[Federal Register Volume 61, Number 232 (Monday, December 2, 1996)]
[Notices]
[Pages 63887-63888]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30614]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37976; File No. SR-NSCC-96-15]
November 25, 1996.


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving a Proposed Rule Change To Process 
Corporate Reorganizations Involving Elections Through NSCC's Continuous 
Net Settlement System

    On August 7, 1996, the National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change (File No. SR-NSCC-96-15) 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ On August 9, 1996, and October 1, 1996, NSCC amended the 
proposed rule change.\2\ Notice of the proposal was published in the 
Federal Register on October 21, 1996.\3\ No comment letters were 
received. For the reasons discussed below, the Commission is granting 
approval of the proposed rule change.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ Letters from Julie Beyers, Associate Counsel, NSCC, to Jerry 
Carpenter, Assistant Director, Division of Market Regulation, 
Commission (August 8, 1996, and September 27, 1996, as revised 
October 1, 1996).
    \3\ Securities Exchange Act Release No. 37818 (October 11, 
1996), 61 FR 54695.
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I. Description

    Through its CNS Reorganization Processing System, NSCC offers its 
members a service whereby they can process within NSCC's CNS system 
transactions in certain securities undergoing corporate reorganizations 
(hereinafter collectively referred to as ``tender offers''). With this 
rule change, NSCC will expand this service to allow its members to 
obtain a guarantee of performance pursuant to the terms of tender 
offers which require shareholders to make an election between two types 
of assets (e.g., stock or cash) through NSCC's CNS system.
    Generally, a person who wishes to participate in a tender offer 
must notify the tenderer of its decision prior to the expiration of the 
tender offer. All shares to be exchanged in the tender offer must be 
delivered to the tenderer prior to the end of the protect period, which 
is typically three days after the end of the expiration of the 
offer.\4\ However, participants with long positions at NSCC (``long 
participants'') are dependent upon the delivery of the securities by 
participants with short positions at NSCC (``short participants'') 
prior to the end of the protect period. If short participants do not 
deliver in time, the long participants are not able to participate in 
the offer.
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    \4\ The purpose of the protect period is to accommodate persons 
who purchase securities on the expiration date with the intention of 
participating in the tender offer. Such persons generally will not 
receive the securities to forward to the tenderer until the 
settlement date three business days later.
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    Under its current service, NSCC guarantees to participants with 
long positions in some securities subject to a tender offer the 
delivery of funds or securities pursuant to the terms of the tender 
offer. If a long participant has elected to use this service and to 
have NSCC guarantee the delivery pursuant to the terms of the tender 
offer, certain short participants will be liable for delivery to the 
long participant of the consideration the long participant would have 
received pursuant to the terms of the tender offer. The rule change 
expands this service and provides members with long positions in 
securities subject to a tender offer with an election as to 
consideration to receive protection for receipt of the tender offer 
consideration.
    Once NSCC receives timely notification of a tender offer and 
starting two business days prior to the expiration of an offer, long 
participants and short participants with positions in the subject 
security will receive information regarding the offer each business day 
on the CNS reorganization information report. On the day prior to the 
expiration of the protect period in a tender offer with an option as to 
the consideration to be received, long participants will be permitted 
to elect their preferences (e.g., cash or securities) by submitting 
electronic instructions to NSCC through DTC's PTS Terminal system. Such 
participants will receive a preliminary protection report. On the same 
day, NSCC will issue a report to short participants advising them of 
their potential liability in the security if delivery is not made by 
the next business day.
    If enough short participants deliver securities prior to the close 
of business of the day the protect period expires, NSCC will redeliver 
these securities to long participants. Such participants can then 
participate in the tender offer outside the facilities of NSCC. If not 
enough short participants deliver securities to meet all delivery

[[Page 63888]]

obligations to the long participants, NSCC will issue to the remaining 
long participants a final protection report and will issue to the 
remaining short participants a final liability report, both of which 
will reflect open positions remaining as of the close of business of 
that day.
    At the expiration of the protect period, NSCC will establish two 
CNS subaccounts representing the alternative forms of consideration for 
each security subject to a tender offer. All open positions for which a 
long participant has made an election will be moved into the 
appropriate CNS reorganization subaccount. The short participants will 
immediately be charged a mark based on the difference between the 
market value of the subject securities and the consideration, and NSCC 
will retain such funds.\5\ In addition, the long positions and short 
positions will continue to be marked to the market daily. Positions in 
a CNS subaccount will be frozen until the payable date for the tender 
offer (i.e., short participants may not deliver in the securities).
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    \5\ In the case of a long participant selecting cash as 
consideration, the corresponding short participant will be charged 
the difference between the cash offered in the tender offer and the 
market price of the securities. In the case of a long participant 
selecting securities as consideration, the corresponding short 
participant will be charged the difference between the market value 
of the subject securities and the market value of the consideration 
securities.
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    On payable date, the subaccounts will be closed. NSCC will credit 
the general CNS account of long participants with either the securities 
or cash that they have elected to receive. NSCC will debit the general 
account of short participants with either the cash or securities they 
have been assigned to deliver. NSCC also will credit the account of 
short participants with the marks to the offer price being retained by 
NSCC.
    Some offers have limits on how many of the subject securities the 
offeror will accept or what percentage of consideration will be paid in 
cash or securities. At the end of the protect period of such offers, 
the offeror will reject on a pro rata basis excess securities. NSCC 
will similarly only hold short participants liable to the extent 
securities would have been accepted by the tenderer.

II. Discussion

    Section 17A(b)(3)(F) \6\ of the Act requires that the rules of a 
clearing agency be designed to facilitate the prompt and accurate 
settlement of securities transactions. The Commission believes that 
NSCC's proposal is consistent with this goal because the proposal 
provides an incentive to short participants to meet their settlement 
obligations on a timely basis. Short participants that fail to meet 
their delivery obligations as required become liable for the economic 
benefits long participants lose in connection with tender offers. 
Furthermore, by processing the deliver and receive obligations created 
through the guarantee through NSCC's CNS system, the proposal will 
allow such obligations to be netted against other obligations of the 
participants. By reducing the number of settlement obligations through 
the netting process, the proposal facilitates the prompt and accurate 
settlement of securities transactions.
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    \6\ 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 
proposed rule change is consistent with the requirements of the Act and 
in particular 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-NSCC-96-15) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-30614 Filed 11-29-96; 8:45 am]
BILLING CODE 8010-01-M