[Federal Register Volume 61, Number 203 (Friday, October 18, 1996)]
[Notices]
[Pages 54483-54484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-26781]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37813; File No. SR-PTC-96-05]


Self-Regulatory Organizations; Participants Trust Company; Order 
Granting Accelerated Approval of a Proposed Rule Change Relating to 
Establishing a New Category of PTC Participant

October 11, 1996.
    On August 21, 1996, the Participants Trust Company (``PTC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-PTC-96-05) pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'')\1\ to establish a 
new category of PTC participant, a ``Federal Reserve participant.'' 
Notice of the proposal was published in the Federal Register on 
September 23, 1996.\2\ No comment letters were received. For the 
reasons discussed below, the Commission is granting accelerated 
approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Securities Exchange Act Release No. 37684 (September 16, 
1996), 61 FR 49807.
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I. Description

    The proposed rule change establishes a new category of PTC 
participant, a Federal Reserve participant, for Federal Reserve 
Banks.\3\ The new category of participants will enable Federal Reserve 
Banks to maintain accounts at PTC for the purpose of accepting 
securities pledged as collateral by PTC participants for discount 
window advances from the Federal Reserve Banks. At a later date, PTC 
participants may be able to deliver securities to the accounts of 
Federal Reserve participants as collateral to secure Treasury tax and 
loan accounts.\4\
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    \3\ The new category of Federal Reserve participant will be 
governed by a new Section 2A to Rule 1 of Article IV of PTC's rules 
(``Qualifications and Duties of Participants and Limited Purpose 
Participants'') and by a new form of participation agreement for 
Federal Reserve participants.
    \4\ A financial institution can be designated as a Treasury tax 
and loan depository to process deposits of Federal taxes and to 
maintain and administer separate accounts known as Treasury tax and 
loan accounts. In order to accept these deposits, the financial 
institution must pledge collateral security to secure Treasury tax 
and loan balances with the Federal Reserve Bank of the district in 
which it is located. 31 CFR 202, 203.
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    Following approval of this proposed rule change, PTC and the 
Federal Reserve Bank of New York (``FRBNY'') will commence a pilot 
program which will be open to a limited number of PTC participants. 
During the pilot program, PTC participants taking part in the pilot 
program will be able to deliver securities that meet the requirements 
of the FRBNY to the FRBNY's Federal Reserve participant's account to 
secure discount window advances. During the pilot program, PTC also 
will undertake software changes that may later permit pledges of 
Treasury tax and loan collateral and pledges of collateral by 
institutions that are not direct participants themselves but use PTC 
participants as custodians.\5\
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    \5\ Many smaller institutions which cannot meet PTC's 
participants' requirements establish clearing arrangements with PTC 
participants in order to utilize PTC's services.
    As necessary, PTC should submit a proposed rule change under 
Section 19(b) of the Exchange Act describing any modifications to 
the program which PTC plans to implement as a result of its review 
of the pilot program.
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    Establishing the Federal Reserve participant as a category of 
participation will enable Federal Reserve Banks to participate in PTC 
in a capacity different from that of PTC's current participants or 
limited purpose participants.\6\ Like limited purpose participants, 
Federal Reserve participants will be restricted from receiving 
securities versus payment and from incurring a debit balance. In 
addition, Federal Reserve participants will not receive principal and 
interest (``P&I'') advances on securities held at PTC and therefore are 
not required to repay third-party loans obtained for this purpose.\7\
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    \6\ Currently, PTC's rules permit participation as either a 
participant or as a limited purpose participant.
    \7\ Federal Reserve participants will not receive P&I through 
PTC because P&I on securities in a pledgee account is paid to the 
pledgor pursuant to PTC's rules.
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    Consistent with the restricted nature of Federal Reserve Bank 
participation, the proposed rule change also provides that Federal 
Reserve participants will be exempt from some of the obligations 
applicable to PTC's other participants and limited purpose 
participants.\8\ The most significant exemptions applicable to Federal 
Reserve participants are that they are not required to: (1) Indemnify 
PTC or any licensor or provider of data processing services to PTC; (2) 
furnish periodic financial reports and open books and records for 
inspection by PTC; (3) pay fees, fines, or assessments; (4) contribute 
to the participants fund; or (5) submit disputes to arbitration.
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    \8\ These exemptions are set forth in the new Section 2A to Rule 
1 of Article IV of PTC's rules.
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    Additional provisions of the proposed rule change are as follows. 
Securities and property in the account of a Federal Reserve participant 
are not subject to any lien, security interest, or ownership interest 
by PTC.\9\ PTC shall not be liable to a Federal Reserve participant or 
any third party for losses arising from nonperformance or 
misperformance of the custody of deposited securities or its duties 
other than the custody of deposited securities except to the extent 
that such loss is attributable to the failure to exercise ordinary care 
by PTC or in the case of willful misconduct or fraudulent or criminal 
acts of PTC. PTC will not waive any of its rules or procedures without 
a Federal Reserve participant's consent if the effect of such

[[Page 54484]]

waiver would be to prejudice a Federal Reserve participant's rights.
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    \9\ Because securities held by PTC for the account of a Federal 
Reserve participant are held in pledgee accounts and transferred 
free into such accounts, this change is merely a restatement of 
PTC's existing rules, which provide that PTC does not have a lien, 
security interest, or ownership interest in securities held and 
transferred in this manner.
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II. Discussion

    Section 17A(b)(3)(F) \10\ of the Exchange Act requires that the 
rules of a clearing agency be designed to assure the safeguarding of 
securities and funds in the custody or control of the clearing agency 
or for which it is responsible. For the reasons set forth below, the 
Commission believes that PTC's proposed rule change is consistent with 
this obligation under the Exchange Act.
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    \10\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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    PTC was established in 1989 as a depository for mortgage-backed 
securities, primarily those guaranteed by the Government National 
Mortgage Association (``GNMAs''), in order to immobilize these 
securities and to allow them to be settled by book-entry. However, 
GNMAs, unlike other mortgage-backed securities such as those guaranteed 
by the Federal National Mortgage Association (``FNMAs'') and the 
Federal Home Loan Mortgage Association (``FHLMCs''), are issued in 
certificated form and therefore cannot be transferred over the Fedwire.
    Currently, in order to use GNMAs as collateral for discount window 
advances from Federal Reserve Banks, PTC participants must physically 
remove the certificates from PTC and deposit them with the Federal 
Reserve Banks. The proposed rule change will enable Federal Reserve 
Banks to maintain accounts at PTC for the purpose of accepting from PTC 
participants securities pledged as collateral for discount window 
advances and as collateral to secure Treasury tax and loan accounts. 
This will allow PTC participants to utilize GNMAs as collateral without 
having to physically remove the certificates from PTC. As a result, the 
Commission believes the proposed rule change facilitates the 
safeguarding of securities in the custody or control of PTC by reducing 
the physical movement of GNMAs and the risk of loss associated with the 
physical movement of these securities. Furthermore, the Commission 
believes that the proposal is consistent with industry efforts to 
immobilize securities certificates and maximize efficiencies in 
securities processing.
    As previously stated, the proposed rule change also provides that 
Federal Reserve participants will be exempt from some of the 
obligations applicable to participants and limited purpose 
participants. The Commission believes that the special provisions 
applicable to Federal Reserve participants are consistent with the 
restricted nature of the Federal Reserve Banks' participation at PTC.
    PTC 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 the filing. The Commission finds good cause 
for so approving the proposed rule change because accelerated approval 
will permit PTC and the FRBNY to immediately commence the pilot 
program. Furthermore, the Commission has not received any comment 
letters and does not expect to receive any comment letters on the 
proposal. In addition, the staff of the Board of Governors of the 
Federal Reserve System (``Board of Governors'') has concurred with the 
Commission's decision to grant accelerated approval.\11\
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    \11\ Telephone conversation between John Rudolph, Board of 
Governors, and Ari Burstein, Division of Market Regulation, 
Commission (October 3, 1996).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the 
Exchange Act and in particular Section 17A of the Exchange Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act, that the proposed rule change (File No. SR-PTC-96-05) be 
and hereby is approved on an accelerated basis.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-26781 Filed 10-17-96; 8:45 am]
BILLING CODE 8010-01-M