[Federal Register Volume 60, Number 214 (Monday, November 6, 1995)]
[Notices]
[Pages 56078-56081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27426]



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[[Page 56079]]


SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36436; File No. SR-DTC-95-14]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of a Proposed Rule Change Seeking Depository 
Eligibility of Fractional Shares and Cent-Denominated Securities

October 30, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 4, 1995, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-DTC-95-14) as described in Items I, II, and III below, which items 
have been prepared primarily by DTC. 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

    DTC is filing the proposed rule change to make fractional shares 
and cent-denominated securities eligible for book-entry delivery and 
other DTC services.

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 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.\2\

    \2\ The Commission has modified the text of the summaries 
prepared 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 purpose of the proposed rule change is to make cent-denominated 
securities and fractional shares eligible for book-entry delivery and 
other DTC services. The proposal is being made in response to numerous 
requests made by DTC participants.\3\ This proposal anticipates the 
accelerated securities processing environment that will be triggered by 
the conversion of DTC's money settlement system to an entirely same-day 
funds settlement (``SDFS'') system. DTC is proposing to implement the 
eligibility of fractional shares on a voluntary basis.\4\

    \3\ In 1992, the results of a survey of DTC participants showed 
that most responding participants wished to have certain types of 
issues not then eligible for depository services made DTC-eligible 
including cent-denominated securities and fractional shares.
    \4\ Infra note 13.
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1. Cent-Denominated Securities
    DTC estimates that approximately 6,000 cent-denominated issues 
exist for which DTC eligibility will become possible if the Commission 
approves DTC's proposed rule change. Of those 6,000 issues, DTC 
estimates that 350 are treasury receipts.\5\

    \5\ This estimate is based on information compiled by a DTC 
participant. Treasury receipts are proprietary products of broker-
dealers created by stripping the coupons from U.S. Treasury 
securities (``Treasuries'') with the resulting instrument 
representing an interest in the stripped coupons or in the remaining 
principal (i.e., zero coupon products). Subsequently, the U.S. 
Treasury began issuing STRIPS (Separate Trading of Registered 
Interest and Principle of Securities) bonds which essentially 
replaced the Treasury receipt in function. The Treasury issues 
STRIPS in a form that allows dealers to sell them immediately as 
zero-coupon products and do not require the repackaging steps that 
are necessary to transform straight Treasuries into zero-coupon 
instruments. Other newly eligible issues will include church bonds 
and various other securities types. Church bonds are securities 
issued by a religious organization to finance building or renovation 
projects. These securities typically are issued in small dollar 
amounts within a confined geographical area.
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    Under the proposed rule change, participants will deposit cent-
denominated securities at DTC by using DTC's Deposit Automation 
Management (``DAM'') service. DTC will in turn submit such securities 
to the appropriate transfer agent. However, the cents portion of the 
aggregate dollar figure for the deposited securities will be 
``truncated'' (i.e., cut off). Having eliminated the cents portion from 
the position, DTC only will reflect the whole dollar amount of deposits 
in the participant's account at DTC. For example, if a participant 
deposits ten certificates at $1.15, $11.00 will credited to the 
participant's DTC account, and the remaining fifty cents will be 
truncated. All related services and transactions thereafter will be 
effected in whole dollar increments, including principal and income 
payments.
    The truncated amounts will be collected in an internal DTC account. 
The sum is not expected to be significant at first and therefore will 
not warrant the expense of developing a complex system to credit the 
truncated cents to each respective depositing participant as the 
amounts accumulate. Instead, the cents and any income derived therefrom 
will become part of DTC's general revenues. Because DTC refunds 
revenues in excess of its costs to its participants, DTC in effect will 
pass along the value of the truncated cents to participants as part of 
DTC's general refund when and if refunds of excess revenues are 
distributed.\6\ Participants also will forfeit any voting rights on 
truncated cents. In time, depending on the size of the accumulated 
truncated amounts, DTC may reconsider developing a tacking mechanism to 
credit these amounts to the accounts of depositing participants.

    \6\ Any refunds from the truncation program will be distributed 
to all DTC participants not only those participants depositing cent-
denominated securities.
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    DTC believes that the actual financial effect on its participants 
of the cent truncation will be negligible and well within industry 
practice for reconciling de minimis differences in such things as 
deliveries and deposits. DTC estimates that if all cent-denominated 
certificates held by its participants were deposited at DTC, the scale 
of the financial impact of the cent truncation would be as set forth 
below.
    According to a 1992 survey, thirty-one DTC participants held cent-
denominated securities represented by 57,114 certificates and more than 
8,000 CUSIP numbers. The value of these positions in 1992 was 
approximately $37 million. Distributed among the DTC's entire 
participant base, the total value of the truncated cents is estimated 
to be less than $22,000. This figure is the result of three 
calculations:
    (i) The average number of certificates for a DTC registered deposit 
is four; therefore, assuming that an average of four certificates is 
included in each deposit, the estimated number of deposits for the 
surveyed participants would be 14,278 (57,114 certificates  4 
certificates per deposit).
    (ii) Assuming that the average truncation for each deposit is fifty 
cents,\7\ the aggregate value of the cents portion would be $7,139 for 
the surveyed participants ($.50  x 14,278).

    \7\ This is the median between the lowest possible truncation 
amount (zero cents) and the highest possible truncation amount (99 
cents).
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    (iii) The surveyed participants represent approximately thirty-
three percent of DTC's monthly billing total. Extrapolating from this 
percentage for all DTC participants depositing cent-denominated 
securities into their DTC accounts, the estimated total truncated 
portion of cents would be $21,631 ($7,139  x 3.03 [mathematical inverse 
of thirty-three percent] = $21,631).

[[Page 56080]]

    If the $21,631 were distributed equally among all DTC participants 
as part of a general refund, the following distributions can be 
projected. DTC's last excess revenue refund to its participants was 
$8,000,000, and the largest portion returned to a participant was 
$372,876, which represented 4.7 percent of the total refund. The 
smallest portion returned was $8, which represented .0001 percent of 
the total refund. Using these percentages, the largest possible refund 
would be $1,016 (4.7 percent of $21,631); the smallest possible refund 
would be two cents (.0001 percent of $21,631); and the average refund 
would be approximately $49 ($21,631  441 direct participants = 
$49.05).\8\

    \8\ Participants will also garner the benefit of administrative 
efficiencies that will attend the elimination of pennies. 
Specifically, fewer keystrokes will be required to enter penny 
amounts, and less record surveillance will be required to account 
for and reconcile penny amounts.
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2. Fractional Shares
    DTC also wishes to make securities denominated in fractional shares 
eligible for deposit.\9\ DTC proposes to carry the fractional portions 
under a contra-CUSIP number, with full shares being reflected in the 
primary CUSIP. Delivery orders and pledges will not initially be 
permitted to be denominated in fractional shares.\10\ However, DTC 
participants will have the option as the fractional shares accumulate 
to full shares under the contra-CUSIP to add them to the preliminary 
CUSIP where they will be eligible for all activities.\11\ 
Alternatively, the fractional shares can be left in the contra-CUSIP. 
DTC also will provide enhanced physical processing so that deposits and 
withdrawals-by-transfer containing both whole and fractional shares can 
be combined, and DTC will handle the process of separating the whole 
shares to the primary CUSIP and the fractional shares to the contra-
CUSIP.

    \9\ A fractional share is a unit of stock less than one full 
share.
    \10\ DTC is also investigating the possibility of developing and 
providing a limited delivery capability that would require receiver 
authorization prior to a delivery being made.
    \11\ DTC participants will also have the ability to break up 
full shares under the primary CUSIP into fractional shares under the 
contra-CUSIP although the resulting fractional shares will not be 
initially eligible for deliver orders or for pledging purposes.
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    DTC believes the proposed rule change is consistent with the 
requirements of Section 17A(b)(3)(F) \12\ of the Act and the rules and 
regulations thereunder applicable to DTC in that it promotes 
efficiencies in the clearance and settlement of securities 
transactions.

    \12\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.

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

    Responses to DTC's current proposal were generally favorable. 
Participants that commented were pleased to learn of DTC's initiative 
to extend depository services to fractional shares and cent-denominated 
securities and indicated that the effort will be beneficial to their 
individual firms as well as to the securities industry overall. They 
indicated that they viewed the initiative as being consistent with the 
industry's long-term goal of achieving a centralized processing 
environment for physical securities, particularly with the goals of 
DTC's DAM Program and the Vision 2000 Committee's recommendations.\13\

    \13\ The Vision 2000 Committee is comprised of representatives 
from the Boards of Directors of DTC and the National Securities 
Clearing Corporation. Its focus is on the elimination of 
inefficiencies and redundancies, the maximization of technology, and 
the reduction in costs in the clearance and settlement industry both 
within and without the United States. The Vision 2000 Committee's 
recommendations are discussed in the Report of the Vision 2000 
Committee (September, 1994).
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    In August 1994, a memorandum detailing DTC's proposal for handling 
cent-denominated securities was issued for participant comment. 
Responding participants generally agreed with the proposal. 
Participants attending a forum on this subject on August 18, 1994, were 
also largely in agreement.
    The current contra-CUSIP approach for fractional shares is a 
realistic near-term improvement on the status quo.\14\ It enables DTC 
to accommodate those participants that wish to reduce or eliminate 
their vault holdings and permits DTC to provide at least limited 
services for fractional shares. At the same time, participants choosing 
not to use the service will not be obliged to make the substantial 
system changes necessitated by the inauguration of a book-entry 
delivery capability for these securities.\15\

    \14\ DTC's initial proposal for handling fractional shares, 
communicated to participants in August 1994, did not contemplate 
implementing the contra-CUSIP approach on a voluntary basis. 
Participants responding at that time expressed reservations about 
anticipated difficulties in reconciliation as well as in providing 
programming resources given that such resources were seen as already 
fully committed to the upcoming change to a same-day funds 
settlement system and to a T+3 settlement cycle. To address its 
participants' concerns, DTC devised the current proposal that 
provides for voluntary implementation. This newer, more flexible 
approach was described to participants in a notice dated December 
14, 1994.
    \15\ Offering DTC participants the ability to make book-entry 
deliveries of fractional shares will be the first step in the 
development of processing capabilities for fractional shares. DTC 
will continue to monitor its participants' need for book-entry 
delivery as experience with this service is gained. The use of a 
single, primary CUSIP for entire positions will also be explored.
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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 DTC 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 Room, 450 Fifth Street NW., Washington, 
DC 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-95-14 and should be submitted by 
November 27, 1995.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\16\

    \16\ 17 CFR 200.30-3(a)(12) (1994). 

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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-27426 Filed 11-3-95; 8:45 am]
BILLING CODE 8010-01-M