[Federal Register Volume 63, Number 163 (Monday, August 24, 1998)]
[Notices]
[Pages 45100-45102]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-22577]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40330; File No. SR-DTC-98-8]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change Increasing the Maximum Net Debit Cap and Modifying 
Procedures for Allocating the Net Debit Cap

August 17, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 11, 1998, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-DTC-98-8) as described in Items I and II below, which items have 
been prepared primarily by DTC. The Commission is publishing this 
notice and order to solicit comments from interested persons and to 
grant accelerated approval of the proposed rule change.
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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 purpose of the proposed rule change is to increase the maximum 
net debit cap employed in DTC's settlement system by $250 million and 
to modify DTC's procedures for allocating the net debit cap of a 
participant having more than one account family.

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

Increase of Maximum Net Debit Cap
    DTC's principal risk is the possible failure of one or more of its 
participants to settle their net debit obligations with DTC at the end 
of a business day. In order to assure that DTC is able to complete 
settlement on the day of a participant failure, DTC currently maintains 
liquidity resources of $1.1 billion, including a cash Participant's 
Fund of $400 million \3\ and a $700 million committed line of credit 
with a consortium of banks.
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    \3\ Each participant is required to make a deposit to the 
Participant's Fund based upon a sixty business-day rolling average 
of the participant's six highest intraday net debit peaks. The 
aggregate amount of all participants' required deposits is $400 
million. In the event that DTC becomes concerned with a 
participant's operational or financial soundness, DTC may require it 
to make an additional deposit to the Participant's Fund. A 
participant may make a voluntary deposit to the Participant's Fund 
in excess of the amount required. Since DTC fully converted to a 
same-day funds settlement system in 1995, the total amount of the 
Participant's Fund, including voluntary deposits, has never been 
less than $650 million.
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    DTC's settlement system imposes net debit caps on all participants. 
Each participant's net debit is limited throughout the processing day 
to a net debit cap that is the lesser of the following four amounts: 
(1) a net debit cap based on the average of the three largest net 
debits that the participant incurs over a rolling 70 business-day 
period; (2) an amount, if any, determined by the participant's settling 
bank; (3) an amount, if any, determined by DTC; or (4) $900 million (an 
amount that is $200 million less than the current amount of DTC's total 
liquidity resources).
    DTC also requires that each participant's net settlement debit be

[[Page 45101]]

fully collateralized. In the event of a participant's failure to 
settle, DTC will first use cash in the Participant's Fund (including 
any voluntary deposits) as a liquidity resource to complete settlement. 
If the Participant's Fund is not sufficient, DTC will borrow from its 
line of credit banks, pledging collateral securities in the failing 
participant's account.
    Over the past two years DRTC's average gross daily settlement 
volumes have increased approximately 40% from $240 billion in 1996 to 
$340 billion in 1997, with daily peak volumes in excess of $400 billion 
on several occasions. ``Settlement progress payments'' (i.e., funds 
sent by participants to DTC during the day primarily when a 
participant's settlement balance has reached its net debit cap) have 
increased from a daily average of $11.5 billion in 1996 to $15.8 
billion in 1997 with daily peaks in excess of $20 billion. In 1997 the 
number of instances where the $900 million debit cap operated to block 
transactions ranged from a low of 46 in January to a high of 74 in 
October.
    DTC is concerned that maintaining the maximum net debit cap at its 
current level of $900 million will continue to have the undesirable 
effect of temporarily blocking substantial numbers of book-entry 
delivery. In order to ease the flow of transactions through its system, 
DTC has decided to increase its committed line of credit from $700 
million to $1 billion, thereby increasing total liquidity to $1.4 
billion, and proposes to increase the maximum net debit cap from $900 
million to $1.15 billion.
Modification of Net Debit Cap Allocation Procedures
    The proposed modification of DTC's procedures for allocating the 
net debit cap of a participant having more than one account family is 
also designed to facilitate transaction flow by providing participants 
that act as issuing/paying agents (``IPAs'') in DTC's Money Market 
Instrument (``MMI'') program greater flexibility in allocating their 
total net debit cap.
    Under DTC's procedures, participants that maintain separate 
families of accounts may allocate their net debit caps among their 
account families at their discretion, or alternatively, they may rely 
on DTC's system-generated allocations.\4\ Each family's net debit cap 
is applied to that family only and not shared by other families of the 
participant. The aggregate of the net debit caps allocated to a 
participant's families must be equal to the participant's total net 
debit cap. For each participant that acts as an IPA, however, DTC 
currently requires that the portion of the total net debit cap 
allocated to the participant's IPA family be no less than the system-
generated allocation. Some IPAs have expressed concern that this 
requirement unnecessarily inhibits their ability to match the 
allocation of net debit cap with important activities occurring in 
their other account families.
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    \4\ The system-generated allocations are calculated based on the 
average of each family's three highest net debit peaks over a 
rolling 70 business-day period.
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    In response to these concerns, DTC proposes to apply the mandatory 
allocation only to IPAs having average daily maturity presentments 
measured over the most recent month equal to or greater than 5% of 
DTC's total MMI maturity presentments. Further, DTC proposes to modify 
the system-generated allocation formula applicable to such a 
participant so that no more than 40% of its total net debit cap would 
have to be allocated to its IPA family. DTC believes that these 
modifications strike an appropriate balance between attempting to 
assure that MMI maturity presentments to IPAs are not blocked due to 
insufficient net debit cap and allowing IPAs to manage efficiently the 
processing of their other activities at DTC.
    The proposed rule change is consistent with the requirements of the 
Act, as amended, and the rules and regulations thereunder because it 
promotes the prompt and accurate clearance and settlement of securities 
transactions.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    DTC has not solicited or received comments on the proposed rule 
change. Informally, a number of participants have expressed support for 
the subject proposals.

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

    Section 17A(b)(3)(F) \5\ 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 
and generally to protect investors and the public interest. The 
Commission believes that the proposed rule change is consistent with 
DTC's obligations under the Act because an increase in DTC's liquidity 
resources will help DTC protect itself, its members, and investors from 
the risks associated with the failure of one or more of its 
participants to settle their obligation with DTC at the end of a 
business day. Furthermore, DTC's new maximum net debit cap will 
constitute a lower proportion of its liquidity resources than was 
previously the case.
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission also believes that DTC's modifications to its 
procedures for allocating the net debit cap of a participant having 
more than one account family are consistent with DTC's obligation under 
the Act. While the modifications will allow participants more 
flexibility in allocating their net debit cap, their total net debit 
cap will still be calculated according to the method which the 
Commission has previously approved as a safe and sound method.
    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 
immediately increase its liquidity resources.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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 Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of DTC. All 
submissions should refer to File No. SR-DTC-98-8 and

[[Page 45102]]

should be submitted by September 14, 1998.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-98-8) be, and hereby is, 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-22577 Filed 8-21-98; 8:45 am]
BILLING CODE 8010-01-M