[Federal Register Volume 61, Number 26 (Wednesday, February 7, 1996)]
[Notices]
[Pages 4692-4694]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2539]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36798; File No. SR-DTC-95-14]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving a Proposed Rule Change Seeking Depository Eligibility 
of Fractional Shares and Cent-Denominated Securities

January 31, 1996.
    On August 4, 1995, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-DTC-95-14) pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal 
was published in the Federal Register on November 6, 1995.\2\ No 
comment letters were received. For the reasons discussed below, the 

[[Page 4693]]
Commission is approving the proposed rule change.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Securities Exchange Act Release No. 36436 (October 30, 
1995), 60 FR 56079.
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I. Description of the Proposal

    Under the rule change, cent-denominated securities and fractional 
shares of securities will be eligible for book-entry deliver and other 
DTC services. The proposal is being made in response to requests made 
by DTC participants.\3\ This rule change anticipates the accelerated 
securities processing environment that will be triggered by the 
conversion of DTC's money settlement system to an entirely same-day 
funds settlement (``SDFS'') system.\4\ DTC will implement the 
eligibility of fractional shares on a voluntary basis.

    \3\ The results of a survey conducted by DTC in 1992 showed that 
most responding participants wished to have certain types of issues 
not then eligible for depository services made DTC-eligible. Among 
others, cent-denominated securities and fractional shares were 
securities participants requested be made depository eligible. 
Subsequently, DTC distributed to its participants a notice dated 
August 24, 1994, which outlines the specific procedures to be 
employed in connection with the proposed services. In response to 
the August notice, seven commenters favored making cent-denominated 
securities eligible for book-entry delivery while our commenters did 
not. The dissenters generally stated that either such services were 
unnecessary in relation to their expense or that the proposed 
services would fail to provide any improvement in the way DTC 
participants currently process such securities. With regard to 
fractional shares, commenters generally favored making such shares 
depository eligible but ten commenters disfavored DTC's use of a 
contra-CUSP to identify the fractional shares. Six commentes favored 
the use of the contra-CUSIP. Dissenting commenters cited the 
anticipated difficulties in CUSIP and contra-CUSIP reconciliation as 
well as in providing programming resources to accommodate the 
contra-CUSIP given that such resources were seen as already fully 
committed to the upcoming change to a same-day funds settlement 
system and the conversion to a T+3 settlement cycle. To address its 
participants' concerns evidenced in the earlier letters, DTC devised 
the current proposal that provides for voluntary implementation of 
services for fractional shares. This newer, more flexible approach 
was described to participants in a notice dated December 14, 1994.
    \4\ The term ``same-day funds'' refers to payment in funds that 
are immediately available and generally are transferred by 
electronic means. Currently, transactions in equities, corporate 
debt, and municipal debt are settled in ``next-day funds'' (a term 
that refers to payment by means of certified checks that are for 
value on the following day). Transactions in commercial paper and 
other money market instruments are settled in same-day funds. On 
February 22, 1996, all issues currently settling in next-day funds 
will convert to settlement in same-day funds.
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    Under the rule change, DTC estimates that approximately 6,000 cent-
denominated issues will become eligible for book-entry delivery. Of 
those 6,000 issues, DTC estimates that 350 are treasury receipts.\5\ 
Participants now will be able to deposit cent-denominated securities at 
DTC by using DTC's Deposit Automation Management (``DAM'') service.\6\ 
In recording participants' deposits, DTC will ``truncate'' (i.e., cut 
off) the cents portion of the aggregate dollar figure for the deposited 
securities. Having eliminated the cents portion from the position, DTC 
only will reflect the whole dollar amount of deposits in the 
participant's account at DTC.\7\ All related services and transactions 
thereafter will be effected in whole dollar increments, including 
principal and income payments.\8\

    \5\ This estimate is based on information compiled by a DTC 
participant. Treasury receipts are proprietary products of broker-
dealers created by stripping the coupons from U.S. Treasury 
securities (``Treasuries'') with the resulting instrument 
representing an interest in the stripped coupons or in the remaining 
principal (i.e. zero coupon products). The U.S. Treasury now issues 
STRIPS (Separate Trading of Registered Interest and Principal of 
Securities) bonds which essentially have replaced the Treasury 
receipt in function. The Treasury issues STRIPS in a format that 
allows dealers to sell them immediately as zero-coupon products and 
does not require the repacking steps that are necessary to transform 
straight Treasuries into zero-coupon instruments. Other newly 
eligible issues will include church bonds and various other 
securities types. Church bonds are securities issued by religious 
organizations to finance building or renovation projects. These 
securities typically are issued in small dollar amount within a 
confined geographical area.
    \6\ DAM is an enhanced automated deposit service that enables 
DTC participants to send details of deposits to DTC in advance of 
forwarding the physical certificates. For a complete description of 
DTC's DAM service, refer to securities Exchange Act Release No. 
33412 (January 4, 1994), 59 FR 1769 [File No. SR-DTC-93-09] (order 
approving proposed rule change).
    \7\ For example, if a participant deposits ten certificates at 
$1.15, $11.00 will be credited to the participant's DTC account, and 
the remaining fifty cents will be truncated.
    \8\ Under the rule change, participants will garner the benefit 
of administrative efficiencies that will attend the elimination of 
centers. Specifically, fewer keystrokes will be required to enter 
dollar values, and less record surveillance will be required to 
account for and reconcile amounts less than a dollar.
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    The truncated amounts will be collected in an internal DTC account. 
DTC has stated that the sum is not expected to be significant at first 
and therefore will not warrant the expense of developing a complex 
system to enable DTC to credit the truncated cents to each respective 
depositing participant. Instead, the cents and any income derived 
therefrom will become part of DTC's general revenues. Because DTC 
refunds revenues in excess of its costs to its participants, DTC in 
effect will pass along the value of the truncated cents to participants 
as part of DTC's general refund when and if refunds of excess revenues 
are distributed.\9\ Participants also will forfeit any voting rights on 
truncated cents.

    \9\ Any refunds from the truncation program will be distributed 
to all DTC participants and not only those participants depositing 
cent-denominated securities.
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    In time, depending on the size of the accumulated truncated 
amounts, DTC may reconsider developing a tracing mechanism to enable it 
credit these amounts to the accounts of depositing participants. In 
order for the Commission to monitor the magnitude of the truncated 
amounts, DTC will provide to the Commission annual written notice of 
the total amount of the general refund distributed to DTC participants 
that is generated from such truncated amounts \10\ and the number of 
issues from which cents were truncated.\11\ However, at this time, DTC 
believes that the actual financial effect on tits participants of the 
cent truncation will be negligible and well within industry practice 
for reconciling de minimis differences in such things as deliveries and 
deposits.

    \10\ Telephone conversation between Jack Weiner, Associate 
Counsel, DTC, and Mark Steffensen, Attorney, Division of Market 
Regulation (``Division''), Commission (January 26, 1996).
    \11\ Telephone conversation between Jack Wiener, Associate 
Counsel, DTC, and Jerry W. Carpenter, Assistant Director, and Peter 
R. Geraghty, Senior Counsel, Division, Commission (January 31, 
1996).
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    Under the new rule, DTC also is implementing a voluntary depository 
eligibility program for securities denominated in fractional 
shares.\12\ DTC will carry the fractional portions under a contra-CUSIP 
number with full shares being reflected in the primary CUSIP. Deliver 
orders and pledges will not initially be permitted to be denominated in 
fractional shares.\13\ However, as the fractional shares accumulate to 
constitute full shares, DTC participants will have the option to move 
the shares from the contra-CUSIP to the primary CUSIP where the shares 
will be eligible for all activities.\14\ Alternatively, the accumulated 
fractional shares can be left in the contra-CUSIP. DTC also will 
provide enhanced physical processing so that deposits and withdrawals-
by-transfer containing both whole and fractional shares can be 
combined. DTC will handle the process of separating the whole shares to 
the primary CUSIP and the fractional shares to the contra-CUSIP.

    \12\ A fractional share is a unit of stock less than one full 
share.
    \13\ DTC also is investigating the possibility of developing and 
providing a limited delivery capability that would require receiver 
authorization prior to a delivery being made.
    \14\ DTC participants also will have the ability to break up 
full shares under the primary CUSIP into fractional shares under the 
contra-CUSIP although the resulting fractional shares will not be 
initially eligible for deliver orders or for pledging purposes.

[[Page 4694]]

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II. Discussion

    Section 17A(b)(3)(F)\15\ of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and to remove 
impediments to and perfect the mechanism of a national system for the 
prompt and accurate clearance and settlement of transactions. The 
Commission believes DTC's proposed rule change is consistent with DTC's 
obligations under the Act because it will make cent-denominated shares 
and fractional shares eligible for deposit at DTC and thus eligible for 
other DTC services. The rule change will allow DTC participants to 
remove cent-denominated securities and fractional share certificates 
from their vaults and to deposit them at DTC. Including cent-
denominated securities and fractional shares in the class of securities 
eligible for deposit at DTC should help to eliminate the costly, 
cumbersome, and inefficient physical processing of these securities 
thus promoting the prompt and accurate clearance and settlement of 
transactions in these types of securities.

    \15\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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III. Conclusion

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

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\16\

    \16\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-2539 Filed 2-6-96; 8:45 am]
BILLING CODE 8010-01-M