[Federal Register Volume 61, Number 236 (Friday, December 6, 1996)]
[Notices]
[Pages 64774-64775]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31077]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38007; File No. SR-DTC-96-21]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of a Proposed Rule Change Relating to the Reversal of
Reclamations by Issuing and Paying Agents
December 2, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on November 5, 1996, The
Depository Trust Company (``DTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change (File No.
SR-DTC-96-21) as described in Items I, II, and III below, which items
have been prepared primarily by DTC. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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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 purpose of the proposed rule change is to put in place a new
service which will allow for Issuing and Paying Agents (``IPA'') to
direct DTC to reverse all matched reclamations for a particular program
made after 3:00 p.m. which are attributable to issuer failure.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, DTC 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. DTC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\2\
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\2\ The Commission has modified the text of the summaries
submitted by DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
DTC filed the proposed rule change because it has identified a
substantial potential risk to IPAs in connection with money market
instruments (``MMIs'') which DTC wants to eliminate as soon as
possible. The risk is brought about by the interplay between two
different services available to DTC participants which were developed
in order to serve two different functions.
Under DTC's MMI program, IPAs act as agents for MMI issuers. As
such, IPAs issue MMIs on the issuers' behalf, and DTC automatically
processes income and maturity payments to the IPAs' accounts. Both the
credits generated from the issuances and the debits generated from
income and maturity payments are netted into the IPA's DTC settlement
obligation. An IPA may issue MMIs and make periodic payments of income,
redemption, or other proceeds on MMIs upon presentment throughout the
day while also being able to reverse transactions for a particular
program in the event of the ``issuer failure'' by giving notice to DTC
by 3:00 p.m. of the IPA's ``refusal to pay.''
This reversal mechanism is designed to make the MMI market more
efficient by allowing IPAs to make issuances and payments with respect
to a particular MMI program throughout the day while still affording
the IPAs the protection of being able to reverse these transactions
until 3:00 p.m. in the event that it becomes apparent that the issuer
will be unable to honor its obligations under the particular program
due to insolvency of default under a particular program.\3\ If this
mechanism were not in place, IPAs would have to wait until they had
received funds from the issuers before making any payments or be at
risk for the funds they had distributed throughout the day. In such a
case, credits for payments on the MMIs would not be available to be
used throughout the day by participants having positions in the MMIs as
is currently the case.\4\
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\3\ The ``refusal to pay'' deadline was set at 3:00 p.m. by the
industry during the period when deliveries of MMIs were made
physically.
\4\ Currently, throughout the processing day a participant is
allowed to use all payment credits it has received that day in
connection with MMI programs, other than the single largest net
payment, in order to meet its net debit cap and collateral monitor
requirements.
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In anticipation of the conversion to the same day funds settlement
(``SDFS''), DTC implemented a new processing schedule. As part of the
new processing schedule, DTC introduced an extended reclamation period
that allowed participants to process reclaims of deliveries until 3:30
p.m.\5\ The reclamation procedure is designed to provide the recipient
of a delivery with the opportunity to reject the delivery.
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\5\ The end of the reclamation period is approximately 3:30, but
this deadline may vary slightly depending upon the timing of the
release of other DTC controls.
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The potential risk to IPAs comes about in the situation where
information regarding an issuer's insolvency becomes available after
the 3:00 p.m. refusal to pay deadline but before the end of the
reclamation period at approximately 3:30 p.m. Under these
circumstances, participants could unwind through the reclamation
process issuances previously made by the IPA. However, the IPA would be
unable to unwind income and maturity payments since these transactions
can only be unwound through the refusal to pay procedure. As a result,
an IPA's settlement balance would be debited by an amount equal to the
reclaimed issuances. Depending upon the settlement procedures in place
between the issuer and the IPA, this situation could result in a direct
exposure to the IPA.
The proposed rule change is designed to restore the IPA's refusal
to pay opportunity with respect to reclamations made to its account
between 3:00 p.m. and the end of the reclamation period. The proposed
rule change will allow IPAs to instruct DTC to reverse those reclaims
that are processed after 3:00 p.m. in the event that the IPA believes
the reclaims are associated with the issuer's insolvency. The IPA will
be able to request the reversal of these reclamations by giving DTC
oral notice within fifteen minutes after the end of the reclamation
period. Subsequently, the IPA will be required to provide DTC within
thirty minutes after the end of the reclamation period with written
notice on the basis of which DTC could treat the issuer as insolvent
under its rules.\6\ A copy of the
[[Page 64775]]
IPAs written notice would then be provided to all participants.
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\6\ DTC's Rule 12 which governs insolvency provides: ``An issuer
of MMI securities subject of any transaction in the MMI Program
shall be treated by [DTC] in all respects as insolvent in the event
that the issuer is determined to be insolvent by any agency which
regulates such issuer or in the event of the entry of a decree or
order by a court having jurisdiction in the premises adjudging the
issuer a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or
composition of or in respect of the issuer under the Federal
Bankruptcy Code or any other applicable Federal or State law or
appointing a receiver, liquidator, assignee, trustee, sequester (or
other similar official) of the issuer or of any substantial part of
its property, or ordering the winding up or liquidation of its
affairs or the institution by the issuer of proceedings to be
adjudicated a bankrupt or insolvent or the consent by it to the
institution of bankruptcy or insolvency proceedings against it, or
the filing by it of a petition or answer or consent seeking
reorganization or relief under the Federal Bankruptcy Code or any
other applicable Federal or State law, or the consent by it to the
filing of any such petition or to the appointment of a receiver,
liquidator, assignee, trustee, sequester (or other similar official)
of the issuer or of any substantial part of its property, or the
admission by it in writing of its inability to pay its debts
generally as they become due, or the taking of corporate action by
the issuer in furtherance of any such action and, notwithstanding
the foregoing, upon the filing by the issuer of a petition seeking
reorganization, arrangement, adjustment or composition of or in
respect of the issuer under the Federal Bankruptcy Code or any other
applicable Federal or State law, or the filing against it or any
such petition, at any time [DTC] receives notice thereof, either
written or oral and from whatsoever source and, without awaiting any
further adjudication, consent thereto, acceptance or approval of
such filing, determines to its reasonable satisfaction that such has
occurred.''
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DTC believes the proposed rule change is consistent with the
requirements of Section 17A of the Act and the rules and regulations
thereunder because the rule proposal will eliminate risks to IPAs
present in the existing system and will therefore promote a more
efficient marketplace. DTC believes that this new service will not
affect the safeguarding of securities and funds in DTC's custody or
control or for which it is responsible.
(B) Self-Regulatory Organization's Statement on Burden on Competition
DTC 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
The substance of the proposed rule change has been presented to the
Public Securities Association MMI Task Force, which has given its
support to providing a new service to IPAs. No written comments have
been solicited or received from DTC participants. DTC will notify the
Commission of any written comments received by DTC.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which DTC consents, the Commission will:
(a) By order approve such proposed rule change or
(b) Institute proceedings to determine whether the proposed rule
change should be disapproved.
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 DTC.
All submissions should refer to the file number SR-DTC-96-21 and
should be submitted by December 27, 1996.
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. 96-31077 Filed 12-5-96; 8:45 am]
BILLING CODE 8010-01-M