[Federal Register Volume 69, Number 84 (Friday, April 30, 2004)]
[Notices]
[Pages 23840-23841]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-9824]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49618; File No. SR-DTC-2003-12]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Approval of Proposed Rule Change Relating to the 
Processing of Maturity Presentments in DTC's Money Market Instrument 
Program

April 26, 2004.
    On September 30, 2003, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change File No. SR-DTC-2003-12 pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposed 
rule change was published in the Federal Register on November 19, 
2003.\2\ No comment letters were received. For the reasons discussed 
below, the Commission is now 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. 48775 (November 12, 
2003), 68 FR 65333 (November 19, 2003).
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I. Description

    The purpose of this filing is to allow DTC to implement new 
procedures regarding the processing of Maturity Presentments (``MP'') 
to its Money Market Instrument (``MMI'') Program.\3\ Specifically, the 
new procedures allow DTC to implement an alignment approach in 
processing MPs and will allow an Issuing/Paying Agent (``IPA'') to 
assign processing priorities to the MMI issuers for which the IPA acts 
as agent.
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    \3\ The references to maturity presentments are intended to 
cover, in addition to MPs, other payment obligations of MMI issuers, 
such as periodic principal payments and periodic interest payments.
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    Under DTC's current procedures for the processing of MPs, early on 
the maturity date (generally around 2 a.m. eastern standard time) DTC 
initiates deliveries of the maturing paper from the accounts of 
participants having positions in the maturing paper to the MMI 
participant account of the IPA. Each MP is processed as the equivalent 
of a book-entry delivery-versus-payment transfer. As such, MPs 
``recycle'' just as any delivery would if the net debit cap or 
collateralization controls applicable to an IPA's account prevent the 
delivery from updating (i.e., being completed). Recycling MPs update 
once additional funds (e.g., from intraday settlement progress payments 
(``SPP'') or from new issuances) are credited to the IPA's account.
    With the exception of a recent DTC rule change enabling an IPA to 
target settlement credits from an SPP to a specific issuer's maturity 
presentments, MPs update on a random basis.\4\ There is no provision in 
DTC's current procedures enabling an IPA to assure that the recycling 
MPs of a specific issuer update by allocating to that issuer's MPs all 
or a specified portion of the IPA's net debit cap or by applying new 
issuance settlement credits of a specific issuer to that issuer's MPs. 
By the same token, because of the random nature of MP processing, the 
IPA is unable to prevent a portion of its net debit cap as well as any 
``excess'' or ``residual'' credits from being used to update the MPs of 
an issuer to which the IPA would prefer not to extend credit.\5\
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    \4\ Securities Exchange Act Release No. 48145 (July 9, 2003), 68 
FR 42442 (July 17, 2003)[File No. SR-DTC-2003-03](proposed rule 
change allowing DTC to modify its settlement progress payment 
procedures to allow DTC participants to direct proceeds from a 
specific SPP be used to fund a particular transaction).
    \5\ ``Excess'' credits refer to credits resulting from an 
issuer's new issuances that exceed that issuer's offsetting MPs, 
SPPs that are not targeted to a specific issuer's MPs, and any 
unallocated net debit cap. ``Residual'' credits refer to credit 
balances from new issuances and targeted SPPs that are not large 
enough to completely offset the same issuer's MPs.
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    The rule change provides for the application of new issuance 
settlement credits to the MPs of the same issuer on a best efforts 
basis and would give IPAs the option to prioritize the order and manner 
in which MPs are processed, including the option to designate an issuer 
as self-funding.\6\ Systemically, it is DTC's intention to align 
activities within the MMI system so that monies from Issuer A's credits 
are generally applied to Issuer A's MPs, subject to existing collateral 
monitor and net debit controls.
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    \6\ IPAs will be able to prioritize between issuers by using new 
Participant Terminal System (``PTS'') functions. IPAs logged into 
DTC's MMII PTS function would select ``Issuer Priority Control'' to 
access the main menu of IPA-issuer options. This new functionality 
would allow IPAs to select which issuers' MPs would recycle at the 
bottom of the ATP queue, perform an issuer control inquiry on 
selected issuers, maintain an audit trail for selected issuers, and 
inquire about MPs for selected issuers.
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    Under the alignment approach, once an IPA has incurred a net debit 
up to its applicable net debit cap (or the IPA's collateral is fully 
used), subsequent MPs presented to the IPA's account will still recycle 
as they do today. When an IPA processes a new issuance of an MMI into 
the system and the issuance transaction updates into the receiving 
participant's account, the resulting credit will then become available 
in the

[[Page 23841]]

IPA's account to fund a recycling MP. At that time, the revised MMI 
system will inquire against the queue of recycling MPs to determine if 
there is an MP for the same issuer with the same base CUSIP that could 
be processed against the available credit. Once the appropriate MP is 
identified, that MP will be taken off the recycle queue and will be 
processed into the IPA's account. As further issuances for that issuer 
occur, additional MPs for the issuer will be processed so that MP 
processing will remain in rough alignment with the related issuance 
activity. If no offsetting MP is available in the recycle queue, the 
credit would be applied to an MP from another issuer, as is the case 
today, to make use of the available liquidity in the IPA's settlement 
account.
    Although the current procedures have worked well, since the events 
of September 11, 2001, participants in DTC's MMI program have been 
working with DTC on changes that would reduce risk without introducing 
processing inefficiencies. The rule change addresses concerns that IPAs 
have raised about the random nature of DTC's process for updating 
maturity presentments by providing IPAs with the means to exercise 
greater control of their intra-day liquidity requirements and credit 
risks.

II. Discussion

    Section 17A(b)(3)(F) \7\ of the Act requires that the rules of a 
clearing agency be designed to remove impediments to and perfect the 
mechanism of a national system for prompt and accurate clearance and 
settlement of securities transactions. By implementing a targeted, 
rather than random, processing methodology that provides for a better 
correlation of MP activity with issuance activity, DTC's proposed rule 
change will enable IPAs to better manage their intraday risk and 
liquidity exposures. As such, the proposed rule change is consistent 
with DTC's statutory obligation to remove impediments to and perfect 
the mechanism of a national system for prompt and accurate clearance 
and settlement of securities transactions.
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    \7\ 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 section 17A of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\8\ that the proposed rule change (File No. SR-DTC-2003-12) be and 
hereby is approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-9824 Filed 4-29-04; 8:45 am]
BILLING CODE 8010-01-P