[Federal Register Volume 61, Number 156 (Monday, August 12, 1996)]
[Notices]
[Pages 41816-41817]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20399]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37523; File No. SR-PTC-96-04]


Self-Regulatory Organizations; The Participants Trust Company; 
Notice of Filing of Proposed Rule Change Relating to the Elimination of 
Prefunding Requirements for Intraday Free Retransfers

August 5, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 2, 1996, the 
Participants Trust Company (``PTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-PTC-96-04) 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 proposed rule change will amend PTC's rules to eliminate the 
requirement that participants prefund free redeliveries (``free 
redeliveries'') involving securities that were received by a 
participant versus payment that same day.

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 
prepared 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 PTC's rules to 
eliminate the requirement that participants must have cash on deposit 
(``optional deposits'') with PTC equal to the original contract value 
for securities that are received the same day versus payment prior to 
making an intraday free redelivery of such securities. These optional 
deposits are commonly referred to as ``prefundings.''
    The requirement that participants prefund intraday free 
redeliveries was added to PTC's rules by MBS Clearing Corporation 
(``MBSCC''), predecessor to PTC.\3\ The purpose of the prefunding 
requirement was to support the original deliverer's security interest 
(``DSI'') and the default provisions which permitted PTC to reverse 
(i.e., unwind) securities deliveries to achieve settlement, both of 
which were added to PTC's rules at the same time.\4\ Both the DSI and 
the unwind procedures subsequently have been eliminated from the PTC 
rules and have been replaced with the participant's intraday collateral 
lien (``PICL'').\5\
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    \3\ In 1988, MBSCC proposed a rule change to require its 
participants to prefund intraday free transfers. 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). 
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 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\ PTC's rules originally provided that securities delivered 
versus payment (i.e., held in a participant's transfer account) were 
held by PTC pending settlement subject to the DSI granted to the 
original delivering participant. If securities were thereafter 
redelivered free from a transfer account, the secured party would 
lose its collateral unless prefunding served as proceeds of that 
collateral. Accordingly, participants that made a free delivery of 
securities subject to a DSI were required to have cash at least 
equal to the original contract value of the securities in the form 
of an optional deposit to the participants fund.
    \5\ For a more complete discussion of PTC's reasons for removing 
the DSI and the unwind procedures, 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).
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    The PICL, which can be exercised only if PTC is insolvent and fails 
to achieve settlement, is granted to those participants with a net 
credit balance

[[Page 41817]]

owed to them by PTC. Participants with a net credit balance have a pro 
rata interest in a common pool of collateral that consists of 
securities held in transfer accounts (i.e., intraday deliveries versus 
payment) for which settlement has not yet occurred, payments made by 
participants to satisfy net debit balances owed to PTC, and prefunding 
payments made to support intraday free redeliveries of securities from 
transfer accounts.
    Prefunding intraday free redeliveries imposes a substantial burden 
on participants. For example, if a participant receives a security in a 
transaction versus payment through PTC and thereafter redelivers it 
free, such participant usually will be receiving payment for the free 
redelivery outside of PTC. Although the participant must have 
sufficient Net Free Equity (``NFE'') \6\ for PTC to process the 
transaction, the participant may not have the cash available until 
after the funds are received from the party receiving the free 
redelivery outside of PTC. In addition, the participant may be in a net 
credit position at PTC when cash prefunding is required as a result of 
other transactions which are processed through its account.
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    \6\ NFE for a participant's account consists of, among other 
things, the cash balances in the participant's account, the market 
value of securities, net of applicable margin in the participant's 
account or associated transfer account, a portion of the 
participant's mandatory deposit to the participants fund, and the 
participant's optional deposits to the participants fund including 
prefunding. Additional components of NFE not relevant to this 
analysis include reserve on gain, which operates to reduce NFE in 
certain transactions, and excess proprietary NFE, a component of 
supplemental processing collateral.
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    PTC believes that the NFE controls applicable to participants will 
adequately protect PTC and the settlement of its transactions if the 
prefunding of intraday free redeliveries is eliminated. Every 
transaction processed through the PTC system, including both deliveries 
versus payment and free redeliveries, is tested to ensure that both the 
delivering and receiving participant's accounts will not have negative 
NFE after giving effect to the transaction.
    PTC believes the NFE computation ensures that sufficient value is 
available to PTC to collateralize a settlement advance if a participant 
defaults on the payment of its debit balance. Under the proposed rule 
change, a free redelivery will not require prefunding although the NFE 
control will block any free redelivery where the deduction of the 
securities from the account of the delivering participant will cause 
its NFE to be negative. Accordingly, the elimination of cash prefunding 
will not diminish this NFE control, which assures that the amount of 
collateral available with respect to a participant's account is 
sufficient to cover the participant's debit balance. Although 
elimination of the prefunding requirement for intraday retransfers may 
result in some reduction in the aggregate collateral pool available to 
the PICL holders, PTC believes the magnitude of such reduction will not 
be material.
    PTC believes that the proposed rule change is consistent with 
Section 17A of the Act \7\ and the rules and regulations thereunder 
because it will facilitate the prompt and accurate clearance and 
settlement of securities transactions and will provide for the 
safeguarding of securities and funds in PTC's custody or control or for 
which PTC is responsible.
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    \7\ 15 U.S.C. 78q-1 (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    PTC does not believe that the proposed rule change imposes any 
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 has received any written comments on the 
proposed rule change. PTC has discussed the proposed rule change with 
its participants informally and at meeting of PTC's Operations 
Committee which is composed of participant representatives. In the 
course of these discussions, participants have indicated a particular 
difficulty in complying with the prefunding requirement for free 
redeliveries of securities that support the issuance of collateralized 
mortgage obligation (``CMO'') securities. In these instances, a 
participant, usually the underwriter, will incur a debit balance in its 
PTC account as a result of the purchase of the securities while 
subsequent redelivery of the securities to a PTC limited purpose 
account is sent free pending issuance of the CMO. The primary source of 
the cash necessary to comply with the prefunding requirement would be 
the proceeds of the to be issued CMO.

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 finding 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which PTC 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 submission 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington D.C. 20549. 
Copies of the submissions, 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, N.W., Washington, 
D.C. 20549. Copies of such filings will also be available for 
inspection and copying at the principal office of PTC. All submissions 
should refer to the file number SR-PTC-96-04 and should be submitted by 
September 3, 1996.

    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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Jonathan G. Katz,
Secretary.
[FR Doc. 96-20399 Filed 8-9-96; 8:45 am]
BILLING CODE 8010-01-M