[Federal Register Volume 61, Number 174 (Friday, September 6, 1996)]
[Notices]
[Pages 47227-47229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22721]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37625; File Nos. SR-Philadep-96-14]
Self-Regulatory Organization; Philadelphia Depository Trust
Company; Notice of Filing and Order Granting Accelerated Partial
Permanent Approval and Accelerated Partial Temporary Approval of a
Proposed Rule Change Seeking Permanent Approval of the Inter-Depository
Delivery Procedures and the Participants Fund Formulas
August 30, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on July 26, 1996, the
Philadelphia Depository Trust Company (``Philadep'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change (File No. SR-Philadep-96-14) as described in Items I and II
below, which items have been prepared primarily by Philadep. The
Commission is publishing this notice and order to solicit comments from
interested persons and to grant accelerated permanent approval of the
portion of the proposed rule change relating to inter-depository
delivery procedures and to grant accelerated temporary approval through
December 31, 1996, of the portion of the proposed rule change relating
to Philadep's participants fund formulas.
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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 seeks permanent approval of Philadep's
inter-depository delivery procedures and of Philadep's participants
fund formulas. The Commission previously granted partial temporary
approval to a proposed rule change establishing Philadep's procedures
for inter-depository deliveries and Philadep's participants fund
formulas as part of the conversion of Philadep's money settlement
system from a next-day funds settlement (``NDFS'') to a same-day funds
settlement (``SDFS'') system.\2\
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\2\ Securities Exchange Act Release No. 36876 (February 22,
1996), 61 FR 7841 [SR-Philadep-95-08] (order granting partial
temporary approval and partial permanent approval of a proposed rule
change).
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, Philadep 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. Philadep has prepared summaries, set forth in sections
(A), (B), and (C) below, of the most significant aspects of such
statements.\3\
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\3\ The Commission has modified the text of the summaries
submitted by Philadep.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
On February 22, 1996, Philadep converted its processing environment
from an NDSF system to an SDFS system. In an effort to reduce risk in
an SDFS settlement environment, the Stock Clearing Corporation of
Philadelphia (``SCCP'') and Philadep implemented a new system and new
controls with enhanced processing capabilities. The Commission approved
Philadep's SDFS system on a permanent basis for all aspects of the
filing except the participants fund formulas and the inter-depository
delivery procedures.\4\
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\4\ Supra note 2.
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1. Inter-Depository Delivery Procedures
When processing a participant's delivery to The Depository Trust
Company (``DTC''), Philadep employs an immediate update technique
whereby a delivering participant's security position, collateral, and
settlement account are immediately updated if the delivering
participant has sufficient securities and collateral to allow the
delivery to be completed. The delivering participant's position is
reduced by the quantity of securities delivered, its settlement account
is credited for the settlement value of the transaction, and its
collateral monitor is increased by the settlement credit received and
reduced by the collateral value of the securities delivered (provided
the securities being delivered are part of the participant's collateral
position).
Once a delivery satisfies Philadep's risk management controls and
completes at Philadep (e.g., the participant has sufficient securities
to make the delivery and the participant's collateral monitor will not
become negative because of the delivery), Philadep send the delivery to
DTC where it is subject to DTC's internal risk management controls. In
certain instances, DTC's internal risk management controls will prevent
a delivery from completing (i.e., the receiving participant does not
have sufficient collateral or the receipt would
[[Page 47228]]
cause the participant to exceed its net debit cap) and will cause the
delivery to pend in DTC's system. At the end of each processing day,
DTC returns to Philadep delivery orders and payment orders that fail to
successfully complete in DTC's system, and Philadep reverses the
deliveries to the original delivering participants. Philadep's
reversals are not subject to Receiver-Authorized Delivery (``RAD'')
processing \5\ or other risk management controls (i.e., net debit cap
and collateral monitor).
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\5\ RAD allows a participant to review and either approve or
cancel incoming deliveries before they are processed in Philadep's
system.
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2. Participants Fund
Philadep Rule 4, governing the participants fund and the procedures
regarding the participants fund formulas currently provide for an all
cash participants fund. The all cash requirement applies to both the
required deposit and any additional or voluntary deposits made by
participants. Pursuant to Rule 4 and Philadep's procedures, Philadep
calculates participants' required cash deposit pursuant to the
following formulas.
(a) Inactive Accounts: $5,000.00 \6\
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\6\ Securities Exchange Release No. 37554 (August 9, 1996), 61
FR 42929 [File No SR-Philadep-96-07] (order granting temporary
approval of proposed rule change to establish a separate participant
category for inactive accounts through December 31, 1996).
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(b) Specialized Services: (maximum $50,000 required with $100 or
greater in average monthly billings for either Deposit or Transfer
activity)
--Deposit Activity: $25,000.00 plus
--Transfer Activity: $25,000.00
(c) Participants not doing Specialized Service activity with
service fees of $100 or greater in average monthly billings. The
greater of either:
(1) $25,000, or;
(2) 1% of the average of the three highest net debits over the past
three months (rounded to the next $5,000 increment).
Philadep recalculates each participant's deposit requirement at the
end of each month based on a participant's activity over the previous
three months. Philadep notifies its participants of any required
deposit increases and the amount of such additional deposit within ten
business days of the end of the month. Participants whose deposit
requirements have decreased are notified at least quarterly although
they may inquire and withdraw excess deposits monthly. Participants may
leave excess cash deposits in the participants fund.
During the pendency of the temporary approval period, Philadep has
more fully considered the risk profile of Philadep and its participants
in an SDFS environment, including the adequacy of the participants fund
formulas and the inter-depository delivery procedures. Philadep has
provided material to the Commission to demonstrate the effectiveness of
the risk management controls of the SDFS system in monitoring and
reducing risk. The temporary approval period for the participants fund
formulas and the inter-depository delivery procedures expires on August
31, 1996. Therefore, Philadep requests that the Commission permanently
approve Philadep's SDFS program in its entirety.
Philadep believes the proposed rule change is consistent with
Section 17A of the Act of the rules and regulations thereunder because
the rule proposal fosters cooperation and coordination with persons
engaged in the clearance and settlement of securities transactions and
further assures the safeguarding of securities and funds in its custody
or control or for which Philadep is responsible.
(B) Self-Regulatory Organization's Statement on Burden on Competition
Philadep does not believe that the proposed rule change will impact
or impose a burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
No written comments have been solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Section 17A(b)(3)(F) of the Act \7\ requires that the rules of a
clearing agency be designed to foster cooperation and coordination with
persons engaged in the clearance and settlement of securities
transactions and 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 Philadep's proposed
procedures relating to inter-depository deliveries are consistent with
Philadep's obligations under Section 17A(b)(3)(F) to foster cooperation
and coordination with persons engaged in the clearance and settlement
of securities transactions because the proposed rule change establishes
procedures for the processing of inter-depository deliveries between
Philadep and DTC.
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\7\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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Because the Commission was concerned that the inter-depository
delivery procedures could create the situation where an inter-
depository reversal arising from an uncompleted delivery at DTC would
cause a Philadep participant to violate its net debit cap at Philadep
near the end of the day, the Commission previously approved Philadep's
inter-depository delivery procedures on a temporary basis in order that
the procedures and their effects could be carefully monitored and
modified if needed before they were permanently approved. Philadep has
reported that during the temporary approval period it did not
experience any inter-depository reversals from DTC that caused a
Philadep participant to violate its net debit cap. Additionally, during
the month of July, Philadep experienced only one end-of-day inter-
depository reversal. Therefore, the Commission is permanently approving
Philadep's inter-depository delivery procedures. However, the
Commission continues to encourage Philadep to examine and to consider
future enhancements to the interface to provide a mechanism through
which Philadep participants can receive real-time notification of
transactions pending at DTC.\8\ In this regard, Philadep must report to
the Commission on a quarterly basis the number and extent of inter-
depository reversals that caused Philadep participants to violate their
net debit caps by $1 million or more.
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\8\ Currently, a Philadep clerk will monitor transactions that
are pending at DTC during the day and will inform Philadep
participants of such pending transactions.
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At this time, the Commission believes that Philadep's proposed rule
change relating to Philadep's participants fund formulas is consistent
with Philadep's obligations under Section 17A(b)(3)(F) to assure the
safeguarding of securities and funds in its custody or control because
Philadep's participants fund formulas, in conjunction with Philadep's
other risk management procedures (i.e., net debit caps and collateral
monitors), provide certain protections for Philadep and its
participants from financial loss associated with member defaults and
insolvencies. However, the Commission continues to have concerns about
the adequacy of Philadep's participants fund formulas in providing a
sufficient source of cash liquidity and the formulas' conformity with
the standards set forth by the Division.\9\ The
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Commission believes clearing agencies must establish an appropriate
level of clearing fund contributions based on, among other things, its
assessment of the risks to which it is subject. Under the proposed rule
change, Philadep's participants fund formulas generally do not take
into consideration to a participant's level of depositor activity.
Instead, the formulas are based on the type of depository services used
by the participant. As such, the Commission has concerns about whether
the size of the participants fund will be sufficient. For these
reasons, the Commission is temporarily approving the portion of the
proposed rule change relating to the participants fund formulas through
December 31, 1996. During the period of temporary approval, Philadep
and the Commission will continue to monitor and to analyze the adequacy
of Philadep's participants fund formulas.
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\9\ Securities Exchange Act Release No. 16900 (June 17, 1980),
45 FR 41920 (order publishing standards to be used by the Division
in reviewing the grant of full registration of clearing agencies).
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Philadep 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 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 allow Philadep participants to continue to utilize the
interface between Philadep and DTC. Accelerated approval of the
proposal also will allow Philadep to continue to apply its participants
fund formulas through December 31, 1996.
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. 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 Philadep. All submissions should
refer to the file number SR-Philadep-96-14 and should be submitted by
September 27, 1996.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-Philadep-96-14) be, and
hereby is, permanently approved for those sections of the proposed rule
change relating to the inter-depository delivery procedures and
temporarily approved through December 31, 1996, for those sections of
the proposed rule change relating to Philadep's participants fund
formulas.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-22721 Filed 9-5-96; 8:45 am]
BILLING CODE 8010-01-M