[Federal Register Volume 60, Number 66 (Thursday, April 6, 1995)]
[Notices]
[Pages 17597-17598]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8494]



-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35554; File No. SR-CHX-94-26]


Self-Regulatory Organizations; The Chicago Stock Exchange, 
Incorporated; Order Approving Proposed Rule Change Relating to 
Implementation of a Three-Day Settlement Standard

March 31, 1995.
    On November 30, 1994, the Chicago Stock Exchange, Incorporated 
(``CHX'') filed a proposed rule change (File No. SR-CHX-94-26) with the 
Securities and Exchange Commission (``Commission'') pursuant to Section 
19(b) of the Securities Exchange Act of 1934 (``Act'').\1\ On December 
14, 1994, CHX filed an amendment to the proposed rule change.\2\ Notice 
of the proposal was published in the Federal Register on January 4, 
1995, to solicit comments from interested persons.\3\ The Commission 
received one written comment.\4\ As discussed below, this order 
approves the proposed rule change.

    \1\15 U.S.C. 78s(b) (1988).
    \2\Letter From David Rusoff, Foley & Lardner, to Christine 
Sibille, Senior Attorney, Office of Securities Processing, Division 
of Market Regulation, Commission (December 16, 1994).
    \3\Securities Exchange Act Release No. 35155 (December 27, 
1994), 60 FR 517.
    \4\Letter from P. Howard Edelstein, President, Electronic 
Settlements Group, Thomson Trading Services, Inc., to Jonathan G. 
Katz, Secretary, Commission (January 25, 1995).
---------------------------------------------------------------------------

I. Description

    In October 1993, the Commission adopted Rule 15c6-1 under the Act 
which will become effective June 7, 1995.\5\ The rule 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. Several of the CHX's rules are interrelated with 
settlement timeframes. The purpose of the proposed rule change is to 
amend CHX's rules consistent with a T+3 settlement standard for 
securities transactions.

    \5\Securities Exchange Act Release Nos. 33023 (October 6, 1993), 
58 FR 52891 (adopting Rule 15c6-1) and 34952 (November 9, 1994), 59 
FR 59137 (changing effective date from June 1, 1995, to June 7, 
1995).
---------------------------------------------------------------------------

    Article XX, Rule 9 will define regular way transactions as 
requiring delivery on the third business day after the trade date. 
Seller's option trades will settle not less than four business days nor 
more than sixty days following the day of the contract. Trades made for 
``next day'' may include delivery on the first or second business day 
following the day of the contract. The proposed rule change also will 
eliminate references to the fourth and fifth full business day 
preceding the final day for subscription contained in Rule 9.
    Article XXVII, Rule 1 will provide that stock transactions shall be 
ex-dividend or ex-rights two business days preceding the record date. 
With respect to record dates on other than a business day, stock 
transactions will be ex-dividend or ex-rights three business days 
preceding the record date.
    Article XXVII, Rule 2 will require stock transactions to be ex-
warrant on the second business day preceding the date of expiration of 
the warrants. 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.
    Article XXX, Rule 15 will require all claims involving erroneous 
comparisons to be made within two business days of the original trade 
date. Claims which concern the omission of a report will need to be 
made within two business days of the date the order should have been 
executed. Claims relative to a lack of comparison of a reported 
transaction will need to be made within two business days of the 
original trade.
    CHX has requested that the proposed rule change become effective on 
the same date as Rule 15c6-1. Rule 15c6-1 is scheduled to become 
effective on June 7, 1995. The transition from T+5 settlement to T+3 
settlement will occur over a four day period.\6\

    \6\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.\7\ Thomson 
believes that the CHX should amend Article XV, Rule 5 which requires 
the use of the facilities of a securities depository for confirmation 
and acknowledgement of all depository-eligible transactions.

    \7\Letter from P. Howard Edelstein, President, Electronic 
Settlements Group, Thomson Trading Services, Inc., to Jonathan G. 
Katz, Secretary, Commission (January 25, 1995).
---------------------------------------------------------------------------

III. Discussion

    The Commission believes the proposal is consistent with the 
requirements of Section 6 of the Act.\8\ Specifically, Section 6(b)(5) 
states that the rules of the exchange must be designed to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, and processing information. The CHX 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 CHX's current rule 
establishing a T+5 settlement cycle will be inconsistent with the 
Commission rules. This proposal will amend the CHX's rules to harmonize 
them with a T+3 settlement cycle.

    \8\15 U.S.C. 78f (1988).
---------------------------------------------------------------------------

    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 the risk to clearing 
corporations, their members, and public investors which is 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.\9\

    \9\The adopting release stated, ``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. [[Page 17598]] 
---------------------------------------------------------------------------

    While the Thomson letter supports the CHX's efforts to shorten the 
settlement cycle for securities transactions, Thomson believes that the 
CHX should amend Article XV, Rule 5, which requires the use of the 
facilities of a securities depository for the confirmation and 
acknowledgement of all depository-eligible transactions whereby payment 
for securities purchased or delivery of securities sold is to be made 
to or by an agent of the customer. The Commission believes that the 
issue raised by the Thomson letter need not be resolved prior to the 
approval of the proposed rule change. Discussions regarding Thomson's 
concerns are underway among the Commission, Thomson, DTC, and the 
Securities Industry Association. The Commission will continue to work 
with the industry to address Thomson's concerns. However, if the 
proposed rule change is not approved prior to the June 7, 1995, 
effective date of Rule 15c6-1, the CHX rules will conflict with the 
Commission Rule 15c6-1.
    The Thomson letter suggests that approval of the proposed rule 
change without amendments to Article XV, Rule 5 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 advanced by the 
policy or decisions and the costs associated therewith. The Commission 
notes that the anticompetitive effects pointed to by Thomson, if in 
fact there are any anticompetitive effects, are not caused by the 
proposed rule change approved by this order but rather by an existing 
CHX 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 CHX's 
proposal is consistent with Section 6 of the Act.\10\

    \10\15 U.S.C. 78f (1988).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-CHX-94-26) be and 
hereby is approved, effective June 7, 1995.

    \11\15 U.S.C. 78s(b)(2) (1988)

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\

    \12\17 CFR 200.30(a)(12) (1994).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-8494 Filed 4-5-95; 8:45 am]
BILLING CODE 8010-01-M