[Federal Register Volume 61, Number 249 (Thursday, December 26, 1996)]
[Notices]
[Pages 68087-68089]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32771]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38059; File No. SR-PTC-96-07]


Self-Regulatory Organizations; Participants Trust Company; Notice 
of Filing of Proposed Rule Change Relating to the Right of Set-off Upon 
the Default of a Participant

December 19, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 2, 1996, the 
Participants Trust Company (``PTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-PTC-96-07) as described in Items I, II, and III below, which items 
have been prepared primarily by PTC. 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).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The proposed rule change relates to PTC's right to set-off credit 
balances in an account of a defaulting participant against an unpaid 
debit balance of the defaulting participant.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, PTC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. PTC 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 
prepared by PTC.

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[[Page 68088]]

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to (1) make explicit 
PTC's right to set-off credit balances in any proprietary account, 
agency account, or pledge account of a defaulting participant, against 
an unpaid debit balance in any other account of the defaulting 
participant and to establish a priority for application thereof; (2) 
grant PTC a right of set-off against the agency seg credit balances of 
a defaulting participant and to include the agency seg credit balance 
in a participant's Net Debit Monitoring Level (``NDML'') calculation; 
(3) clarify that in addition to the present representation that 
securities are deposited in conformity with the terms of any applicable 
customer agreement, each participant represents and warrants to PTC 
that securities and other property (including credit balances) held by 
PTC in an account maintained by such participant are, by reason of 
these applicable customer agreements, subject to clearing agency rules; 
and (4) make miscellaneous conforming and technical changes to certain 
provisions of PTC's rules.
Background

Account Structure

    Participants maintain their securities positions at PTC in one or 
more master account, each of which is comprised of one or more accounts 
of the following types: proprietary accounts for securities that are 
held by the participant as principal; agency accounts for securities 
that are held by the participant as agent; pledgee accounts for 
securities that are held by the participant as pledgee or pursuant to 
financing arrangements; and various seg and hold-in-custody accounts 
associated with the proprietary and agency accounts for purposes of 
segregation.

Cash Balance Structure

    Each Proprietary account, agency account, and pledgee account has a 
cash balance associated with it against which credits and debits are 
posted, including amounts owing with respect to securities delivered 
versus payment intraday to the transfer account associated with the 
account. Each cash balance is either a credit balance or debit balance 
depending on whether the participant is in a net funds credit position 
or debit position with respect to the applicable account to which the 
cash balance relates at the time the determination is made.

NDML

    PTC restricts the net debit amount each participant may owe PTC by 
imposing a net debit cap by means of the NDML.\3\ A participant's NDML 
is compared to the total of the net cash balances in its proprietary 
account, agency account, and pledgee account. PTC will not process a 
transaction that will result in a net debit balance that exceeds a 
participant's NDML. If a participant is at its NDML limit, it must take 
steps to reduce the net debit balance. Such a participant may prefund 
the payment of its debit balance by means of making optional deposits 
of cash to the participants fund by wiring funds to PTC intraday. A 
participant may also deliver securities versus payment through PTC's 
system which will generate a credit to the cash balance of the account 
from which the securities are transferred and will result in a 
reduction of the debit balance of that account.
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    \3\ The maximum NDML for any participant is the amount of PTC's 
committed line of credit for settlement, which is currently $2 
billion. This maximum is imposed in compliance with the Federal 
Reserve Policy Statement on Payments System Risk, as amended 
effective April 13, 1995, which requires private delivery-against-
payment securities systems to ``have sufficient safeguards so that 
it will be able to settle on time if any one of its major 
participants defaults.''
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Set-off in the NDML Structure

    The ability to apply a defaulting participant's proprietary, 
agency, and pledgee credit balances against its unpaid settlement 
obligations is implicit in the NDML structure to assure that the 
failure of a single participant is covered by PTC's committed line of 
credit for settlement. It is also implicit in other provisions of 
PTC's.\4\ Participant responsibility for the total amount of its PTC 
obligations, as monitored by its NDML, also is consistent with PTC's 
applicant review process in which PTC verifies that a participant has 
sufficient financial resources to satisfy its total obligations to PTC 
by assessing the capital and financial resources of the prospective 
participant without regard to the resources or capital of the customers 
of the participant.
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    \4\ For example, provisions of PTC's rules that require payment 
of all debit balances by a participant and prohibit a participant 
from asserting set-offs or defenses against payment of its debit 
balances and that grant PTC a lien in cash and property of a 
participant.
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    However, PTC's rules are silent on the aplication of pledgee and 
agency credit balances in the event a participant does not make 
complete payment of all account obligations at settlement. In addition, 
PTC's ``default rule'' states that PTC will set-off any credit balance 
in a proprietary account of a defaulting participant against an unpaid 
debit balance in another account. This rule does not make reference to 
PTC's right to set-off against agency and pledgee credit balance of a 
defaulting participant.
Proposed amendments

Set-off upon Participant Default

    The proposed rule change will clarify that upon a particpant's 
default in payment of a debit balance PTC will apply any credit 
balances in the participant's proprietary accounts, pledgee accounts, 
and agency accounts to reduce the unpaid obligation of the participant 
consistent with the other provisions of PTC's rules mentioned above. 
The proposed rule change also will extend PTC'S right of set-off in the 
event of a participant's default to include any agency seg credit 
balances of the defaulting participant.

Set-off Priority

    The set-off priority will be applied in the same order as governs 
in the event of a participant default. Specifically, the proposed set-
off priority will enable PTC to apply credit balances of a defaulting 
participant to reduce the participant's unpaid debit balances in the 
following priority: first, by application of any credit balance in its 
proprietary account(s); second, in its pledge account(s); third, in its 
agency account(s); and lastly, in its agency seg account. These credit 
balance(s) are applied toward payment of unpaid debit balances in the 
following priority: first, to any agency debit balance(s); \5\ second, 
toward payment of any pledgee debit balance(s); and lastly, toward 
payment of any proprietary debit balance(s).
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    \5\ Under PTC's rules, the agency seg account may not have a 
debit balance.
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Inclusion of Agency Seg Credit Balance

    The proposed rule change will modify the NDML calculation to 
include agency seg credit balances and will give PTC a lien in the 
agency seg credit balance and a right to set-off against agency seg 
credit balances in the event a participant defaults in the payment of 
its other debit balances. The inclusion of agency seg credit balances 
in the NDML calculation will allow a participant to have the benefit of 
these credits in calculating its net obligation to PTC.
    Agency seg accounts are not permitted to incur a debit balance and 
may not receive securities subject to a transfer versus payment. 
Therefore, PTC does not have a lien on securities in an agency seg 
account. The securities in

[[Page 68089]]

the agency seg account will remain free of PTC's lien consistence with 
current rules and the regulatory obligations of the participants with 
respect to such customer securities that are held in agency seg 
accounts.

Clarification of Participant Representations and Warranties

    The proposed rule change also will clarify that all securities, 
funds, and other property maintained or transferred to an account at 
PTC are issued, deposited, transferred, or otherwise applied in 
conformity with the terms of any applicable customer, pledge, or 
financing agreement and are by reason of the applicable customer 
agreements subject to clearing agency rules.

Technical Amendments to PTC's Rules

    PTC also is proposing to make certain technical changes to several 
sections of its rules to conform them to the present rule change. In 
particular, the definition of NDML will be amended to delete the 
provision that PTC will require a participant to confirm its ability to 
pay its debit balance when the NDML is reached. As changed, the 
definition will conform to the actual NDML procedure applied by PTC and 
to the substantive provisions of PTC's rules which govern and describe 
PTC's Net Debit Monitoring procedure.
    PTC's rules also will be amended to state that PTC will not process 
a transaction that causes a debit balance in any single account of a 
participant to exceed that participant's NDML. This conforms to PTC's 
current actual procedural control which imposes this additional credit 
check (in addition to capping a participant's net obligation at the 
master account level at its NDML) that is not reflected in the current 
NDML rule.
    PTC believes the proposed rule change is consistent with the 
requirements of Section 17(b)(3)(F) of the Act \6\ and the rules and 
regulations promulgated thereunder because it will facilitate the 
prompt and accurate clearance and settlement of securities transactions 
and the safeguarding of securities and funds in PTC's custody and 
control or for which it is responsible.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    PTC does not believe that the proposed rule change imposes any 
burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants or Others

    PTC has neither solicited nor received comments on this proposed 
rule change.

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 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 PTC 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. Sec. 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 PTC. All 
submissions should refer to the file number SR-PTC-96-07 and should be 
submitted by January 16, 1997.

    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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-32771 Filed 12-24-96; 8:45 am]
BILLING CODE 8010-01-M