[Federal Register Volume 61, Number 34 (Tuesday, February 20, 1996)]
[Notices]
[Pages 6404-6405]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-3667]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36837; File No. SR-DTC-96-02]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Regarding Principal and Income Payments to Participants
February 13, 1996
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on January 23, 1996, The
Depository Trust Company (``DTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change as
described in Items I, II, and III below, which items have been prepared
primarily by DTC. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
\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 purpose of the proposed rule change is to clarify and restate
several procedures related to DTC's payment of principal and income
(``P&I'') to participants.
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 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.\2\
\2\ The Commission has modified the text of the summaries
prepared 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 purpose of the proposed rule change is to clarify and restate
DTC procedures for the payment of P&I in light of the planned
conversion of DTC's money settlement system to an entirely same-day
funds settlement (``SDFS'') system.
In the current next-day funds settlement (``NDFS'') and SDFS
systems, DTC often earns interest overnight on P&I payments received by
DTC on the payment date in same-day funds and paid to participants in
next-day funds. At the end of each month, DTC distributes or refunds
that month's overnight interest earnings to participants on a pro rata
basis.\3\ After DTC converts entirely to an SDFS system, which
conversion is scheduled for February 22, 1996, it will normally pay P&I
in same-day funds. Because overnight interest on such payments will
decrease dramatically, monthly refunds to participants correspondingly
will be much smaller. When interest is earned due to exceptional
conditions, DTC will distribute refunds to its participants in
conformity with its present rule.
\3\ For a description of DTC's P&I payment refund procedures,
refer to Securities Exchange Act Release Nos. 17203 (October 8,
1980), 45 FR 68817 [File No. SR-DTC-80-06] (notice of filing and
immediate effectiveness of a proposed rule change implementing a
refund policy); 23219 (May 8, 1986), 51 FR 17845 [File No. SR-DTC-
86-03] (notice of filing and immediate effectiveness of a proposed
rule change modifying procedures for crediting corporate cash P&I
payments); 23686 (October 7, 1986), 51 FR 37104 [File No. SR-DTC-86-
04] (order approving a proposed rule change modifying DTC's
procedures regarding crediting P&I payments, charging back P&I
payments, and refunding dividend investment income to paying
agents); and 25869 (June 30, 1988), 53 FR 25557 [File No. SR-DTC-88-
08] (notice of filing and immediate effectiveness of a proposed rule
change modifying procedures to allocate to participants P&I payments
on SDFS securities in next-day funds on payable date).
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Currently, DTC sometimes credits participants in next-day funds on
the payable date for P&I payments not yet received. In many cases, the
money is received in same-day funds after DTC has settled with its
participant but before the end of the business day on the payable date.
Consequently, the money is available for next-day funds payments to
participants on the payable date. After the conversion to an entirely
SDFS system, P&I payments made after 2:30 p.m. (eastern standard time)
on the payable date may be received by DTC too late to fund payments to
participants in a net credit position but early enough to avoid the
need for an overnight borrowing. DTC has extensive historical business
records of its dealings with paying agents and has developed a model to
predict which late P&I payments received after DTC's settlement should
nevertheless come in early enough to avoid the need to borrow
overnight. Based upon this historical mode, in some cases of late P&I
payments DTC will make a final allocation at approximately 4:00 p.m. to
participants for such P&I payments in anticipation of receipt of good
funds (i.e., same-day funds) from the paying agent later on that same
business day. In order to do so, DTC has to be prepared to take out an
intraday or overnight loan when necessary. Therefore, DTC will commit
to a line of credit. The commitment cost will be charged to
participants monthly on a pro rata basis based on the P&I payments each
participant received during the previous calendar year or other
reasonably determined period. This commitment charge will be assessed
whether or not borrowing was necessary during that month. On occasions
when there is borrowing, the interest cost of the loan will be assessed
on a pro rata basis among participants receiving payments on the
payable date(s) that were funded by such borrowing. Each participant
will receive a statement that will identify issues and/or issuers and
their agents that paid DTC late and the participant's share of the
interest cost for each one.
DTC believes that the proposed rule change is consistent with
Section 17A of the Act \4\ and the rules and regulations thereunder
because it will provide for the equitable allocation of dues, fees, and
other charges among participants.
\4\ 15 U.S.C. 78q-1 (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
DTC does not believe that the proposed rule change will have an
impact on or impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
In 1990, after reviewing the recommendations of the Group of
Thirty,\5\ the U.S. Working Committee, Group of Thirty, Clearance and
Settlement Project concluded, among other things, that depositories
should pay dividends, interest, redemption, and reorganization payments
to their
[[Page 6405]]
participants in same-day funds.\6\ In August 1993, the report of the
Same-Day Funds Payment Task Force to the U.S. Working Committee, Group
of Thirty, Clearance and Settlement Project issued its report (``Task
Force Report'') on how to achieve this goal.\7\
\5\ The Group of Thirty was established in 1978 as an
independent, nonpartisan, nonprofit organization composed of
international financial leaders whose focus is on international
economic and financial issues. In March 1989, the group approved a
report setting forth nine recommendations for improving and
harmonizing securities clearance and settlement systems in the
world's principal markets. Group of Thirty, Clearance and Settlement
Systems in the World's Securities Markets (March 1989).
\6\ ``Implementing the Group of Thirty Recommendations in the
U.S.,'' U.S. Working Committee, Group of Thirty, Clearance and
Settlement Project (November 1990).
\7\ ``Report of the Same-Day Funds Payment Task Force to the
U.S. Working Committee,'' U.S. Working Committee, Group of Thirty,
Clearance and Settlement Project (August 1993).
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In July 1994, DTC distributed its document entitled ``Same-Day
Funds Settlement System Conversion,'' which states, ``Participants
should be mindful that once DTC's conversion to same-day funds
settlement takes place, both the dividend and interest and the
reorganization refunds will substantially decline and change in
nature.'' \8\ In December 1994, DTC's discussed the Task Force Report
in a memorandum to participants and others. Among other things, DTC
stated that it was ``exploring temporarily borrowing funds not received
from agents by 2:30 p.m.'' eastern standard time and that ``DTC reports
will identify for participants certain relevant information concerning
the resulting interest expense.'' \9\
\8\ The Depository Trust Company and National Securities
Clearing Corporation, Memorandum (July 29, 1994).
\9\ The Depository Trust Company, Memorandum to Participants
(December 5, 1994).
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This proposed rule change for refunds and borrowing was also
discussed in many other publications that DTC sent to participants and
others. In the fall of 1995, DTC sent a customized letter to each
participant ``to assist [the participant] in assessing the impact of
the SDFS conversion on [the participant's] 1995 budget.''
No comments have been received by DTC. Interested persons
previously submitted comments to the U.S. Working Committee in response
to the 1993 Task Force Report.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
The foregoing rule change has become effective pursuant to Sections
19(b)(3)(A)(i) and (ii) \10\ of the Act and pursuant to Rules 19b-
4(e)(1) and (2) \11\ promulgated thereunder in that the proposal
constitutes a stated policy, practice, or interpretation with respect
to the meaning, administration, or enforcement of an existing rule, and
the proposal also establishes a due, fee, or other charge. At any time
within sixty days of the filing of such rule change, the Commission may
summarily abrogate such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act.
\10\ 15 U.S.C. 78s(b)(3)(A)(i) and (ii) (1988).
\11\ 17 CFR 240.19b-4(e)(1) and (2) (1995).
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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. 552, will be available for inspection and copying in the
Commission's Public Reference Room, 450 Fifth Street NW., Washington,
DC 20549. Copies of such filing will also be available for inspection
and copying at the principal office of DTC. All submissions should
refer to File No. SR-DTC-96-02 and should be submitted by March 12,
1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\12\
\12\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-3667 Filed 2-16-96; 8:45 am]
BILLING CODE 8010-01-M