[Federal Register Volume 68, Number 115 (Monday, June 16, 2003)]
[Notices]
[Pages 35744-35745]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-15112]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48007; File No. SR-DTC-2003-07]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving Proposed Rule Change To Establish a Transaction Look-
Ahead Process

June 10, 2003.

I. Introduction

    On April 9, 2003, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') proposed rule 
change SR-DTC-2003-07 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 28, 2003.\2\ For the reasons discussed 
below, the Commission is approving the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 47709 (April 21, 2003), 
68 FR 22432.
---------------------------------------------------------------------------

II. Description

    The purpose of the proposed rule change is to establish a 
transaction look-ahead process (``Look-Ahead'') which will reduce 
transaction blockage by applying the net amount of offsetting receive 
and deliver transactions in the same security rather than the gross 
amount of the receive transaction to a participant's net debit cap.\3\
---------------------------------------------------------------------------

    \3\ The net debit cap, based upon the activity of the 
participant, is the maximum amount a participant may owe for 
transactions. Currently, the maximum allowable net debit cap is $1.8 
billion per participant.
---------------------------------------------------------------------------

    DTC's system controls prevent the processing of a transaction 
(i.e., cause the transaction to recycle) when the deliverer has 
insufficient position or insufficient collateral, the receiver has 
insufficient collateral, or the processing of the transaction would 
cause the receiver's net debit cap to be breached. For purposes of 
these controls, each transaction is assessed individually without 
regard to offsetting transactions that might resolve any system control 
issue presented by the initial transaction itself.
    In principle, a long series of back-to-back transactions could be 
blocked as a result of the first transaction failing. For example, if a 
transaction fails because of insufficient position, insufficient 
collateral, or breaching of the net debit cap, then a second 
transaction could fail because it is dependent on the first delivery to 
establish the necessary securities position, then a third could fail, 
and so on. This does in fact occur quite often in the money market 
instrument (``MMI'') market because of the large values involved when 
issuing/paying agents sell new commercial paper to broker-dealers who 
then make deliveries to custodians, who in turn have maturities of 
commercial paper awaiting acceptance by the issuing/paying agents.
    DTC plans to introduce Look-Ahead in June. Look-Ahead will reduce 
transaction blockage by applying the net amount of offsetting receive 
and deliver transactions in the same security rather than the gross 
amount of the receive transaction to a participant's net debit cap. 
Look-Ahead will identify receive transactions pending due to a net 
debit cap insufficiency and will link them to offsetting delivery 
transactions in the same security pending for a quantity deficiency. 
DTC will calculate the net effect of the offsetting transactions on the 
three participants involved, and if the net of the transactions results 
in positive risk management controls in all three accounts, the 
transactions will be completed. Initially, this capability will be 
available only for muni and corporate bonds, including MMIs where it is 
expected to have the widest application.
    As a result of Look-Ahead, the number of recycling transactions 
should be reduced which could also reduce the need for intraday funding 
by participants. Participants will not be required to make systemic 
changes and can continue to process their deliveries as they do today.

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\ The Commission 
finds that DTC's proposed rule change is consistent with this 
requirement because by applying the net amount of offsetting receive 
and deliver transactions in the same security rather than the gross 
amount of the receive transaction to a participant's net debit cap, the 
proposed rule change should reduce the number of blocked transactions 
at DTC which will promote the prompt and accurate clearance and 
settlement of securities transactions.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

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.

[[Page 35745]]

    It Is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-2003-07) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\5\
---------------------------------------------------------------------------

    \5\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary
[FR Doc. 03-15112 Filed 6-13-03; 8:45 am]
BILLING CODE 8010-01-M