[Federal Register Volume 62, Number 244 (Friday, December 19, 1997)]
[Notices]
[Pages 66703-66706]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33194]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39444; File Nos. SR-DTC-97-16, SR-NSCC-97-08, SR-
Philadep-97-04, SR-SCCP-97-04]


Self-Regulatory Organizations; The Depository Trust Company; 
National Securities Clearing Corporation; Philadelphia Depository Trust 
Company; Stock Clearing Corporation of Philadelphia; Order Granting 
Partial Permanent Approval and Partial Temporary Approval of Proposed 
Rule Changes Relating to a Decision by the Philadelphia Stock Exchange, 
Incorporated to Withdraw From The Securities Depository Business and to 
Restructure and Limit its Clearance and Settlement Business

December 11, 1997.
    In August and September, 1997, The Depository Trust Company 
(``DTC''), National Securities Clearing Corporation (``NSCC''), 
Philadelphia Depository Trust Company (``Philadep''), and Stock 
Clearing Corporation of Philadelphia (``SCCP'') filed with the 
Securities and Exchange Commission (``Commission'') proposed rule 
changes pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act''),\1\ concerning the decision by the Philadelphia Stock 
Exchange, Incorporated (``PHLX'') to withdraw from the securities 
depository business and to restructure its clearance and settlement 
business.\2\ Notices of the proposals were published in the Federal 
Register on October 15 and 16, 1997.\3\ The Commission received one 
comment letter, which pertained to DTC and which expressed concern that 
PHLX's decision to withdraw from the clearance and settlement and 
securities depository businesses reduced competition in the market.\4\ 
The Commission also received DTC's letter responding to the comment 
letter.\5\ For the reasons discussed below, the Commission is approving 
the proposed rule changes.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ On August 5, 1997, DTC filed its proposed rule change with 
the Commission (File No. SR-DTC-97-16). On August 6, 1997, NSCC 
filed with the Commission and on August 28, 1997, amended its 
proposed rule change (File No. SR-NSCC-97-08). On September 25, 
1997, Philadep filed its proposed rule change with the Commission 
(File No. SR-Philadep-97-04). On September 30, 1997, SCCP filed its 
proposed rule change with the Commission (File No. SR-Philadep-97-
04).
    PHLX submitted a rule filing on November 14, 1997 (File No. SR-
PHLX-97-59) in connection with its withdrawal from the clearance and 
settlement and securities depository businesses. PHLX's rule filing 
is being addressed in a separate notice and order.
    \3\ Securities Exchange Act Release Nos. 39222 (October 8, 
1997), 62 FR 53847 (DTC); 39220 (October 8, 1997), 62 FR 53848 
(NSCC); 39223 (October 8, 1997), 62 FR 53681 (SCCP); 39221 (October 
8, 1997), 62 FR 53681 (Philadep).
    \4\ Letter from P. Howard Edelstein, President, Electronic 
Settlements Group, Thomson Financial Services, Inc., (November 4, 
1997).
    \5\ Letter from Richard B. Nesson, Executive Vice President and 
General Counsel, DTC (November 14, 1997).
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I. Description

    PHLX is withdrawing from the securities depository business 
currently offered through its wholly owned subsidiary, Philadep, and is 
restructuring and limiting its clearance and settlement business 
currently offered through its wholly owned subsidiary, SCCP. DTC, NSCC, 
PHLX, Philadep, and SCCP have entered into an agreement dated as of 
June 18, 1997, governing arrangements relating to PHLX's decision 
(``Agreement''). Pursuant to the Agreement, as discussed below, most of 
the current day-to-day depository and clearance services of Philadep 
and SCCP will now be provided by DTC and NSCC.

A. Agreement

    Under the Agreement, the parties are working to assure an orderly 
transition with respect to the cessation of Philadep's operations and 
the restructuring of SCCP's operations. Philadep and DTC have agreed to 
assist sole Philadep participants in becoming DTC participants to the 
extent that they meet DTC qualifications and desire to become DTC 
participants. Philadep and DTC also have agreed to cooperate in the 
transfer of securities from the custody of Philadep to the custody of 
DTC.
    After the closing date of the Agreement, SCCP no longer will 
maintain its continuous net settlement (``CNS'') system for conducting

[[Page 66704]]

settlements between SCCP and its participants. As a result, SCCP will 
cease providing the cash settlement services attendant to Philadep's 
same-day funds settlement system and the Philadep settlement process. 
However, pursuant to the Agreement, SCCP may continue to offer limited 
clearing and settlement services to PHLX members. SCCP intends to 
provide trade confirmation and recording services for PHLX members that 
carry out transactions through regional interface operations (``RIO'') 
accounts and ex-clearing accounts. Under the amended versions of SCCP 
Rules 10 and 11, SCCP will not provide clearing guarantees on such 
transactions.
    SCCP will continue to offer margin services for certain 
participants in a special account established by SCCP at NSCC. Pursuant 
to the Agreement, SCCP will establish an omnibus account at NSCC and 
will abide by NSCC's rules and procedures as a participant of NSCC. 
Under the Agreement, SCCP may offer margin services only to: (i) PHLX 
equity specialists for their specialists and alternate specialists 
transactions, as well as for their proprietary transactions in 
securities for which they are not appointed as specialists or alternate 
specialists and (ii) PHLX members listed on a schedule that are not 
PHLX equity specialists for their proprietary transactions.\6\
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    \6\ Under the Agreement, SCCP may add other PHLX members to this 
schedule subject to NSCC's approval. The Commission understands that 
at this time SCCP will be offering margin services only to PHLX 
members that are PHLX equity specialists.
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    Under the Agreement, PHLX, Philadep, and SCCP will not directly or 
indirectly engage in or compete in the business of providing securities 
depository services or clearance and settlement services for a period 
of five years. This prohibition does not apply to PHLX's equity 
ownership interest in The Options Clearing Corporation and does not 
apply to SCCP's providing of margin services.

B. SCCP Rule Changes \7\

    A new definition of ``margin member'' is established in SCCP Rule 1 
to reflect those PHLX floor firms entitled to clear through a SCCP 
margin account.\8\ Pursuant to the amended version of SCCP Rule 9, SCCP 
may provide margin accounts for margin members that clear and settle 
their transactions through SCCP's omnibus clearance and settlement 
account. SCCP will margin such accounts based on its procedures and on 
Regulation T of the Board of Governors of the Federal Reserve 
System.\9\
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    \7\ SCCP included the text of its revised rules as an exhibit 
which is available for inspection and copying at the Commission's 
public reference room and through SCCP.
    \8\ Under the rule change, the term ``margin member'' is defined 
to include participants that are PHLX specialists, alternate 
specialists, and other PHLX floor members specifically approved by 
NSCC to effect trading in a margin account.
    \9\ 12 CFR 220.
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    At any time, SCCP may demand a margin member to provide additional 
margin based upon its review of the margin member's security positions 
held by SCCP. SCCP will retain its margin thresholds as currently 
specified in its procedures and may require adequate assurances or 
additional margin in addition to the minimum margin thresholds in order 
to protect SCCP in issues deemed by SCCP to warrant additional 
protection. SCCP may demand any such margin payments in federal funds 
in accordance with its procedures.
    SCCP may issue margin calls to any margin member whose margin 
requirement exceeds the account equity of the margin member's margin 
account.\10\ SCCP may waive any amount that would trigger a margin call 
not exceeding $500. A margin member that fails to meet a margin call 
will be subject to SCCP Rule 22 (formerly SCCP Rule 23) which governs 
disciplinary proceedings and penalties. SCCP may cease to act for 
delinquent margin members and will retain a lien on all delinquent 
margin members' accounts and securities therein.
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    \10\ Under the rule change, SCCP Rule 1 defines the term 
``account equity'' as the total net current market value of security 
positions held in the margin account plus or minus cash balances in 
such account.
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    SCCP will segregate and maintain records on each individual margin 
account and will maintain the omnibus account so as to reflect all 
positions in SCCP's margin accounts. SCCP also will guarantee the 
settlement obligations of the omnibus account to NSCC. Pursuant to the 
Agreement, PHLX will guarantee SCCP's obligations to NSCC.
    SCCP's books and records for the omnibus clearance and settlement 
account will reflect all activity that occurs in the account at NSCC 
and DTC. At any time prior to midnight (Eastern Time) on the next 
business day after SCCP receives a margin member's trade, SCCP will be 
entitled to reverse such a trade from such margin member's account. 
SCCP will settle the omnibus clearance and settlement account with NSCC 
each business day in accordance with NSCC's rules and procedures. 
Accordingly, SCCP will be subject to NSCC's rules including, but not 
limited to, the following: (i) Daily mark-to-market requirements, (ii) 
allocations of long and short securities positions, (iii) dividend and 
reorganization settlement activities, and (iv) pledging of collateral 
and stock loans. Dividends, reorganizations, adjustments, and buy-ins 
will be passed through to margin members in accordance with SCCP's 
procedures. SCCP will continue to provide margin members with purchase 
and sales reports, bookkeeping reports, dividend and reorganization 
reports, and preliminary equity reports in accordance with SCCP's 
procedures.
    SCCP will have one composite settlement per day with NSCC through 
the omnibus clearance and settlement account. SCCP will maintain line 
of credit (``LOC'') arrangements with one or more commercial banks 
sufficient to support anticipated funding needs of the underlying 
margin accounts. In order to cover all such margin debits, SCCP 
anticipates obtaining an aggregate of $5 million in committed and $5 
million in uncommitted LOCs from each of two separate lending 
institutions, totaling $20 million.
    SCCP is amending its Rule 14 (formerly SCCP Rule 15) to provide 
that mark-to-market funds may not be used to finance margin members' 
account activity. SCCP also is amending Rule 14 to provide that any 
mark-to-market funds collected by SCCP will be segregated and invested 
in accordance with analogous procedures set forth in SCCP Rule 4. Under 
the amended version of SCCP Rule 13, SCCP will pass through any buy-ins 
submitted by NSCC to SCCP or by a SCCP participant to NSCC in 
accordance with NSCC's buy-in rules and procedures.
    To ensure that margin members have an efficient way to obtain 
securities depository services after the closure of Philadep's 
depository service, NSCC will sponsor SCCP in opening a depository 
account at DTC to benefit margin members. If margin members carry out 
trades in securities that are not eligible for custodial services in 
DTC's book-entry system, SCCP will use NSCC's direct clearing service 
to settle the transactions. SCCP will continue to perform bookkeeping 
and reconciliation services for the omnibus clearance and settlement 
account and its related DTC custody account pursuant to SCCP 
procedures.
    In accordance with NSCC's participants fund formulae, SCCP, as a 
NSCC participant and as a sponsored participant of DTC, will be 
required to provide NSCC and DTC with participants fund contributions. 
SCCP is deleting its participants fund formulae applicable to inactive 
accounts, full service CNS accounts, and layoff accounts. SCCP will 
establish a fixed

[[Page 66705]]

$35,000 contribution for each of the following account categories: 
specialist margin and non-specialist margin. No changes will be made to 
the RIO account formula. Accordingly, RIO account participants will 
continue to be subject to a contribution of $10,000 to $75,000 
depending upon monthly trading activity. SCCP will continue to use its 
current procedure under which a participant engaging in more than one 
account type activity will be subject only to the formula that would 
generate the highest participants fund contribution.
    SCCP may allocate any portion of its participants fund to satisfy 
NSCC's and DTC's participants fund requirements with respect to the 
omnibus account. Any excess SCCP participants fund cash not used to 
fund SCCP's NSCC and DTC participants fund requirements will be 
segregated and invested by SCCP in accordance with SCCP Rule 4. If 
SCCP's participants fund formulae do not provide for contributions that 
equal those which would be required pursuant to the NSCC and DTC 
participants fund formulae, SCCP reserves the right to collect from 
each participant an additional pro rata charge to meet any such 
deficit.
    SCCP is amending SCCP Rule 4 to specify that no participants fund 
contributions may be used in financing margin members' margin account 
activity.\11\ In addition SCCP is amending Rule 4 to provide for the 
establishment by SCCP and Philadep of a reserve fund that will be used 
to provide a liquid fund to draw on as necessary to meet certain 
specified expenses. The reserve fund will be funded with deposits of 
$1,000,000 by August 11, 1998; $1,000,000 by August 11, 1999; and 
$1,000,000 by August 11, 2000. The reserve fund will be held and 
invested in accordance with the procedures set forth in SCCP Rule 4 for 
the holding and investment of the participants fund. Amounts drawn from 
the reserve fund must be replenished within sixty days following the 
date of each such withdrawal. SCCP Rule 4 also is being amended to 
provide that no portion of the reserve fund may be used in financing 
margin members' margin account activity.
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    \11\ As previously stated, SCCP is establishing separate sources 
of funding, including bank LOCs, to serve the operation of its 
margin members' margin accounts.
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    SCCP is amending its schedule of fees to delete those fees 
associated with services no longer to be offered. SCCP will now charge 
RIO Accounts fees of $0.05 per $1,000 of contract value.

II. Comment Letters

    The Commission received two comment letters in response to the 
notice of DTC's proposed rule change: one was a comment letter from 
Thomson Financial Services (``Thomson'') pertaining to DTC and one was 
a response from DTC to Thomson's letter.\12\ Thomson stated that it did 
not object to DTC's proposal to offer depository services to former 
sole Philadep participants; however, Thomson also stated its belief 
that the cessation of Philadep's services might adversely affect 
competition.
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    \12\ Supra Notes 4 and 5.
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    DTC stated in response that it is strongly committed to 
competition. DTC noted that the regional stock exchanges have decided 
independently that maintaining their own securities depositories was no 
longer in their members' best interests. In addition, DTC stated that 
when the regional stock exchanges have decided to close their 
securities depositories, DTC always has responded promptly by expending 
resources to ensure the safe transfer of funds and securities.

III. Discussion

    Section 17A(b)(3)(F) of the Act \13\ requires that the rules of a 
clearing agency be designed to promote prompt and accurate clearance 
and settlement of securities transactions and 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 the proposed rule changes by DTC, NSCC, 
Philadep, and SCCP are consistent with the requirements of Section 
17A(b)(3)(F) because they should facilitate prompt and accurate 
clearance and settlement of securities transactions by providing More 
efficient and less expensive clearing and depository services. 
Moreover, because the proposals provide for the orderly transfer of 
open positions and securities from SCCP to NSCC and from Philadep to 
DTC, the Commission believes the proposals are consistent with the 
obligations of DTC, NSCC, Philadep, and SCCP to safeguard securities 
and funds in their custody and control and to provide for the prompt 
and accurate clearance and settlement of securities transactions.
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
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    Section 19(b) of the Act \14\ provides that the Commission shall 
approve proposed exchange and clearing agency rule changes if it finds 
that the proposals are consistent with the requirements of the Act and 
the rules and regulations thereunder that govern those organizations. 
Competition among clearing agencies is a factor that the Commission 
must consider in its examination of any proposal.\15\ However, the 
Commission is not required to achieve its regulatory objectives in the 
least anticompetitive manner and is at most required to decide that any 
anticompetitive effects of its actions are necessary or appropriate to 
the achievement of its objectives.\16\ Therefore, in assessing the 
anticompetitive effect, the Commission is required to balance the 
maintenance of fair competition along with a number of other equally 
important express purposes of the Act such as the protection of 
investors and the safeguarding of securities and funds.\17\
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    \14\ 15 U.S.C. 78s(b).
    \15\ See Exchange Act Section 17A(b)(3)(I), 15 U.S.C. 78q-
1(b)(I).
    \16\ 15 U.S.C. 78c(f). Bradford National Clearing Corp. v. SEC, 
590 F.2d 1085, 1105 (D.C. Cir. 1978).
    \17\ Id. at 1106.
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    Despite the dominant market position of DTC and NSCC, the 
Commission believes the current regulatory scheme and the particular 
structure and nature of the clearing and depository industries provide 
ample means of avoiding the potential negative effects of a monopoly. 
Sections 17A and 19 of the Act and the rules thereunder provide the 
Commission appropriate and effective regulatory authority over DTC and 
NSCC. The Commission believes that after the consummation of the 
proposed arrangements, securities industry members will continue to 
have access to high quality, low cost depository and clearing services 
provided under the mandate of the Act. Accordingly, the Commission 
believes that the proposed transaction advances the objectives of the 
national clearance and settlement and system without an inappropriate 
or unnecessary burden upon competition.
    Thus, the light of the above, the Commission finds that approval of 
the proposals is warranted. However, because a part of SCCP's proposed 
rule change concerns the restructuring of SCCP's operations to enable 
SCCP to offer limited clearing and settlement services to certain PHLX 
members, the Commission finds that it is appropriate to grant only 
temporary approval to the portion of SCCP's proposed rule change that 
amends SCCP's By-laws, Rules, or Procedures. This will allow the 
Commission and SCCP to see how well SCCP's restructured operations are 
functioning under actual working conditions and to determine whether 
any adjustments are necessary. Thus, the Commission is approving the 
portion of SCCP's proposal that amends

[[Page 66706]]

its By-laws, Rules, or Procedures through December 31, 1998.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposals are 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 changes of Philadep (File No. SR-Philadep-97-
04), of DTC (File No. SR-DTC-97-16), and of NSCC (File No. SR-NSCC-97-
08) and the portion of SCCP's proposed rule change dealing with its 
entering into the Agreement (File No. SR-SCCP-97-04) be and hereby are 
approved.
    It is further Ordered, pursuant to Section 19(b)(2) of the Act, 
that the portion of SCCP's proposed rule change that amends its By-
laws, Rule, or Procedures (File No. SR-SCCP-97-04) be and hereby is 
approved through December 31, 1998.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-33194 Filed 12-18-97; 8:45 am]
BILLING CODE 8010-01-M