Self-Regulatory Organizations; the Depository Trust Company; Notice of Filing of a Proposed Rule Change Relating to Establishment if the Stock Loan Income-Tracking System

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34218; File No. SR-DTC-94-07]

June 15, 1994.

Self-Regulatory Organizations; the Depository Trust Company;

Notice of Filing of a Proposed Rule Change Relating to Establishment if

the Stock Loan Income-Tracking System

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ notice is hereby given that on May 6, 1994, 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) (1988).

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I. Self-Regulatory Organization's Statement of the Terms of

Substance of the Proposed Rule Change

The proposed rule change will establish the stock loan income-

tracking system that will eliminate the need for participants to track

income distributions on their securities that are the subject of

outstanding stock loans.

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. 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.

A. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

Participants have informed DTC that pursuant to the terms of stock

loan agreements, the borrower must promptly pass to the lender

distributions received on the borrowed securities during the period

that the loan is outstanding. Stock loan activity among participants is

a high-volume business, and there usually are many outstanding loans in

DTC's system at any one time. Because the underlying collateral

involved in these loans constantly changes, careful record keeping of

loan activity for the purpose of determining the proper allocation of

income distributions is important.

While existing DTC procedures enable participants to identify stock

loan-related deliver orders (``DOs'') through the use of reason codes,

proper allocation of income payments arising from these loans currently

rests entirely with the lending and borrowing participants because DTC

currently allocates such income to participants to whom the securities

are credited on the relevant date (i.e., generally the record date).

Lending participants recover income that DTC has allocated to borrowers

of securities either through DTC's securities payment order (``SPO'')

service or through some other mechanism upon which the participants

mutually agree.

The proposed stock loan income-tracking system will facilitate

participants' processing of income attributable to securities that are

the subject of outstanding stock loans.\2\ The proposed system will

track and monitor participants' stock loan-related DOs; will net the

share amounts by participant, CUSIP, and transaction type; and will

automatically credit income distributions to the proper participant on

income payment date. To accomplish this, DTC will create a special

stock loan memo account, which will maintain a daily net balance of

loan obligations for each stock loan counterparty of each participant.

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\2\The term stock loan is used in the securities industry to

describe loans of both debt and equity securities. DTC's proposed

system will track income attributable to both debt and equity

securities.

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Should a stock loan memo position not balance with a participant's

records (e.g., because of a DO processed with an incorrect reason

code), either the lending or borrowing participant can adjust the stock

loan memo account position through the participant terminal system

(``PTS''). Any such adjustments will be subject to affirmation by the

counterparty participant.

In addition, the proposed rule change will provide that a party

from whom distributions are due to be transferred may unilaterally halt

all future distribution transfers by giving a letter of instructions to

DTC two or more business days in advance and by giving a copy to the

counterparty. DTC will notify the counterparty participant of any

action DTC takes based on the instructions. DTC will implement the

directions contained in the letter of instructions without making any

determination about the parties' legal obligations to each other. If

the participant submitting the letter of instructions is in fact still

legally obligated, the noninstructing counterparty may seek to enforce

its right to receive future distributions outside of DTC.

If by reason of merger, acquisition, or the like, one participant's

accounts are being transferred to another participant, DTC also will

transfer the transferring participant's open stock loan positions to

the transferee participant.

Before permitting a participant to retire, DTC will verify that the

participant has closed out all its entitlements and obligations for

future distributions created by stock loans. If DTC ceases to act for a

participant, DTC will determine which other DTC participants are stock

loan counterparties and will adjust those participants' stock loan memo

account positions in order to balance the elimination of DTC's

obligations and rights to or from the terminated participant. The

counterparties' legal obligations or rights with respect to the

terminated participant will not be changed DTC's action. However,

because DTC will cease allocating distributions attributable to the

terminated participant's transactions, remaining counterparty

participants will have to make arrangements outside DTC to receive or

pay future distributions on any stock loans with the terminated

participant that remains open after DTC has ceased to act.

Before the stock loan income-tracking system is implemented, DTC

will provide a means for participants to load DTC's stock loan data

base with information about currently outstanding stock loans.

Deliveries made after implementation with a stock loan reason code will

automatically be added to this data base.

The proposed rule change is consistent with the requirements of

Section 17A of the Act and the rules and regulations thereunder because

it is an automated procedure that will eliminate inefficient income

processing by stock loan counterparties. The proposed rule change also

is consistent with DTC's obligation under Section 17A to safeguard

securities and funds in its custody or control or for which it is

responsible because the proposal provides reports and inquiry functions

to participants for their review and reconciliation and provides for

the termination of future DTC obligations upon a participants's

voluntary or involuntary termination of its membership.

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

DTC's plan to investigate the automation of stock loan income

processing was announced to participants in the 1991 DTC Program Agenda

which described a stock loan tracking system, similar to DTC's

repurchase agreement tracking, that would monitor participant stock

loan positions and automatically credit the lender instead of the

borrower with dividends or interest due. The system was also noted in

the 1992 and 1993 Program Agendas. DTC held a series of meetings with

approximately ten broker and bank participants to solicit their

comments on plans for the stock loan income-tracking system. These

comments were incorporated into the final design of the proposed

system.

Written comments received on the 1991 Program Agenda included

comments from thirteen participants and others on stock loan income-

tracking system. (No comments were received on either the 1992 or 1993

Program Agenda entry.)\3\ Two of those comments raised issues to which

responses follow. In its November 27, 1991, comment letter, the

Securities Industry Association asked whether DTC could assist

participants with the monitoring of substitute payments by a special

report. In response, DTC notes that in the proposed system income

payments will be coded as stock loan payments on DTC's reports to

participants, and the participant will have the ability to identify

stock loan income payments on electronic files. In its December 18,

1991, comment letter, the New York Clearing House recommended that DTC

develop access to the stock loan income-tracking service through DTC's

computer-to-computer facility and mainframe dual host as well as

through PTS. In response, DTC notes that the reason codes on DOs that

will trigger stock loan income-tracking are accepted by all three means

of DO input.

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\3\These comment letters, all of which were favorable, are cited

in Exhibit 5 to the filing.

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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 published its reasons for so

finding or (ii) as to which the self-regulatory organization consents,

the Commission will:

(A) By order approve the proposed rule change or

(B) Institute proceedings to determine whether the proposed rule

change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

Copies of the submission, all subsequent amendments, all written

statement, 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 the above-referenced

self-regulatory organization. All submission should refer to File No.

SR-DTC-94-07 and should be submitted by July 13, 1994.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-15142 Filed 6-21-94; 8:45 am]

BILLING CODE 8010-01-M