[Federal Register Volume 60, Number 77 (Friday, April 21, 1995)]
[Notices]
[Pages 19971-19973]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-9911]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35613; File No. SR-DTC-95-06]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of a Proposed Rule Change Seeking to Modify the Same-
Day Funds Settlement System to Accommodate the Overall Conversion to 
Same-Day Funds Settlement for Securities Transactions

April 17, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on March 22, 1995, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-DTC-95-06) as described in Items I, II, and III below, which items 
have been prepared primarily by DTC. 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). [[Page 19972]] 
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The purpose of the proposed rule change is to convert DTC's current 
same-day funds\2\ settlement (``SDFS'') system Participants Fund to an 
all cash fund and to modify certain risk management controls and other 
features of the SDFS system. The proposed rule change is part of the 
conversion of DTC's entire money settlement system to an SDFS system. 
The Participants Fund for the next-day funds\3\ settlement (``NDFS'') 
system will not be affected by the proposed rule change.

    \2\The term ``same-day funds'' refers to payment in funds that 
are immediately available and generally are transferred by 
electronic means.
    \3\The term ``next-day funds'' refers to payment by means of 
certified checks that are for value on the following day.
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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 that 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 currently processes the money settlements related to different 
types of securities transactions in either the NDFS system or the SDFS 
system. The NDFS system is used primarily for the money settlement of 
equity, corporate debt, and municipal debt issue transactions. The SDFS 
system began operation in 1987 and is used primarily for the money 
settlement of transactions in commercial paper and other money market 
instruments (``MMIs'').\4\

    \4\For a description of the SDFS system, refer to Securities 
Exchange Act Release Nos. 24689 (July 9, 1987), 52 FR 26613 [File 
No. SR-DTC-87-04] (order granting temporary approval to DTC's SDFS 
settlement service); 26051 (August 31, 1988), 53 FR 34853 [File No. 
SR-DTC-88-06] (order granting permanent approval to DTC's SDFS 
settlement service); and 33958 (April 22, 1994), 59 FR 22878 [SR-
DTC-93-12] (order temporarily approving the MMI settlement program).
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    DTC and the National Securities Clearing Corporation (``NSCC'') 
jointly issued three memoranda which described DTC's and NSCC's 
respective plans for converting their payment system to SDFS.\5\ DTC's 
sections of the memoranda described its plan to combine its NDFS and 
SDFS systems into a single system which will be based on the design of 
the current SDFS system with some modifications. DTC's and NSCC's plans 
are in accord with the 1989 recommendation of the international Group 
of Thirty\6\ that all securities transactions should settle in same-day 
funds.\7\

    \5\The Depository Trust Company and National Securities Clearing 
Corporation, Memorandum (July 1, 1992) (``1992 Memorandum''); The 
Depository Trust Company and National Securities Clearing 
Corporation, Memorandum (July 26, 1993) (``1993 Memorandum''); The 
Depository Trust Company and National Securities Clearing 
Corporation, Memorandum (July 29, 1994) (``1994 Memorandum'').
    \6\The Group of Thirty was established in 1978 as an 
independent, non-partisan, non-profit organization composed of 
international financial leaders whose focus is on international 
economic and financial issues.
    \7\Group of Thirty, Clearance and Settlement Systems in the 
World's Securities Markets (March 1989) (``Group of Thirty 
Report'').
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    All issues currently settling in DTC's NDFS system will be 
converted to the SDFS system on a single day, which DTC anticipates 
will occur in the fourth quarter of 1995 or the first quarter of 1996. 
In order to assure an efficient conversion, certain modifications to 
the current SDFS system will be implemented at various times during 
1995 prior to the overall conversion date. The proposed rule change 
will implement a number of the modifications described in the 1994 
Memorandum.
    Currently, the SDFS system Participants Fund consists of cash and 
securities and has separate components for money market instruments and 
for other SDFS system securities. The proposed rule change seeks to 
convert DTC's SDFS system Participants Fund to an all cash fund with no 
separate component for the MMI Program.\8\ The proposed rule change 
also seeks to decrease the minimum deposit to the SDFS system 
Participants Fund from $200,000 to $10,000 and to change the method of 
calculating a participant's required deposit.

    \8\Only one DTC Participants Fund will be needed when the NDFS 
system and the SDFS system are combined in a new SDFS system. Based 
on current activity levels, DTC believes that a $400 million cash-
only Participants Fund will provide sufficient protection against 
present liquidity and credit risks. Pursuant to its rules, DTC may 
change the formulas used to determine a participant's required 
deposit or require a participant to make additional deposits to the 
Participants Fund.
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    The proposed SDFS Participants Fund formula bases each 
participant's required deposit on the amount of liquidity that the 
participant uses in the system. A participant's liquidity use is 
determined by a sixty day rolling average of the participant's intraday 
net debit peaks.\9\ The proposed rule change will require a participant 
to deposit in the SDFS Participants Fund an amount equal to that 
participant's proportional liquidity needs.\10\

    \9\The new SDFS system would monitor the levels of a 
participant's net settlement debits during each day and record the 
highest net debit experienced by that participant. This measure of 
liquidity is referred to as the participant's ``intra-day net debit 
peak.''
    \10\For example, assume DTC had three participants, A, B, and C, 
and had established a $400,000,000 Participants Fund. Each 
participant's minimum deposit would be $10,000 for a total of 
$30,000 which leaves $399,970,000 as the incremental fund deposit 
amount needed for the Participants Fund. In order to allocate the 
$399,970,000 among the three participants, their respective average 
intraday net debit peaks would be used. Assume Participant A's 
average net debit peak is $300,000,000, Participant B's is 
$500,000,000, and Participant C's is $500,000,000. Since all 
incurred net debit peaks of at least $300,000,000, each created 
liquidity needs of $300,000,000 and would contribute equally to 
provide DTC's first $300,000,000. Each would be responsible for a 
$10,000 minimum deposit plus a $99,990,000 increment bringing the 
total to $100,000,000 for each participant. Participants B and C 
would be asigned an additional $100,000,000 increment since they 
were responsible for creating liquidity needs up to $500,000,000. 
Together, A, B, and C would be assigned incremental amounts totaling 
$499,970,000. Since the goal is to create a $400,000,000. 
Participants Fund, the $499,970,000 must be prorated downward to 
399,370,000, the amount needed in addition to their minimum 
contributions to achieve $400,000,000. Each participant's increments 
would be reduced by applying a factor of .799988 (i.e., 399,970,000/
499,970,000). Their required deposits would then be as follows:

                                                                        
A: $10,000+($99,990,000 x .799988)=.......................   $80,000,800
B: $10,000+ ($199,990,000 x .799988)=.....................   159,999,600
C: $10,000+ ($199,990,000 x .799988)=.....................   159,999,600
                                                           -------------
                                                             400,000,000
                                                                        

    In addition, the proposed rule change seeks to modify certain risk 
management controls in the SDFS system. The method used to calculate 
the net debit cap for each participant will be changed\11\ and the 
maximum net debit cap for each participant will be increased to 
$900,000,000 for approximately $580,000,000 today. The proposed rule 
change also seeks to add the Largest Provisional Net Credit (``LPNC'') 
calculation control which is applied to a participant's net settlement 
balance and collateral monitor in order to protect DTC against the 
combined failure of an issuer of MMIs and a participant. The LPNC 
control creates a provisional or simulated net balance by 
[[Page 19973]] withholding a participant's largest net settlement 
credit due to transactions in any single issuer's MMIs. The risk 
management controls will be applied to the provisional net balance that 
is created by the LPNC procedure, and transactions that cause the 
provisional net balance to violate those risk management controls will 
not be completed.\12\

    \11\Net debit caps will be determined by and will be applied to 
a participant's simulated net debit balances caused by the Largest 
Provisional Net Credit (``LPNC'') procedure described below.
    \12\DTC will subtract the amount of a participant's largest 
provisional net credit due to transactions in any single issuer's 
MMIs from the participant's collateral monitor (``simulated 
collateral monitor'') and net debit or credit balance (``simulated 
balance''). If a transaction will cause the simulated collateral 
monitor to turn negative (i.e., the participant's collateral would 
be insufficient to cover its simulated net debit after the 
transaction) or the resulting net debit balance to exceed the 
participant's net debit cap, the transaction will be blocked. 
Blocked transactions will be recycled until credits from other 
transactions in MMIs of issuers other than those of the largest 
provisional net credit cause the simulated collateral monitor to be 
positive or the resulting net debit to be within the net debit cap 
limits.
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    The proposed rule change also seeks to modify certain aspects of 
DTC's Participant Operating Procedures on reclamations for both the 
NDFS and the SDFS systems,\13\ the Receiver Authorized Delivery 
(``RAD'') service\14\ and the recycle algorithm for delivery 
orders.\15\ The modified procedures provide for the validation of all 
delivery order and payment order reclaims by DTC's system and establish 
a minimum threshold of $15,000,000 for bilateral RAD limits. DTC also 
proposes to offer SDFS system users a second recycle option for 
delivery orders. Transactions that are recycled because of insufficient 
positions or management controls are currently prioritorized based on 
type of transaction and then size of transaction (``Option 1''). The 
second option will provide participants with the ability to choose 
whether pending transactions caused by an insufficient position would 
be recycled in the order in which they were entered (first in, first 
out) or in the Option 1 prioritization schedule.\16\

    \13\A reclamation is the return of a delivery order or a payment 
order by a participant.
    \14\RAD allows participants to review and either approve or 
cancel incoming deliveries before they are processed in DTC's 
system.
    \15\DTC's Account Transfer Processor system provides for the 
recycling or pending of transactions that cannot be completed due to 
a participant's insufficient positions or violation of risk 
management controls (i.e., Net Debit Cap and Collateral Monitor).
    \16\Under Options 1 and 2, CNS deliveries are always given the 
highest priority on the recycle guene.
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    Most of the modifications to be implemented by the proposed rule 
change will be effective on dates to be specified by DTC in the second 
quarter of 1995. The control involving the LPNC calculation and the 
$15,000,000 threshold of bilateral RAD limits will be made effective on 
dates to be specified by DTC in the third quarter of 1995.
    DTC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act and the rules and regulations 
thereunder because converting all of DTC's payment systems to an SDFS 
system will facilitate the prompt and accurate clearance and settlement 
of securities transactions.

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

    DTC does not believe that the proposed rule change will impact or 
impose a burden on competition.

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

    The conversion plans were described in detail in the three 
memoranda referenced above and have been discussed extensively with DTC 
participants and securities industry organizations. The 1994 Memorandum 
described changes in the conversion plans as a result of those 
discussions. Since the distribution of the 1994 Memorandum, written 
comments from DTC participants or others on the modifications to the 
current SDFS system to be implemented by this proposed rule change have 
not been received. No other written comments have been solicited or 
received. DTC will notify the Commission of any written comments 
received by DTC.

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 DTC 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, N.W., Washington, D.C. 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, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of DTC. All 
submissions should refer to file number SR-DTC-95-06 and should be 
submitted by May 12, 1995.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\17\

    \17\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-9911 Filed 4-20-95; 8:45 am]
BILLING CODE 8010-01-M