[Federal Register Volume 65, Number 84 (Monday, May 1, 2000)]
[Notices]
[Page 25411]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-10729]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42711; File No. SR-DTC-99-24]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving a Proposed Rule Change Relating to Collateralization 
Procedures

April 21, 2000.
    On October 27, 1999, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change 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 January 14, 2000.\2\ No comment letters were 
received. 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. 42323 (January 7, 2000), 
65 FR 2449 (January 14, 2000).
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I. Description

    The rule change revises DTC's collateralization procedures \3\ to 
provide for a systemic monitor to withhold collateral value for 
collateral associated with the participant (e.g., the participant's own 
commercial paper). \4\ Specifically, DTC will implement an Issuer/
Participant Number (``IPN'' control to systemically monitor collateral 
received in each participant's account.
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    \3\ DTC's current procedures relating collateralization and risk 
management controls are set forth in memorandums dated March 17, 
1995, which are attached as Exhibit 3 to DTC's filing.
    \4\ For a complete description of DTC's collateralization 
procedures, refer to Exhibit 2 of DTC's rule filing.
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    The IPN will identify securities related to a participant and will 
withhold from the participant any collateral value associated with the 
securities. For example, transactions related to an issuing/paying 
agent (``IPA'') account (e.g., receives versus payment) will continue 
to be processed in essentially same manner except that no value will be 
given to the IPA's collateral monitor for the collateral value of 
securities received that are associated with the IPA.
    IPN is based on the legal structure of a participant; therefore, 
the IPA control will apply to every participant's account. For example, 
if a participant has an IPA account through which it issues money 
market instrument securities (``MMI securities'') on its own behalf and 
also has a custody account and if the participant processes an MMI 
issuance delivery of its own MMI securities from its IPA account to its 
custody account, the participant would receive no collateral value in 
the custody account for the delivery of the MMI securities. IPN will 
not affect DTC's calculations of a participant's net debit cap or 
largest provisional net credit.

II. Discussion

    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 or 
for which the clearing agency is responsible. The Commission believes 
that DTC's proposed rule change is consistent with DTC's obligations 
under the Act because the new procedures will reduce the risk that a 
participant's collateral will not be sufficient to satisfy its 
settlement obligations.
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    \5\ 15 U.S.C. 78q-1(b)(3)F).
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    DTC uses collateralization as a method to protect itself and its 
participant from the inability of one or more participants to pay its 
settlement obligations. Collateralization ensures that at all times 
each participant maintains collateral in its account equal to or 
greater than its net cash settlement obligation (i.e., its net debit). 
If a participant were to fail to pay its settlement obligation, DTC 
would use the collateral in the failing participant's account to 
support any borrowings necessary to finance the failing participant's 
settlement obligation or could liquidate the collateral to cover the 
participant's settlement obligation. If a participant were to receive 
value in DTC's collateral monitor for collateral that is associated 
with the participant, DTC would probably not have sufficient collateral 
if that participant were to default because the participant's 
collateral would probably have little or no value in a default 
situation. Accordingly, the rule change establishes a systemic monitor 
that will withhold collateral value for collateral associated with a 
participant. This should help ensure that DTC will have sufficient 
resources to satisfy outstanding settlement obligations in the event of 
a participant default.

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-99-24) 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. 00-10729 Filed 4-28-00; 8:45 am]
BILLING CODE 8010-01-M