Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of a Proposed Rule Change Relating to the Pledge of Government Securities as Collateral

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33602; File No. SR-DTC-94-02]

Self-Regulatory Organizations; The Depository Trust Company;

Notice of Filing of a Proposed Rule Change Relating to the Pledge of

Government Securities as Collateral

February 8, 1994.

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

(``Act''),\1\ notice is hereby given that on January 26, 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

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

DTC is filing the proposed rule change to provide for a procedure

to allow participants to pledge government securities to DTC to cover

outstanding Next-Day Funds Settlement (``NDFS'') short positions.

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 and

discussed any comments it received on 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 the

Statutory Basis for, the Proposed Rule Change

(a) The purpose of the proposed rule change is to provide an

alternate means for participants to satisfy their obligation to provide

DTC with a short position penalty. When a participant incurs a short

position, DTC now imposes a cash penalty of 130% of the market value of

the short securities. The cash DTC receives is invested and earns

interest. The interest earned is returned to participants at periodic

intervals during the year as part of the general refund.\2\ Under the

proposed rule change, interest earned on pledged securities will be

automatically credited to participants' accounts (as is currently the

procedure for all pledged securities positions). The proposed rule

change thereby will provide participants with a more efficient method

to receive interest income. By allowing participants to pledge

government securities to DTC to replace cash deposits, the proposed

rule change will improve participants' cash management abilities.

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\2\The general refund allocates back to participants excess

operating revenues and interest earned calculated by activity

levels.

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Under the proposal, participants could pledge government securities

residing in their DTC ``free'' accounts to DTC as collateral to replace

cash deposits to cover outstanding NDFS short positions. Only short

positions aged thirty calendar days or more will be considered eligible

for collateralizaion. Initially, only DTC-eligible\3\ U.S. Treasury

issues (Treasury bills, bonds, and notes) which are fully guaranteed by

the U.S. government will be accepted as collateral.

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\3\``Eligible securities'' refers to government securities that

are eligible for DTC services. DTC may hold such securities through

its account at the Federal Reserve Bank of New York.

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Each day, DTC will inform each participant of its short positions

aged thirty days or older as of the close of the previous business day.

The participant could then enter a request over DTC's Participant

Terminal System (``PTS'') to pledge government securities to a newly

established DTC pledge account in order to have its short charges

reversed. The pledge system will verify that the securities being

pledged are eligible for collateralization before the pledge is allowed

to update into DTC's system.

The value of participants' securities short positions and pledged

securities will be marked to the market on a daily basis, and short

charges will be adjusted accordingly. Participants may pledge

additional securities to cover an increase in their aggregate short

charges or request a release of pledged securities which are no longer

needed to cover their aggregate short charges.

A participant may request a release of collateral. In that

instance, the securities would be returned to the ``free'' account at

the end of the processing day, and the short charges would be

reinstated the following day. The participant may also substitute

pledged securities. After inputting the new pledge and the release

request, the participant would contact the Reconciliation Department

prior to 12:30 p.m. to request a release approval.

If pledged securities are redeemed, DTC will hold the redemption

proceeds in a suspense account until the pledged securities are

released and moved to the participant's ``free'' account. At that time,

the redemption proceeds are credited to participants' settlement

accounts. If pledged government securities are called for redemption,

the participant must release the pledge and move the securities to a

``free'' account. Interest earned on pledged securities will be

automatically credited to participants' accounts.

(b) The proposal is consistent with the requirements of Section 17A

the Act and the rules and regulations thereunder applicable to DTC

since the proposed rule change will give DTC participants greater

flexibility in collateralizing their short positions. At the same time

the proposal will continue to provide DTC with high quality collateral

for short positions.

B. Self-Regulatory Organization's Statement on Burden on Competition

DTC does not believe that the proposed rule change imposes any

burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received From Members, Participants, or Others

DTC's Short Position Advisory Committee, composed of members

representing DTC participants, has reviewed the proposed rule change

and supports its approval. No official comments have been solicited or

received. DTC will notify the Commission of any written comments

received by DTC.

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 publishes 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

statements 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 also will be available for

inspection and copying at the principal office of the above-mentioned

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

SR-DTC-94-2 and should be submitted by March 8, 1994.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-3483 Filed 2-14-94; 8:45 am]

BILLING CODE 8010-01-M