[Federal Register Volume 61, Number 7 (Wednesday, January 10, 1996)]
[Notices]
[Pages 745-750]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-364]



-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36681; File No. SR-Philadep-95-08]


Self-Regulatory Organizations; Philadelphia Depository Trust 
Company; Notice of Filing of a Proposed Rule Change Converting the 
Settlement System for Securities Transactions to a Same-Day Funds 
Settlement System

January 4, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),1 notice is hereby given that on November 3, 1995, the 
Philadelphia Depository Trust Company (``Philadep'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change (File No. SR-Philadep-95-08) as described in Items I, II, and 
III below, which items have been prepared primarily by Philadep. On 
December 19, 1995, Philadep filed an amendment to the proposed rule 
change.2 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).
    \2\ Letter from Keith Kessel, Compliance Officer, Philadep and 
SCCP to Peter R. Geraghty, Esq., Division of Market Regulation, 
Commission (December 14, 1995).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Philadelphia Depository Trust Company (``Philadep'') proposes 
to amend Rules 1, 4, and 9 and adopt Rule 4(A) and certain Philadep 
Procedures.3 The proposed rule change reflects a planned industry 
conversion to an expanded same-day funds settlement (``SDFS'') 
environment.

    \3\ The text of these proposals is attached as Exhibit B to File 
No. SR-Philadep-95-08. The file is available for review in the 
Commission's Public Reference Room and at the principal office of 
Philadep.
---------------------------------------------------------------------------

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

    In its filing with the Commission, Philadep 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. Philadep has prepared summaries, set forth in sections 
(A), (B), and (C) below, of the most significant aspects of such 
statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Introduction
    The proposed rule change sets forth the rules and procedures 
governing Philadep's SDFS system service. Philadep intends to provide 
SDFS depository services for all eligible securities. Philadep has made 
a substantial commitment to designing and building the data processing 
and computer network that will be the foundation for Philadep's SDFS 
system. Throughout this major industry conversion, Philadep has worked 
closely with the Stock Clearing Corporation of Philadep (``SCCP''), 
other registered clearing agencies, the Commission and the Board of 
Governors of the Federal Reserve System (``Federal Reserve'').
    In accordance with the SDFS service, Philadep will accept deposits 
of securities certificates for safekeeping and will provide the full 
range of SDFS depository services which include, but are not limited 
to, deposits, book-entry delivery and receive orders, withdrawals, 
pledges, trade confirmations, affirmations, transfers and dividend/
interest payments. New Philadep Rules and Procedures have been created 
for, among other things, pledging, failure to settle, transaction 
processing, risk management and money settlement in an expanded SDFS 
environment. Philadep has made substantial revisions to its current 
SDFS Procedures Manual and has included some of the salient procedural 
sections as exhibits to this rule change.4

    \4\ The text of the proposed procedures are attached as Exhibits 
B (3)-(6) to File No. SR-Philadep-95-08. The file is available for 
review in the Commission's Public Reference Room and at the 
principal office of Philadep.
---------------------------------------------------------------------------

    In assessing the impact of an expanded SDFS environment, the 
operational requirements, risk, liquidity needs, among other matters, 
were evaluated on a joint SCCP/Philadep basis. Operationally, both 
wholly-owned subsidiaries of the Philadelphia Stock Exchange, Inc. 
(``PHLX'') are integrally-related. Both registered clearing as well as 
strategic business objectives.
    Many links or tie-ins between SCCP and Philadep exist by by-law, 
rule and agreement. For example, pursuant to a long-standing joint 
agency agreement between SCCP and Philadep, SCCP, on behalf of 
Philadep, effects, among other things, daily money settlements on 
behalf of Philadep participants for securities received into and 
delivered out of their accounts; processing of CNS movements from one 
participant to another; processing of all SCCP/Philadep dividend and 
reorganization settlements; and the preparation, rendering and 
collection of bills to Philadep participants for depository services.
    In addition to these services, Philadep, on behalf of SCCP, 
facilitates book-entry movements through a joint SCCP and Philadep 
allocation system in order to assure continuous net settlements for the 
accounts of SCCP participants. Philadep also has 

[[Page 746]]
contractually agreed to provide SCCP with the means to pledge 
collateral to banks so that SCCP may obtain secured loans from such 
respective banks.
2. Risk Management Controls
    Risk management controls play a major role in the design of 
Philadep's SDFS system.\5\ Philadep's risk management controls are 
intended to protect Philadep participants against the inability of a 
participant to pay for its settlement obligations. Philadep employs two 
primary risk management controls for securities processing; 
specifically, the collateral monitor and the net debit cap. As a result 
of the close nexus between Philadep and SCCP, Philadep's collateral 
monitor and net debit cap analysis incorporates SCCP settlements with 
Philadep.

    \5\ The text of the new SDFS risk management controls is 
attached as Exhibit B(4) to File No. SR-Philadep-95-08. The file is 
available for review in the Commission's Public Reference Room and 
at the principal office of Philadep.
---------------------------------------------------------------------------

    Philadep will utilize two features to manage risk. The first 
involves participant collateralization; the second involves the 
regulation of net debits. Philadep has designed the collateralization 
aspect of SDFS to assure that a participant will have sufficient 
collateral in its account to liquidate in the event that it (i) becomes 
insolvent and/or (ii) fails to pay for its settlement obligation. In 
addition to collateralization, the procedures governing operational 
activity would prevent the completion of transactions if their 
completion would cause a participant's individual net debit to exceed 
its net debit cap. In this regard, the net debit cap application helps 
to assure that Philadep will have sufficient cash liquidity to complete 
settlement if any single participant fails to settle.
    An individual participant's net debit cap is limited by Philadep's 
established maximum net debit cap. The largest net debit cap is always 
set lower than Philadep's total available liquidity. Presently, based 
on a planned SCCP/Philadep total liquidity level of $60 million, the 
maximum net debit cap a participant may incur is $40 million.
A. Collateralization
    Philadep shall operate its SDFS system on a fully collateralized 
basis. Participants will be required to have sufficient collateral in 
their accounts to support their net settlement debits. If a participant 
does not have sufficient collateral in its account, the transaction 
will not be completed. The respective participant cannot allow its net 
debit to exceed the total value of its collateral; otherwise, these 
transactions are held on a recycle (pend) queue until sufficient 
collateral is generated to allow their completion.
    A participant may have several sources of collateral. The primary 
sources of collateral are the following:
    (1) Deposits by the participant to the Participants Fund;
    (2) Proprietary or firm positions that the participant designates 
as collateral;
    (3) Securities received versus payment, for which the participant 
has not yet paid (includes CNS deliveries); and
    (4) Securities added to a participant's account, but not received 
versus payment (e.g., deposits, free deliveries, free pledge releases, 
release of segregated securities) that the participant designates as 
collateral.
    Because collateralization is an integral part in Philadep's SDFS 
service, Philadep will conservatively assign values to various sources 
of collateral, which will be subject to haircuts. Securities designated 
as collateral by participants are valued based on the securities' prior 
business day's closing market price, less an applicable haircut.
    Philadep employs haircuts to protect itself and its participants 
against price fluctuations in collateral in the event that Philadep 
must liquidate the collateral of an insolvent participant. Moreover, 
because Philadep may have to finance a participant's failure overnight 
and borrow against a participant's collateral, Philadep's haircut 
structure takes into consideration the haircuts imposed by its lending 
institutions. Ordinarily, banks will not assign the full market value 
to securities used to collateralize loans, rather banks will generally 
consider the relative price volatility of the collateral and impose a 
haircut accordingly.
    Philadep haircuts the value of securities in a manner consistent 
with industry standards and which will satisfy the dual objectives of 
(i) adequately protecting Philadep and its participants from loss and 
(ii) enhancing Philadep's ability to secure sufficient financing in the 
event of a failure to settle situation. The haircut levels configured 
by security type are as follows:

Equities--10%
Corporate and Municipal Debt--5%
Money Market Instruments--2%, 5% or up to 100%
    (depending on their term and investment grade rating)

    Philadep may revisit its liquidity needs at any time, including 
intraday. Philadep reserves the right to reprice and modify haircuts 
intraday if it determines these changes to be in the best interest of 
Philadep and its participants.
B. Net Debit Caps
    Net debit caps are central to Philadep's SDFS risk management 
controls. Net debit caps limit the amount of settlement net debits 
(amount to be paid by the participant) that a participant may incur at 
any point during the processing day. Philadep will apply a net debit 
cap to each participant's account, determined by such participant's net 
debit history at Philadep and SCCP. Net debit caps are dynamic and, 
accordingly, will periodically adjust in relation to the participant's 
ongoing activity.
    A participant may not allow its net settlement debit to exceed its 
net debit cap. If a participant's net settlement debit would exceed its 
respective net debit cap for transactions that are subject to risk 
management control,\6\ the system will not allow the participant to 
complete the transaction. The transaction will be placed in a pending 
queue until the account generates sufficient offsetting credits from 
subsequent account activity. Most credits come from securities 
deliveries versus payment; securities pledges for value; principal, 
dividend or interest allocations; or from received funds (Settlement 
Progress Payments or ``SPP'') wired to Philadep's account at Philadep's 
designated settling bank(s).

    \6\ CNS and reclamation activity will be exempt from risk 
management controls at the inception of SDFS. In other words, SCCP/
Philadep will still process these activities. However, when a 
participant exceeds the net debit cap as a result of these 
activities, SCCP/Philadep may request settlement prepayments to 
reduce the daily debit. If SCCP/Philadep does not receive such 
prepayments, Philadep may reverse unsettled book-entry receives 
previously accepted to attain a positive collateral position, 
reducing the net debit to an amount under the net debit cap.
---------------------------------------------------------------------------

    Philadep will calculate net debit caps on daily net settlement 
activities and may adjust these figures monthly. A participant's net 
debit cap will be specifically determined by the following steps:
    (1) Philadep calculates a participant's average of the three 
highest end-of-day net debit settlements over a rolling three-month 
period to establish a ``base figure.'' For purpose of calculating a 
participant's net debit settlement, Philadep includes the net CNS 
settlement.
    (2) A participant's base figure is then multiplied by a factor to 
determine the participant's individual net debit cap, which cannot 
exceed Philadep's currently established maximum net debit cap of $40 
million. Factors are 

[[Page 747]]
based on a sliding scale, ranging from 1 to 2, where lower base figures 
are multiplied by larger factors and higher base figures are multiplied 
by smaller factors.
    (3) Notwithstanding the specific net debit cap calculated for any 
particular participant in subparagraph (2) above, all participants are 
subject to a minimum net debit cap to be computed based on 50% of the 
combined SCCP and Philadep Participants Funds. The minimum net debit 
cap \7\ will be recalculated and adjusted semiannually.

    \7\ Presently estimated at $3,500,000.
---------------------------------------------------------------------------

    Despite the participant's base figure, Philadep reserves the right 
to make adjustments to a participant's net debit cap. Philadep may 
effect such change for a length of time deemed necessary and 
appropriate by Philadep's management.
C. Proposed Rule 4(A)
    Philadep proposes to adopt Rule 4(A) in order to clarify that 
Philadep is authorized to pledge, repledge, hypothecate, transfer, 
create a security interest, and/or assign (any of the foregoing shall 
heretofore be termed a ``pledge'') any or all property received by 
Philadep from its participants and earmarked for Philadep to use as 
collateral for participant's unsatisfied obligations.\8\

    \8\ The text of proposed Rule 4(A) is attached as Exhibit B(2) 
to File No. SR-Philadep-95-08. The file is available for review in 
the Commission's Public Reference Room and at the principal office 
of Philadep.
---------------------------------------------------------------------------

    Philadep defines the following as eligible collateral to secure 
unsatisfied obligations: (i) deposits in the Participants Fund; (ii) 
the securities or repurchase agreements in which the Participants Fund 
is invested overnight; (iii) certain qualifying securities which secure 
the open account indebtedness of the participant; (iv) securities which 
have been pledged to Philadep as a voluntary deposit to the 
Participants Fund; and (v) any or all securities designated as 
collateral (collectively ``allowable assets'').
    Philadep may pledge allowable assets to a lender. For instance, 
Rule 4(A) specifies that Philadep shall have the right to pledge 
securities to lenders in the event a participant fails to settle.
    If Philadep pledges these allowable assets, Philadep will make the 
appropriate account entries, reflecting the creation and transfer of 
the respective security interest from the participant to Philadep and 
from Philadep to the lender. Likewise, if a participant designates 
securities as net additions, Philadep will record the security interest 
on its books for such net additions, reflecting the decrease in the 
account of the pledging participant and an increase in Philadep's 
account corresponding to such net additions. Philadep will reverse 
these journal entries upon the release and return of any pledged 
assets, reflecting a decrease in the account of any pledgee and an 
increase in the account of the pledgor as appropriate.
D. Use of the Collateral Monitor to Measure Participants' Available 
Collateral
    Philadep will monitor the collateral in each of the participant's 
accounts. The mechanism to be used to regulate the collateral is 
referred to as the ``collective monitor.'' The collateral monitor 
cannot become negative.
    At the start of each business day, Philadep credits each 
participant's collateral monitor with its respective participants Fund 
deposit. The collateral monitor reflects at all times the amount by 
which the collateral in a participant's account secures the net debit 
in its settlement account. Thus, the collateral monitor equals the 
arithmetic summation of the difference of the value of the 
participant's collateral (less an applicable haircut) and its net 
settlement obligation.\9\ In other words, a participant's collateral 
(less an applicable haircut) must equal or exceed a given participant's 
net settlement obligation.

    \9\ For example, if a participant had collateral securities with 
a market value of $10,000, subject to a 10% haircut, the value of 
the participant's collateral would be equal to $9,000. If the 
participant also incurred a debit of $8,000, its collateral monitor 
would equal $1,000 {($10,000-[10% x $10,000]+(-$8,000)}.
---------------------------------------------------------------------------

    Philadep continually verifies the collateral value to assure that 
the deliverer and receiver's collateral monitor would not become 
negative as a result of Philadep processing an incipient transaction. 
If the transaction would cause either participant to be under-
collateralized, Philadep prevents the transaction until the deficient 
participant has infused sufficient collateral into its account for the 
transaction to complete.\10\

    \10\ The text of the new SDFS recycling procedure is attached as 
Exhibit B(5) to File No. SR-Philadep-95-08. The file is available 
for review in the Commission's Public Reference Room and at the 
principal office of Philadep.
---------------------------------------------------------------------------

E. Methods of Controlling Collateral
    Philadep's SDFS system will provide an on-line, real-time mechanism 
to monitor and infuse intraday collateral.
    Controls comprise: (i) classifying collateral, (ii) updating 
collateral valuations and (iii) furnishing new collateral.\11\

    \11\ A discussion of the collateral controls is attached as 
Exhibit B(4) to File No. SR-Philadep-95-08. The file is available 
for review in the Commission's Public Reference Room and at the 
principal office of Philadep.
---------------------------------------------------------------------------

    With regard to collateral classification, participants may 
designate free (unpledged) securities positions in participants' 
accounts as either collateral or non-collateral.
    In addition to the opening free positions, intraday positions have 
collateral value. However, Philadep will not provide the same latitude 
to participants as described for free positions to classify certain 
other types of transactions. Specifically, Philadep's SDFS system will 
automatically designate securities received versus payment as 
collateral because they represent incomplete transactions (receiver-
participants have not yet paid for these securities).
    With regard to updating the collateral valuation, Philadep's SDFS 
system will credit a participant's collateral monitor with the 
collateral value; that is, its market value, less the applicable 
haircut.
    With regard to both the classification and infusion of additional 
collateral, participants have several methods of managing collateral in 
their accounts, outlined as follows:

General Classification of Opening (Start-of-Day) Securities 
Positions as Collateral

    Participants may give Philadep instructions to designate all 
securities in the participant's account as collateral at the opening 
of each business day. Philadep would then designate all start-of-day 
positions as collateral, and the respective participant's collateral 
monitor would be credited with its collateral value.

Automatic Classification of Free Securities Additions

    Participants may give Philadep instructions to designate all 
free securities transactions to its collateral monitor (e.g., 
deposits, free delivery orders (``DOs'') received).

Intraday Reclassification of Securities

    Participants may submit instructions to Philadep, to reclassify 
a specific quantity of an issue as collateral, previously classified 
as non-collateral, resulting in a collateral monitor credit equal to 
the collateral value of the securities reclassified. Conversely, 
participants may request that Philadep reclassify as non-collateral 
those securities that have previously been classified as collateral. 
However, Philadep would not fulfill such instruction if such removal 
of collateral from the participant's account would cause its 
collateral monitor to become negative.

[[Page 748]]


Settlement Progress Payments (``SPPs'')

    Participants could increase their collateral monitor by wiring 
SPPs to Philadep's account at its designated settling bank(s). The 
participant's collateral monitor, as well as its settlement account, 
would be credited for the amount of the SPP; thus, a participant's 
actual net debit would be reduced.

    In summary, Philadep is building a computerized system that will 
continuously track the value of each participant's collateral on a 
real-time, on-line basis, to ensure that the collateral's value is 
equal to or exceeds the participant's current net settlement debit. If 
a participant does not have sufficient collateral to cover the 
resulting net settlement debit from a proposed transaction, the 
participant may pledge more collateral or cash to enable Philadep to 
act on the transaction instructions; otherwise, such transaction will 
not be completed and pend in the system until Philadep receives 
sufficient collateral on the participant's behalf. Participants may 
wire funds to Philadep intraday to satisfy their collateral 
requirements.
3. Pending Transactions--Recyle Algorithm
    If an incoming delivery order would cause a participant to exceed 
its net debit cap and/or create insufficient collateral, Philadep will 
place such transactions in a recycle (pending) queue and prioritize it 
accordingly.\12\ Transactions that continue to pend at the close of the 
processing day will be purged from the system and must be subsequently 
re-entered by the participant that initially entered it.

    \12\ An overview of the recycle process is attached as Exhibit 
B(5) to File No. SR-Philadep-95-08. The file is available for review 
in the Commission's Public Reference Room and at the principal 
office of Philadep.
---------------------------------------------------------------------------

4. Settlement and Failure to Settle Procedures
    At the end of the processing day, Philadep will provide each 
participant with a net settlement amount, which will be the aggregate 
of the end-of-the-day net debits and credits in the participant's SCCP 
and/or Philadep accounts. Money settlements will occur daily with 
immediately available funds in the form of fed wire transfers into and 
out of Philadep's account at its designated settling bank(s).
    In the event a participant or its representative bank/depository 
institution fails to settle, Philadep will utilize its liquidity 
resources to finance such participant's unsettled net debit. Philadep 
will prioritize the order in which it will use the resources. Philadep 
will first use cash from the Participants Fund and other immediately 
available internal sources prior to drawing upon its external bank 
credit facilities. In the event that Philadep must use external lines 
of credit to secure an extension of credit in connection with the 
defaulting participant, Philadep shall secure the participant's assets 
as collateral as described earlier in subsections 2 (D) and (E).
    When and if the participant settles by 10:00 A.M., Eastern Time, 
the next morning, Philadep will use the settlement payment received to 
repay the principal and finance charges of the lending bank. Philadep 
will then return the pledged collateral to the participant. For 
example, if the defaulting participant is solvent and pays its net 
debit balance and interest charge in same-day funds on the day after 
the default, Philadep would generally reverse the procedures followed 
on the day of the default. Philadep would repay lenders and restore 
pledged securities.
    If, on the other hand, the defaulting participant remains in 
default the next business day, Philadep may take the following steps in 
successive order: (1) apply the defaulting participant's Clearing Fund 
deposit to satisfy the participant's obligation; (2) apply collateral 
of the defaulting participant which are the subject of incomplete 
transactions; (3) apply any other collateral of the defaulting 
participant, including collateral which are not subject to incomplete 
transactions; (4) if the participant's collateral is exhausted, apply 
pro rata net credit reductions to all participants who delivered 
securities to the defaulting participant on the day of the default, 
such reductions being limited to the amount of the net credit balance 
of each participant resulting from transactions with the defaulting 
participant; (5) in the alternative to such net credit reductions, 
resell to the delivering participant securities that were sold to the 
defaulting participant on the day of the default; and (6) make pro rata 
net credit reductions to all participants with net credit balances, 
including those participants that did not make deliveries to the 
defaulting participant on that day.
5. Paying Agent Charge-Back Procedures
    With respect to principal, dividend, interest and corporate 
reorganization payment obligations (``P&I payments'') under the 
proposed rule change, Philadep will pay such amounts when paid. 
Specifically, Philadep will pay participants in same-day funds upon 
receipt of payment by paying agents of such distributions in same-day 
funds in accordance with Philadep's operating procedures. Philadep 
worked diligently to affect paying agents' timely disbursement of P&I 
payments to Philadep by payable dates. Philadep has witnessed dramatic 
improvement over the past year in paying agents' timely disbursement of 
P&I payments in same-day funds to Philadep. Philadep remains 
steadfastly committed to working closely with the industry, the 
Commission and the Federal Reserve, among others, in educating paying 
agents and assuring their maximum adherence to the higher standards of 
payment performance required under the SDFS environment.
    In order to induce the delivery of P&I payments in same-day funds 
from paying agents that would not otherwise receive such payments from 
issuers in same-day funds on payable date, Philadep may agree to 
provide rebates to such paying agents. Philadep will act as the 
conduit, passing along such rebate costs to those participants 
benefiting from receiving same-day P&I payments that would have 
otherwise received payment in next-day funds.
    Philadep will be authorized to immediately charge-back participants 
that were previously credited with payments. In order to charge-back 
participants, the paying agent must furnish Philadep a written request 
within ten (10) business days of the payable date and may do so for 
several reasons: (1) an error by the paying agent; (2) a failure by the 
issuer to provide the paying agent with sufficient funds to cover the 
payments; (3) the bankruptcy of the issuer on or prior to the payable 
date; or (4) other paying agent default.
    Additionally, Philadep may also charge-back participants for any 
errors made by Philadep, including errors as a result of erroneous 
announcements or payment calculations credited to participants in 
anticipation of payments which Philadep has not received. For either 
charge-back method, Philadep reserves the right to impute and recover 
interest from the respective participant.
    With regard to charge-backs initiated by the paying agent, Philadep 
shall notify the participant one (1) business day prior to the date 
Philadep enters the charge-back in the participant's daily settlement 
account. Although Philadep usually verifies the facts stated in the 
notice from the paying agent, Philadep does not have any obligation to 
do so. If the paying agent notifies Philadep more than ten (10) 
business days after payment date, Philadep is not required to charge-
back the participant's account, but will cooperate with the paying 
agent and the participant to resolve the matter. For Philadep initiated 
charge-

[[Page 749]]
backs, Philadep generally will give participants one (1) day notice of 
the charge-back.
6. Revised Participants Fund
    To compensate for the risks in a SDFS environment and to respond to 
Philadep's increased liquidity needs, Philadep will modify its 
Participants Fund in its form and size. Philadep will maintain an all 
cash Participants Fund.
    The all cash requirement applies to both the minimum and any 
additional, voluntary deposits. If participants decide to make 
voluntary, additional deposits, they will accomplish two objectives: 
first, it allows them to increase the level of settlement activities 
that may occur without potential disruption and, second, they will 
receive interest rebates from SCCP/Philadep for deposits in excess of 
$50,000 in accordance with SCCP/Philadep's procedures.
    Each Philadep participant must deposit a minimum amount of 
$10,000.\13\ Whereas some inactive participants will only maintain a 
required deposit of $10,000, many participants will have to deposit 
additional amounts based upon the type and extent of their clearing and 
depository activities. In order to effect the transition of Philadep 
and its participants to the SDFS environment, Philadep will implement 
these changes on or before February 1996.

    \13\ See Exhibits B(1) and B(3) attached to File No. SR-
Philadep-95-08. The file is available for review in the Commission's 
Public Reference Room and at the principal office of Philadep.
---------------------------------------------------------------------------

    Philadep will calculate the required cash deposit according to a 
participant's activity \14\ in accordance with the following formulae 
[formulae (a), (b) and (c) below are not additive; a participant shall 
be only responsible for making the highest deposit amount required by 
any single formula below]:

    \14\ For Philadep participants that utilize the RIO interface 
for settlement, half of the SCCP Clearing Fund deposit requirement 
shall be allocated to Philadep's Participants Fund to protect 
against potential settlement defaults for securities not eligible 
for the RIO interface. Similarly, those Philadep participants that 
clear and settle through CNS accounts at SCCP shall have their 
respective Philadep and SCCP Participants Fund deposits combined and 
then divided equally and allocated between Philadep and SCCP to 
satisfy the Fund deposit requirement at each clearing corporation.

(a) Inactive Accounts: $10,000.00 \15\

    \15\ For Philadep Inactive Participants that are also SCCP 
Inactive Participants, the Philadep Participants Fund deposit shall 
be $5,000. For Philadep Inactive Participants that are also SCCP 
Active Participants, no additional Philadep Participants Fund 
deposit will be required.
---------------------------------------------------------------------------

    (less than $100 of average monthly billings)
(b) Specialized Services:
    (maximum $50,000 required with $100 or greater in average monthly 
billings for either Deposit or Transfer activity)
    --Deposit Activity: $25,000.00 plus
    --Transfer Activity: $25,000.00
(c) Participants not doing Specialized Service activity with service 
fees of $100 or greater in average monthly billions The greater of 
either:
    (1) $25,000, or;
    (2) 1% of the average of the three highest net debits over the past 
three months, if higher than the SCCP required deposit (rounded to the 
next $5,000 increment).

    Philadep will recalculate the Participants Fund deposit 
requirements at the end of each month based on the previous three 
months prior to the most recent month. Philadep will notify its 
participants of any required deposit increases and the amount of such 
additional deposit within ten (10) business days of the end of the 
month. Participants whose deposit requirements have decreased will be 
notified at least quarterly, although they may inquire and withdraw 
excess deposits monthly. In this way, participants may leave excess 
cash deposits in the participants fund and reduce the level of monthly 
administration that would otherwise be necessary. As previously stated, 
Philadep will also accept voluntary excess fund deposits to reduce 
administrative burdens.
    Philadep estimates that at the time of implementing the foregoing 
modifications to the risk management controls, SCCP and Philadep will 
have combined liquidity resources of over $60 million, comprising $7 
million in combined cash deposits to the Participants Fund (under the 
revised formulae), $4.7 million in unrestricted capital and $50 million 
in lines of credit,\16\ altogether designed to support the new SDFS 
system. SCCP/Philadep will routinely monitor these amounts and assess 
the need to increase them over time based on SCCP and Philadep activity 
levels. Considering SCCP/Philadep's risk and liquidity structure, 
Philadep's net debit cap levels are conservative, having been set in 
accordance with such combined liquidity resources and with due regard 
to SCCP's long-standing margin account financing program.

    \16\ As of the date of this filing, SCCP/Philadep has secured 
$30 million in such credit lines and projects to secure $20 to $40 
million in additional lines.
---------------------------------------------------------------------------

    Philadep believes that the proposed rule change is consistent with 
Section 17A of the Act because it promotes the prompt and accurate 
clearance and settlement of securities transactions in securities and 
funds in Philadep's custody and under its control. Philadep believes 
that with the development of the new SDFS system and its attendant risk 
management controls, Philadep and its participants are protected from 
the risk of a material loss. Philadep's Rules and Procedures are 
designed to promote efficiencies and protect Philadep and its 
participants in an expanded SDFS environment.

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

    Philadep does not believe that the proposed rule change will impact 
or impose a burden on competition.

(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. Philadep will 
notify the Commission of any written comments received by Philadep.

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 Philadep 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. Sec. 552, will be available for inspection and copying in 
the Commission's Public Reference 

[[Page 750]]
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 Philadep. All submissions should refer to the file 
number SR-Philadep-95-08 and should be submitted by January 31, 1996.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\17\

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

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-364 Filed 1-9-96; 8:45 am]
BILLING CODE 8010-01-M