[Federal Register Volume 67, Number 168 (Thursday, August 29, 2002)]
[Notices]
[Pages 55444-55445]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-22086]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46415; File No. SR-DTC-2002-04]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Approval 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

August 23, 2002.

I. Introduction

    On March 25, 2002, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-DTC-2002-04 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 May 28, 2002.\2\ No comment 
letters were received. 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. 45969 (May 20, 2002), 67 
FR 36945.
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II. Description

(i) Current Maturity Presentments

    Under DTC's current procedures for the processing of maturity 
presentments of money market instruments (``MMIs'') that are in DTC's 
custody, early on the maturity date (generally around 2 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 
maturity presentments are processed as the equivalent of book-entry 
deliveries versus payment. If the net debit cap or collateralization 
controls applicable to the IPA's account prevents the delivery from 
being completed, maturity presentments will ``recycle'' just as any 
delivery would. If recycled, the maturity presentment 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 maturity presentments 
occur randomly without regard to the identity of the offsetting 
prepayment/issuance transactions. For example, an issuance of Issuer 
A's commercial paper (``CP'') into the IPA's account might establish 
collateral in the IPA's account that could be used to support the 
processing of a maturity presentment of Issuer B's CP. 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 p.m. (ET) on the maturity date. This intention will be 
communicated to all participants by DTC. DTC will then reverse any 
completed maturity presentments 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

    Currently, the Receiver-Authorized Delivery (RAD) function enables 
each participant to limit and consider certain securities 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.
    However, under DTC's current procedures, RAD is not available for 
maturity presentments initiated by DTC on behalf of presenting 
participants because maturity presentments are known in advance and can 
generally be presumed to be valid obligations due and payable. 
Moreover, the processing of maturity presentments 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 
maturity presentment 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 maturity presentments 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 proposed rule change provides 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 may subject maturity presentments 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 maturity presentments 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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III. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions.\4\ By implementing 
a RAD-like function in times of unusual market stress for maturity 
presentments of MMIs, DTC will enable IPAs to control the presentation 
of maturing paper into their accounts and thereby better manage their 
exposures in times of unusual market stress. As a result, the risk that 
an IPA will have to refuse to pay a maturity presentment, along with 
the serious issuer default procedures

[[Page 55445]]

that DTC employs in such a refuse to pay situation, will be reduced. 
Therefore, the Commission finds that the rule change implementing the 
RAD-like function for maturity presentments of MMIs should facilitate 
the prompt and accurate clearance and settlement of securities at DTC 
and for that reason is consistent with Section 17A and the rules and 
regulations thereunder.
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    \4\ 15 U.S.C. 78q-1(b)(3)(F).
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III. 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 with the requirements of Section 17A of the Act and the 
rules and regulations thereunder applicable.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-2002-04) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-22086 Filed 8-28-02; 8:45 am]
BILLING CODE 8010-01-U