[Federal Register Volume 60, Number 206 (Wednesday, October 25, 1995)]
[Notices]
[Pages 54740-54743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-26429]



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[[Page 54741]]


SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36377; File No. SR-PTC-95-06]


Self-Regulatory Organizations; Participants Trust Company; Notice 
of Filing of Proposed Rule Change Modifying Processing System

October 16, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 15, 1995, the 
Participants Trust Company (``PTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-PTC-95-06) as described in Items I, II, and III below, which Items 
have been prepared primarily by PTC. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.

    \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 will amend PTC's rules to reflect changes 
to its processing system that will cause both the deliver and receive 
sides in a securities transaction to simultaneously receive debits and 
credits to their respective securities and cash positions.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, PTC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. PTC has prepared summaries, set forth in sections A, B, 
and C below, of the most significant aspects of such statements.\2\

    \2\The Commission has modified the text of the summaries 
prepared by PTC.
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A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to amend PTC's rules to 
reflect changes to its processing system which are intended to satisfy 
a commitment (``Commitment No. 3'') made by PTC to the Commission and 
to the Board of Governors of the Federal Reserve System (``Board of 
Governors'') when PTC was established. Commitment No. 3 stated that PTC 
would ``make the necessary technical changes (including Rules changes) 
for Delivering Participants to: (i) Be immediately notified, or able to 
ascertain, that securities debited from a Delivering Participant's 
Account or associated Transfer Account have not been credited to the 
Receiving Participant's Account or associated Transfer Account; and 
(ii) be able to retrieve such undelivered securities and to redeliver, 
pledge or hold such securities.''\3\ The proposed rule change 
eliminates the optional matching process currently available under 
PTC's rules between delivery and receipt of securities transfers which 
creates an intermediate status characterized as the ``abeyance 
account.'' The proposed rule change deletes the abeyance account, 
amends the receipt mode provisions, and provides for simultaneous 
credits and debits of an account transfer to both the receiving and 
delivering participants or limited purpose participants.\4\ PTC 
believes that Commitment No. 3 is satisfied through the elimination of 
the situation where a delivering participant's securities account has 
been debited and cash account credited when the receiving participant's 
securities account has not been credited and cash account debited.

    \3\Securities Exchange Act Release No. 26671 (March 28, 1989), 
54 FR 13266 (approving PTC's application for registration as a 
clearing agency under Section 17A of the Act) and letter from the 
Board of Governors approving PTC's application for stock in the 
Federal Reserve Bank of New York (March 27, 1989).
    \4\The abeyance account and the receipt mode provisions are 
discussed in detail later in this notice.
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    These amendments are proposed to take effect on or about November 
6, 1995, concurrent with the implementation of a new software release, 
SPEED Release 5.6, which will make the corresponding changes to PTC's 
SPEED transaction processing system.
1. Delivery of Securities Subject to an Account Transfer Under Current 
Processing System
    A delivering participant or limited purpose participant initiates a 
transfer of securities to another participant or limited purpose 
participant by instructing an account transfer of securities from its 
account or associated transfer account. If the account from which the 
transfer is requested satisfies the conditions set forth in PTC's 
rules,\5\ then PTC debits the securities from the account or associated 
transfer account of the delivering participant or limited purpose 
participant and, if the transfer is versus payment, credits the related 
cash balance.

    \5\PTC Rules, Article II, Rule 13, Section 1(b) generally 
requires sufficient securities and Net Free Equity (``NFE'') with 
respect to the account of the delivering participant or limited 
purpose participant. NFE measures the value of the collateral which 
is available to secure liquidity for payment of the account debit 
balance associated with the transaction. PTC Rules, Article II, Rule 
9. PTC will not process an account transfer if, as a result of such 
transfer, the required NFE is not available in the account at the 
time delivery is attempted.
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2. Receipt of Securities Subject of an Account Transfer Under Current 
Processing System
    Under PTC's rules,\6\ prior to crediting securities to the account 
of the receiving participant or limited purpose participant or in an 
account transfer versus payment its associated transfer account, the 
receipt of the securities must comply with the receipt mode selected by 
the receiving participant or limited purpose participant. Furthermore, 
if the transfer is versus payment, the receiving participant must have 
sufficient NFE, and the resulting debit to the account cash balance 
must not cause the receiving participant's net debit balance to exceed 
its Net Debit Monitoring Level (``NDML'').\7\

    \6\PTC Rules, Article II, Rule 13, Section 1(c).
    \7\PTC will not process transactions that increase a 
participant's net debit balance to a level greater than its NDML. 
When the NDML is reached or exceeded, PTC is entitled to require 
either confirmation of the participant's ability to pay its debit 
balance or prefunding of such debit balance. PTC Rules, Article II, 
Rule 2, Section 4.
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3. Receipt Modes
    Generally, a participant or limited purpose participant currently 
may choose one of the following receipt modes for receiving securities 
to its account or its associated transfer account in an account 
transfer versus payment: Auto Buy-In Mode, authorizing the receipt of 
all transactions; Auto-Match Mode, authorizing the receipt of all 
previously designated transactions either listed with specificity or by 
designating specified dollar tolerances; or Manual Match Mode, in which 
no transactions are preauthorized.\8\

    \8\PTC Rules, Article II, Rule 11. These provisions are 
eliminated by the present rule change.
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    Securities deliveries for which the receipt is not preauthorized 
are posted to the await match list associated with the receiving 
account and recorded in an abeyance account and are credited to the 
receiving account or associated transfer account only after the 
receiving participant or limited purpose participant approves the 
transfer. Any securities remaining on the await match list that are not 
approved or rejected prior to the close of daily processing are deemed 
approved by the receiving 

[[Page 54742]]
participant or limited purpose participant.\9\

    \9\PTC Rules, Article II, Rule 11.
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4. Abeyance Account
    Securities that are debited from the delivering participant's or 
limited purpose participant's account but not simultaneously credited 
to the account of the receiving participant or limited purpose 
participant because the receipt is not authorized by the receipt mode 
utilized by the receiving participant or limited purpose participant 
are recorded in the abeyance account until the transfer can be 
completed. In the current processing system, the delivering participant 
or limited purpose participant has no means of ascertaining whether the 
transfer has been completed to the account or associated transfer 
account of the receiving participant or limited purpose participant or 
whether the securities remain recorded in the abeyance account and 
placed on the await match list associated with the account of the 
receiving participant or limited purpose participant. Recording the 
securities delivery in the abeyance account is not deemed to effect any 
transfer of the securities or create or extinguish any interest in the 
securities held by PTC prior to such recording.\10\

    \10\PTC Rules, Article II, Rule 3, Section 1 and Rule 13, 
Sections 1(c)(i)(B) and 1(c)(ii)(B).
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5. Policy Considerations Behind Commitment No. 3
    A main policy consideration leading to Commitment No. 3 was the 
concern that in the case of an uncompleted account transfer versus 
payment the unexpected return to the delivering participant of the 
unmatched securities in the abeyance account and the corresponding 
elimination of the credit to the account cash balance of the delivering 
participant could place liquidity pressures on the delivering 
participant. Such liquidity pressure could occur at the end of the 
processing day just prior to settlement when there is little time for a 
participant to fund an unanticipated debit.
6. Summary of Proposed Systems and Rules Modifications
    Since 1989, PTC has considered various proposals to address the 
concerns behind Commitment No. 3 including an inquiry facility for 
delivering participants or limited purpose participants to ascertain if 
their deliveries had been received into the receiving participant's or 
limited purpose participant's account or associated transfer account in 
the case of an account transfer versus payment to the account of a 
receiving participant. The present rule change proposes to satisfy 
Commitment No. 3 by modifying the processing system to debit and credit 
simultaneously the accounts of delivering and receiving participants 
with securities and cash irrespective of the receipt mode chosen by the 
receiver. PTC believes this modification resolves Commitment No. 3 
because there will no longer be a situation where the delivering 
participant has received a cash balance credit before the receiving 
participant has received a cash balance debit.
    The functionality of the PTC match receipt modes will be maintained 
only as a transaction monitoring tool to designate the status of 
securities in the account or associated transfer account of the 
receiving participant or limited purpose participant after the transfer 
has been credited to the account. because debits to the cash balance of 
the account of the receiving participant will be immediate, it is 
anticipated that receiving participants will monitor their account son 
a timely basis.
7. Proposed Securities Transfer Processing Sequence
    Processing changes also will be made in SPEED Release 5.6,\11\ 
altering the sequence of transaction processing. The credit of 
securities will be posted to the account or associated transfer account 
of the receiving participant or limited purpose participant regardless 
of the receipt mode applied to the account. Similarly, in the case of 
an account transfer versus payment, the associated debit of cash will 
be posted to the account of the receiving participant or limited 
purpose participant regardless of the receipt mode applied to the 
account.

    \11\SPEED Release 5.6 is the latest upgrade in PTC's transaction 
processing system.
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    The delivering participant's or limited purpose participant's 
accounts or associated transfer accounts also will be posted 
simultaneously with the appropriate entries for securities debits and 
cash credits when the delivery has satisfied all conditions necessary 
to complete the transfer (i.e., the delivering account has sufficient 
available securities and sufficient NFE; in the case of an account 
transfer versus payment, the receiving account has sufficient NFE and 
the receiving participant's NDML will not be exceeded; or in the case 
of account transfers of securities to a pledgee account by use of the 
Collateral Loan Facility, the receipt is approved by the receiving 
participant or limited purpose participant).\12\

    \12\Currently, the requirement that a receiving participant or 
limited purpose participant must approve a transfer of securities to 
a pledgee account is specified in PTC's Participant Operating Guide 
description of the Collateral Loan Facility but not in PTC's rules. 
As a result of the proposed rule change, this requirement now will 
be specified in PTC's rules.
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    SPEED Release 5.6 is currently being tested and is anticipated to 
be operational in early November 1995. The earliest scheduled 
implementation date is November 6, 1995, based upon full participant 
tests on October 14 and 28, 1995, and assuming no coding or other 
changes are required as a result of these and other quality assurance 
testing procedures. PTC intends to implement the proposed rule changes 
upon implementation of SPEED Release 5.6.
8. Effect on NFE and NDML of Receiving Participant or Limited Purpose 
Participant
    The change in the sequence of transaction processing to produce 
simultaneous debiting and crediting of cash requires that the cash 
balance of the receiving participant's account in an account transfer 
versus payment be debited even though the delivery has not been 
approved by the receiving participant. Match functionality no longer 
will operate to defer the debit to the cash balance of the receiving 
participant or limited purpose participant until the delivery is 
approved. Because unmatched deliveries of account transfers versus 
payment no longer will generate a credit to the cash balance of the 
delivering participant or limited purpose participant without the 
corresponding debit to the receiving participant, it is anticipated 
that the implementation of SPEED Release 5.6 may result in increased 
incidences of failed deliveries due to NDML and NFE violations.
    PTC has monitored potential credit fails in anticipation of SPEED 
Release 5.6 by calculating and monitoring participants' NFE and NDML 
usage periodically throughout the processing day based on the 
hypothetical immediate posting of both matched and unmatched 
transactions to the receiving participant's account. Under the 
monitoring program, potential NDML violations have been minimal, but 
potential NFE violations have been noted. Participants have been 
advised of the hypothetical NFE and NDML violations and of the amount 
of the credit deficiency that would have occurred if SPEED Release 5.6 
was operational. PTC has worked with participants extensively to 
prepare them 

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for the changes in their procedures that will be required to ensure a 
smooth transition to the new transaction processing sequence. 
Furthermore, SPEED Release 5.6 also includes an auto-retry facility 
that automatically will recycle transactions that fail to complete due 
to credit deficiencies. Under the auto-retry facility, transactions 
will be resubmitted for the delivery process at set intervals 
throughout the day. If it is determined that both the deliverer and 
receiver pass the credit checks, the item then will be processed and 
debits and credits will be posted to the appropriate accounts.
9. Proposed Changes to PTC's Rules Implementing the Systems 
Modifications
    The proposed amendments to PTC's rules delete references throughout 
the rules to the abeyance account and to the use of a receipt mode as a 
condition to completion of an account transfer. PTC also will make 
corresponding changes to its Participant Operating Guide that are 
consistent with the systems changes of SPEED Release 5.6 and the 
proposed rule amendments.
    PTC believes that the proposed rule change is consistent with 
Section 17A(b)(3)(F) of the Act\13\ and the rules and regulations 
thereunder because it facilitates the prompt and accurate clearance and 
settlement of securities transactions and provides for the safeguarding 
of securities and funds in PTC's custody or control or for which PTC is 
responsible.

    \13\15 U.S.C. 78q-1(b)(3)(F) (1988).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    PTC does not believe that the proposed rule change will impose any 
burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    PTC developed the SPEED Release 5.6 systems modifications in 
consultation with its participants and solicited their comments by 
Administrative Bulletins dated July 28, 1994; October 28, 1994; and 
March 20, 1995. PTC also solicited participant responses to the 
proposal informally and at meetings of PTC's Operations Committee of 
which participant representatives are members.
    Participant comments on the proposed rule change expressed two main 
concerns with the original proposal. One concern was from participants 
that use the match functionality. These participants were concerned 
that the immediate debit to the cash balance of a receiving 
participant's account for deliveries not yet approved by the receiving 
participant would adversely affect the participant's NFE or NDML. The 
second concern was a need to include an auto-retry facility for any 
such transactions that fail to complete because of credit deficiencies. 
The first concern did not result in any change to the original proposal 
because the requirement for the simultaneous debiting and crediting of 
cash requires that the receiver's cash balance be debited even though 
the delivery has not been approved by the receiver. In response to the 
second concern of participants that there be an auto-retry mechanism, 
PTC has incorporated a facility into Release 5.6 that will 
automatically recycle transactions which fail to complete because of 
credit deficiencies.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the self-regulatory organization consents, 
the Commission will:
    (A) By order approve such proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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, NW., Washington, DC 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. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of PTC. All submissions 
should refer to file number SR-PTC-95-06 and should be submitted by 
November 15, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\

    \14\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-26429 Filed 10-24-95; 8:45 am]
BILLING CODE 8010-01-M