[Federal Register Volume 61, Number 15 (Tuesday, January 23, 1996)]
[Notices]
[Pages 1808-1810]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-792]



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[[Page 1809]]


SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36711; File No. SR-PTC-95-06]


Self-Regulatory Organizations; Participants Trust Company; Order 
Approving Proposed Rule Change Modifying Processing System

January 11, 1996.
    On September 15, 1995, the Participants Trust Company (``PTC'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change (File No. SR-PTC-95-06) pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ The 
proposed rule change amends PTC's rules to reflect changes to its 
processing system. The Commission published notice of the proposed rule 
change in the Federal Register on October 25, 1995.\2\ For the reasons 
discussed below, the Commission is approving the proposed rule change.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ Securities Exchange Act Release No. 36377 (October 16, 
1995), 60 FR 54741.
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I. Description

    The proposed rule change amends PTC's rules to reflect changes to 
its processing system that will cause both the deliver and receive 
sides in a securities transaction to simultaneously receive debits and 
credits to their respective securities and cash positions. The changes 
to the processing system are intended to satisfy a commitment 
(``Commitment No. 3'') made by PTC to the Commission and to the Board 
of Governors of the Federal Reserve System (``Board of Governors'') 
when PTC was established. Commitment No. 3 stated that PTC would ``make 
the necessary technical changes (including Rules changes) for 
Delivering Participants to: (i) be immediately notified, or able to 
ascertain, that securities debited from a Delivering Participant's 
Account or associated Transfer Account have not been credited to the 
Receiving Participant's Account or associated Transfer Account; and 
(ii) be able to retrieve such undelivered securities and to redeliver, 
pledge or hold such securities.'' \3\ These amendments took effect on 
January 8, 1996, concurrent with the implementation of new software, 
SPEED Release 5.6, which software will make the corresponding changes 
to PTC's SPEED transaction processing system.\4\

    \3\ Securities Exchange Act Release No. 26671 (March 28, 1989), 
54 FR 13266 (approving PTC's application for registration as a 
clearing agency under Section 17A of the Act) and letter from the 
Board of Governors approving PTC's application for stock in the 
Federal Reserve Bank of New York (March 27, 1989).
    \4\ SPEED Release 5.6 is the latest upgrade in PTC's transaction 
processing system.
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    Under PTC's previous procedures, a delivering participant initiated 
a transfer of securities to another participant by instructing an 
account transfer of securities from its account or associated transfer 
account. If the account from which the transfer was requested satisfied 
the conditions set forth in PTC's rules,\5\ PTC debited the securities 
from the account or associated transfer account of the delivering 
participant and if the transfer was versus payment credited the related 
cash balance.

    \5\ PTC Rules, Article II, Rule 13, Section 1(b), generally 
requires sufficient securities and Net Free Equity (``NFE'') with 
respect to the account of the delivering participant. NFE measures 
the value of the collateral which is available to secure liquidity 
for the transaction. PTC Rules, Article II, Rule 9. PTC will not 
process an account transfer if, as a result of such transfer, the 
required NFE is not available in the account at the time delivery is 
attempted.
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    Prior to crediting securities to the account of the receiving 
participant or in an account transfer versus payment transaction to the 
associated transfer account, the receipt of securities was required to 
comply with the receipt mode selected by the receiving participant.\6\ 
Furthermore, if the transfer was versus payment, the receiving 
participant was required to have sufficient NFE, and the resulting 
debit to the account cash balance could not have caused the receiving 
participant's net debit balance to exceed its Net Debit Monitoring 
Level (``NDML'').\7\

    \6\ A participant could choose one of the following receipt 
modes for receiving securities to its account or its associated 
transfer account in an account transfer versus payment transaction: 
Auto Buy-In Mode, authorizing the receipt of all transactions; Auto-
Match Mode, authorizing the receipt of all previously designated 
transactions either listed with specificity or by designating 
specified dollar tolerances; or Manual Match Mode, in which no 
transactions were preauthorized.
    \7\ PTC will not process transactions that increase a 
participant's net debit balance to a level greater than its NDML. 
When the NDML is reached or exceeded, PTC is entitled to require 
either confirmation of the participant's ability to pay its debit 
balance or prefunding of such debit balance. PTC Rules, Article II, 
Rule 2, Section 4.
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    Securities deliveries for which the receipt was not preauthorized 
were posted to the await match list associated with the receiving 
account, were recorded in an abeyance account, and were credited to the 
receiving account or associated transfer account only after the 
receiving participant approved the transfer. The delivering participant 
had no means of ascertaining whether the transfer account of the 
receiving participant or whether the securities remained recorded in 
the abeyance account and placed on the await match list associated with 
the account of the receiving participant. Recording the securities 
delivery in the abeyance account was not deemed to effect any transfer 
of the securities or create or extinguish any interest in the 
securities held by PTC prior to such recording.\8\ Any securities 
remaining on the await match list that were not approved or rejected 
prior to the close of the daily processing were deemed approved by the 
receiving participant.

    \8\ PTC Rules, Article II, Rule 3, Section 1 and Rule 13, 
Sections 1(c)(i)(B) and 1(c)(ii)(B).
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    Under PTC's modified processing system, debits and credits will be 
made simultaneously to the accounts of delivering and receiving 
participants irrespective of the receipt mode chosen by the receiver. 
As was possible with PTC's previous processing system, there will no 
longer be a situation where the delivering participant receives a cash 
credit before the receiving participant has received a cash debit. 
Securities credits and cash debits in the case of an account transfer 
versus payment will be posted to the account or associated transfer 
account of the receiving participant regardless of the receipt mode 
applied to the account.\9\ Similarly, the delivering participant's 
account or associated transfer account also will be posted with the 
appropriate entries for securities debits and cash credits when the 
delivery has satisfied all conditions necessary to complete the 
transfer.\10\

    \9\ Despite the change in the sequence of transaction 
processing, transfers versus payment still must satisfy PTC's normal 
risk management controls in order to complete the transfers (i.e., 
the receiving participant's account must have sufficient NFE and the 
receiving participant's NDML must not be exceeded).
    \10\ I.e., when the delivering account has sufficient available 
securities and sufficient NFE; in the case of an account transfer 
versus payment transaction when the receiving account has sufficient 
NFE and the receiving participant's NDML will not be exceeded; or in 
the case of account transfer or securities to a pledgee account by 
use of PTC's Collateral Loan Facility when the receipt is approved 
by the receiving participant. The requirement that a receiving 
participant must approve a transfer of securities to a pledgee 
account formally was specified in PTC's Participant Operating Guide 
description of the Collateral Loan Facility but not in PTC's rules. 
As a result of the proposed rule change, this requirement now will 
be specified in PTC's rules.
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    The proposed amendments to PTC's rules delete references throughout 
the rules to the abeyance account and to the use of a receipt mode as a 
condition to completion of an account transfer. PTC also will make 
corresponding changes to its Participant Operating Guide that are 
consistent with the systems changes of SPEED Release 5.6 and the 
proposed rule amendments.

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II. Discussion

    Section 17A(b)(3)(F) of the Act \11\ requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and to provide for 
the safeguarding of securities and funds in its custody or control or 
for which it is responsible. The Commission believes that PTC's 
proposal is consistent with these obligations because the modifications 
to PTC's processing system should help decrease the potential for 
liquidity problems for delivering participants at the end of the day 
which existed under the former processing system.

    \11\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
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    Since 1989, PTC has considered various proposals to address the 
concerns behind Commitment No. 3.\12\ The Commission believes that the 
modifications to PTC's processing system in the proposed rule change 
satisfies Commitment No. 3 by deleting the abeyance account, amending 
the receipt mode provisions, and providing for simultaneous credit and 
debit of an account transfer to both the receiving and delivering 
participant or limited purpose participant. These changes will 
eliminate the situation where a delivering participant's securities 
account has been debited and cash account credited when the receiving 
participant's securities account has not been credited and cash account 
debited.

    \12\ Supra note 3 and accompanying text.
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    A main policy consideration leading to Commitment No. 3 was the 
concern that in the case of an uncompleted account transfer versus 
payment the unexpected return to the delivering participant of the 
securities in the receiving participant's abeyance account and the 
corresponding elimination of the credit to the cash balance of the 
delivering participant could place liquidity pressures on the 
delivering participant. Such liquidity pressure could occur at the end 
of the processing day just prior to settlement when there is little 
time for a participant to fund an unanticipated debit. The Commission 
believes the modifications to PTC's processing system should help to 
decrease the potential for such liquidity pressure.
    In addition, because unmatched deliveries of account transfers 
versus payment transactions no longer will generate a credit to the 
cash balance of the delivering participant without the corresponding 
debit to the cash balance of the receiving participant, it was 
anticipated that the implementation of SPEED Release 5.6 could result 
in increased incidences of failed deliveries due to NDML and NFE 
violations. In anticipation of the implementation of SPEED Release 5.6, 
PTC has monitored potential credit fails by monitoring participants' 
NFE and NDML usage periodically throughout the processing day using the 
hypothetical immediate posting of both matched and unmatched 
transactions to the receiving participant's account. Under the 
monitoring program, potential NDML violations have been minimal, but 
potential NFE violations have been noted.
    PTC advised participants of the hypothetical NFE and NDML 
violations and of the amount of the hypothetical credit deficiency so 
that participants could monitor their transactions and adjust their 
businesses in order to comply with the new processing sequence when it 
became operational on January 8, 1996. The Commission believes that 
PTC's extensive work with its participants should help to ensure a 
smooth transition to the new transaction processing sequence and should 
help to minimize NFE and NDML violations.\13\ Furthermore, consistent 
with PTC's obligations to safeguard securities or funds in its custody, 
control, or for which it is responsible, PTC has thoroughly tested 
SPEED Release 5.6 including performing several full participant tests 
and has made several changes as a result of these and other quality 
assurance testing procedures to ensure that SPEED Release 5.6 operates 
properly upon implementation.

    \13\ The Commission recently approved a proposed rule change 
establishing the opening of security processing activity at PTC at 
8:30 a.m. instead of the previous time of 7 a.m. This change was to 
conform the opening of PTC's security processing to the opening time 
of the Federal Reserve System's fedwire. This will eliminate the 
hour and a half window during which time transactions failing PTC's 
credit checks cannot be processed because of participants' inability 
to move funds to PTC until the 8:30 fedwire opening. Securities 
Exchange Act Release No. 36677 (January 3, 1996), [SR-PTC-95-08] 
(order granting accelerated permanent approval of proposed rule 
change).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the Act, in particular with 
Section 17A of the Act, and with the rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (File No. SR-PTC-95-06) be and 
hereby is approved.

    \14\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\15\

    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-792 Filed 1-22-96; 8:45 am]
BILLING CODE 8010-01-M