[Federal Register Volume 59, Number 235 (Thursday, December 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30130]


[[Page Unknown]]

[Federal Register: December 8, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35034; File Nos. SR-DTC-94-08 and SR-DTC-94-09]

 

Self-Regulatory Organization; the Depository Trust Company; Order 
Granting Temporary Approval of Proposed Rule Changes To Establish 
Procedures To Recall Certain Deliveries Which Have Created Short 
Positions as a Result of Call Lotteries and Rejected Deposits

November 30, 1994.
    On May 23, 1994, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') proposed rule 
changes (File Nos. SR-DTC-94-08 and SR-DTC-94-09) under Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'')\1\ seeking 
permanent approval of certain procedures and seeking to establish 
certain new procedures to eliminate short positions. Notice of the 
proposals was published in the Federal Register on August 24, 1994.\2\ 
For the reasons discussed below, the Commission is temporarily 
approving the proposed rule changes through May 1, 1995.
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    \1\15 U.S.C. Section 78(b)(1) (1998).
    \2\Securities Exchange Act Release No. 34561 (August 19, 1994), 
59 FR 44441.
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I. Description

    Collectively, the proposed rule changes seek (1) permanent approval 
of DTC's existing procedures to recall securities deliveries which have 
created short positions as a result of call lotteries and (2) to expand 
the procedures to recall securities deliveries which have created short 
positions as a result of rejected deposits. The Commission previously 
granted temporary approval to the procedures relating to recall of 
short positions created as a result of call lotteries.\3\
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    \3\For a complete description and discussion of the procedures 
designed to help eliminate short positions caused by call lotteries, 
refer to Securities Exchange Act Release No. 30552 (April 2, 1992), 
57 FR 12352 [File No. SR-DTC-90-02] (order approving proposed rule) 
change on a temporary basis until April 1, 1994).
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    File No. SR-DTC-94-08 seeks permanent approval of the procedures 
that enable participants to recall book-entry deliveries of callable 
securities\4\ if the participants' accounts become short as a result of 
deliveries made between the call publication date\5\ and the date of 
DTC's call lottery.\6\ File No. SR-DTC-94-09 seeks to expand the 
procedures to allow participants to recall book-entry deliveries of 
securities if the participants' accounts become short because 
securities previously deposited at DTC are rejected by the transfer 
agent within ninety days of deposit for registered securities and 
within nine months for bearer securities.\7\ If securities are rejected 
by the transfer agent after ninety days or nine months from the date of 
deposit at DTC, participants will not be able to recall the book-entry 
delivery, and therefore, their accounts will remain short.
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    \4\A callable security is either preferred stock or bonds which 
the issuer is permitted or required to redeem.
    \5\The call publication date is the date on which the issuer 
gives notice of redemption.
    \6\DTC has established a lottery process to allocate securities 
in a partially called issue among participants having positions in 
the issue. DTC allocates the called securities among participants 
that had positions in the issue on the call publication date rather 
than on the day when the lottery was held. Securities Exchange Act 
Release No. 21523 (November 27, 1984), 49 FR 47352 [File No. SR-DTC-
84-09] (notice of filing and immediate effectiveness of proposed 
rule change).
    \7\Under DTC procedures, a participant depositing securities 
receives immediate credit in its securities account (i.e., before 
the certificates are sent to the transfer agent for transfer and 
registration in the name of DTC's nominee). Once the participant's 
account is credited, the securities are available to the depositing 
participant for deliveries, withdrawals, and pledges. If the 
transfer agent rejects a transfer after the depositing participant 
has made a book-entry delivery of the credited securities, 
elimination of the credit from the participant's account may create 
a short position. The proposed rule change will enable the 
depositing participant to reclaim the securities from the 
participant that received the book-entry delivery.
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    The procedures will allow a participant with a short position to 
initiate the recall process within ten business days of the short 
position being created by sending a broadcast message directly to the 
receiver of the book-entry delivery. Participants will be able to 
transmit this message through DTC's Participant Terminal System 
network. The receiving participant will have five business days to 
comply with the recall request if the participant has a position in 
that security at DTC. If the receiving participant no longer has such a 
position at DTC, it must comply with the recall request within fifteen 
business days.\8\ If the short position is less than the amount of the 
delivery, the receiver has the option to return the entire delivery or 
just the portion which is short. If the receiving participant does no 
comply with the recall request within the applicable time, the 
recalling participant may request DTC's intervention.\9\ Recalls will 
only reverse the book-entry delivery; the original transaction still 
must be settled by the delivering and receiving participants (i.e., the 
delivering participant must deliver securities to the receiving 
participant).
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    \8\A reclamation can create a short position in the receiving 
participant's account if the securities already have been delivered 
to another party or withdrawn, from DTC. In the event of further 
redeliveries, each redelivering participant also will have ten 
business days from the time its account is driven short to recall 
the securities in order to eliminate its respective short position.
    \9\The intervention request must be submitted to DTC no later 
than twenty-five days after the original reclamation request was 
made.
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II. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency, such as DTC, be designed to promote the prompt and 
accurate clearance and settlement of securities transactions and to 
assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible.\10\ The Commission believes that the proposals are 
consistent with DTC's obligations under Section 17A(b)(3)(F) because 
the proposed procedures should help reduce the number of short 
positions created either by call lotteries or rejected deposits. In 
addition, although DTC participants are generally aware that due to the 
existence of short positions DTC may not have access to physical 
securities corresponding to participants' long positions and even 
though participants with short positions are required to deposit with 
DTC 130% of the positions' market value, the Commission believes that 
DTC's procedures are desirable because by reducing the number of short 
positions DTC better protects itself and its participants against 
market risk associated with the short positions.
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    \10\15 U.S.C. Section 78q-1(b)(3)(F).
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    However, the Commission realizes that the proposed reclamation 
procedures could cause broker-dealers inadvertently to create 
possession or control deficits.\11\ Therefore, the Commission believes 
that the proposed rule changes should be carefully monitored before the 
procedures become permanent. For this reason the Commission is 
temporarily approving the proposed rule changes through May 1, 1995.
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    \11\The Commission is concerned with the proposals' impact on 
Rule 15c3-3 under the Act [17 CFR 240.15c3-3]. This rule requires 
broker-dealers to obtain and thereafter maintain physical possession 
or control of fully-paid securities and excess margin securities 
carried by a broker-dealer for the account of a customer [17 CFR 
240.15c3-3(b)(1)]. If as a result of a recall procedure, DTC 
reverses the delivery of a security that is a fully-paid or excess 
margin security, the participant could incur a deficit in the number 
of securities that should be under its physical possession or 
control.
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule changes are consistent with the requirements of the Act 
and in particular with the requirements of Section 17A of the Act and 
the rules and regulations thereunder.
    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule changes (File Nos. SR-DTC-94-08 and SR-
DTC-94-09) be, and hereby are, approved through May 1, 1995.

    \12\15 U.S.C. Section 78s(b)(2).
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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) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-30130 Filed 12-7-94; 8:45 am]
BILLING CODE 8010-01-M