[Federal Register Volume 66, Number 129 (Thursday, July 5, 2001)]
[Notices]
[Page 35472]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-16788]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44491; File No. SR-DTC-00-17]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Approval of a Proposed Rule Change To Eliminate DTC's 
Option To Resell to Deliverers the Securities They Had Previously 
Delivered by Book Entry to the Account of a Participant That Has Failed 
To Settle Its Debit Obligation to DTC

June 28, 2001.

I. Introduction

    On November 14, 2000, the Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-DTC-00-17) 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 17, 2001.\2\ The 
Commission received two comment letters in support of the proposal.\3\ 
For the reasons discussed below, the Commission is granting approval of 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 44172, (April 10, 2001), 
66 FR 19820.
    \3\ Letters from Diane L. Schueneman, First Vice President, 
Merrill Lynch Investment Managers Operations and Arthur L. Thomas, 
Chief Operating Officer, Merrill Lynch Securities Services Division, 
to Dennis Dirks, President, Depository Trust Company (June 7, 2000) 
(``Merrill Lynch'') and from Jeffrey P. Neubert, President and Chief 
Executive Officer, New York Clearing House, to John Mancuso, Senior 
Systems Director, The Depository Trust & Clearing Corporation 
(September 22, 2000)(``NYCH'').
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II. Description

    If a participant fails to pay its settlement obligation to DTC at 
the end of the day, DTC will use its liquidity resources (all-cash 
participants fund and bank line of credit) to complete settlement. 
Currently, DTC's rules provide that if the participant is insolvent and 
use of the participant's participants fund deposit does not eliminate 
its net debit obligation, DTC may on the business day following the 
failure-to-settle either: (1) Resell to deliverers the securities they 
had delivered to the insolvent participant on the day of the failure 
(``resale procedure'') or (2) sell in the open market those securities 
and other collateral in the insolvent participant's account. Under the 
proposed rule change, DTC would amend its Rule 9(B) to eliminate DTC's 
option to resell to deliverers the securities they had previously 
delivered by book-entry to the account of a participant that has failed 
to settle its debit obligation to DTC.
    The resale procedure was included in DTC's rules prior to the 
industry's conversion to same-day funds settlement and DTC's adoption 
of associated risk management controls, including the collateral 
monitor and the imposition of net debit caps.\4\ The collateral monitor 
systematically prevents a participant from accruing a net debit that 
exceeds the value of the collateral in its account by blocking any 
transaction that would have that effect. For this purpose, collateral 
includes: (1) The participant's deposit to the participants fund, (2) 
the value of securities in the participant's account that it has 
designated as collateral, and (3) the value of securities that are the 
subject of deliveries from other participants. The collateral value 
attributed to securities is equal to their market value minus a 
``haircut'' determined by DTC. DTC believes that its risk management 
controls adequately limit DTC's risk exposure in the event of a 
participant insolvency and that there is no need to rely upon the 
resale procedure.
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    \4\ For a description of same day funds settlement and DTC's 
adoption of associated risk management controls, refer to Securities 
Exchange Act Release Nos. 24689 (July 9, 1987), 52 FR 26613 [File 
No. SR-DTC-87-04] (order granting temporary approval to DTC's same-
day fund settlement service), 26051 (August 31, 1988), 53 FR 34853 
[File No. SR-DTC-88-06] (order granting permanent approval to DTC's 
same-day fund settlement service), 27360 (May 16, 1995), 60 FR 27360 
[File No. SR-DTC-95-06] (order modifying DTC's same-day funds 
settlement system to accommodate the overall conversion to same-day 
settlement for securities transactions), and 36843 (February 14, 
1996), 61 FR 6672 [File No. SR-DTC-96-03] (order granting 
modifications to certain DTC procedures in order to facilitate 
conversion to entirely same-day funds settlement system).
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III. 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 it is responsible. The Commission believes that DTC's risk 
management controls such as collateral monitoring and the use of net 
debit caps adequately limit DTC's exposure in the event of a 
participant failure to settle an insolvency situation. The Commission 
further believes that DTC's right to sell the insolvent's collateral in 
the open market give DTC a sufficient means to eliminate any 
unsatisfied net debit obligation of the insolvent participant. 
Therefore, the Commission finds DTC's decision to eliminate its right 
to resell securities to deliverers and to rely upon its risk management 
controls and its right to resell collateral into the open market is 
consistent with DTC's obligations to assure the safeguarding of 
securities and funds which are in the custody or control of DTC or for 
which it is responsible because use of the risk management controls and 
open market sales should provide DTC with the means to meet its 
financial obligations in the event of a participant's failure to 
settle.
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular 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-00-17) 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. 01-16788 Filed 7-3-01; 8:45 am]
BILLING CODE 8010-01-M