[Federal Register Volume 61, Number 141 (Monday, July 22, 1996)]
[Notices]
[Pages 37948-37950]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18456]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37440; File No. SR-DTC-96-07]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change to Modify Certain Provisions of the Fund/SERV Interface 
Agreement to Accommodate Same-Day Funds Settlement

July 15, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on March 6, 1996, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-DTC-96-07) 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.
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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 modify certain 
provisions of DTC's Fund/SERV Interface Agreement (``Fund/SERV 
Agreement'') with the National Securities Clearing Corporation 
(``NSCC'') because of 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 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\
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    \2\ The Commission has modified the text of the summaries 
submitted by DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In 1989, DTC established an interface with NSCC to allow DTC 
participants that were not Fund/SERV members to access NSCC's Fund/SERV 
system.\3\ Several provisions of the Fund/SERV Agreement between DTC 
and NSCC relating to settlement must be modified because of the 
conversion to SDFS.\4\
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    \3\ Fund/SERV is a centralized, automated processing system for 
mutual fund purchases and redemptions. For a further description of 
Fund/SERV and DTC's interface with NSCC, refer to Securities 
Exchange Act Release Nos. 25146 (November 20, 1987), 52 FR 45418 
[File No. SR-NSCC-87-08] (order granting permanent approval to 
NSCC's Fund/SERV); 31937 (March 1, 1993), 58 FR 12609 [File No. SR-
NSCC-92-14] (order approving modifications to NSCC's Fund/SERV); and 
27056 (July 24, 1989), 54 FR 31752 [File No. SR-DTC-89-09] (order 
approving DTC's Fund/SERV interface with NSCC).
    \4\ For further 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).
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    The Fund/SERV Agreement currently provides that DTC participants 
that participate in the Fund/SERV interface are required to make an 
additional deposit to DTC's next-day funds settlement (``NDFS'') 
participants fund. Under DTC's SDFS system, there no longer is a 
separate NDFS participants fund. Furthermore, each participant's Fund/
SERV activity now will be included in the formula used to determine the 
amount of that participant's required deposit to DTC's

[[Page 37949]]

participants fund.\5\ Accordingly, the Fund/SERV Agreement is being 
modified to reflect the existence of a single participants fund and a 
new participants fund formula.
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    \5\ Under DTC's SDFS system procedures, a participant's required 
deposit is based on the participant's liquidity needs. Therefore, a 
participant's Fund/SERV activity, to the extent it results in 
liquidity use (i.e., net debits), will be included in the 
calculation of its required participants fund deposit.
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    In addition, the Fund/SERV Agreement will be modified to reflect 
the application of the SDFS settlement procedures and the SDFS failure 
to settle procedures, are set forth in DTC's Rules and Procedures. 
Under the proposed rule change, DTC no longer will settle Fund/SERV 
obligations separately from other settlement activity conducted between 
DTC and NSCC. DTC's settlement obligations resulting from Fund/SERV 
interface activity will be settled on a net basis with all other 
settlement obligations between DTC and NSCC. In the event a DTC 
participant fails to settle with DTC and the participant has a Fund/
SERV debit owed to NSCC, DTC will employ its failure to settle 
procedures. If DTC's failure to settle procedures result in sufficient 
funds to pay NSCC, DTC will make such payment to NSCC. If the failure 
to settle procedures do not result in sufficient funds to pay the 
debit, DTC will not make payment to NSCC. On the next business day, 
NSCC will, on DTC's request, reverse the Fund/SERV transactions of the 
defaulting participant and recover any credits paid to NSCC Fund/SERV 
members with respect to the transactions.
    DTC believes the proposed rule change is consistent with Section 
17A of the Act and the rules and regulations thereunder because the 
proposed rule change will modify the Fund/SERV Agreement between DTC 
and NSCC to reflect the conversion to an entirely SDFS settlement 
system. 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 proposed 
rule change modifies the Fund/SERV Agreement to reflect the application 
of DTC's SDFS failure to settle procedures.

(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

    Comments on the proposed rule change were not solicited. DTC will 
notify the Commission of any written comments received by DTC.

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

    Section 17A(b)(3)(F) of the Act \6\ 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 and to foster cooperation and coordination 
with persons engaged in the clearance and settlement of securities 
transactions. The Commission believes that DTC's proposed rule change 
is consistent with DTC's obligations under Section 17A(b)(3)(F) because 
the proposed rule change should further reduce DTC's risk exposure with 
regard to its participants' Fund/SERV activities by applying DTC's SDFS 
settlement procedures and DTC's failure to settle procedures to the 
Fund/SERV interface.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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    Furthermore, although DTC does not guarantee its participants' 
Fund/SERV settlement payments to NSCC, the proposed rule change 
includes safeguards against losses due to participant defaults. Under 
the amended Fund/SERV Agreement between DTC and NSCC, DTC's SDFS 
failure to settle procedures will be employed to identify excess 
collateral and/or other funds to cover DTC's settlement obligations to 
NSCC resulting from a failed participant's Fund/SERV activities. If the 
application of DTC's SDFS failure to settle procedures produces funds 
to pay the defaulting participant's Fund/SERV obligations, then there 
should be a reduction in the number of reversals at NSCC. If DTC's 
procedures fail to produce sufficient funds, DTC will not be liable for 
the remaining settlement obligations, and NSCC will reverse the Fund/
SERV transactions the following day.
    The Commission also believes the proposal is consistent with DTC's 
obligations to foster cooperation and coordination with persons engaged 
in the clearance and settlement of securities transactions because the 
proposal will allow DTC and NSCC to settle obligations arising from 
Fund/SERV interface activity on a net basis; thus, simplifying the two 
clearing agencies' settlement procedures. Furthermore, the revised 
Fund/SERV Agreement sets forth DTC's and NSCC's responsibilities if a 
participant fails to settle and establishes a framework by which DTC 
and NSCC can mitigate the risks posed by a defaulting participant.
    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 prior to the thirtieth day after the 
date of publication of notice of filing because the proposed rule 
change will amend the Fund/SERV Agreement between DTC and NSCC in 
accordance with DTC's conversion to SDFS on February 22, 1996, and will 
allow DTC to apply the safeguards provided under the SDFS failure to 
settle procedures to the Fund/SERV interface immediately. Furthermore, 
the Commission has previously published notice of and approved NSCC's 
rule filing with regard to the proposed changes in the Fund/SERV 
interface and DTC's rule filing setting forth its SDFS failure to 
settle procedures. DTC's and NSCC's proposed rule changes did not 
generate any comment letters, and the Commission does not anticipate 
comments with regard to DTC's amendment to the Fund/SERV Interface 
Agreement.

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 the file number SR-DTC-96-07 and should be submitted by August 
12, 1996.

[[Page 37950]]

    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-96-07) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-18456 Filed 7-19-96; 8:45 am]
BILLING CODE 8010-01-M