[Federal Register Volume 60, Number 84 (Tuesday, May 2, 1995)]
[Notices]
[Pages 21575-21577]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10790]



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[[Page 21576]]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35649; File No. SR-DTC-94-19]


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

April 26, 1995.
    On December 5, 1994, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-DTC-94-19) under Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ As filed, the proposal 
consisted of changes to the depository-eligibility requirements for 
securities issues to require that principal and income distributions be 
made in same-day funds and provided for the use of a ``Blanket Letter 
of Representations'' in lieu of individual letters of representations 
for each securities issue.\2\ Notice of the proposal was published in 
the Federal Register on February 14, 1995.\3\ On April 3, 1995, DTC 
amended the proposed rule change by requesting that the Commission 
withdraw from consideration the portion of the proposed rule change 
that related to implementing the use of a Blanket Letter of 
Representations for making securities depository-eligible.\4\ The 
Commission received one comment letter opposing a part of DTC's 
proposal.\5\ For the reasons discussed below, the Commission is 
approving the proposed rule change.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\Same-day funds, which are also known as ``Fed funds,'' are 
immediately available for redelivery on the day of receipt.
    \3\Securities Exchange Act Release No. 35342 (February 8, 1995), 
60 FR 8434.
    \4\Letter from Piku Thakkar, Assistant Counsel, DTC, to Peter 
Geraghty, Senior Counsel, Division of Market Regulation, Commission 
(April 3, 1995).
    \5\Letter from Terrence Hassett, President, North East 
Securities Transfer Association, Inc. (``NESTA''), to Jonathan Katz, 
Secretary, Commission (March 16, 1995). NESTA opposes the part of 
DTC's proposal that would deny depository eligibility to issues 
brought to market by agents who fail to make principal and income 
payments in same-day funds. In response, DTC stated that agents will 
not be penalized for isolated incidents of a failure to pay DTC in 
same-day funds on payment date and that the sanction of denying 
depository eligibility to an issue would be a last resort mechanism 
used in very limited circumstances. Furthermore, DTC indicated that 
it will make efforts to accommodate the needs of issuers and agents 
and will work closely with them in converting to a same-day funds 
payment standard for principal and income payments. Telephone 
conversation between Piku Thakkar, Assistant Counsel, DTC and 
Katherine Horan, Attorney, Commission (April 11, 1995).
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I. Description

A. Background

    In 1988, the Group of Thirty\6\ determined that international 
agreement on a set of practices and standards for clearance and 
settlement systems was desirable. Accordingly, a Working Committee 
appointed by the Group of Thirty issued a report in March 1989 
containing nine recommendations to reduce risk, improve efficiency, and 
reduce costs in the world's clearance and settlement systems.\7\ One 
recommendation called for making payments associated with the 
settlement of securities transactions consistent across instruments and 
markets by adopting a same-day funds payment convention. The U.S. 
Working Committee of the Group of Thirty\8\ concluded that payment for 
settlements among financial intermediaries and between financial 
intermediaries and their institutional customers should be made using 
same-day funds. In particular, the U.S. Working Committee concluded 
that payments for dividends, interest, redemptions, and 
reorganizations, commonly referred to as ``principal and income 
payments,'' also should be made using same-day funds.

    \6\The Group of Thirty, established in 1978, is an 
international, nonprofit organization charged with broadening the 
understanding of international economic and financial issues, 
exploring the international repercussions of decisions taken in 
public and private sectors, and examining the choices available to 
policymakers.
    \7\Group of Thirty, Clearance and Settlement Systems in the 
World's Securities Markets, New York and London, March 1989.
    \8\The U.S. Working Committee of the Group of Thirty is an 
organization made up of representatives from broker-dealers, banks, 
and financial intermediaries charged with analyzing the existing 
clearance and settlement systems in the U.S. in light of the Group 
of Thirty's nine recommendations.
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    Thereafter, the U.S. Working Committee encouraged DTC and the 
National Securities Clearing Corporation (``NSCC'') to focus on 
developing a same-day funds settlement system for U.S. trades in equity 
securities and corporate and municipal debt. Accordingly, in June 1992, 
DTC and NSCC published a memorandum entitled ``A Same-Day Funds 
Settlement System Proposal for Industry Evaluation.'' In response to 
the memorandum, issues were raised regarding the appropriate handling 
of principal and income payments in a same-day funds settlement 
environment. Accordingly, a task force comprised of issuers, trustees, 
paying agents, depositories, depository participants and their 
customers, and the respective representative organizations for these 
various groups was formed (``Same-Day Funds Task Force'' or ``Task 
Force'') to explore ways that principal and income payments could be 
made to a depository for pass through to participants in same-day funds 
on payment date.\9\

    \9\In the current next-day funds settlement (``NDFS'') system, 
paying agents make payments in same-day funds to depositories for 
corporate income payments (e.g., interest and dividends) and 
reorganization actions (e.g., tenders and exchanges) for the 
majority of issues. Although corporate and municipal redemption 
payments and municipal income payments may be paid in next-day 
funds, generally paying agents make these payments in same-day funds 
on payment date to ensure their timely arrival at the depositories. 
DTC invests these funds overnight and rebates to the paying agents 
interest on the deposits as compensation for holding the funds 
overnight.
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    The Task Force determined that converting to a same-day funds 
settlement system for principle and income payments would have a 
significant impact on industry participants, including a change in the 
timing of payments to depositories by paying agents. Paying agents will 
have to make payments to depositories earlier in the day so that 
depositories can settle with their participants before the Fedwire 
closes.
    The Task Force recommended that several principles be adopted in 
order to convert to a same-day funds settlement system for principal 
and income payments. As discussed below, DTC proposes to incorporate 
the relevant provisions in its operational arrangements memorandum.

B. Proposed Rule Change

    DTC's operational arrangements that are necessary for securities 
issues to be eligible for DTC services 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.\10\ The purpose of the rule change is to 
incorporate in DTC's operational arrangements memorandum 
[[Page 21577]] principles for the processing of principal and income 
payments in same-day funds.\11\ Towards this end, the operational 
arrangements memorandum incorporates the relevant provisions of the 
``Standards for Principal and Income Payments Guidelines'' established 
by the U.S. Working Committee of the Group of Thirty. Pursuant to this 
rule change, the relevant provisions of these principles, as set forth 
below, will become a part of DTC's income and reorganization/redemption 
payments standards.

    \10\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.
    \11\DTC's operational arrangements were published in a June 1987 
memorandum and were 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, all new issues are 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 through July 31, 1996, to pay the same rebates it now 
pays to paying agents that pay municipal interest and municipal and 
corporate redemptions to DTC in same-day funds on payment date.\12\

    \12\Supra note 9.
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    However, once DTC converts to same-day funds settlement for all 
security transactions, DTC will make all payments to its participants 
on payment date in same-day funds. As a result, DTC will not have funds 
resulting from overnight investing available to rebate to paying 
agents. Recognizing that participants will benefit by receiving all 
their expected payments in same-day funds on payment date DTC will 
charge participants in proportion to their holdings in each issue for 
which a rebate applies the funds needed to pay the rebate from the date 
of the conversion to same-day funds settlement for all security 
transactions until July 31, 1996. 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 for which the paying agents 
already pay DTC in same-day funds on payment date and which currently 
are not subject to interest earnings rebates. However, DTC will require 
that 100% of corporate interest, dividend, and reorganization payments 
to 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 DTC's guidelines, DTC may decide to systematically 
prevent the allocation of such payments to participants on the payable 
date. Eventually, DTC also may elect to deny depository-eligibility to 
issues brought to market by noncomplying issuers or agents.

II. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and to foster 
cooperation and coordination with persons engaged in the clearance and 
settlement of securities transactions. The Commission believes that the 
proposed rule change is consistent with Section 17A(b)(3)(F) because it 
provides a framework for the conversion of principal and income 
payments to same-day funds. Making principal and income payments in 
same-day funds is consistent with the goal of prompt and accurate 
clearance and settlement because it will give participants same-day 
access to their funds. Requiring paying agents to provide DTC with the 
corresponding CUSIP numbers for each issue for which payment is being 
made will make the processing of such payments more accurate. The 
Commission also believes that the guidelines for converting to a same-
day funds payment standard for principal and interest payments are 
consistent with the goal of fostering cooperation and coordination 
among persons engaged in the clearance and settlement of securities 
transactions. Specifically, in order to allow paying agents time to 
modify their current business practices, DTC will continue to pay 
rebates through July 31, 1996, to those paying agents currently making 
payments to DTC in same-day funds on payment date for municipal 
interest and municipal and corporate redemption payments.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular with Section 17A of the Act and the rules and regulations 
thereunder.
    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-DTC-94-19) be, and 
hereby is, approved.

    \13\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.\14\

    \14\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-10790 Filed 5-1-95; 8:45 am]
BILLING CODE 8010-01-M