[Federal Register Volume 62, Number 88 (Wednesday, May 7, 1997)]
[Notices]
[Pages 25008-25009]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-11793]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38564; File No. SR-DTC-96-22]
Self-Regulatory Organizations; The Depository Trust Company;
Order Approving a Proposed Rule Change To Amend DTC's Charge Back and
Return of Funds Procedures
April 30, 1997.
On December 4, 1996, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change (File No. SR-DTC-96-22) pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal
was published in the Federal Register on March 5, 1997.\2\ The
Commission received one comment letter in response to the filing.\3\
For the reasons discussed below, the Commission is approving the
proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 38340 (February 26,
1997), 62 FR 10104.
\3\ Letter from Thomas S. Dillon, Chairman, PSA Corporate Bond
Operations Committee (March 26, 1997).
---------------------------------------------------------------------------
I. Description
The rule change amends DTC's charge back and return of funds
policies to shorten from ten business days to one business day after
the payable date the period within which a paying agent can request
that DTC return principal and income (``P&I'') payments that have been
allocated to participants.\4\ The rule change also amends the procedure
so if an agent requests the return of a P&I payment more than one
business day after a payable date, DTC will work with the agent and
participant to resolve the matter; but DTC will not return the
allocated payments without the participant's consent.
---------------------------------------------------------------------------
\4\ Although the rule change reduces the time within which a
paying agent can request a reversal of allocated funds from ten
business days to one business day following payable date, the actual
reversal may take up to two or three business days after the payable
date. For example, if a paying agent requests a reversal from DTC
late in the day of the first business day after the payable date
(``P+1''), DTC would likely notify its participants on the morning
of the following business day (``P+2''). In the interest of fairness
and pursuant to DTC's procedures, DTC must notify all affected
participants one business day prior to the date on which DTC enters
the reversal into its participants' daily settlement accounts.
Accordingly, the actual reversal will not occur until P+3. Telephone
conversation with Larry E. Thompson, Deputy General Counsel and
Senior Vice President, DTC (December 18, 1996).
---------------------------------------------------------------------------
Under its previous procedures,\5\ if the paying agent notified DTC
in writing
[[Page 25009]]
within ten business days of a payable date that an issuer failed to
provide the paying agent with sufficient funds to cover the payments or
that an issuer was bankrupt,\6\ DTC would return P&I payments to the
paying agent after the funds had been credited to the accounts of DTC
participants.\7\ However, PSA The Bond Market Trade Association
(``PSA'') expressed concern with the previous procedures and the
associated risk of loss placed upon DTC participants in the event a
payment was returned to a paying agent.\8\ In response, DTC convened a
joint working group of paying agents, PSA representatives, and other
interested parties.\9\ In October 1996, the working group concluded
that DTC should reduce the period within which DTC will return funds to
paying agents from ten business days to one business day. DTC concurred
with the working group's recommendation and has amended its procedures
accordingly.
---------------------------------------------------------------------------
\5\ For a complete description of the procedures relating to
DTC's procedures, refer to Securities Exchange Act Release Nos.
23219 (May 8, 1986), 51 FR 17845 [SR-DTC-86-03] (notice of filing
and immediate effectiveness on a temporary basis of a proposed rule
change); 23686 (October 7, 1986), 51 FR 37104 [SR-DTC-86-04] (order
permanently approving proposed rule change); 26070 (September 9,
1988) 53 FR 36142 [SR-DTC-88-17] (notice of filing and immediate
effectiveness of proposed rule change clarifying that charge back
procedures apply to DTC's same-day funds settlement system and next-
day funds settlement system); and 35452 (March 7, 1995), 60 FR
13743, [SR-DTC-95-03] (notice of filing and immediate effectiveness
of proposed rule change excluding money market instrument programs
from DTC's charge back and return of funds procedures).
\6\ DTC's procedures also allows DTC to return previously
credited payments due to an error by the paying agent upon written
request from a paying agent within ten business days of the payable
date. The rule change does not alter this portion of DTC's
procedures.
\7\ The return of P&I payments to paying agents after the funds
have been credited to the accounts of DTC participants is commonly
referred to as a ``clawback.''
\8\ Letter from Heather L. Ruth, President, PSA to William F.
Jaenike, Chairman of the Board and Chief Executive Officer, DTC
(August 16, 1996).
\9\ The working group is composed of representatives from the
Corporate Trust Advisory Board of the American Bankers Association,
the Bank Depository User Group, the Corporate Trust Advisory
Committee of the Corporate Fiduciaries Association of New York City,
the New York Clearing House--Securities Committee, PSA, the
Securities Industry Association, and DTC.
---------------------------------------------------------------------------
II. Comment Letter
The Commission received one comment letter in response to DTC's
notice of a proposed rule change.\10\ The commenter strongly supports
the rule change and believes that the rule change will make significant
progress toward achieving finality of payment that it believes the
market expects. The commenter also noted that DTC's previous policy was
inconsistent with market perceptions regarding the finality of DTC
payments and contrary to widely accepted payment principles favoring
finality.
---------------------------------------------------------------------------
\10\ Supra note 2.
---------------------------------------------------------------------------
III. Discussion
Section 17A(b)(3)(F) \11\ of the Act requires that the rules of a
clearing agency be designed to remove impediments to and perfect the
mechanism of a national system for prompt and accurate clearance and
settlement of securities transactions. The Commission believes that
DTC's rule change is consistent with DTC's obligations under the Act
because the amended procedures should finalize P&I payments sooner
which should reduce the uncertainty and potential risk of loss DTC's
previous procedures placed on its participants.
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal 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-DTC-96-22) be, and hereby
is, approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
---------------------------------------------------------------------------
\12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-11793 Filed 5-6-97; 8:45 am]
BILLING CODE 8010-01-M