[Federal Register Volume 60, Number 57 (Friday, March 24, 1995)]
[Notices]
[Pages 15618-15619]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-7238]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35506; File No. SR-NYSE-94-40]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change Relating to Implementation of a 
Three-Day Settlement Standard

March 17, 1995.
    On November 3, 1994, the New York Stock Exchange, Inc., (``NYSE'') 
filed a proposed rule change (File No. SR-NYSE-94-40) with the 
Securities and Exchange Commission (``Commission'') pursuant to Section 
19(b) of the Securities Exchange Act of 1934 (``Act'').\1\ Notice of 
the proposal was published in the Federal Register on December 23, 1994 
to solicit comments from interested persons.\2\ The Commission received 
one comment letter.\3\ As discussed below, this order approves the 
proposed rule change.

    \1\15 U.S.C. 78s(b) (1988).
    \2\Securities Exchange Act Release No. 35110 (December 16, 
1994), 59 FR 35011.
    \3\Letter from Dr. Keith B. Jarrett, President, Thomson Trading 
Services, Inc., to Jonathan G. Katz, Secretary, Commission (January 
12, 1995).
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I. Description

    In October 1993, the Commission adopted Rule 15c6-1 under the 
Act\4\ which establishes three business days after the trade date 
(``T+3''), instead of five business days (``T+5''), as the standard 
settlement cycle for most securities transactions. The rule will become 
effective June 7, 1995.\5\ Several of the current NYSE's rules are 
interrelated with a T+5 settlement time frame. The purpose of the rule 
change is to amend NYSE's rules to be consistent with a T+3 settlement 
standard for securities transactions.

    \4\17 CFR 240.15c6-1.
    \5\Securities Exchange Act Release Nos. 33023 (October 6, 1993), 
58 FR 52891 (order adopting Rule 15c6-1) and 34952 (November 9, 
1994), 59 FR 59137 (order changing the effective date from June 1, 
1995, to June 7, 1995).
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    NYSE Rules 64(a)(3), 65(b), and 85(d)(3) specify the delivery date 
for securities sold in regular way transactions, odd lot sales, and 
cabinet sales, respectively. The time frames contained in each rule is 
being shortened to conform to a T+3 settlement cycle. Rule 64(a)(5) 
currently provides that on the second, third, fourth, and fifth 
business days preceding the final day for subscription, bids, and 
offers in rights to subscribe shall be made only for delivery next day. 
This section is being amended to eliminate references to the fourth and 
fifth business days. Rule 64(c) is being amended to provide that 
seller's option trades can settle on the third business day, rather 
than the fifth business day, after the trade date.
    Rule 235 is being amended to provide that transactions in stocks 
shall be ex-dividend or ex-rights on the second business day preceding 
the record date rather than on the fourth business day. With regard to 
a record date on a day other than a business day, transactions in 
stocks shall be ex-dividend or ex-rights on the third preceding 
business day rather than on the fifth preceding business day. The time 
frame contained in Rule 257 for delivery of dividends or rights for 
securities sold before the ``ex'' date but delivered after the record 
date is being shortened to three days after record date.
    Rule 236 prescribes when ex-warrant trading will begin. The ex-
warrant period is being changed to the second business day preceding 
the date of expiration of the warrants instead of the fourth business 
day. When warrant expiration occurs on other than a business day, the 
ex-warrant period will begin on the third business day preceding the 
expiration date instead of on the fifth business day.
    Rule 387(a)(4) requires a member to obtain an agreement from its 
customer to deliver instructions to its agent within certain time 
periods with respect to receipt and delivery of securities sold 
delivery versus payment (``DVP'') or receipt versus payment (``RVP''). 
All the time frames contained in Rule 387(a)(4) are being shortened by 
two days. Rule 123A.32 currently states that the liability of a 
specialist shall not extend beyond the closing price on the third 
business day where it is deemed that the specialist did not send out a 
report. This time frame is being shortened by two business days. The 
proposal shortens the time frames contained in Rule 123B(b)(2) (A) and 
(B) for correcting [[Page 15619]] execution reports.\6\ Supplementary 
Material .10, .12, and .13 of Rule 128B are being amended to shorten 
the time frames for tape corrections and other errors.\7\

    \6\Rule 123B(b)(2)(A) is being amended to require that for most 
transaction between brokers, if a purchase or sale has been reported 
in error and a transaction has appeared on the tape at the price of 
the erroneous report, the broker who made the error will be required 
to render a corrected report not later than noon on T+1 rather than 
one hour after the opening on T+2. Rule 123B(b)(2)(B) is being 
amended to require that for orders received by the specialist 
through the Designated Order Turnaround System or the Limit Order 
System, if the subscribing member organization requests a correction 
from the specialist prior to the opening of the second business day, 
rather than third business day, following the transaction, the 
specialist shall correct the report. Rule 123B(b)(2)(B) also is 
being amended to require that if the erroneous report is at a price 
more than one-half point away from the execution price, the 
specialist must render a corrected report not later than noon on T+1 
rather than one hour after the opening on T+2.
    \7\Supplementary Material .10 is being amended to require that 
in the event that publication of a change, correction, or 
cancellation of a transaction which previously appeared on the tape 
or of a transaction omitted from the tape is not made on the tape on 
the day of the transaction, such change, correction, cancellation, 
or omission may be published in the ``sales sheet'' within three 
business days, rather than within seven calendar days, of the date 
of the transaction with the approval of both the buying and selling 
members and a floor official. Supplementary Rule .12 is being 
amended to require that erroneous publications made on the tape due 
to mechanical or system troubles or clerical errors may be corrected 
in the sales sheet within three business days, rather than within 
seven calendar days, of the date of the transaction under the 
direction of an authorized NYSE employee. Supplementary Material .13 
will require that any other errors in the amount of a transaction 
reported erroneously to a reporter by a party to the transaction may 
be published on the sales sheet within three business days, rather 
than within seven calendar days, of the date of the transaction with 
the approval of a floor official.
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    The NYSE has requested that the proposed rule change become 
effective on the same date as Rule 15c6-1. Rule 15c6-1 becomes 
effective on June 7, 1995.\8\

    \8\The transition from five day settlement to three day 
settlement will occur over a four day period. Friday, June 2, will 
be the last trading day with five business day settlement. Monday, 
June 5, and Tuesday, June 6, will be trading days with four business 
day settlement. Wednesday, June 7, will be the first trading day 
with three business day settlement. As a result, trades from June 2 
and June 5 will settle on Friday, June 9. Trades from June 6 and 
June 7 will settle on Monday, June 12.
II. Written Comment

    The Commission received one comment letter from Thomson Trading 
Services, Inc. (``Thomson'') suggesting that additional regulatory 
changes may be necessary to implement T+3 settlement.\9\ Thomson 
believes that the NYSE should amend Rule 387(a)(5) which requires the 
use of the facilities of a securities depository for confirmation and 
acknowledgement of all transactions in securities which are depository-
eligible.

    \9\Letter from Dr. Keith B. Jarrett, supra note 3.
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III. Discussion

    The Commission believes the proposal is consistent with the 
requirements of Section 6 of the Act.\10\ Specifically, Section 6(b)(5) 
states that the rules of an exchange must be designed to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, and processing information. NYSE rules and other 
self-regulatory organizations' rules currently establish the standard 
time frame for settlement of securities transactions. On June 7, 1995, 
the new settlement cycle of T+3 will be established as mandated by the 
Commission's Rule 15c6-1. As a result, the NYSE's current rules 
providing for a T+5 settlement cycle will be inconsistent with the 
Commission's rule. This proposal will amend the NYSE's rules to 
harmonize them with the Commission's rule 15c6-1 and a T+3 settlement 
cycle.

    \10\15 U.S.C. 78f (1988)
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    In addition, the Commission believes that the proposed rule change 
is consistent with Section 6(b)(5) of the Act in that it protects 
investors and the public interest by reducing risks to clearing 
corporations, their members, and public investors which are inherent in 
settling securities transactions. The reduction of the time period for 
settlement of most securities transactions will correspondingly 
decrease the number of unsettled trades in the clearance and settlement 
system at any given time. Thus, fewer unsettled trades will be subject 
to credit and market risk, and there will be less time between trade 
execution and settlement for the value of those trades to 
deteriorate.\11\

    \11\The Commission release adopting Rule 15c6-1 stated that 
``the value of securities positions can change suddenly causing a 
market participant to default on unsettled positions. Because the 
markets are interwoven through common members, default at one 
clearing corporation or by a major market participant or end-user 
could trigger additional failures resulting in risk to the national 
clearance and settlement system.'' Securities Exchange Act Release 
No. 33023 (October 6, 1993), 58 FR 52891.
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    While Thomson's letter supports the NYSE's efforts to shorten the 
settlement cycle for securities transactions, Thomson believes that the 
NYSE should amend Rule 387, which requires the use of the facilities of 
a securities depository for the confirmation and acknowledgement of all 
DVP or RVP transactions in depository-eligible securities. The 
Commission believes that the issue raised by the Thomson letter need 
not be resolved prior to the approval of the NYSE's proposed rule 
change. Discussions regarding Thomson's concerns are underway among the 
Commission, Thomson, and DTC. DTC has submitted a rule filing that will 
establish a linkage between DTC and vendors such as Thomson.\12\ The 
Commission intends to consider whether self-regulatory organization 
rules should continue to preclude use of private vendor systems for 
confirmation/affirmation services in DVP/RVP trades. However, if the 
NYSE's proposed rule change being approved by this order is not 
approved prior to the June 7, 1995, effective date of Rule 15c6-1, the 
NYSE rules will conflict with the Commission Rule 15c6-1.

    \12\Securities Exchange Act Release No. 35332 (February 3, 
1995), 60 FR 8102 (notice of filing of proposed rule change).
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    The Thomson letter suggests that approval of the proposed rule 
change without amendments to Rules 387 raises competitive concerns. 
Under the Act, the Commission's responsibility is to balance the 
perceived anticompetitive effects of a regulatory policy or decision 
against the purpose of the Act that would be advance by the policy or 
decisions and the costs associated therewith. The Commission notes that 
any anticompetitive effects pointed to by Thomson are not caused by the 
proposed rule change being approved by this order but rather by an 
existing NYSE rule. The Commission is reviewing Thomson's claim but 
does not believe that approval of this proposal will itself create any 
burdens on competition. Moreover, as discussed above, the rule advances 
fundamental purposes under the Act, namely the efficient clearance and 
settlement of securities.

IV. Conclusion

    For the reasons stated above, the Commission finds that NYSE's 
proposal is consistent with Section 6 of the Act.\13\

    \13\15 U.S.C. 78f (1988).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (File No. SR-NYSE-94-40) be and 
hereby is approved and will become effective on June 7, 1995.

    \14\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.\15\

    \15\17 CFR 200.30(a)(12)(1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-7238 Filed 3-23-95; 8:45 am]
BILLING CODE 8010-01-M