[Federal Register Volume 59, Number 233 (Tuesday, December 6, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29933]


[[Page Unknown]]

[Federal Register: December 6, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35022; File No. SR-PHILADEP-91-03]

 

Self-Regulatory Organizations; Philadelphia Depository Trust 
Company; Order Approving a Proposed Rule Change Establishing Procedures 
Whereby PHILADEP Interfaces With The Depository Trust Company's Same-
Day Funds Settlement Services

November 29, 1994.
    On December 3, 1991, the Philadelphia Depository Trust Company 
(``PHILADEP'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-PHILADEP-91-03) 
under Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ to codify PHILADEP's accommodation procedures whereby a 
PHILADEP participant can gain access to same-day funds settlement 
(``SDFS'') services provided by The Depository Trust Company (``DTC''). 
Notice of the proposal was published in the Federal Register on May 28, 
1993.\2\ No comment letters were received. On September 27, 1994, 
PHILADEP amended the proposal in the following respects:\3\ (i) 
PHILADEP seeks to increase the number of transactions\4\ that may be 
processed in the system to one hundred (100) per day as opposed to the 
limitation of fifty (50) per day that was set forth in the notice of 
proposed rule change and (ii) PHILADEP will approve a transaction once 
the participant acknowledges the transaction and approves it unless the 
PHILADEP Interface Department determines that the participant needs to 
make a prepayment or pledge additional collateral to its account at 
PHILADEP to ensure that the transaction will not cause the participant 
to exceed its net debit cap or collateralization control.\5\ These 
amendments are technical in nature and do not require republication of 
notice and filing. For the reasons discussed below, the Commission is 
approving the proposed rule change subject to the following 
limitations: (i) PHILADEP's program is limited to one PHILADEP 
participant and, (ii) the number of transactions that may be processed 
is limited to one hundred per day.\6\
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\Securities Exchange Act Release No. 32347 (May 21, 1993), 58 
FR 31058.
    \3\Letter from Keith Kessel, Compliance Officer, PHILADEP, to 
Peter Geraghty, Staff Attorney, Division of Market Regulation, 
Commission (September 21, 1994).
    \4\Infra note 6.
    \5\The third amendment clarifies the language in the notice of 
proposed rule change describing the above-referenced procedure. The 
amendment produces the same effect of requiring the participant to 
advance more funds or collateral before PHILADEP will accept or 
acknowledge the deposit.
    \6\For calculation purposes, a transaction is a securities 
delivery made to or from the participant's PHILADEP SDFS account 
whether free or against payment.
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I. Description

    To accommodate a PHILADEP participant that desires to settle its 
SDFS transactions through the facilities of a securities depository 
registered with the Commission, PHILADEP has become a participant in 
DTC's SDFS system. Consequently, PHILADEP will be the conduit for its 
participant's SDFS transactions. PHILADEP, as a participant in DTC's 
SDFS, will be required to make a deposit to DTC's SDFS Fund. PHILADEP 
will collect the SDFS Fund deposit from the participant taking part in 
PHILADEP's SDFS system. PHILADEP has no beneficial interest in any SDFS 
transactions and will not initiate any such transactions for its own 
account. Therefore, the extent of activity and concomitant collateral 
necessary to be posted to support such activity pursuant to the 
PHILADEP/DTC agreement will be collected directly from the PHILADEP 
participant generating the SDFS activity. In addition, the settlement 
debits and credits created by the activity in PHILADEP's account at DTC 
will be collected from or paid to the PHILADEP participant.
    DTC will charge PHILADEP its normal SDFS service fees, and PHILADEP 
will pass these fees to its participant making use of the linked 
service. This participant must execute a separate agreement with 
PHILADEP explicitly agreeing to abide by PHILADEP's relationship with 
DTC in connection with the provisions of SDFS services. Specifically, 
PHILADEP requires its participant to abide by DTC's rules and 
procedures governing the SDFS system. For example, DTC's SDFS security 
eligibility rules, instruction forms, processing cut-off windows, and 
risk controls are all directly incorporated as requirements to be 
followed by PHILADEP and its participant. PHILADEP's participant is 
provided with copies of DTC's SDFS procedures manual and is instructed 
to follow these procedures. Interdepository delivery orders cannot 
occur unless PHILADEP has an adequate SDFS securities position at DTC.
    To enhance further the risk reduction measures built into DTC's 
SDFS system (e.g.,) net debit caps and collateralization controls), 
PHILADEP has established additional safeguards consistent with DTC's 
SDFS procedures with respect to its participant using the SDFS system. 
Each SDFS transaction authorization request on a delivery to be 
received from DTC is directed by PHILADEP's Interface Department to the 
PHILADEP participant for verification and approval or cancellation of 
the request.\7\ If the participant acknowledges the transaction and 
approves it,\8\ PHILADEP will verify that the transaction will not 
cause PHILADEP to exceed its net debit cap or collateralization 
controls at DTC, and concomitantly will not cause the participant at 
PHILADEP to exceed its net debit cap and collateralization controls at 
PHILADEP.\9\ Only if the participant has sufficient funds and 
collateral in its account will PHILADEP authorize the delivery to be 
completed and credit the securities to the participant's account. If 
the participant has insufficient funds or collateral in its account, 
the transaction will recycle, and PHILADEP will contact the participant 
and allow the participant to post additional funds or collateral to 
permit the transaction to complete processing.\10\
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    \7\The participant must indicate a reason when cancelling a 
transaction.
    \8\The process of a participant acknowledging a transaction and 
approving it is known as receiver authorized delivery.
    \9\Because PHILADEP's account at DTC is an omnibus account and 
PHILADEP's program is limited to one PHILADEP participant, 
PHILADEP's net debit cap and collateralization requirement at DTC is 
the net debit cap and collateralization requirement for the 
participant in PHILADEP's program.
    \10\As an absolute protection from intraday settlement risk, 
PHILADEP in most instances will require its participant to have or 
deliver 100% of the funds to its account before PHILADEP authorizes 
the receipt of SDFS securities.
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    When the PHILADEP participant must deliver SDFS securities, the 
PHILADEP participant sends instructions via facsimile to PHILADEP's 
Interface Department on or before the established cut-off times that 
are consistent with DTC established procedures. PHILADEP, on behalf of 
its participant, then sends notification of the delivery to DTC, but 
only after PHILADEP confirms that its participant has a current 
position in the subject security. Once DTC determines the transaction 
will not cause its participant or PHILADEP to exceed their respective 
net debit caps or collateralization controls and allows the transaction 
to be completed, PHILADEP will credit the participant's account. 
Finally, PHILADEP and DTC reconcile PHILADEP's positions in SDFS 
eligible securities on account at DTC each day, and PHILADEP reconciles 
its individual participant's positions that reflect that aggregate.
    Because PHILADEP's SDFS system is offered as an accommodation to 
its participant, PHILADEP will restrict use of the system to the one 
participant currently using the system and will restrict the number of 
transactions that may be processed in the system to one hundred per 
day.\11\ Future expansion of the SDFS system is dependent, among other 
things, upon PHILADEP's operational capabilities and will require the 
filing of a proposed rule change under Section 19(b)(2) of the Act.
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    \11\Supra footnote 6.
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II. Discussion

    The Commission believes that PHILADEP's proposal is consistent with 
Section 17A of the Act and specifically with Sections 17A(b)(3)(A) and 
(F).\12\ Sections 17A(b)(3)(A) and (F) require that a clearing agency 
be organized and its rules be designed to facilitate and promote the 
prompt and accurate clearance and settlement of securities transactions 
and to assure the safeguarding of securities and funds in the clearing 
agency's custody or control or for which it is responsible. The 
Commission believes that PHILADEP's proposal to incorporate the 
safeguards proposed in DTC's SDFS system (e.g. collateralization 
controls, net debit caps, receiver-authorized delivery, and SDFS Fund 
deposit) should help protect PHILADEP from the failure of the PHILADEP 
participant to meet its settlement obligation to PHILADEP. For example, 
the collateralization control requires that the participant have 
sufficient collateral in its account to cover any projected net 
settlement debit. This assures that the transactions do not result in 
financial loss to PHILADEP. The net debit cap helps to protect against 
abnormal intraday debit peaks that are out of line with the 
participant's prior month's average daily activity level. The third 
safeguard is the receiver-authorized delivery instructions which allow 
the participant to monitor deliveries directed to its account before 
the deliveries are posted to its account. The SDFS Fund protects 
PHILADEP from losses from defaults by providing a source of liquidity 
in the SDFS system. These incorporated safeguards will not operate 
independently but will function as an interdependent set of controls 
that will help ensure the safety of PHILADEP's interface with DTC.
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    \12\15 U.S.C. 78q-1(b)(3) (A) and (F) (1988).
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    Section 17A(b)(3)(F) also requires that the rules of a clearing 
agency foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions and to remove 
impediments to and perfect the mechanism of a national system for the 
prompt and accurate clearance and settlement of securities 
transactions. The Commission believes that PHILADEP's proposal is 
consistent with this section of the Act because the interface will 
provide the PHILADEP participant with the ability to have its 
transaction in SDFS securities efficiently processed through the 
facilities of a clearing agency thus avoiding the inefficiencies 
inherent in the settlement of SDFS securities outside the automated 
facilities of a securities clearing agency.

III. Conclusion

    The Commission finds that PHILADEP's proposal is consistent with 
the requirements of the Act and particularly with Section 17A and the 
rules and regulations thereunder.
    It is therefore ordered, Pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-PHILADEP-91-03) be, and 
hereby is, approved.

    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) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-29933 Filed 12-5-94; 8:45 am]
BILLING CODE 8010-01-M