCC will effect journal entries to reverse the settlement obligations 
of the prime brokers and will reestablish the settlement obligations of 
the executing brokers. On a best effort basis, NSCC will telephone the 
executing brokers to advise them of the disaffirmation. Prior to the 
June 1995 conversion to three business days as the standard settlement 
period,\7\ DTC will develop an automated mechanism that prime brokers 
can utilize to disaffirm previously affirmed trades.\8\
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    \7\For a detailed description of the conversion to three 
business day settlement, refer to Securities Exchange Act Release 
No. 33023 (October 6, 1993) 58 FR 52891. (Order adopting Rule 15c6-
1)
    \8\In early 1995, DTC expects to file a proposed rule change 
with the Commission under Section 19(b)(1) of the Act to implement 
as an optional enhancement to the ID system, an advice of correction 
feature, which will enable the prime broker to ``DK'' a trade (i.e., 
to indicate to the executing broker that the prime broker does not 
intend to clear and settle the trade).
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    DTC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act and the rules and regulations 
thereunder applicable to DTC because the proposed rule change will 
promote efficiencies in the clearance and settlement of prime broker 
trades. The proposed rule change will be implemented consistently with 
the safeguarding of securities and funds in DTC's custody or control or 
for which it is responsible because the proposed rule change will be 
implemented as an option in DTC's ID system.

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

    DTC perceives no impact on competition by reason of the proposed 
rule change.

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

    The proposed rule change has been discussed with the Prime 
Brokerage Committee. Written comments from DTC Participants or others 
have not been solicited or received on the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Section 17A(a)(1)(C) of the Act sets forth Congress findings that 
new data processing and communications techniques create the 
opportunity for more efficient, effective, and safe procedures for 
clearance and settlement.\9\ Section 17A(a)(2)(A)(ii) of the Act 
directs the Commission to facilitate the establishment of linked or 
coordinated facilities for the clearance and settlement of securities 
transactions.\10\ The Commission believes the proposed rule change will 
further these goals by facilitating the confirmation and affirmation of 
prime broker transactions through DTC's ID system and by facilitating 
the settlement of prime broker trades through either DTC or NSCC. 
Section 17A(b)(3)(F) of the Act requires that rules of a clearing 
agency promote the prompt and accurate clearance and settlement of 
securities transactions and assure the safeguarding of securities and 
funds which are in the custody or control of the clearing agency or for 
which it is responsible.\11\ The Commission believes that the proposal 
is consistent with DTC's responsibilities under Section 17A of the Act 
because the proposal will facilitate the option of having prime broker 
trades settled in NSCC's CNS system, which should promote efficiency by 
having those trades netted with the prime brokers' and executing 
brokers' other positions in the same security. The Commission further 
believes that the proposal is consistent with DTC's responsibility to 
safeguard securities and funds because utilizing the ID system for 
confirming, affirming, and disaffirming prime broker trades should help 
provide standardized procedures by which the respective parties can 
perform their duties in settling prime broker transactions.
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    \9\15 U.S.C. 78q-1(a)(1)(C).
    \10\15 U.S.C. 78q-1(a)(2)(ii).
    \11\15 U.S.C. 78q-1(b)(3)(F).
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    DTC has requested that the Commission find good cause for approving 
the proposed rule changes prior to the thirtieth day after the date of 
publication of notice of the filing. The Commission finds good cause 
for so approving the proposed rule because accelerated approval will 
enable prime brokers and executing brokers to confirm and affirm prime 
broker transactions through the ID system and to have the option to 
settle these trades in CNS as soon as possible. Furthermore, 
accelerated approval will allow the effective date of the temporary 
approval of DTC's prime broker option to coincide with the effective 
date of the prime broker letter issued by the Division.\12\ In 
addition, the Commission previously published notice of a similar DTC 
proposal\13\ that sought to establish the same prime broker option as 
is the subject of this current filing; the earlier proposed rule change 
did not generate any comment letters, and none are expected on DTC's 
current proposal.
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    \12\Letter from Michael A. Macchiaroli, Associate Director, 
Division, Commission to Jeffrey C. Bernstein, Prime Broker 
Committee, and to Seth J. Gersch, Committee of Executing Brokers 
(July 18, 1994).
    \13\Securities Exchange Act Release No. 28048 (May 18, 1994), 55 
FR 22121 [File No. SR-DTC-90-05] (notice of proposed rule change). 
On April 20, 1994, DTC withdrew File No. SR-DTC-90-05 from 
consideration so that DTC could reevaluate the prime broker option 
in light of the Division's letter dated January 25, 1994. Supra note 
3. Letter from Carl H. Urist, Deputy General Counsel, DTC to Jerry 
W. Carpenter, Branch Chief, Division, Commission (April 20, 1994).
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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, NW., Washington, DC 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. 552, will be available for inspection and copying in the 
Commission's Public Reference room, 450 Fifth Street, NW., Washington, 
DC 20549. Copies of such filing will also be available for inspection 
and copying at the principal office of DTC. All submissions should 
refer to the File No. SR-DTC-94-13 and should be submitted by November 
1, 1994.
    It is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\14\ that the proposed rule change (File No.SR-DTC-94-13) be, and 
hereby is approved on a temporary basis through May 31, 1995.

    \14\15 U.S.C. 78s(b)(2).
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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\17 CFR 200.30-3(a)(12) (1994).
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[FR Doc. 94-25002 Filed 10-7-94; 8:45 am]
BILLING CODE 8010-01-M