[Federal Register Volume 61, Number 39 (Tuesday, February 27, 1996)]
[Notices]
[Pages 7288-7290]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4350]



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

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36867; File No. SR-DTC-96-06]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Amending Rules and Cross-Guarantee Agreement to Accommodate 
Same-Day Funds Settlement

February 21, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on February 2, 1996, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-DTC-96-06) 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 from interested persons and to 
grant accelerated approval of the proposed rule change.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
---------------------------------------------------------------------------

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 amend DTC's rules and 
to amend the current Netting Contract and Limited Cross-Guarantee 
agreement between the National Securities Clearing Corporation 
(``NSCC'') and DTC (``NSCC/DTC Agreement'') to accommodate the 
conversion of DTC's money settlement system entirely to a same-day 
funds settlement (``SDFS'') system.

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 

[[Page 7289]]
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 
submitted by DTC.
---------------------------------------------------------------------------

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

    On February 22, 1996, DTC plans to combine its next-day funds 
settlement (``NDFS'') system and its SDFS system into a single SDFS 
system, which will be based on the design of the current SDFS system 
with some modifications. The conversion was described in three 
memoranda issued jointly by NSCC and DTC\3\ and was discussed in a DTC 
proposed rule change approved by the Commission on May 16, 1995.\4\

    \3\ The Depository Trust Company and National Securities 
Clearing Corporation, Memorandum (July 1, 1992; July 26, 1993; and 
July 29, 1994).
    \4\ For additional information regarding DTC's SDFS system, 
refer to Securities Exchange Act Release No. 35720 (May 16, 1995), 
60 FR 27360 [File No. SR-DTC-95-06] (order granting accelerated 
approval of a proposed rule change modifying the SDFS system).
---------------------------------------------------------------------------

    In order to assure an efficient conversion, some of the 
modifications to the current SDFS system were implemented at various 
times during 1995. The amendments which are the subject of this 
proposal to DTC's rules are technical changes and are mainly concerned 
with the elimination of provisions relating to the NDFS system. Certain 
amendments to the rules are being made for purposes of clarity and 
consistency of style.\5\

    \5\ The specific changes to DTC's rules are attached as Exhibit 
2(a) to DTC's proposed rule change and is available in the 
Commission's Public Reference Room or through DTC.
---------------------------------------------------------------------------

    The conversion also requires DTC to make certain amendments to the 
current NSCC/DTC Agreement.\6\ The current NSCC/DTC Agreement provides 
that with respect to participants common to both entities (``common 
members''), DTC and NSCC agree to net daily a common member's final net 
settlement debit or credit at one entity with the common member's final 
net settlement credit or debit at the other entity. In most instances, 
the result will be either one net debit obligation payable to either 
DTC or NSCC or one net credit receivable from either DTC or NSCC.\7\ In 
the event of a default of a common member, the current NSCC/DTC 
Agreement also provides that any resources remaining after the failed 
common member's obligations to the guaranteeing clearing agency have 
been satisfied will be made available to the other clearing agency. The 
guarantee is not absolute but rather is limited to the extent of the 
resources relative to the failed member remaining at the guaranteeing 
clearing agency. The principal resources will be the failed member's 
settlement net credit balances and its deposits to the clearing 
agencies' clearing funds.\8\

    \6\ The cross-guarantees were described in the joint memorandum 
dated July 29, 1994, supara note 3.
    \7\ If a common member has either a net settlement debit at both 
DTC and NSCC or a net settlement credit at both DTC and NSCC, the 
common member will make payments to both DTC and NSCC or receive 
payments from both DTC and NSCC.
    \8\ For a complete description of DTC's and NSCC's agreement, 
refer to Securities Exchange Act Release No. 33548 (January 31, 
1994), 59 FR 5638 [File Nos. SR-DTC-93-08 and SR-NSCC-93-07] (order 
approving proposed rule change).
---------------------------------------------------------------------------

    The proposed rule change amends the current NSCC/DTC Agreement to 
include cross-guarantees of NSCC and DTC arising from transactions 
effected through NSCC's continuous net settlement (``CNS'') system. 
NSCC's CNS system continually nets all trades due to settle the next 
day against each other and against prior days' unsettled long and short 
positions in the same securities. NSCC is the contra-party to each CNS 
transaction. Thus, NSCC participants obligated to deliver securities 
will deliver the securities to NSCC as free book-entry movements at DTC 
(``short covers''). NSCC participants obligated to receive securities 
will receive the securities from NSCC as free book-entry movements at 
DTC (``long allocation'').
    Certain cross-guarantees between NSCC and DTC are being established 
to permit transactions to flow smoothly between DTC's system and the 
CNS system in a collateralized SDFS environment. DTC will provide a 
guarantee to NSCC of all long allocations, and NSCC will provide a 
guarantee to DTC for all short covers. The guarantees provided in the 
amended NSCC/DTC Agreement, among other things, will ensure that debits 
created in DTC's system will continue to be collateralized when the 
securities serving as collateral are delivered into the CNS system as 
short covers. The guarantees also will reduce risk at NSCC by ensuring 
that long allocations or the approximate value of long allocations will 
be made available to NSCC to cover certain exposures.
    When securities that are received versus payment in DTC's system 
are turned into CNS short covers, NSCC will provide a guarantee to DTC 
equal to the prior day's closing price of the securities.\9\ If CNS 
short covers are satisfied from securities that were not received 
versus payment in DTC's system, NSCC will provide a guarantee to DTC 
equal to the prior day's closing market value less an applicable 
haircut. DTC will take this guarantee into account for collateral 
monitor purposes.

    \9\ The guarantee from NSCC to DTC is calculated on a per share 
basis.
---------------------------------------------------------------------------

    When long allocations to participants are redelivered in DTC's 
system, DTC will provide a guarantee to NSCC equal to the prior day's 
closing price of the long allocations less an applicable haircut. The 
guarantee will serve as a collateral substitute for long allocations 
and only will be called on to the extent a participant fails to settle 
due to insolvency and NSCC's own internal close-out procedures result 
in a net loss to NSCC. DTC will apply its normal collateralization 
controls to the value of its guarantee to NSCC to ensure that it has 
sufficient collateral to cover potential guarantee obligations to NSCC 
as the result of a participant redelivering CNS long allocations in 
DTC's system.
    DTC believes the proposed rule change is consistent with Section 
17A of the Act \10\ and the rules and regulations thereunder because 
the conversion entirely to an SDFS system will promote efficiency and 
safety in the clearance and settlement of securities transactions. DTC 
also believes the proposed rule change will be implemented consistently 
with the safeguarding of securities and funds in DTC's custody or 
control or for which it is responsible because the proposal modifies 
DTC's current SDFS system.

    \10\ 15 U.S.C. Sec. 78q-1 (1988).
---------------------------------------------------------------------------

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

    DTC perceives no impact on competition by reason of the proposed 
rule change.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received from Members, Participants, or Others

    The conversion plans were described in detail in the three joint 
memoranda referred to above and have been discussed extensively with 
participants and securities industry organizations. The 1994 memorandum 
described changes in the conversion plans as a result of those 
discussions. Since the distribution of the 1994 memorandum, written 
comments from DTC participants or others have not been solicited or 
received on the amendments to DTC's rules and the amendments to the 
NSCC/DTC Agreement which are the subject of the proposed rule change.

[[Page 7290]]


III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    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, 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, and to 
foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions.

    \11\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
---------------------------------------------------------------------------

    The Commission believes that DTC's proposed rule change is 
consistent with DTC's obligations under Section 17A(b)(3)(F) to 
facilitate the prompt and accurate clearance and settlement of 
securities transactions because the proposed rule change should 
facilitate DTC's conversion entirely to an SDFS system by eliminating 
provisions in DTC's rules relating to an NDFS system. The overall 
conversion to a SDFS system should help reduce systemic risk by, among 
other things, eliminating overnight credit risk. The SDFS system also 
should reduce risk by achieving closer conformity with the payment 
methods used in the derivatives markets, government securities markets, 
and other markets.
    The Commission also believes the proposal is consistent with DTC's 
obligations to assure the safeguarding of securities and funds in its 
custody or control and to foster cooperation and coordination with 
persons engaged in the clearance and settlement of securities 
transactions because the proposed rule change should further reduce 
DTC's and NSCC's risk exposure by amending the NSCC/DTC Agreement to 
include cross-guarantees for transactions effected through NSCC's CNS 
system. The guarantees, among other things, should ensure that debits 
created in DTC's system will continue to be collateralized when the 
securities serving as collateral are delivered into the CNS system as 
short covers. Additionally, the guarantees also should reduce risk at 
NSCC by ensuring that long allocations or the approximate value of long 
allocations will be available to NSCC to cover certain exposures.
    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 proposed rule change 
modifies DTC's rules and the NSCC/DTC Agreement in anticipation of 
DTC's conversion to an SDFS system on February 22, 1996. Accelerated 
approval of the proposal will allow DTC to effect the conversion and to 
implement the safeguards provided under the NSCC/DTC Agreement on that 
date.

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. Sec. 552, will be available for inspection and copying in 
the Commission's Public Reference Room, 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-96-06 and should be 
submitted by March 19, 1996.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-96-06) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\

    \12\ 17 CFR 200.30-3(a)(12) (1995).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-4350 Filed 2-26-96; 8:45 am]
BILLING CODE 8010-01-M