[Federal Register Volume 60, Number 135 (Friday, July 14, 1995)]
[Notices]
[Pages 36318-36320]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17264]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35940; File No. SR-DTC-95-07]
Self-Regulatory Organizations; the Depository Trust Company;
Notice of Filing and Order Granting Accelerated Approval on a Temporary
Basis of a Proposed Rule Change Relating to DTC's Short Position
Reclamation Procedures
July 6, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on April 20, 1995, The
Depository Trust Company (``DTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change (File No.
SR-DTC-95-07) as described in Items I and II below, which items have
been prepared primarily by DTC. The Commission is publishing this
notice and order to solicit comments from interested persons and to
grant accelerated approval of the proposed rule change on a temporary
basis through December 31, 1995.
\1\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change seeks permanent approval of DTC's existing
procedures to recall securities deliveries which have created short
positions as a result of call lotteries or rejected deposits. The
Commission previously granted temporary approval to proposed rule
changes establishing DTC's procedures to recall certain deliveries
which have created short positions as a result of call lotteries.\2\
The Commission also previously granted temporary approval to expand the
procedures to recall securities deliveries which have created short
positions as a result of rejected deposits.\3\
\2\ For a complete description and discussion of the procedures
designed to eliminate short positions caused by call lotteries,
refer to Securities Exchange Act Release Nos. 30552 (April 2, 1992),
57 FR 12352 [File No. SR-DTC-90-02] (order granting temporary
approval through April 1, 1994, of DTC's procedures to recall
certain deliveries which have created short positions as a result of
call lotteries) and 35034 (November 30, 1994), 59 FR 63396 [File
Nos. SR-DTC-94-08 SR-DTC-94-09] (order granting temporary approval
through May 1, 1995, of DTC's procedures to recall certain
deliveries which have created short positions as a result of call
lotteries and rejected deposits).
\3\ Securities Exchange Act Release No. 35034.
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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.\4\
\4\ The Commission has modified the text of the summaries
submitted by DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule change
The proposed rule change seeks permanent approval of procedures
that: (1) Enable participants to recall book-entry deliveries of
callable securities \5\ if the participant's account became short as a
result of deliveries made between the call publication date \6\ and the
date of DTC's call lottery \7\ and (2) enable participants to recall
securities deliveries which have created short positions as a result of
rejected deposits.\8\
\5\ Callable securities are either preferred stock or bonds
which the issuer is permitted or required to redeem before the
stated maturity date at a specified price.
\6\ The call publication date is the date on which the issuer
gives notice of redemption.
\7\ DTC has established a lottery process to allocate called
securities in a partially called issue among participants having
positions in the issue. DTC allocates the called securities among
participants that had positions in the issue on the call publication
date rather than on the day when the lottery is held. For a
description of DTC's lottery processing procedures, refer to
Securities Exchange Act Release No. 21523 (November 27, 1984), 49 FR
47352 [File No. SR-DTC-84-09] (notice of filing and immediate
effectiveness of proposed rule change).
\8\ Under DTC procedures, a participant depositing securities
receives immediate credit in its securities account (i.e., before
the certificates are sent to the transfer agent for transfer and
registration in DTC's nominee name). Once the participant's account
is credited, the securities are available to the depositing
participants for deliveries, withdrawals, and pledges. If the
transfer agent rejects a deposit after the depositing participant
has made a book-entry delivery of the credited securities,
elimination of the credit from the participant's account may create
a short position. If the securities are rejected by the transfer
agent after ninety days of the deposit for registered securities and
after nine months for bearer securities, the participant will not be
able to recall the book-entry delivery and the participant's account
will remain short.
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Pursuant to DTC's proposal, a participant with a short position
created either because of a delivery made between the call publication
date and
[[Page 36319]]
the date of DTC's lottery or because of a rejected deposit may initiate
the recall process within ten business days of the creation of the
short position by sending a broadcast message directly to the receiver
of the book-entry delivery. Participants will be able to transmit this
message through DTC's Participant Terminal System network. The
receiving participant will have five business days to comply with the
recall request if it has a position in that security at DTC. If the
receiving participant no longer has such a position at DTC, it must
comply with the recall request within fifteen business days. If the
short position is less than the amount of the delivery, the receiver
has the option to return the entire delivery or just a portion equal to
the delivering participant's short position. If the receiving
participant does not comply with the recall request within the
applicable time, the recalling participant may request DTC's
intervention.\9\ Recalls will reverse only the book-entry delivery
while the original transaction still must be settled by the delivering
and receiving participants (i.e., the delivering participant must
deliver securities to the receiving participant).
\9\ The intervention request must be submitted to DTC no later
than twenty-five days after the original reclamation request was
made.
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DTC believes that the reclamation procedures have been effective in
reducing short positions caused by call lotteries. Through March 31,
1995, a total of 265 short positions valued at $48.3 million have been
eliminated pursuant to the rule. As of March 31, 1995, DTC's 256
participants carried a total of 968 short positions valued at
approximately $37.4 million.\10\ The proposed rule change is part of a
program that is being implemented at the request of participants and
securities industry groups to eliminate short positions.
\10\ For the purposes of this filing, DTC defines the term
``short position'' to mean a separate entry (line item) representing
a participant's obligation to deliver to DTC one or more securities
in a specific issue. Letter from Piku K. Thakkar, Assistant Counsel,
DTC, to Chris Concannon, Commission (May 26, 1995).
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DTC believes the proposed rule change is consistent with the
requirements of Section 17A of the Act and the rules and regulations
thereunder because the rule proposal seeks to make permanent procedures
that should help reduce the number of short positions created either by
call lotteries or by rejected deposits and thus should assure the
safeguarding of securities and funds which are in the custody and
control of DTC or for which DTC is responsible.
(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
No 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
Section 17A(b)(3)(F) 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.\11\ The Commission believes that DTC's
short position reclamation procedures are consistent with DTC's
obligations under Section 17A(b)(3)(F) because the proposed procedures
should help DTC assure the safeguarding of securities and funds by
reducing the number of outstanding short positions at DTC created
either by call lotteries or by rejected deposits.
\11\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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Under DTC's procedures, participants are obligated to cover their
short positions immediately. As an incentive 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, DTC
participants are assessed a daily charge of 130% of the market value of
each security for which the participant has a short position at
DTC.\12\ By assessing a 130% daily charge to short positions in a
participant's account, DTC limits its risk of loss to instances when
there is a rise in the market price of the security above 130%. With
this rule change, DTC should further reduce its risk of loss by
allowing DTC participants to recall certain deliveries which have
resulted in short positions which should further reduce the total
number of outstanding short positions. Thus, the proposal is consistent
with Section 17A(b)(3)(F) \13\ of the Act in that it should help DTC to
reduce its risk of loss and thereby should enhance DTC's ability to
safeguard securities and funds under its control.
\12\ Securities Exchange Act Release No. 26896 (June 5, 1989),
54 FR 25185 [Filed No. SR-DTC-89-07] (order approving a proposed
rule change concerning invitations to tender to cover short
positions).
\13\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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DTC has requested that the Commission find good cause for approving
the proposed rule change prior to the thirtieth day after the date of
publication of notice of the filing. The Commission finds good cause
for so approving the proposed rule change because accelerated approval
will allow DTC participants to continue to utilize without any
disruption the reclamation procedures for short positions created by
call lotteries or by rejected deposits.
However, the Commission realizes that the proposed reclamation
procedures could cause broker-dealers inadvertently to create
possession or control deficits.\14\ Therefore, the Commission believes
that the proposed rule change should be carefully monitored before the
procedures become permanent. For this reason, the Commission is
temporarily approving the proposed rule change through December 31,
1995.
\14\ The Commission is concerned with the proposal's impact on
broker-dealer's compliance with Rule 15c3-3 under the Act [17 CFR
240.15c3-3]. This rule requires broker-dealers to obtain and
thereafter to maintain physical possession or control of fully-paid
securities and excess margin securities carried by a broker-dealer
for the account of a customer [17 CFR 240.15c3-3(b)(1)]. If as a
result of a recall procedure, DTC reverses the delivery of a
security that is a fully-paid or excess margin security at the
receiving broker-deficit in the number of securities that should be
under its physical possession or control.
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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. Sec. 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 the file number SR-DTC-95-07
[[Page 36320]]
and should be submitted by August 4, 1995.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-DTC-95-07) be, and hereby
is, approved through December 31, 1995.
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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-17264 Filed 7-13-95; 8:45 am]
BILLING CODE 8010-01-M