[Federal Register Volume 62, Number 168 (Friday, August 29, 1997)]
[Notices]
[Pages 45894-45895]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23005]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38964; File No. SR-DTC-97-05]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving a Proposed Rule Change Relating to the Establishment of 
Procedures to Distinguish Repurchase Transactions and Other Financing 
Transactions From Securities Pledges

August 22, 1997.
    On May 14, 1997, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') a proposed rule 
change (File No. SR-DTC-97-05) 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 July 15, 1997.\2\ The 
Commission received no comment letters in response to the filing. On 
August 7, 1997, DTC amended the proposed rule change.\3\ 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. 38820 (July 7, 1997), 62 
FR 37947.
    \3\ The amendment was technical in nature and therefore did not 
require republication of the notice.
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I. Description

    The rule change amends DTC's Collateral Loan Program (``CLP'') 
procedures \4\ to enable DTC's participants to distinguish repurchase 
transactions (``repos'') and other types of financing transactions from 
pledges of securities. The CLP's current procedures do not 
differentiate between a securities transaction that involves the 
transfer of the entire interest in securities (i.e., as in a repo 
transaction) from a securities transaction that involves the transfer 
of

[[Page 45895]]

a security interest or other limited interest in the securities (i.e., 
a pledge).\5\
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    \4\ A copy of DTC's procedures for repo accounts is attached as 
Exhibit 2 to DTC's proposed rule change, which is available for 
inspection and copying at the Commission's Public Reference Room or 
through DTC.
    \5\ According to DTC, many of its participants use the CLP to 
effect repos.
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    Under the proposed rule change, any organization that is eligible 
to establish a pledgee account (i.e., ``receiver'') at DTC may 
establish a repo account. Consequently, a participant engaging in a 
repo or other type of financing transaction will be able to deliver 
securities to the receiver's repo account instead of the receiver's 
pledgee account.\6\ DTC will deem instructions to deliver securities to 
a repo account as instructing DTC to transfer to the receiver the 
entire interest in the securities and not just a security interest or 
other limited interest.\7\
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    \6\ The instructions for a delivery of securities to a repo 
account use the same data fields as the instructions for a pledge to 
a pledgee account, which includes a mandatory hypothecation code 
field. A participant delivering securities to a repo account must 
enter the number seven, eight, or nine in the hypothecation code 
field. The entry of the number seven, eight, or nine in the 
hypothecation code field of instructions for a delivery to a repo 
account does not constitute a notice or representation as to any 
matter by the delivering participant. The entry of the number seven, 
eight, or nine in the hypothecation code field of such instructions 
is merely an action needed to effect the delivery through DTC's 
facilities. A participant pledging securities to a pledgee account 
must continue to enter the number one, two, or three, whichever is 
applicable, in the hypotecation code field. Participants are 
responsible for entering the appropriate number in the hypothecation 
field for all transactions. Letter from Carl Urist, Deputy General 
Counsel, DTC (August 7, 1997).
    \7\ According to DTC's proposed procedures for repo accounts, 
the operation of a repo account will be identical to the operation 
of a pledgee account. As with a pledgee account: (1) the voting 
rights on securities credited to a repo account will be assigned to 
the participant that delivered the securities to the repo account; 
(2) cash dividend and interest payments and other cash distributions 
on the securities will be credited to the account of the delivering 
participant; (3) distributions of securities for which the 
exdistribution date is on or prior to the payable date or in which 
the distribution is payable in a different security will be credited 
to the account of the delivering participant; and (4) any stock 
splits or other distributions of the same securities for which the 
ex-distribution date is after the payable date will be credited to 
the repo account of the receiver. Also, the reports and statements 
that DTC sends to participants and receivers for transactions 
involving repo accounts will be the same as the reports that DTC 
generates for a pledgee account except that such reports and 
statements will carry a repo account number.
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    DTC will accept instructions solely from a receiver with respect to 
the disposition of securities credited to the receiver's repo account. 
The receiver may instruct DTC to deliver securities credited to its 
repo account to its DTC participant account if the receiver is also a 
DTC participant or to any other DTC participant account.\8\ Any 
receiver that instructs DTC to deliver securities credited to its repo 
account to another receiver or to a DTC participant other than the 
original delivering participant will be required to provide DTC with 
certain warranties and must indemnify DTC, its stockholders, and 
certain employees against potential liability.\9\
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    \8\ According to DTC, there are a small number of non-member 
banks that maintain pledge accounts at DTC. Conversation with Carl 
H. Urist, Deputy General Counsel, DTC (August 22, 1997).
    \9\ The indemnification provides protection from liability that 
may arise in the event that, unknown to DTC, at the time of the 
transfer there was a filing by the Securities Investor Protection 
Corporation or other court order that prohibited such transfer. Id.
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II. Discussion

    Section 17A(b)(3)(F) \10\ of the Act requires that the rules of a 
clearing agency be designed to safeguard securities and funds in DTC's 
custody or control or for which it is responsible. The Commission 
believes that DTC's proposed rule change is consistent with DTC's 
obligations under the Act because the new procedures should enable DTC 
participants to avoid any confusion as to whether a securities transfer 
is actually the sale of a security or the pledge of a security as 
collateral. Consequently, the procedures should reduce the potential 
for the inadvertent delivery of dividend payments, proxy materials, or 
other items to the wrong party.
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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III. 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-97-05) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-23005 Filed 8-28-97; 8:45 am]
BILLING CODE 8010-01-M