[Federal Register Volume 61, Number 215 (Tuesday, November 5, 1996)]
[Notices]
[Pages 56990-56991]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28309]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37882; File No. SR-PHILADEP-96-10]


Self-Regulatory Organizations; Philadelphia Depository Trust 
Company; Notice of Filing and Order Granting Accelerated Approval of 
Proposed Rule Change Regarding Use of the Institutional Delivery System 
for Prime Brokers Transactions

October 28, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 28, 1996 the 
Philadelphia Depository Trust Company (``Philadep'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change (File No. SR-PHILADEP-96-10) as described in Items I and II 
below, which Items have been prepared primarily by Philadep. On 
September 16, 1996, Philadep filed an amendment to the proposed rule 
change.\2\ 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).
    \2\ Letter from J. Keith Kessel, Compliance Officer, Philadep, 
to Jerry W. Carpenter, Assistant Director, Division of Market 
Regulation, Commission (September 13, 1996).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Philadep proposes to allow its participants to utilize its links 
with the Depository Trust Company's (``DTC'') Institutional Delivery 
(``ID'') system for the confirmation and affirmation of securities 
transactions that are to be settled by prime brokers.\3\
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    \3\ For a complete description of DTC's ID system, refer to 
Securities Exchange Act Release No. 34779 (October 3, 1994), 59 FR 
51465 [File No. SR-DTC-94-13] (notice of filing and order granting 
accelerated approval on a temporary basis of the ID system).
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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.\4\
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    \4\ 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

    Philadep proposes to allow its participants to utilize the ID 
system for the confirmation and affirmation of trades that are to be 
settled by prime brokers.\5\ Under the proposed rule, Philadep 
participants may elect to use a prime broker option on the ID system to 
accommodate requests from their customers to send certain orders to 
another broker for execution. Although these orders will be executed by 
another broker, all such orders subsequently will settle at the prime 
broker.
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    \5\ Prime brokers are ID participating broker-dealers that 
settle, clear, and finance trades and provide custodial facilities 
for institutional customers.
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    Prime broker arrangements typically are designed by full service 
firms to facilitate the clearance and settlement of securities trades 
for retail and institutional investors that are active market 
participants. The prime broker arrangement involves the prime broker, 
the executing broker, and the institutional customer. The prime broker 
must be a registered broker-dealer that clears and finances customer 
trades executed by one or more other broker-dealers (``executing 
brokers'') on behalf of the customer. Customers place orders with an 
executing broker. The executing broker maintains an account in the name 
of the prime broker for the benefit of the customer to accommodate such 
customer orders. The customer maintains its funds and securities in an 
account with the prime broker.
    When a customer places a trade order, the executing broker buys or 
sells securities. On the same day (i.e., trade date), the customer will 
notify the prime broker of the trade made by the executing broker. The 
prime broker records the customer's order in its books and records and 
issues a confirmation to the customer. The executing broker will 
utilize the ID system to confirm the transaction with the prime broker. 
The prime broker will affirm the trade through the ID system if the 
trade information submitted by the customer matches the information 
received from

[[Page 56991]]

the executing broker. Subsequently, the prime broker settles with the 
executing broker and the customer according to normal settlement 
procedures.
    Prime broker participants also will have the option to disaffirm 
trades. Disaffirmation involves the reversal of an affirmed 
confirmation back to an unaffirmed confirmation status. A disaffirming 
prime broker will notify both Philadep and the executing broker through 
Philadep's terminal system, Philanet, that a previously affirmed ID 
prime broker trade is being disaffirmed. Philadep will verify that each 
disaffirmation instruction matches an existing ID trade, and on a 
``best efforts'' basis, Philadep will attempt to contact the executing 
broker by telephone to inform it of the disaffirmation. Philadep then 
will determine the settlement mode of the disaffirmed trade (e.g., 
trade-for-trade or continuous net settlement [``CNS'']). If a 
disaffirmed trade is scheduled to settle trade-for-trade or outside 
Philadep, Philadep will not take any further action.\6\
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    \6\ For trade-for-trade settlement, prime brokers will not 
deliver on the sell side or will reclaim the transaction on the buy 
side. For trades settling outside Philadep, prime brokers will block 
settlement through their agents or correspondents.
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    If a disaffirmed trade is scheduled to settle in CNS, Philadep will 
provide information to the appropriate clearing corporation so that the 
clearing corporation can effect journal entries to reverse the 
settlement obligations of the prime brokers. This reversal will 
reestablish the settlement obligations of the executing brokers. On a 
best efforts basis, the clearing corporation will telephone the 
executing brokers to advise them of the disaffirmation.
    Philadep believes that it will need to make minimal changes to its 
current system to accommodate this business. Most notably, Philadep 
will establish two account numbers that will serve to segregate the 
prime broker activity of its ID participants from other types of 
activity.
    Philadep believes that the proposed change is consistent with 
Section 17A of Act \7\ because it promotes the prompt and accurate 
clearance and settlement of securities transactions and safeguards 
securities and funds in Philadep's custody or control.
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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

    Philadep does not believe that the proposed rule change will impose 
any inappropriate 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 relating to the proposed rule change have been 
received. Philadep will notify the Commission of any written comments 
received by Philadep.

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

    Section 17A(b)(3)(F) of the Act \8\ requires the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions. Additionally, 
Section 17A(a)(2)(ii) of the Act \9\ directs the Commission to 
facilitate the linked or coordinated facilities for the clearance and 
settlement of securities transactions. The Commission believes that the 
proposed rule change is consistent with Philadep's obligations under 
the Act because the proposal permits Philadep participants to utilize 
DTC's ID system to settle prime broker trades which should promote the 
prompt and accurate clearance and settlement of securities transactions 
whether such trades settle through CNS (i.e., thereby netting prime 
brokers' and executing brokers' other positions in the same security) 
or trade for trade through the existing ID system. Furthermore, the 
Commission believes that the proposed rule change enhances the ID 
linkage between DTC and Philadep through which Philadep participants 
will be able to settle prime broker trades.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
    \9\ 15 U.S.C. 78q-1(a)(2)(ii) (1988).
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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 the filing. The Commission finds good 
cause for so approving the proposed rule change because accelerated 
approval will permit Philadep participants to immediately utilize the 
ID system for prime broker securities transactions. Furthermore, 
approval of the proposed rule change will allow Philadep to enhance its 
existing ID linkage with DTC, whose prime brokerage service has already 
been subject to notice and comment.\10\ Although the Commission has 
received one comment letter supporting the rule proposal, the 
Commission does not expect to receive additional comment letters on the 
proposal.\11\
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    \10\ Supra note 3.
    \11\ In that letter, the commenter asserted that it will be 
competitively disadvantaged if Philadep is unable to offer prime 
broker services to its participants. Letter from Robert B. Kaplan, 
Vice President, BHC Securities, Inc., to Larry E. Bergmann, Senior 
Associate Director, Division, Commission (July 30, 1996).
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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, 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, NW., Washington, 
DC 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-96-10 and should be submitted by 
November 26, 1996.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (File No. SR-PHILADEP-96-10) be 
and hereby is approved.

    \12\ 15 U.S.C. 78s(b) (2)(1988).
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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-28309 Filed 11-4-96; 8:45 am]
BILLING CODE 8010-01-M