[Federal Register Volume 69, Number 137 (Monday, July 19, 2004)]
[Notices]
[Pages 43042-43043]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16327]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50006; File No. SR-DTC-2004-03]


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

July 12, 2004.
    On March 18, 2004, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change File No. SR-DTC-2004-03 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 May 20, 2004.\2\ 
No comment letters were

[[Page 43043]]

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. 49709 (May 14, 2004), 69 
FR 29155 (May 20, 2004).
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I. Description

    The purpose of this filing is to allow DTC to modify its procedures 
relating to how deliveries are processed in DTC's Money Market 
Instrument (``MMI'') Program. Under DTC's current procedures applicable 
to MMI transactions, early on the maturity date (generally around 2 
a.m.)\3\ DTC initiates deliveries of 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 
transactions are processed as the equivalent of valued delivery orders 
(``DO''). The IPA can ``refuse to pay'' for maturing paper of a 
particular issuer by communicating that intention to DTC before 3 p.m. 
on the maturity date. DTC will inform all participants of the IPA's 
refusal to pay by broadcast message. DTC will then, among other things, 
reverse any completed maturity presentments by recrediting them to 
presenting participants.
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    \3\ All times are Eastern Standard Time.
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    The MMI procedures also provide for participants that are receivers 
of new MMI issuance DOs (e.g., custodian banks) to have until 3:30 p.m. 
to reclaim those DOs back to the IPA.\4\ Since the reclaim can be 
``matched'' with a DO processed on the same day, the reclaim is 
permitted to bypass the Receiver Authorized Delivery (``RAD'') system 
and DTC's risk management controls (e.g., net debit cap and collateral 
monitor) if the value of the DO is less than $15 million.\5\
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    \4\ Reclaims, or reclamations, are the means by which receivers 
can return erroneous deliveries.
    \5\ RAD is a control mechanism that allows participants to 
review transactions prior to completion of processing in order to 
limit participants' exposure from misdirected or erroneously entered 
DOs. The bypassing of DTC's risk management controls is designed to 
address industry concern that the receiver not be ``stuck'' with a 
delivery it should not have received because of DTC's risk 
management controls.
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    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. IPAs have raised concerns about potentially 
having to fund an issuer's maturity at a level higher than anticipated 
at the time IPA decides not to exercise a ``refusal to pay'' because 
the IPA fails to receive the settlement credits associated with new 
issuance DOs that are reclaimed after 3 p.m. As a result, IPAs are 
forced to make ``refusal to pay'' decisions based on incomplete data 
and are subject to increased exposure to individual issuers.
    The rule change addresses these concerns by subjecting reclamations 
of all new MMI issuance DOs received after 2:30 p.m. to RAD controls 
and treating them as original transactions subject to DTC's normal risk 
management controls.\6\ To reduce the potential impact of the change in 
the processing of reclaims received after 2:30 p.m., the rule change 
provides receivers of new issuance DOs with the option of having those 
deliveries made subject to RAD at 2 p.m. thereby giving these 
participants electing this option one-half hour to consider whether to 
accept or reject the new issuance DOs.\7\ While the cutoff for the 
Issuing/Paying agent (``IPA'') to exercise its ``refusal to pay'' 
option will remain at 3 p.m., the rule change clarifies that since 
under certain circumstances DTC may extend the 2 p.m. and 2:30 p.m. 
cutoffs referred to above, DTC may also extend the 3 p.m. cutoff.
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    \6\ As a result, reclamations made after 2:30 p.m. will not be 
eligible for processing during the exclusive reclaim period (3:20 
pm. to 3:30 p.m.) and may not be ``re-reclaimed'' by the receiver.
    \7\ All new issuance DOs processed after 2:00 p.m. will 
automatically be subject to RAD unless the participant instructs DTC 
to the contrary. DTC participants may opt-out of forced RAD by 
completing the ``Forced MMI RAD Election Form'' and submitting it to 
their DTC relationship manager. The election form is available on 
DTC's website (www.dtc.org) as Attachment A to DTC Important Notice 
5337. A participant that, at first, elected to opt out of 
the forced RAD functionality may opt back in by submitting a new 
completed election form to its DTC relationship manager.
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II. Discussion

    Section 17A(b)(3)(F)\8\ 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 moving up the cutoff for 
reclamations for new MMI issuance DOs, DTC's proposed rule change will 
enable IPAs to make more informed decisions on whether to provide 
credit for a particular issuer and therefore 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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    \8\ 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,\9\ that the proposed rule change (File No. SR-DTC-2004-03) be and 
hereby is approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-16327 Filed 7-16-04; 8:45 am]
BILLING CODE 8010-01-P