[Federal Register Volume 61, Number 213 (Friday, November 1, 1996)]
[Notices]
[Pages 56598-56599]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28001]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37869; File No. SR-PTC-96-04]


Self-Regulatory Organizations; Participants Trust Company; Order 
Approving a Proposed Rule Change Relating to the Elimination of 
Prefunding Requirements for Intraday Free Retransfers

October 25, 1996.
    On July 2, 1996, the Participants Trust Company (``PTC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-PTC-96-04) pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ to eliminate prefunding 
requirements for intraday free retransfers. Notice of the proposal was 
published in the Federal Register on August 12, 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. Sec. 78s(b)(1) (1988).
    \2\ Securities Exchange Act Release No. 37523 (August 5, 1996), 
61 FR 41816.
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I. Description

    The rule change amends 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 PTC's predecessor, MBS 
Clearing Corporation (``MBSCC'').\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 PTC's 
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 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 can impose 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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II. Discussion

    Section 17A(b)(3)(F) \7\ of the Act requires that the rules of a 
clearing

[[Page 56599]]

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 obligations under the Section 17A of 
the Act. Each 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's NFE controls 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 thereby reducing the risk that the amount 
of collateral available with respect to a participant's account is not 
sufficient to cover the participant's debit balance. The elimination of 
cash prefunding will not diminish PTC's NFE controls. In addition, the 
elimination of cash prefunding will release collateral previously 
required by PTC which should increase participants' liquidity while PTC 
should not incur any additional risks by such release.
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    \7\ 15 U.S.C. Sec. 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-96-04) 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) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-28001 Filed 10-31-96; 8:45 am]
BILLING CODE 8010-01-M