[Federal Register Volume 61, Number 4 (Friday, January 5, 1996)]
[Notices]
[Pages 429-430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-166]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36651; File No. SR-DTC-95-21]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Order Granting Accelerated Permanent Approval of a 
Proposed Rule Change Concerning Short Position Reclamation Procedures

December 28, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 9, 1995, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-DTC-95-21) 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 on the proposed rule change from 
interested persons and to grant permanent approval of the proposed rule 
change on an accelerated basis.

    \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 for the recall of securities deliveries that 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 for the recall of certain 
deliveries which have created short positions as a result of call 
lotteries or rejected deposits.\2\

    \2\ For a complete description and discussion of the procedures 
designed to eliminate short positions caused by call lotteries or 
rejected deposits, 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 that have created short 
positions as a result of call lotteries); 35034 (November 30, 1994), 
59 FR 63396 [File Nos. SR-DTC-94-08 and SR-DTC-94-09] (ordering 
granting temporary approval through May 1, 1995, of DTC's procedures 
to recall certain deliveries that have created short positions as a 
result of call lotteries and rejected deposits); and 35940 (July 6, 
1995), 60 FR 36318 [File No. SR-DTC-95-07] (order granting temporary 
approval through December 31, 1995, of DTC's procedures to recall 
certain deliveries that have created short positions as a result of 
call lotteries and rejected deposits).
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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.\3\

    \3\ 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 a participant to recall book-entry deliveries of 
callable securities \4\ if the participant's account becomes short as a 
result of deliveries made between the call publication date \5\ and the 
date of DTC's call lottery \6\ and (2) enable a participant to recall 
securities deliveries that have created short positions as a result of 
rejected deposits.\7\ 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.

    \4\ 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.
    \5\ The call publication date is the date on which the issuer 
gives notice of redemption.
    \6\ 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].
    \7\ 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 
participant 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.
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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 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.\8\ Participants are 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 still must 
deliver securities to the receiving participant).

    \8\ 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.
    \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 and rejected 
deposits. Through September 1995, a total of 287 short positions valued 
at $54,289,000 have been eliminated through the use of the reclamation 
procedures.
    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.

[[Page 430]]


(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 \10\ 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. 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.

    \10\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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    Under the DTC's procedures, participants are obligated to cover 
their short positions immediately. As an incentive to cover a 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.\11\ 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) \12\ 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.

    \11\ Securities Exchange Act Release No. 26896 (June 5, 1989), 
54 FR 25185 [File No. SR-DTC-89-07] (order approving a proposed rule 
change concerning invitations to tender to cover short positions).
    \12\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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    Because the Commission was concerned that the proposed reclamation 
procedures could inadvertently cause broker-dealers to create 
possession or control deficits,\13\ the Commission previously approved 
the proposed rule change on a temporary basis in order that the 
reclamation procedures could be carefully monitored before they were 
approved permanently. The Commission is now permanently approving the 
reclamation procedures because during the temporary approval period the 
Commission has not received any reports of possession or control 
deficit problems caused by the procedures.

    \13\ The Commission was concerned with the proposal's impact on 
broker-dealers' 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-dealer participant, the participant could incur a 
deficit in the number of securities that should be under its 
physical possession or control.
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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 filing. The Commission finds good cause for so 
approving the proposed rule change because the Commission has noticed 
the procedures on several separate occasions without receiving any 
comment letters and because accelerated approval will allow DTC 
participants to continue to utilize the procedures without any 
disruption when the current temporary approval expires.

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. 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-95-21 and should be 
submitted by January 26, 1996.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-95-21) be, and hereby 
is, permanently approved.

    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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Jonathan G. Katz,
Secretary.
[FR Doc. 96-166 Filed 1-4-96; 8:45 am]
BILLING CODE 8010-01-M