[Federal Register Volume 62, Number 29 (Wednesday, February 12, 1997)]
[Notices]
[Pages 6595-6596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3478]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38252; File No. SR-PTC-96-07]


Self-Regulatory Organizations; Participants Trust Company; Order 
Approving a Proposed Rule Change Relating to the Right of Set-Off Upon 
the Default of a Participant

February 6, 1997.
    On December 2, 1996, the Participants Trust Company (``PTC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-PTC-96-07) pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ to clarify PTC's right of 
setoff upon the default of a participant. Notice of the proposal was 
published in the Federal Register on December 26, 1996.\2\ No comment 
letters were received. For the reasons discussed below, the Commission 
is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 38059 (December 19, 
1996), 61 FR 68087.
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I. Description

    The proposed rule change clarifies that upon a participant's 
default in payment of a debit balance PTC will set-off any credit 
balances in the participant's accounts to reduce the unpaid obligation 
of the participant. Participants maintain their securities positions at 
PTC in one or more master accounts, 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

[[Page 6596]]

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.
    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.
    PTC restricts the net debit amount each participant may owe PTC by 
imposing a net debit cap by means of a Net Debit Monitoring Level 
(``NDML'').\3\ A participant's NDML is compared to the total of the net 
cash balances in its proprietary accounts, agency accounts, and pledgee 
accounts. 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. 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.
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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.
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    PTC's rules however are silent on the application 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 balances of a 
defaulting participant.
    The proposed rule change clarifies that upon a participant's 
default in payment of a debit balance PTC is authorized to apply any 
credit balances in the participant's proprietary accounts, pledgee 
accounts, and agency accounts to reduce any unpaid obligations of the 
participant. 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.

II. Discussion

    Section 17A(b)(3)(F) \4\ of the Act requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds in the custody or control of the clearing agency or for which 
it is responsible. As discussed below, the Commission believes that 
PTC's rule change is consistent with this obligation under the Act.
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    \4\ 15 U.S.C. 78q-1(b)(3)(F).
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    One of the principal risks to PTC and its participants is that a 
participant will not pay its net debit balance and will cause PTC or 
its participants to incur substantial losses. Default by one or more 
participants with a large net debit balance relative to PTC's committed 
lines of credit would strain PTC's ability to meet its settlement 
obligations on the day of default.
    As previously discussed, the proposed rule change clarifies PTC's 
right to apply any credit balances in the participant's proprietary 
accounts, pledgee accounts, and agency accounts to reduce the unpaid 
obligation of the participant upon the participant's default, modifies 
the NDML calculation to include agency seg credit balances, and 
authorizes PTC to set-off against agency seg credit balances in the 
event a participant defaults in the payment of its debit balances.
    The Commission believes that clarifying and extending PTC's right 
of set-off upon the default of a participant reduces the risks to PTC 
and its participants. PTC's set-off and NDML procedures are designed to 
safeguard PTC and its participants against the risk of participant 
default and provide PTC with sufficient liquidity to complete 
settlement in the event of a participant default. PTC's NDML also 
assures PTC and its participants that one or more participants will not 
accumulate an intraday net debit so large as to compromise the 
integrity of PTC's system. The proposed rule change should not only 
better enable PTC to fulfill its safeguarding obligations under the Act 
but should benefit participants by including agency seg credit balances 
in the NDML calculation which will allow participants to have the 
benefit of these credits in the calculation of their net obligation to 
PTC.

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 with the requirements of 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-PTC-96-07) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-3478 Filed 2-11-97; 8:45 am]
BILLING CODE 8010-01-M