[Federal Register Volume 61, Number 103 (Tuesday, May 28, 1996)]
[Notices]
[Pages 26552-26554]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13250]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37227; File No. SR-PTC-96-01]


Self-Regulatory Organizations; Participants Trust Company; Notice 
of Filing of a Proposed Rule Change Eliminating the Deduction of 
Reserve on Gain in the Calculation of Net Free Equity for Proprietary 
and Agency Accounts of a Receiving Participant in Certain Transactions

May 20, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ notice is hereby given that on February 5, 1996, the 
Participants Trust Company (``PTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-PTC-96-01) as described in Items I, II, and III below, which items 
have been prepared primarily by PTC. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \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 amend Article I, Rule 
1 of PTC's Rules to eliminate the deduction of reserve on gain 
(``ROG'') in the calculation of net free equity (``NFE'') for 
proprietary and agency accounts of a receiving participant in certain 
transactions while retaining the deduction of ROG as it applies to the 
calculation of NFE for proprietary and agency accounts of a delivering 
participant.

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

    In its filing with the Commission, PTC 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. PTC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
submitted by PTC.
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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 amend Article I, Rule 
1 of PTC's Rules to eliminate the deduction of ROG in the calculation 
of NFE for proprietary and agency accounts of a receiving participant 
in certain transactions. PTC intends to retain the deduction of ROG as 
it applies to the calculation of NFE for proprietary and agency 
accounts of a delivering participant.
    Under PTC's current rules, in connection with any account transfer 
versus payment, ROG is: (1) With respect to a delivering participant, 
the amount by which the contract value credited to the cash balance of 
the account of the delivering participant exceeds the market value of 
the securities delivered or (ii) with respect

[[Page 26553]]

to a receiving participant, the amount by which the market value of the 
securities credited to the transfer account associated with the account 
of the receiving participant exceeds the contract value of the 
transaction. As explained below, ROG (if applicable) is excluded in the 
computation of NFE for proprietary and agency accounts.
    As set forth in Article II, Rule 9 of PTC's Rules, NFE for any 
agency or proprietary account is calculated as the sum of (i) the 
applicable percentage, as defined in Article I, Rule 1 of PTC's rules, 
of the market value of securities in the account and the associated 
transfer account, (ii) the cash balance in the account, and (iii) the 
participant's supplemental processing collateral, as calculated 
pursuant to the formula set forth in Article I, Rule 1 of PTC's rules, 
to the extent not required to collateralize an account transfer in any 
other account, minus the amount (if any) of ROG with respect to the 
account.
    NFE measures the value associated with the account of a participant 
that is available to support transaction processing to or from the 
participant's account. Under Article II, Rule 9, Section 2 and Article 
II, Rule 13, PTC will not process an account transfer of securities if 
as a result of such transfer the account of that delivering participant 
or receiving participant will have negative NFE.
    In any account transfer versus payment from a proprietary of agency 
account in which the contract value of the securities exceed the market 
value, the deliverer's ROG is the difference in those values. The 
deliverer's ROG is deduced in calculating the NFE of the account of the 
delivering participant to prevent the delivering participant from using 
the gain on the transaction to increase its NFE (i.e., the amount 
available to the participant to support other activity in its account). 
The deduction of the deliverer's ROG creates an NFE ``reserve'' to 
ensure that if necessary sufficient funds exist in the delivering 
participant's account to permit the debit of the contract value from 
the cash balance in the account of the delivering participant in the 
event the transaction is reversed (i.e., ``DK'ed'') by the receiving 
participant because of error or other circumstances permitted under the 
guidelines for good delivery. The ROG deduction also prevents a 
delivering participant, who inputs the terms of the trade on PTC's 
system, from abusing the system by creating additional NFE through the 
delivery versus payment of securities at an artificially inflated 
value.
    The receiver's ROG is the difference in value that results when the 
market value of securities received into a proprietary or agency 
account versus payment exceeds the contract value of the securities. 
(I.e., On the receive-side of the transaction, the amount of the 
potential NFE gain would be the excess of market value of the 
securities over contract value.) Currently, the receiver's ROG is 
deducted in the calculation of NFE of the account of the receiving 
participant. However, the rationale for deducting the receiver's ROG is 
different from that for deducting the deliverer's ROG. Unlike deliver-
side ROG, receive-side ROG is not needed to ensure a receiving 
participant's ability to reverse a securities transaction because the 
receiving participant initiates the reversal and controls the 
availability of NFE in its account.
    The deduction of the receiver's ROG in the NFE calculation for an 
account of a receiving participant was incorporated into PTC's rules in 
1989 pursuant to the order granting PTC's registration as a clearing 
agency. The rule's purpose was to assure sufficient NFE in an account 
to enable PTC to reverse securities deliveries to achieve settlement in 
the event of participant default.\3\ The provisions of PTC's rules 
providing the ability to reverse transactions has been deleted.\4\ 
Accordingly, deduction of ROG from the NFE on the receive-side is no 
longer required.
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    \3\ In 1988, MBS Clearing Corporation (``MBSCC''), PTC's 
predecessor, proposed a rule change to its Depository Division rules 
to include receiver's ROG in the NFE calculation of a receiving 
participant's account. Securities Exchange Act Release No. 26101 
(September 22, 1988), 53 FR 37895 [File No. SR-MBS-88-14] (notice of 
filing of proposed rule change relating to Depository Division 
rules). Subsequently, the order granting PTC's registration as a 
clearing agency incorporated the proposed rule change stating that 
PTC's rules were essentially identical to MBSCC's Depository 
Division rules including the most recently proposed rule changes. 
Securities Exchange Act Release No. 26671 (March 31, 1989), 54 FR 
13266, [File No. 600-25] (order granting registration as a clearing 
agency and statement of reasons).
    \4\ For a more complete discussion of PTC's reasons for removing 
the reversal capability, refer to Securities Exchange Act Release 
No. 27193 (August 29, 1989), 54 FR 37065 [File No. SR-PTC-89-02] 
(order approving proposed rule change).
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    PTC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act and the rules and regulations 
thereunder because the proposal facilitates the prompt and accurate 
clearance and settlement of securities transactions and provides for 
the safeguarding of securities and funds in PTC's possession or control 
or for which PTC is responsible.

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

    PTC does not perceive that the proposed rule change will impose a 
burden on competition.

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

    PTC has not solicited nor received written comments on this 
proposed rule change.

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 the self-regulatory organization 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 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 PTC. All submissions should 
refer to File No. SR-PTC-96-01 and should be submitted by June 18, 
1996.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12) (1995).

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[[Page 26554]]

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-13250 Filed 5-24-96; 8:45 am]
BILLING CODE 8010-01-M