[Federal Register Volume 60, Number 231 (Friday, December 1, 1995)]
[Notices]
[Pages 61724-61725]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29322]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36510; File No. SR-MSTC-95-10]


Self-Regulatory Organizations; Midwest Securities Trust Company; 
Notice of Filing of Proposed Rule Change Relating to Midwest Securities 
Trust Company's Decision To Withdraw From the Securities Depository 
Business

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 
Midwest Securities Trust Company (``MSTC'') filed with the Securities 
and Exchange Commission (``Commission'') the proposed rule change (File 
No. SR-MSTC-95-10) as described in Items, I, II, and III below, which 
items have been prepared primarily by MSTC. 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 the Chicago Stock Exchange, Incorporated (``CHX'') to 
withdraw from the clearance and settlement, securities depository, and 
branch receive businesses conducted through its subsidiaries, the 
Midwest Clearing Corporation (``MCC''), MSTC, and the 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 Clearance Corporation (``NSCC''), MCC, and STC/NJ. 
The proposed arrangements as they relate to MSTC 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 would cease providing securities depository services by 
January 15, 1996.
    (2) DTC would offer sole MSTC participations an opportunity to 
become DTC participants if they meet DTC'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.
    (4) DTC and NSCC would make certain payments to MSTC.
    (5) In general, for a period of ten years MSTC would not engage in 
the business from which it has decided to withdraw (i.e., the 
securities depository business). However, MSTC would be free to provide 
specified securities depository-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 MSTC's By-Laws to 
reduce the size of its board of director.\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, MSTC 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. MSTC 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 MSTC.
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(A) Self-Regulatory Organization's 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 businesses it conducts through its subsidiaries 
MCC, MSTC, and STC/NJ in order to focus its resources on the operations 
of the exchange itself. The primary purpose of the proposed 
arrangements is to permit CHX and MSTC to achieve this objective while 
affording MSTC participants on opportunity to become DTC participants 
and transfer their securities to DTC. 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 last 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 

[[Page 61725]]
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, an industry consensus was reached that the conversion date 
will be February 22, 1996. As a result of this scheduled conversion 
date, CHX and MSTC have determined to cease providing securities 
depository 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 or 
utilize any other depository service provider. Moreover, 
interdepository 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 and MSTC in operating an interface would be 
eliminated.
    Another purpose of the proposed rule change is to reduce the size 
of MSTC's board of directors. This reduction conforms with the 
simultaneous reductions in the size of the boards of directors of MCC 
and CHX. Because of their withdrawal from the businesses described 
above, CHX and MSTC no longer believe it is necessary to maintain such 
a large board of directors. As a result, MSTC is eliminating four board 
positions in conjunction with the CHX's elimination of the Participant 
Governor positions. Those current board members whose slots have been 
eliminated, however, may serve out the remainder of their terms.
    MSTC 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 will facilitate the industry's 
conversion to same-day funds settlement for virtually all securities 
transactions and thereby facilitate the prompt and accurate clearance 
and settlement of such transactions. The proposal will provide 
qualified sole MSTC participants with access to DTC's facilities and 
will be implemented consistently with the safeguarding of securities 
and funds in MSTC's custody and control. In addition, it will foster 
cooperation and coordination with persons engaged in the clearance and 
settlement of securities transactions.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    MSTC believes the proposed arrangements will not impose any burden 
or competition not necessary or appropriate in furtherance of the 
purposes of the Act. Securities depositories registered under Section 
17A of the Act are not conventional 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 
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 to respond to regulatory 
requirements. Both the Boston Stock Exchange in 1982 and the Pacific 
Stock Exchange in 1987 terminated the operation of their securities 
depositories.
    After consummation of the proposed arrangements, securities 
industry members will continue to have access to high-quality, low-cost 
depository 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 
interface costs must be mutualized, thereby requiring some participants 
to subsidize costs incurred by others, CHX's and MSTC's withdrawal from 
maintaining depository facilities will reduce costs to participants and 
thereby remove impediments to competition. Finally, CHX's ability to 
focus its resources on the operations of the 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

    Written 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 submission 
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. Copies of such filing also will be available for inspection and 
copying at the principal office of MSTC. All submissions should refer 
to the file number SR-MSTC-95-10 and should be submitted by December 
22, 1995.
    For the Commission by the Division of Market Regulation, pursuant 
to delegated authority.\9\

    \9\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29322 Filed 11-30-95; 8:45 am]
BILLING CODE 8010-01-M