[Federal Register Volume 62, Number 95 (Friday, May 16, 1997)]
[Notices]
[Pages 27097-27098]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12824]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38604; File No. SR-PTC-97-01]


Self-Regulatory Organizations; Participants Trust Company; Notice 
of Filing and Order Granting Accelerated Approval of a Proposed Rule 
Change Relating to Limited Cross-Guarantee Agreements

May 9, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on February 11, 1997, the 
Participants Trust Company (``PTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-PTC-97-01) as described in items I and II below, which items have 
been prepared primarily by PTC. The Commission is publishing this 
notice and order to solicit comments on the proposed rule change from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

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 amend PTC's rules to 
permit PTC to enter into limited cross-guarantee agreements with other 
clearing organizations.

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\
---------------------------------------------------------------------------

    \2\ The Commission has modified the text of the summaries 
prepared by PTC.
---------------------------------------------------------------------------

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

    The purpose of the proposed rule change is to amend PTC's rules to 
permit PTC to enter into limited cross-guarantee agreements contain a 
guarantee from one clearing agency to another clearing agency that can 
be invoked in the event of a default of a common member. The guarantee 
provides that the resources of a defaulting common member remaining 
after its obligations to the guaranteeing clearing agency have been 
satisfied will be used to satisfy its obligations that remain 
unsatisfied at the other clearing agency. The guarantee is limited to 
the amount of a defaulting common member's resources remaining at the 
guaranteeing clearing agency.
    Generally, limited cross-guarantee agreements may be beneficial to 
the clearing agency because amounts available under limited cross-
guarantee agreements may be applied to satisfy or reduce unpaid 
obligations of the defaulting participant. With regard to PTC, these 
amounts may reduce charges against the participants fund or amounts 
borrowed from other participants or third party lenders or allocations 
of losses to the original counterparties of a defaulting participant 
under PTC's rules. The benefits generally accruing to the clearing 
agencies from a limited cross-guarantee agreement are illustrated by 
the following example: Participant A, a common participant of clearing 
agency 1 and clearing agency 2, declares bankruptcy. Upon insolvency, 
participant A owes clearing agency 1 $10 million and clearing agency 2 
owes participant A $7 million. In the absence of an inter-clearing 
agency limited cross-guarantee agreement, clearing agency 2 would be 
obligated to pay $7 million to participant A's bankruptcy estate and 
clearing agency 1 would have

[[Page 27098]]

a claim for $10 million against participant A's bankruptcy estate as a 
general creditor with no assurance as to the extent of recovery. 
However, an effective cross-guarantee arrangement would obligate 
clearing agency 2 to pay clearing agency 1 an amount equal to 
participant A's $7 million receivable from clearing agency 2 thereby 
reducing clearing agency 1's net exposure from $10 million to $3 
million. This approach would enable clearing agency 1 to secure earlier 
payment and would allow clearing agency 2 to fulfill its obligations 
without making an actual payment to participant A's bankruptcy estate.
    PTC currently intends to enter into a limited cross-guarantee 
agreement with MBS Clearing Corporation (``MBSCC''), a clearing agency 
registered under the Act. At a later date, PTC may determine to enter 
into limited cross-guarantee agreements with other clearing 
organizations, subject to authorization by PTC's Board of Directors.
    In order to allow PTC to enter into one or more limited cross-
guarantee agreements with other clearing organizations, the proposed 
rule change will add new Rule 9, to Article IV of PTC's rules to govern 
PTC's limited cross-guarantee agreements. As proposed, the rule will 
authorize PTC to enter into limited cross-guarantee agreements, subject 
to approval of PTC's Board of Directors. The rule also provides that 
each participant will be liable to PTC for any payments that PTC is 
required to make with respect to such participant pursuant to a limited 
cross-guarantee agreement, and that securities, funds, or other 
property of the participant to which PTC has a lien, other than 
securities in the participants' proprietary or agency accounts, may be 
applied in satisfaction of such obligation. In addition, the rule 
provides that amounts received by PTC under any limited cross-guarantee 
agreement will be applied to reduce the common participant's unpaid 
obligations to PTC and assessments made in respect thereof under PTC's 
rules.
    PTC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \3\ and the rules and 
regulations thereunder because it is designed to assure the 
safeguarding of securities and funds in the custody or control of PTC 
or for which it is responsible and to foster cooperation and 
coordination with persons engaged in the clearance and settlement of 
securities transactions. The staff of the Board of Governors of the 
Federal Reserve System (``Board of Governors'') has concurred with the 
Commission's granting of accelerated approval.\4\
---------------------------------------------------------------------------

    \3\ 15 U.S.C. 78q-1.
    \4\ Telephone conversation between Theo Lubke, Board of 
Governors, and Jeffrey Mooney, Attorney, Division of Market 
Regulation, Commission (May 8, 1997).
---------------------------------------------------------------------------

(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 not solicited and does not intend to solicit comments on 
this proposed rule change. PTC has not received any unsolicited written 
comments from participants or other interested parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible.\5\ The Commission believes that PTC's rule 
change is consistent with its obligation to assure the safeguarding of 
securities and funds in its custody or control because, as the 
Commission found in several recently approved limited cross-guarantee 
agreements,\6\ PTC's proposed limited cross-guarantee agreement is a 
method to reduce the risk of loss due to a common member's default.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78q-1(b)(3)(F).
    \6\ Securities Exchange Act Release Nos. 37616 (August 28, 1996) 
61 FR 46887. [File Nos. SR-MBSCC-96-02, SR-GSCC-96-03, and SR-ISCC-
96-04] (order approving proposed rule changes seeking authority to 
enter into limited cross-guarantee agreements) and 38410 (Mary 17, 
1997) 62 FR 13931 [File No. SR-OCC-96-18] (order granting approval 
of proposed rule change to revise rules to include limited cross-
guarantee agreements).
---------------------------------------------------------------------------

    The Commission also believes the rule change is consistent with 
PTC's obligation under Section 17A(b)(3)(F) to foster cooperation and 
coordination with persons engaged in the clearance and settlement of 
securities transactions. The Commission believes that by entering into 
such cross-guarantee agreements, PTC and the other clearing agencies 
can mitigate the systemic risks posed to them and to the national 
clearance and settlement system that arises as a result of a defaulting 
member.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after publication of the notice of 
filing because accelerated approval will allow PTC to immediately 
participate in a limited cross-guarantee agreement with MBSCC thereby 
allowing both PTC and MBSCC to benefit from the reduction of risk that 
results from this type of arrangement.

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 PTC. All submissions should 
refer to the file number SR-PTC-97-01 and should be submitted by June 
6, 1997.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-PTC-07-01) be, and hereby 
is, approved on an accelerated basis.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
---------------------------------------------------------------------------

    \7\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-12824 Filed 5-15-97; 8:45 am]
BILLING CODE 8010-01-M