[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