[Federal Register Volume 60, Number 30 (Tuesday, February 14, 1995)]
[Notices]
[Pages 8434-8435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3566]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35342; File No. SR-DTC-94-19]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change Regarding Implementation of 
New Guidelines Regarding Principal and Income Payments in a Same-Day 
Funds Environment

February 8, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 5, 1994, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
primarily by DTC. On January 24, 1995, DTC amended the proposed rule 
change to include a statement that the proposed rule change did not 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.\2\ The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\Letter from Piku Thakkar, Assistant Counsel, DTC, to Peter R. 
Geraghty, Division of Market Regulation, Commission (January 24, 
1995).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change consists of modifications to the existing 
operational arrangements necessary for a securities issue to become 
eligible for DTC's services. Specifically, the rule change calls for 
changes to the processing of principal and income distributions in a 
same-day funds environment.\3\

    \3\Same-day funds, which are also known as ``Fed funds'', are 
immediately available for redelivery on the day of receipt.
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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 places 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

    DTC's operational arrangements are designed to maximize the number 
of issues that can be made depository eligible while ensuring orderly 
processing and timely payments to participants. DTC's experience 
demonstrates that when issuers, underwriters, and their counsel are 
aware of DTC's requirements those requirements can be met almost 
without exception.\4\ The purpose of the proposed rule change is to 
incorporate in DTC's operational arrangements memorandum principles for 
the processing of principal and income payments in same-day funds.\5\ 
Towards this end, the operational arrangements memorandum will 
incorporate the relevant provisions of the ``Standards 
[[Page 8435]] for Principal and Income Payments Guidelines'' 
established by the U.S. Working Committee of the Group of Thirty. These 
principles will become a part of DTC's income and reorganization/
redemption payments standards.

    \4\During 1993, a total of 392,000 new issues were made eligible 
for DTC's services. This was 99.94% of all new issues submitted to 
DTC's Underwriting Department for eligibility determinations. These 
figures include equity, corporate debt, municipal debt, and U.S. 
Government and Agency securities. In the unusual circumstance where 
the processing characteristics of a new issue that is being 
structured would not meet DTC's operational arrangements, if 
contacted early enough in the planning process DTC staff often is 
able to assist in suggesting restructuring alternatives that would 
permit the issue to be made depository eligible.
    \5\DTC's operational arrangements memorandum was published in 
June 1987 and was updated in both June 1988 and February 1992. For a 
complete description of the operational arrangements memorandum, 
refer to Securities Exchange Act Release No. 24818 (August 19, 
1987), 52 FR 31833 [File No. SR-DTC-87-10] (order approving the 
implementation of DTC's operational arrangements for the eligibility 
of security issues), and Securities Exchange Act Release No. 30625 
(April 30, 1992), 57 FR 18534 [File No SR-DTC-92-06] (order 
approving modifications to DTC's operational arrangements).
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    First, DTC proposes that all new issues be required to meet 
depository-eligibility requirements and must be structured so that all 
payments to depositories of principal and income are made in same-day 
funds on payment date by 2:30 p.m. Eastern Standard time.
    Second, for all depository-eligible issues already outstanding, 
paying agents must remit to DTC all principal and income payments in 
same-day funds on payment date by 2:30 p.m. Eastern Standard time 
according to existing arrangements between the paying agent and DTC. 
Recognizing that paying agents for certain issues may need to modify 
their current business arrangements to account for this change, DTC 
will continue to pay through July 31, 1996, the same rebates as paid 
now to paying agents that result from paying agents municipal interest 
and municipal and corporate redemptions to DTC in same-day funds on 
payment date.
    However, once DTC converts to same-day funds settlement for all 
security transactions, DTC will not have investment funds available to 
rebate to paying agents because DTC intends to make all payments to its 
participants on payment date in same-day funds. Recognizing that 
participants will benefit by receiving all their expected payments in 
same-day funds on payment date, from the date of the conversion to 
same-day funds settlement for all security transactions until July 31, 
1996, DTC will charge participants in proportion to their holdings in 
each issue for which a rebate applies the funds needed to pay the 
rebate. With respect to payments made on or after August 1, 1996, these 
charges to participants will no longer be required. The rebate will not 
be applied to payments of corporate interest, dividends, and 
reorganizations in which the paying agent already pays DTC in same-day 
funds on payment date. These payments currently are not subject to 
interest earnings rebates. However, DTC will require that 100% of 
corporate interest, dividend, and reorganization payments be paid to 
DTC in same-day funds on payment date by 2:30 p.m. Eastern Standard 
time.
    Third, DTC will require paying agents to provide DTC with the CUSIP 
numbers for each issue for which payment is being sent as well as the 
dollar amount of the payment for each issue no later than noon Eastern 
Standard time on the payment date. Notification of payment details 
should be made using automated communications.
    Finally, if an issuer or agent continually fails to make payment as 
called for in the guidelines, DTC may decide to systematically prevent 
the allocation of such payments to participants on the payable date. 
Eventually, DTC may also elect to deny depository eligibility to issues 
brought to market by non-complying issuers or agents.
    The proposal also seeks to amend the operational arrangements 
memorandum to introduce the use of a ``Blanket Letter of 
Representations.'' This document will be submitted by an issuer to DTC 
only once for all issues thus eliminating the need for individual 
letters of representations for book-entry-only issues under certain 
circumstances.
    DTC believes that 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 proposal will facilitate the 
prompt and accurate clearance and settlement of securities transactions 
by promoting the immobilization of securities.

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

    DTC indicated that it did not believe that the proposed rule change 
would impose any burden on competition not necessary or appropriate in 
the furtherance of the purposes of the Act.

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

    DTC's operational arrangements were developed in close consultation 
with many bond trustees, issuers' agents, participants, and industry 
groups throughout the country in order to assure that these processing 
standards can be met. DTC has disseminated these memoranda widely to 
corporate and public finance professionals, underwriters, bond counsel, 
and issuers so that they may consider whether documentation relating to 
issues sought to be made depository-eligible adequately accommodates 
these requirements.
    In addition, both industry organizations and self-regulatory 
organizations have endorsed the four principles discussed above. These 
organizations include the American Bankers Association, the Bank 
Depository User Group, the Government Finance Officers Association, the 
Municipal Securities Rulemaking Board (``MSRB''),\6\ the Public 
Securities Association, and the Reorganization Division, Dividend 
Division, Securities Operations Division, and the Operations Committee 
of the Securities Industry Association.

    \6\The MSRB has, however, raised questions about how these 
guidelines would be enforced.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) As the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the self-regulatory organization consents, 
the Commission will:
    (A) By order approve such proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 Section, 450 Fifth Street, NW., 
Washington, DC. 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-94-19 and should be submitted by 
March 7, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to the delegated authority.\7\

    \7\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-3566 Filed 2-13-95; 8:45 am]
BILLING CODE 8010-01-M