[Federal Register Volume 61, Number 136 (Monday, July 15, 1996)]
[Notices]
[Pages 36949-36950]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17928]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37411; File No. SR-PTC-96-01]


Self-Regulatory Organizations; Participants Trust Company; Order 
Approving 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

July 8, 1996.
    On February 5, 1996, the Participants Trust Company (``PTC'') field 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-PTC-96-01) 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 May 28, 1996.\2\ No comment 
letters were received. For the reasons discussed below, the Commission 
is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Securities Exchange Act Release No. 37227 (May 20, 1996), 61 
FR 26552.
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I. Description

    The rule change amends Article I, Rule 1 of PTC's rules to 
eliminate the deduction of reserve on gain (``ROG'') \3\ in the 
calculation of net free equity (``NFE'') \4\ for proprietary and agency 
accounts of a receiving participant in certain transactions. PTC will 
retain the deduction of ROG as it applies to the calculation of NFE for 
proprietary and agency accounts of a delivering participant.
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    \3\ In connection with any account transfer versus payment, ROG 
is: (i) 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 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.
    \4\ Article II, Rule 9 of PTC's rules provides that NFE for any 
agency or proprietary account is 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.
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    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 the delivering participant 
or receiving participant will have negative NFE.
    In any account transfer versus payment from a proprietary or agency 
account in which the contract value of the securities exceeds the 
market value, the deliverer's ROG is the difference in those values. 
The deliverer's ROG is deducted in calculating the NFE of the account 
of the delivering participant to prevent the gain on the transaction 
from increasing the delivering participant's 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 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, 
which 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 a transaction, the amount of the 
potential NFE gain is the excess of market value of the securities over 
contract value). 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 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.\5\ The provisions of PTC's rules providing the 
ability to reverse transactions has been deleted.\6\ Accordingly, 
deduction of

[[Page 36950]]

ROG from the NFE on the receive-side is no longer required.
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    \5\ In 1988, MBS Clearing Corporation (``MBSCC''), PTC's 
predecessor, proposed a rule change to its Depository Division rules 
to include 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).
    \6\ For a more complete discussion of PTC's reasons for removing 
the reversal capability, refer to Securities Exchange Act Release 
No. 34701 (September 22, 1994), 59 FR 49730 [File No. SR-PTC-94-03] 
(order approving proposed rule change eliminating PTC procedures 
relating to deliverer's security interests). In the notice of 
proposed rule change pertaining to this order, the Commission 
erroneously referred to Release No. 27193 (August 29, 1989), 54 FR 
37065 [File No. SR-PTC-89-02] (order approving proposed rule change) 
as the rule change that removed PTC's reversal capability.
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II. Discussion

    Section 17A(b)(3)(F) \7\ of the act requires that the rules of a 
clearing agency be designed 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. The Commission believes that PTC's 
proposed rule change is consistent with PTC's obligation under the 
Section 17A of the Act. Elimination of the NFE deduction for receive-
side ROG is consistent with the prior repeal of PTC's authority to 
reverse transactions. Because PTC no longer can reverse transactions 
and because the receive-side participant initiates any reversal due to 
erroneous delivery or other permitted circumstances and thus controls 
the availability of NFE in its account, the ROG deduction is no longer 
necessary. As a result, participants with receive-side ROG should 
benefit from the increased liquidity resulting from the release of NFE 
previously encumbered by PTC should not incur any additional risks by 
such release. Moreover, by maintaining the NFE ROG deduction for 
deliver-side participants, PTC should be able to continue to protect 
itself from the risks associated with permitted reversals initiated by 
receive-side participants by ensuring that sufficient NFE exists in 
delivering participants' accounts. The exclusion of deliver-side ROG 
from NFE also should continue to dissuade deliver-side participant from 
taking actions to artificially inflate their NFE.
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    \7\ 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-PTC-96-01) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-17928 Filed 7-12-96; 8:45 am]
BILLING CODE 8010-01-M