[Federal Register Volume 62, Number 242 (Wednesday, December 17, 1997)]
[Notices]
[Pages 66158-66160]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-32821]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39422; File No. SR-DTC-97-20]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Expanding the Money Market Instrument Settlement Program

December 19, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 22, 1997, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') and on November 13, 1997, amended 
the proposed rule change (File No. SR-DTC-97-20) as described in Items 
I and II below, which items have been primarily prepared by DTC. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to grant accelerated 
approval of the proposed rule change on a permanent basis.
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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 seeks permanent approval of DTC's expanded 
money market instrument (``MMI'') settlement program. The Commission 
previously approved DTC's expanded MMI program on a temporary basis.

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

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

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[[Page 66159]]

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

    DTC's expanded MMI program is an extension of DTC's same-day funds 
settlement (``SDFS'') system. The proposed rule change seeks permanent 
approval of DTC's expanded MMI settlement program for transactions in 
institutional certificates of deposit, municipal commercial paper, and 
bankers' acceptances.\3\ The proposed rule change also seeks to 
permanently approve changes made to DTC's MMI programs for corporate 
commercial paper (``CP''), medium term notes, preferred stock in a CP-
like mode, short term bank notes, and discount notes.\4\
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    \3\ Securities Exchange Act Release Nos. 33958 (April 22, 1994), 
59 FR 22878; and 35655 (April 28, 1995), 60 FR 22423.
    \4\ Id.
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    The Commission previously granted only temporary approval to the 
expansion of DTC's MMI settlement program because at the time DTC had 
not yet implemented the largest provisional net credit (``LPNC'') 
control. The LPNC control consists of two new risk management features 
which are designed to protect DTC against the combined failure of a MMI 
issuer and a participant.
    Under the first LPNC risk management feature, DTC subtracts from a 
participant's actual overall SDFS net debit or credit the amount of the 
participant's largest provisional net credit due to transactions in any 
single issuer's MMI program. If a transaction causes the resulting net 
debit (``simulated net debit'') to exceed the participant's net debit 
cap, the transaction will be blocked until the account receives 
sufficient credits to complete the transaction.
    Under the second LPNC risk management feature, DTC subtracts from 
the participant's collateral monitor the amount of a participant's 
largest provisional net credit due to transactions in any single 
issuer's MMI program. If a transaction will cause the resulting 
collateral monitor (``simulated collateral monitor'') to become 
negative (i.e., the participant's collateral would be insufficient to 
cover its simulated net debit after the transaction), the transaction 
will be blocked until the account receives sufficient collateral to 
complete the transaction.\5\
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    \5\ Because transactions in a failing MMI issue would be 
reversed by DTC only if DTC is informed of the default by 3:00 PM 
(Eastern Time), LPNC procedures remain in effect only until 
approximately 3:05 PM (Eastern Time). After this time, 
collateralization and net debit cap controls are applied to net 
debits incurred by participants as a result of transactions that 
have actually completed.
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    DTC has reported that MMI issuers have defaulted both before and 
after the LPNC controls were implemented in September 1995. However, 
since the implementation of the LPNC controls, DTC stated that it has 
not had any problems with liquidity or blocked transactions. DTC 
indicated that the application of LPNC controls may cause some 
participants to reach their net debit cap and as a result, block the 
completion of further transactions. However, DTC reported that 
participants generally complete blocked transactions by sending 
intraday funds to DTC for credit to their participant settlement 
account.
    DTC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act \6\ and the rules and 
regulations promulgated thereunder because it promotes the prompt and 
accurate clearance and settlement of transactions in MMIs.
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    \6\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change will impact or 
impose a burden on competition.

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

    DTC has not solicited comments on the proposed rule change. 
Discussions with DTC participants indicate continued wide support for 
the MMI programs.

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

    Section 17A(b)(3)(F) \7\ 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. The Commission believes that DTC's 
proposed rule change is consistent with DTC's obligations under the 
Act.
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    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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    Because the Commission was concerned that the proposed expanded MMI 
settlement program increased risks associated with the use of 
provisional credits, the Commission previously approved the proposed 
rule change on a temporary basis until the new LPNC controls could be 
implemented and monitored for their effectiveness. During the temporary 
approval period, the LPNC risk management features have helped minimize 
the impact of a default by an MMI issuer. In this regard, since the 
LPNC controls were implemented in September 1995, DTC has reported that 
it has had no problems with liquidity or blocked transactions. Thus, 
the Commission finds that DTC's expanded MMI settlement program, with 
the addition of the LPNC controls, is consistent with its obligations 
under the Act to assure the safeguarding of securities and funds which 
are in its custody or control or for which it is responsible.
    DTC has requested that the Commission find good cause for approving 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of the filing. The Commission finds good cause 
for approving the proposed rule change prior to the thirtieth day after 
the date of publication of notice of filing because accelerated 
approval will allow DTC to continue to use its MMI program without 
interruption.

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, NW., Washington, DC 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, NW., Washington, 
DC. Copies of such filing will also be available for inspection and 
copying at the principal office of the above-mentioned self-regulatory 
organization.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-97-20) be and hereby is 
permanently approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).

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[[Page 66160]]

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-32821 Filed 12-16-97; 8:45 am]
BILLING CODE 8010-01-M