[Federal Register Volume 67, Number 102 (Tuesday, May 28, 2002)]
[Notices]
[Pages 36945-36946]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-13192]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45969; File No. SR-DTC-2002-04]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of a Proposed Rule Change Relating to the Application 
of a Receiver-Authorized Delivery-Like Function to Maturity 
Presentments for Money Market Instruments in Times of Unusual Market 
Stress

May 20, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on March 25, 2002, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which items have been prepared 
primarily by DTC. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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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 proposed rule change would amend DTC's procedures to allow the 
application of a Receiver-Authorized Delivery (``RAD'')-like function 
in times of unusual market stress to maturity presentments (``MPs'') of 
money market instruments (``MMIs'') that are in DTC's custody.

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

(i) Current Maturity Presentments
    Under DTC's current procedures for the processing of MPs, early on 
the maturity date (generally around 2:00 a.m.), DTC initiates 
deliveries of the maturing paper from the accounts of participants 
having position in the maturing paper to the MMI participant account of 
the issuing/paying agent (``IPA''). These MPs are processed as the 
equivalent of book-entry deliveries versus payment. As such, MPs may 
``recycle'' just as any delivery would if the net debit cap or 
collateralization controls applicable to the IPA's account prevents the 
delivery from being completed. If recycled, the MP delivery would be 
completed once additional funds such as settlement obligation 
prepayments or new issuances are credited to the IPA's account. 
Attempts to complete deliveries of recycling MPs occur randomly without 
regard to the identity of the offsetting prepayment/issuance 
transactions. For example, an issuance for commercial paper (``CP'') 
Issuer A might establish collateral in the IPAs account that could be 
used to support the processing of a maturity of CP Issuer B's paper. 
This arrangement has operated successfully since MMIs first became DTC-
eligible in 1990.
    DTC's MMI procedures provide that the IPA can ``refuse to pay'' for 
maturing paper of a particular issuer by communicating that intention 
to DTC before 3:00 p.m. (ET) on the maturity date. This intention will 
be communicated to all participants by DTC. DTC will then reverse any 
completed MPs by recrediting them to presenting participants' accounts, 
which offsets the associated settlement credits in those accounts. DTC 
will also unwind the following transactions it may have processed 
earlier that day in the same and other MMIs of that ``defaulting 
issuer': uncompleted maturity presentments; any valued issuances; any 
periodic income (interest or dividend) and principal presentments; and 
any reorganization presentments. In addition, DTC will mark down the 
collateral value of all of the defaulting issuer's MMIs in the system 
to zero and will block further issuances of that issuer's paper through 
DTC.
(ii) Application of Receiver-Authorized Delivery-Like Function
    The Receiver-Authorized Delivery (RAD) function enables each 
participant to limit and consider certain securities

[[Page 36946]]

deliveries (those obligating the participant to pay $15 million or 
more) and certain payment orders (those obligating the participant to 
pay $1 million or more) which are directed to its account by any other 
participant before its account is updated. Certain other transactions, 
including substantially overvalued deliveries and deliveries initiated 
just prior to cutoff, are automatically subject to the RAD function.
    Under DTC's current procedures, RAD is not available for MPs 
initiated by DTC on behalf of presenting participants because MPs are 
known in advance and can generally be presumed to be valid obligations 
due and payable. Moreover, the processing of MPs occurs early in the 
processing day in the expectation that the associated money credits 
posted to the accounts of presenting participants will be available to 
support the efficient subsequent processing of new MMI issuances. 
Finally, subjecting all MMI maturities to RAD would impose an 
operational burden on IPAs, who would be required to authorize each MP 
in order for the transaction to be completed.
    Since the events of September 11, IPAs have raised a concern that 
in such emergency situations the random nature of DTC's process for 
updating recycling MPs prevents the IPAs from aligning the funding of 
maturities with offsetting issuances of the same issue or with 
decisions to activate back-up lines of credit in order to fund a 
particular issuer's maturing obligations.
    The purpose of the proposed rule change is to provide to IPAs in 
the event of a systemic, operational, or other crisis that could result 
in MMI maturities not being funded in the normal course a mechanism for 
dealing with the nonpayment of maturities that does not have the 
consequences of a ``refusal to pay.'' Under the proposed rule change, 
in extraordinary circumstances \3\ and only after consultation with its 
regulators, DTC at its option could direct MPs for MMIs maturing on the 
days following the crisis to a new contingency RAD-like feature. This 
would afford the IPA an opportunity to review and approve MPs prior to 
having them processed into its account and would provide the IPA 
additional measures of control over its financial obligations to 
particular MMI issuers in times of unusual market stress. DTC would 
continue this procedure at its option until processing conditions 
returned to a more normal state.
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    \3\ Such circumstances would be evidenced by the closing of one 
or more national securities exchanges (e.g., the New York Stock 
Exchange or Nasdaq).
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    DTC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act because it will promote the 
prompt and accurate settlement of securities transactions and will be 
implemented in a manner that is consistent with DTC's risk management 
controls.

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

    DTC perceives no impact on competition by reason of the proposed 
rule change.

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

    The proposed rule change was reviewed with members of The Bond 
Market Association's Money Market Operations Committee in December 2001 
and the Commercial Paper Issuers Working Group in January 2002. They 
agreed that using the proposed RAD-like feature offers many advantages 
in that it is a process that can be rapidly deployed by DTC on the days 
following a disaster and that allows IPAs to control the presentation 
of maturing paper into their accounts and thereby better manage their 
exposures in times of unusual market stress.
    Some members of these industry groups expressed concern that 
subjecting MPs to RAD-like controls might impose a difficult 
operational burden on IPAs if they would be required to authorize each 
MP individually. In this connection, a custodian bank pointed out that 
a significant delay in the availability of credits from successfully 
processed MPs (which but for the need for RAD approvals would have been 
processed in the early morning hours) could leave custodians with 
higher than usual debits and therefore could potentially cause the 
recycling of other delivery versus payment transactions. To address 
these concerns, the RAD-like controls developed by DTC will provide the 
IPA with several options to facilitate its processing, including the 
ability to approve all MPs as a group.

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

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the self-regulatory organization consents, 
the Commission will:
    (A) By order approve such proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

VI. 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 NW, Washington, DC 20549-0609. 
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 NW, Washington, 
DC 20549. Copies of such filing will also be available for inspection 
and copying at the principal office of DTC. All submissions should 
refer to the File No. SR-DTC-2002-04 and should be submitted by June 
18, 2002.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-13192 Filed 5-24-02; 8:45 am]
BILLING CODE 8010-01-P