[Federal Register Volume 60, Number 231 (Friday, December 1, 1995)]
[Notices]
[Pages 61720-61722]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29321]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36509; File No. SR-CHX-95-27]
Self-Regulatory Organizations; The Chicago Stock Exchange,
Incorporated; Notice of Filing of Proposed Rule Change Relating to
Chicago Stock Exchange, Incorporated's Decision To Withdraw From the
Clearance and Settlement and Securities Depository Businesses
November 27, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on November 16, 1995, the
Chicago Stock Exchange, Incorporated (``CHX'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change (File No. SR-CHX-95-27) as described in Items I, II, and III
below, which items have been prepared primarily by CHX. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
\1\ 15 U.S.C. Sec. 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 involves proposed arrangements relating to
a decision by CHX to withdraw from the clearance and settlement,
securities depository, and branch receive businesses conducted through
its subsidiaries, the Midwest Clearing Corporation (``MCC''), Midwest
Securities Trust Company (``MSTC''), and Securities Trust Company of
New Jersey (``STC/NJ'').\2\ Parties to the proposed arrangements are
The Depository Trust Company (``DTC''), CHX, MSTC, the National
Securities Clearing Corporation (``NSCC''), MCC, and STC/NJ. The
proposed arrangements as they relate to CHX would provide for the
following:
\2\ STC/NJ is a wholly-owned subsidiary of CHX that currently
provides certain services, including a securities custody service.
STC/NJ is not a clearing agency as defined in the Act and therefore
is not required to register with the Commission.
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(1) MSTC and MCC would cease providing securities depository and
securities clearing services, respectively, by January 15, 1996.
(2) DTC would offer sole MSTC participants an opportunity to become
DTC participants, if they meet DTC's qualifications. NSCC would offer
sole
[[Page 61721]]
MCC participants the opportunity to become NSCC participants if they
meet NSCC's qualifications.
(3) DTC and MSTC would cooperate to assure the orderly transfer of
securities from the custody of MSTC to the custody of DTC for DTC
participants that authorize such transfers. Open positions of MCC
participants that are or that become NSCC participants and that
authorize the transfer of their positions will be transferred to the
books of NSCC.
(4) DTC would acquire certain assets and assume certain lease and
other contractual obligations of STC/NJ.
(5) DTC would assume certain lease obligations of CHX.
(6) DTC and NSCC would make certain payments to CHX, MSTC, MCC, and
STC/NJ.
(7) In general, for a period of ten years CHX, MCC, MSTC, and STC/
NJ would not engage in the businesses from which they have decided to
withdraw (i.e., the securities clearing, securities depository, and
branch receive businesses). However, CHX and its subsidiaries would be
free to provide specified securities depository-related and securities
clearing-related services and products to CHX members and certain
third-parties under certain circumstances.\3\
\3\ A more detailed description of these proposed arrangements
is contained in Exhibit 2 to the filing. A copy of the filing and
all exhibits is available for copying and inspection in the
Commission's Public Reference Room.
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The proposed rule change also seeks to modify CHX's Constitution to
reduce the size of the Board of Governors.\4\
\4\ The text of these proposed changes is contained in Exhibit A
to the filing. A copy of the filing and all exhibits is available
for copying and inspection in the Commission's Public Reference
Room.
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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, the self-regulatory organization
included statements concerning the propose 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. CHX has prepared summaries, set
forth in section (A), (B), and (C) below, of the most significant
aspects of such statements.\5\
\5\ The Commission has modified the text of the summaries
prepared by CHX.
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(A) Self-Regulatory Organizations' Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
CHX has determined to close its clearance and settlement and
securities depository business in order to focus its resources on the
operations of the exchange itself. The primary purpose of the proposed
arrangements is to permit CHX to achieve this objective while affording
MCC participants an opportunity to become NSCC participants and
affording MSTC participants an opportunity to become DTC participants
and transfer their open positions and securities to NSCC and DTC. Both
MCC and MSTC participants, however, would be free to utilize any other
service provider of their choosing. This is consistent with the
industry's effort to eliminate redundant infrastructure costs
associated with operating separate organizations.
The timing of the proposal is related to the industry's planned
conversion to same-day funds settlement.\6\ Currently, transactions in
equities, corporate debt, and municipal debt are settled in next-day
funds.\7\ Transactions in commercial paper and other money market
instruments are settled in same-day funds. As the Commission is aware,
the registered clearing agencies have been working with the industry
over the least few years to develop a system that will provide for the
settlement of virtually all securities transactions in same-day funds.
These efforts have been encouraged by the Commission, the Board of
Governors of the Federal Reserve System, and the Federal Reserve Banks
of New York and Chicago, and these plans have been monitored by the
staffs of these regulatory bodies.\8\ Under the conversion plan, all
issues currently settling in DTC's next-day funds settlement system
will be transferred to DTC's same-day funds settlement system on a
single day. Several months ago, a consensus was reached that the
conversion date will be February 22, 1996. As a result of this
scheduled conversion date, CHX has determined to cease providing
securities depository, securities clearing, and branch receive services
by January 15, 1996.
\6\ The term ``same-day funds'' refers to payment in funds that
are immediately available and generally are transferred by
electronic means.
\7\ The term ``next-day funds'' refers to payment by means of
certified check that is for value on the following day.
\8\ In approving certain modifications of DTC's existing system
in order to accommodate the overall conversion to same-day funds
settlement, the Commission stated that it ``believes that the
overall conversion to an SDFS system will help reduce systemic risk
by eliminating overnight credit risk. The SDFS system also will
reduce risk by achieving closer conformity with the payment methods
used in the derivatives markets, government securities markets and
other markets.'' Securities Exchange Act Release No. 35720 (May 16,
1995), 60 FR 27360 [File No. SR-DTC-95-06] (order granting
accelerated approval to proposed rule change modifying the same-day
funds settlement system).
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The proposed arrangements should result in substantial savings for
the securities industry. In connection with this proposal, former sole
MSTC participants may become DTC participants if they qualify, and
former sole MCC participants may become NSCC participants if they
qualify or utilize any other clearing and depository service provider.
Moreover, interdepository and clearing interfaces involve the
maintenance of substantial facilities, communications networks, and
account and inventory reconciliation mechanisms. As a result of the
proposal, the substantial costs incurred by both DTC, NSCC, MCC, and
MSTC in operating interfaces would be eliminated.
Another purpose of the proposed rule change is to reduce the size
of the CHX's Board of Governors. This reduction conforms with the
simultaneous reductions in the size of the boards of directors of MCC
and MSTC. Because of its withdrawal from the businesses described
above, CHX no longer believes it is necessary to maintain such a large
board of directors. As a result, CHX is eliminating the Participant
Governor positions. Those current board members whose slots have been
eliminated may serve out the remainder of their terms.
CHX believes that proposed rule change is consistent with Section
6(b)(5) of the Act \9\ in that it will enable the CHX to focus its
energies on its core business, the exchange. This, in turn, will
promote just and equitable principles of trade, remove impediments and
perfect the mechanism of a free and open market and a national market
system, and, in general, protect investors and the public interest. The
proposal also will foster cooperation and coordination with persons
engaged in clearing and settling transactions in securities.
\9\ 15 U.S.C. 78f(b)(5) (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
CHX does not believe the proposed arrangements will improve any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act. Securities depositories and securities
clearing corporations registered under Section 17A of the Act are not
conventional
[[Page 61722]]
businesses but utilities created to serve members of the securities
industry for the purpose of providing certain services that are
ancillary to the businesses in which industry members compete with one
another. Operating a securities depository and securities clearing
corporation requires a substantial and continuing investment in
infrastructure, including securities vaults, telecommunications links
with users, data centers, and disaster recovery facilities in order to
meet the increasing needs of participants and respond to regulatory
requirements. Both the Boston Stock Exchange in 1981 and the Pacific
Stock Exchange in 1987 terminated the operations of their securities
depositories and substantially terminated the operations of their
securities clearing corporations.
After consummation of the proposed arrangements, securities
industry members will continue to have access to high-quality, low-cost
depository and clearing services provided under the mandate of the Act.
The overall cost to the industry of having such services available will
be reduced, thereby permitting a more efficient and productive
allocation of industry resources. Furthermore, because most of a
depository's and a clearing corporation's interface costs must be
mutualized, thereby requiring some participants to subsidize costs
incurred by others, CHX's withdrawal from maintaining depository and
clearing facilities should reduce costs to participants and thereby
remove impediments to competition. Finally, CHX's ability to focus its
resources on the operations of its exchange should help enhance
competition among securities markets.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
Comments on the proposal have not been solicited or received.
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, 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 Room, 450 Fifth Street, NW.,
Washington, DC. Copies of such filing also will be available for
inspection and copying at the principal office of CHX. All submissions
should refer to the file number SR-CHX-95-27 and should be submitted by
December 22, 1995.
For the Commission by the Division of Market Regulation, pursuant
to delegated authority.\10\
\10\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland.
Deputy Secretary.
[FR Doc. 95-29321 Filed 11-30-95; 8:45am]
BILLING CODE 8010-01-M