[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