[Federal Register Volume 60, Number 118 (Tuesday, June 20, 1995)]
[Notices]
[Pages 32185-32186]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14977]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35839; File No. SR-DTC-95-01]
Self-Regulatory Organizations; the Depository Trust Company;
Order Approving a Proposed Rule Change Establishing a Procedure To Buy-
in Securities To Eliminate Participants' Short Positions Older Than
Ninety Days
June 12, 1995.
On January 13, 1995, the Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change (File No. SR-DTC-95-01) 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 17, 1995.\2\ The
Commission received no comment letters.\3\ For the reasons discussed
below, the Commission is approving the proposed rule change.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ Securities Exchange Act Release No. 35469 (March 10, 1995),
60 FR 14473.
\3\ In response to an ``Important Notice'' to its members
requesting comment on the proposed buy-in procedures, DTC received
11 comment letters. In general, DTC's members were opposed to an
earlier version of the proposed buy-in procedures which used a
tiered approach based on the age of the short position (i.e.,
offerings starting at 110% after 90 days and extending to 130% after
150 days). DTC believes that this rule change addresses the concerns
set forth by the commentors.
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I. Description of the Proposal
DTC currently employs procedures to help eliminate short positions
caused by book entry deliveries of callable securities made between the
call publication date and the lottery processing date and procedures to
help eliminate short positions caused by rejected deposits.\4\ Under
DTC rules, when DTC participants have short positions in their
accounts, DTC debits the participants' accounts by an amount equal to
130% of the market value of the short position as determined by DTC.
DTC believes collecting 130% of the value of the short position
protects DTC against risk and provides participants with an incentive
to cover short positions promptly. The short position is marked to the
market daily until the short position is covered or matures.
\4\ For a complete description of DTC's procedures, refer to
Securities Exchange Act Release No. 35034 (December 8, 1994), 59 FR
63396 [File Nos. SR-DTC-94-08 and SR-DTC-94-09] (order granting
temporary approval of procedures to recall certain deliveries which
have created short positions as a result of call lotteries and
rejected deposits).
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DTC has established procedures that permit DTC to use the short
position charge as a funding source to buy-in
[[Page 32186]] securities to cover short positions which have not been
covered by participants within ninety days. Under the buy-in
procedures, once a short position has aged beyond ninety calendar days
DTC will broadcast to participants that have long positions in the
security an Invitation to Cover Short Request (``ICSR'') message using
the Participant Terminal System (``PTS'') operated by DTC.\5\ DTC will
issue the invitations at premiums above market value on a sliding scale
set according to the following table:
\5\ ICSR is the DTC service that enables DTC participants having
short positions to invite DTC participants with long positions in
the same or similar securities to tender securities to the
participants with the short positions. Under DTC's buy-in
procedures, DTC will initiate the ICSR procedures. For further
discussion of ICSR, refer to Securities Exchange Act Release Nos.
26896 (June 5, 1989), 54 FR 25185 [File No. SR-DTC-89-07] (order
approving rule change establishing ICSR procedures) and 27586
(January 4, 1990), 55 FR 1132 [File No. SR-DTC-89-18] (order
approving rule change amending certain ICSR procedures).
Short Position Value
[Market Value]
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Maximum Possible
Minimum Maximum Premium Percent Premium
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$1............... $50,000 12 $6,000
50,001........... 100,000 8 8,000
100,001.......... 300,000 5 15,000
300,001.......... 500,000 3 15,000
500,001.......... (\1\) 2 (\2\)
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\1\ Up.
\2\ Unlimited.
If DTC is unsuccessful in finding a seller through the ICSR
function, DTC will contact by telephone participants with long
positions in the security. DTC may elect to use the services of a
broker to obtain the securities at a price not to exceed the current
market value plus the premium based upon the value of the short
position.
If DTC is able to buy-in some or all of the securities needed to
cover a participant's short position, DTC will: (1) Credit the
securities to the participant's account, (2) reduce the short position
charge by the amount of the purpose price of the securities together
with the expense of the cover transaction including any brokerage fee
or other administrative expense, and (3) if the short position has been
eliminated entirely, credit the account of the participant with the
balance, if any, of the short position charge.
II. Discussion
Section 17A(b)(3)(F) \6\ requires that the rules of a clearing
agency be designed to assure the safeguarding of securities and funds
in the custody or control of the clearing agency or for which it is
responsible. The Commission believes that DTC's rule change meets these
requirements because it establishes additional procedures to eliminate
aged short positions and therefore helps to protect DTC against risk.
\6\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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DTC's procedures are modelled on existing DTC procedures used to
eliminate short positions of participants whose DTC accounts have been
closed.\7\ DTC's rule change also is in response to concerns raised by
the Federal Reserved Bank of New York urging DTC to take additional
steps to eliminate aged short positions. The Federal Reserve Bank of
New York has expressed concern about DTC continuing to give long
position credits to its participants where such credits are not
supported by securities in inventory.
\7\ Securities Exchange Act Release No. 33261 (November 30,
1993), 58 FR 64626 [File No. SR-DTC-92-11] (order approving a
proposed rule change relating to the elimination of short positions
in a retired participant's account).
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The proposal will permit DTC to take affirmative steps to reduce
the outstanding short positions and the risks associated with such
short positions. Under DTC's procedures, participants are obligated to
cover their short positions immediately. DTC participants are assessed
a daily charge of 130% of the market value of the security as an
incentive for the participant to cover the short position as soon as
possible and as a cushion to protect DTC in the event of a sharp rise
in the market price of the security.\8\ By assessing a 130% daily
charge to short positions in a participant's account, DTC will limit
its risk of loss to instances when there is a rise in the market price
of the security above 130%. The buy-in procedures will limit further
DTC's risk of loss by permitting DTC to use the short position charge
to take affirmative action to buy-in securities to cover short
positions older than ninety days.
\8\ Securities Exchange Act Release No. 26896 (June 5, 1989), 54
FR 25185 [File No. SR-DTC-89-07] (order approving a proposed rule
change concerning invitations to tender to cover short positions).
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III. Conclusion
The Commission finds that the proposal is consistent with the
requirements of the Act, particularly with Section 17A(b)(3)(F) of the
Act and the rules and regulations thereunder.
IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-DTC-95-01) be, and hereby
is, approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\9\
\9\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-14977 Filed 6-19-95; 8:45 am]
BILLING CODE 8010-01-M