[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]                             
------------------------------------------------------------------------
                                                        Maximum Possible
     Minimum            Maximum        Premium Percent       Premium    
------------------------------------------------------------------------
$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\)    
------------------------------------------------------------------------
\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