[Federal Register Volume 60, Number 87 (Friday, May 5, 1995)]
[Notices]
[Pages 22423-22425]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-11130]



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 SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35655; File No. SR-DTC-95-05]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Extending Temporary Approval of a Proposed Rule Change Expanding 
the Money Market Instrument Settlement Program

April 28, 1995.

    On March 7, 1995, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') a proposed rule 
change (File No. SR-DTC-95-05) pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal 
was published in the Federal Register on March 24, 1995.\2\ No comment 
letters were received. For the reasons discussed below, the Commission 
is extending its temporary approval of the proposed rule change through 
April 30, 1996.

    \1\15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\Securities Exchange Act Release No. 35513 (March 17, 1995), 
60 FR 15614.

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I. Description of the Proposal

A. Generally

    On April 22, 1994, the Commission approved, on a temporary basis 
until April 30, 1995, DTC's proposed rule change making its existing 
Money Market Instrument (``MMI'') settlement services available for 
transactions in additional types of MMIs.\3\ The current proposed rule 
change seeks permanent approval of the new and expanded MMI settlement 
program. The expanded MMI settlement program includes institutional 
certificates of deposit (``CD''), municipal commercial paper, and 
bankers' acceptances. Prior to the April 1994 enhancement, the MMI 
program included corporate commercial [[Page 22424]] paper (``CP''), 
medium-term notes, preferred stock in a CP-like mode, short-term bank 
notes, and discount notes.

    \3\Securities Exchange Act Release No. 33958 (April 22, 1994), 
59 FR 22878 [File No. SR-DTC-93-12] (order temporarily approving 
proposed rule change expanding DTC's MMI program).
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    The new and expanded MMI program is an extension of DTC's Same-Day 
Funds Settlement (``SDFS'') system.\4\ The automated operating 
procedures for the MMI program are virtually the same as those followed 
by SDFS participants and by Institutional Delivery (``ID'') system 
users for basic depository services in other eligible SDFS securities. 
The MMI issues being made SDFS-eligible will be distributed in book-
entry-only form by the issuer's issuing agent that, as with commercial 
paper and medium-term notes in the MMI program, will send MMI issuance 
instructions to DTC electronically. Settlement of an issue will be on 
the same day as the issuance or on a specified future day. The issuer's 
paying agent will serve as DTC's custodian and will hold a master or 
balance MMI certificate for DTC unless the issuer and its issuing and 
paying agent bank choose to distribute uncertificated MMIs through 
DTC.\5\ Because SDFS-eligible MMIs will be book-entry-only, participant 
operating procedures for deposits and withdrawals will not apply to 
MMIs.

    \4\DTC's SDFS system currently includes the following issue 
types: corporate commercial paper, municipal notes and bonds, 
municipal variable-rate demand obligations, zero coupon bonds backed 
by U.S. Government securities, continuously offered medium-term 
corporate notes, short-term bank notes, auction-rate and tender-rate 
preferred stocks and notes, collateralized mortgage obligations and 
other asset-backed securities, Government trust certificates and 
Government agency securities not eligible for the Fed's book-entry 
system, retail certificates of deposit, corporate and municipal 
variable mode obligations, corporate bonds, discount notes, and unit 
trusts. For a detailed description and discussion of DTC's SDFS 
system, including the implementation of the commercial paper 
program, refer to Securities Exchange Act Release Nos. 26051 (August 
31, 1988), 53 FR 34853 [File No. SR-DTC-88-06] (order permanently 
approving DTC's SDFS system) and 30986 (July 31, 1992), 57 FR 35856 
[File No. SR-DTC-92-01] (order approving implementation of 
commercial paper program).
    \5\Uncertificated MMIs are not evidenced by any certificate 
whatsoever. Bills, notes, bonds, and other securities have been 
issued in uncertificated form by U.S. government and federal 
agencies for many years.
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B. Risk Management

    The fundamental risk in the SDFS system is that a participant will 
default on its payment obligation. The expanded MMI program is offered 
as an extension of DTC's current SDFS system; therefore, DTC will 
employ the same risk management controls (e.g., net debit 
collateralization, net debit caps, and receiver-authorized deliveries) 
to transactions in these new MMIs as are employed in the current SDFS 
system.\6\

    \6\Supra note 4.
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    Net debit collateralization requires each participant to maintain 
in its account throughout the processing day collateral at least equal 
in value to the participant's net settlement debit. During the 
processing day, if a transaction will cause a net debit greater than 
the amount of collateral in the participant's account at the time the 
transaction is being processed, DTC will recycle the transaction until 
there is sufficient collateral in the participant's account. 
Transactions in the new MMI programs also will be subject to the 
participant's net debit cap.\7\ The net debit cap helps to protect 
against abnormal intraday debit peaks that are out of line with a 
participant's prior month's average daily activity level. The net debit 
cap also reduces the possibility that the failure to settle by more 
than one participant will not cause DTC to exceed its liquidity 
resources. The new MMI programs also will utilize the receiver-
authorized delivery control which allows a participant to monitor 
deliveries and payment orders directed to its account before the orders 
are posted to the account.

    \7\Each participant's net debit is limited throughout the 
processing day to a net debit cap that is the least of the following 
four amounts: (1) A multiple of the participant's required and 
voluntary deposits to the SDFS fund, (2) an amount that is equal to 
seventy-five percent of DTC's liquidity resources, including cash 
deposits to the SDFS fund and lines of credit for loans to 
facilitate SDFS settlement, (3) an amount, if any, determined by the 
participant's settling bank, and (4) an amount, if any, determined 
by DTC. Supra note 4.
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    In addition, DTC's three failure to settle procedures applicable to 
the CP program will be applicable to the new MMI programs. First, DTC 
will employ the same procedures with regard to the sequence in which 
DTC will use MMI collateral and eliminate payment order debits in a 
failing participant's account. Second, if DTC is notified before 3 p.m. 
eastern standard time (``E.S.T.'') that a paying agent will not pay on 
an MMI issuer's maturity presentments, reorganization presentments, 
periodic principal presentments, or periodic income presentments or if 
DTC is informed of an MMI issuer's bankruptcy and a participant fails 
to settle with DTC on that day, DTC has the authority to reduce the 
settlement credits of participants who had transactions on the day of 
default with the defaulting issuer or the defaulting participant on the 
day of default. Third, if the paying agent has not settled with DTC by 
noon E.S.T. on the DTC business day following the settlement day or if 
a paying agent is determined to be insolvent according to DTC's rules, 
DTC will notify the issuers utilizing that paying agent and provide 
those issuers with information on any presentments related to their 
MMIs on which the PA failed to pay DTC.

C. Expanded MMI Program

    DTC will be expanding its CP program to include ``uncommon CP.'' 
Uncommon CP is CP paying income periodically, a variable amount of 
income, or a variable amount of principal. It also includes CP 
denominated in a foreign currency, CP with a maturity of 271 days to a 
year, or corporate variable-rate demand obligations in CP mode. These 
instruments were not included in the original CP program.\8\

    \8\Supra note 4.
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    DTC also will be enhancing its MMI program for medium-term notes, 
short-term notes, discount notes, and preferred stock in CP-like mode. 
Processing of medium-term notes will be enhanced by DTC's collection 
and allocation of income, principal, reorganization, and maturity 
payments within the SDFS system. Paying agents will no longer have to 
separately wire such payments to DTC. Instead, as with maturity 
payments in the CP program, these payments will be included in each 
paying agents' net settlement figure due to or from DTC at the end of 
each day. Similarly, settlement of short-term notes will be enhanced 
with the inclusion of maturity payments and periodic income payments in 
the SDFS system and in the paying agent's net SDFS amounts due to or 
from DTC. The restriction that short-term notes must have a minimum 
maturity period of thirty days to be included in this program will be 
removed. The short-term notes, the discount notes, and the preferred 
stock in CP-like mode aspects of the program will all provide for 
uncertificated issuer programs. However, one master note or certificate 
may be held for DTC by the paying agent.

II. Discussion

    Section 17A(b)(3)(F)\9\ of the Act requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible. As discussed below, the Commission 
believes that DTC's proposed rule change is consistent with DTC's 
obligations under the Act.

    \9\15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
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    The new and enhanced MMI program is an extension of DTC's current 
SDFS system and includes many of the same [[Page 22425]] risk 
management features that are employed in the SDFS system. The 
Commission previously examined these features with DTC first proposed 
the SDFS system,\10\ when the CP program was added,\11\ and when the 
Commission granted temporary approval to the expanded MMI program.\12\ 
At those times, the Commission found, and continues to believe, that 
these risk management measures are consistent with Section 17A of the 
Act and should minimize the impact of a default by a participant in the 
SDFS system.

    \10\Supra note 4.
    \11\Supra note 4.
    \12\Supra note 3.
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    The use of provisional credits and unwind procedures if an MMI 
issuer were to default, however, could increase the risk of settlement 
gridlock in certain circumstances. For example, if DTC were to confirm 
the insolvency of an MMI issuer before 3:00 p.m.,\13\ DTC would reverse 
all participants' credits attributable to the insolvent issuer without 
regard to any of the risk management controls. Such reversals of 
credits could result in a participant having a net debit that exceeds 
the participant's net debit cap and DTC's liquidity resources. If such 
a participant then failed to settle its net debit with DTC, DTC could 
possibly have difficulty completing other settlements.

    \13\If DTC can not confirm that an MMI issuer is insolvent 
before 3:00 p.m. E.S.T., DTC will not reverse credits attributable 
to that issuer because after 3:00 p.m. E.S.T. credits are no longer 
provisional in DTC's SDFS system.
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    As an interim solution to reduce these risks, DTC has obtained 
additional lines of credit dedicated to the completion of settlement in 
the SDFS system in the event a participant fails to settle after 
application of the unwind procedures. The additional lines of credit 
are supported by securities pledged to the SDFS fund and are not 
included as a part of DTC's liquidity resources when determining a 
participant's net debit cap. DTC also continues to employ its liquidity 
monitoring system which simulates double default scenarios every 
fifteen minutes beginning at 2:00 p.m. E.S.T.
    As discussed in the original order granting temporary approval to 
DTC's MMI program, DTC proposed a long term solution to reduce the 
risks associated with the use of provisional credits. The solution, 
which changes the components of DTC's liquidity resources and seeks to 
implement new risk management controls, was designed after consulting 
with the Federal Reserve Bank of New York and recently has been filed 
with the Commission for approval.\14\ However, because the largest 
provisional net credit procedure is not scheduled for implementation 
until the third quarter of 1995, the Commission believes that extension 
of temporary approval of the rule change is appropriate pending the 
full operational capability of DTC's system enhancements.

    \14\For a complete discussion of DTC's proposed changes, refer 
to Securities Exchange Act Release No. 35613 (April 17, 1995), 60 FR 
19971 [File No. SR-DTC-95-06] (notice of proposed rule change). DTC 
proposes to establish to all-cash participants fund in an amount of 
$400 million and a fixed net debit cap of $900 million. DTC has also 
proposed to add the Largest Provisional Net Credit (``LPNC'') 
calculation control which is to be applied to a participant's net 
settlement balance and collateral monitor in order to protect DTC 
against the combined failure of a MMI issuer and a participant.
    Under the LPNC Control, 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 balance to be within the net 
debit cap limits.
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act and the 
rules and regulations thereunder.
    Ir is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-95-05) be, and hereby 
is, approved on a temporary basis through April 30, 1996.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\15\

    \15\17 CFR 200.30-3(a)(12) (1994).
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[FR Doc. 95-11130 Filed 5-4-95; 8:45 am]
BILLING CODE 8010-01-M