[Federal Register Volume 63, Number 171 (Thursday, September 3, 1998)]
[Notices]
[Pages 47057-47058]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23766]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40368; File No. SR-DTC-97-21]


Self-Regulatory Organizations; The Depository Trust Corporation; 
Order Approving a Proposed Rule Change Relating to Modification of 
Processing Bankers' Acceptances

August 26, 1998.
    On October 14, 1997, The Depository Trust Corporation (``DTC'') 
filed with the Securities and Exchange Commission (``Commission''), and 
on November 6, 1997, and February 23, 1998, amended a proposed rule 
change (File No. SR-DTC-97-21) 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 April 21, 1998.\2\ No comment 
letters were received. For the reasons 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. 39861 (April 14, 1998), 
63 FR 19772.
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I. Description

    In 1994, the Commission approved an expansion of DTC's money market 
instruments (``MMI'') settlement program to include, among other 
things, BAs,\3\ which allowed DTC to process non-fungible BAs.\4\ The 
purpose of the proposed rule change is to modify DTC's procedures to 
allow an accepting bank, at its option, to assign one CUSIP number to a 
bundle of its BAs that are issued at a discount and that have the same 
maturity date. DTC will treat all such BAs assigned the same CUSIP 
number as fungible.
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    \3\ Securities Exchange Act Release Nos. 33958 (April 22, 1994), 
59 FR 22879 (order approving proposal on temporary basis); and 35655 
(April 28, 1995), 60 FR 22423 (extension of temporary approval).
    \4\ Non-fungible BAs consist of those with only one underlying 
customer, draft, and accepting bank. A CUSIP number is assigned to 
each BA as opposed to a bundle of BAs, as is currently proposed by 
the rule change.
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    Under existing practices in the BA market, an issuing bank and an 
investor may agree that a single issuance transaction can be settled by 
the bank's delivery of a bundle of drafts, which may involve different 
drawers, different underlying transactions, different goods, or 
different countries of origin or destination, so long as each component 
draft has been accepted by the issuing bank and has the same maturity 
date. The program for processing BAs will reflect industry practice by 
permitting an issuing bank to settle a single issuance transaction by 
book-entry delivery of interests in a bundle of drafts accepted by the 
bank, maturing on the same date, and identified by a single CUSIP 
number.
    Subsequent to the initial issuance of these fungible BAs, the 
issuing bank may increase the total amount of the issue outstanding by 
including additional accepted drafts of the same or longer tenure as 
the other component drafts.\5\ Similarly, the issuing bank may 
substitute for a component draft of an outstanding issue of fungible 
BAs another accepted component draft having the same or longer maturity 
date. DTC will make available to participants though its Participant 
Terminal System information about the features (e.g., identity of 
drawer, goods, country of origin, and destination) of each component 
draft of fungible BAs that has been provided by the bank's issuing 
agent as of the date of the inquiry.
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    \5\ Where the component drafts have different maturity dates, 
the bank issuing fungible BAs will be required to pay full maturity 
on the earliest date that the component draft matures.
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    Market participants will remain responsible for complying with 
regulations of the U.S. Treasury Department's Office of Foreign Assets 
Control (``OFAC'') as they pertain to DTC-eligible BAs. In providing 
issuance instruction to DTC, the bank's issuing agent will be required 
to acknowledge that the issuance complies with OFAC regulations. The 
acknowledgement shall constitute a representation that the issuing 
agent maintains an appropriate system for assuring compliance with OFAC 
regulations and that the subject issuance complies with those 
regulations.
    The bank's issuing agent will also be required to indicate in the 
issuance instructions whether or not the BAs being issued are eligible 
for purchase and discount at a federal reserve bank. DTC will make the 
information available to participants but will not verify the accuracy 
of information provided by the issuing agent with respect to the BAs. 
DTC will not be liable for any loss related to the accuracy or 
completeness of information about BAs made available by it.
    In the event of the accepting bank's insolvency, DTC's MMI program 
procedures relating to MMI issuer insolvency will apply. Furthermore, 
in order to put participants in a position to independently pursue 
claims against the bank or any other party (e.g., the drawer of an 
accepted draft), DTC will seek to have accepted drafts which had been 
made payable or endorsed to DTC's nominee, Cede & Co., at the time the 
BAs were first issued, exchanged for accepted drafts made payable or 
endorsed to each participant having a position in each issue of the 
bank's BAs.\6\ If DTC is unable to arrange for such exchanges, DTC will 
act with respect to matters involving each issue of BAs (i.e., CUSIP) 
in accordance with the written instructions of the participants having 
sixty-six and two-thirds percent or more of the total position in that 
issue.
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    \6\ A participant having a position on DTC's books in an issue 
of fungible BAs accepted by the insolvent bank would receive 
component drafts with each draft in an amount proportional to the 
participant's position in that issue.
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    As with other types of financial instruments in DTC's MMI program, 
BAs rated in one of the top two ratings categories by at least one of 
the largest bank-debt rating agencies and investment grade or above by 
other rating agencies will receive a two percent haircut from market 
price for purposes of collateral valuation. BAs rated as investment 
grade only by the ratings agencies will receive a five percent haircut 
and all lower-rated or unrated BAs will receive a 100 percent haircut 
(resulting in zero collateral value). BAs that are in default will not 
be eligible for deposit at DTC.

II. Discussion

    Section 17A(b)(3)(F) of the \7\ requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds in this custody or

[[Page 47058]]

control of the clearing agency or for which it is responsible. The 
Commission believes that the proposed rule change is consistent with 
DTC's obligations under Section 17A(b)(3)(F) because it provides a more 
efficient manner in which industry participants may process BA 
transactions while potentially reducing the risks associated with 
current industry processing methods. Furthermore, DTC has put in place 
sufficient safeguards to protect the interests of other DTC 
participants engaged in the clearance and settlement of securities.\8\
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    \7\ 15 U.S.C. 78sq-1(b)(3)(F).
    \8\ DTC's BA program has been designed in consultation with and 
with the approval of the Federal Reserve Bank of New York.
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    The Commission previously examined the risk management features of 
the MMI program when DTC proposed to add it to DTC's Same-Day Funds 
Settlement system \9\ and when permanent approval was sought.\10\ At 
those times, the Commission found and continues to believe that the 
risk management controls adopted by DTC are sufficient to address the 
risks associated with processing BAs. Furthermore, with the inclusion 
of DTC's additional risk management efforts incorporated by this rule, 
namely requiring OFAC compliance and establishing insolvency 
procedures, the Commission believes that any additional risks that may 
arise as a result of DTC processing fungible BAs are also sufficiently 
addressed.
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    \9\ Supra note 3.
    \10\ Id.
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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-97-21) 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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Jonathan G. Katz,
Secretary.
[FR Doc. 98-23766 Filed 9-2-98; 8:45 am]
BILLING CODE 8010-01-M