Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change Relating to the Modification of DTC's Reclamation Procedures

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36476; File No. SR-DTC-95-16]

Self-Regulatory Organizations; The Depository Trust Company;

Notice of Filing and Order Granting Accelerated Approval of a Proposed

Rule Change Relating to the Modification of DTC's Reclamation

Procedures

November 9, 1995.

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

(``Act''),\1\ notice is hereby given that on August 23, 1995, The

Depository Trust Company (``DTC'') filed with the Securities and

Exchange Commission (``Commission'') the proposed rule

[[Page 57729]]

change (File No. SR-DTC-95-16) as described in Items I and II below,

which items have been prepared primarily by DTC. The Commission is

publishing this notice and order to solicit comments on the proposed

rule change from interested persons and to grant accelerated approval

of the proposed rule change.

\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 purpose of the proposed rule change is to modify DTC's

reclamation procedures as part of the conversion of DTC's money

settlement system to an entirely same-day funds settlement (``SDFS``)

system. The proposed rule change will affect reclamations that are

processed in both the SDFS system and the next-day funds settlement

(``NDFS'') system.\2\ The revisions include (1) extending the period

DTC will match reclaims with deliveries from the business day the

reclaim is submitted to the business day the reclaim is submitted and

the prior business day and (2) processing unmatched reclaims instead of

rejecting them.

\2\ The changes described in this notice and order apply to both

NDFS and SDFS reclaims unless specified as otherwise.

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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 that 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.\3\

\3\ The Commission has modified the text of the summaries

submitted by DTC.

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

Statutory Basis for, the Proposed Rule Change

DTC planned to implement modifications to its reclamation

procedures in the second quarter of 1995, but the implementation was

postponed until the third quarter of 1995 at the request of

participants.\4\ Some participants were concerned that the modified

reclamation procedures would be implemented at a time when the number

of reclamations might increase as a result of the implementation of the

shortened settlement time frame required under Commission Rule 15c6-1,

which became effective on June 7, 1995.\5\

\4\ A reclaim is the return of a delivery order or a payment

order by a participant.

\5\ Securities Exchange Act Release Nos. 33023 (October 6,

1993), 58 FR 52891 (adoption of Rule 15c6-1) and 34952 (November 9,

1994) 59 FR 59137 (changing the effective date of Rule 15c6-1).

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Furthermore, after additional discussions with participants, The

Cashiers Association of Wall Street, the Securities Lending Division of

the Securities Industry Association, and the New York Clearing House

Association, DTC revised the planned modifications to the reclamation

procedures as discussed below. The revisions include (1) extending the

period for matching reclaims with deliveries from the business day the

reclaim is submitted to the business day the reclaim is submitted and

the prior business day and (2) process unmatched reclaims instead of

rejecting them.

The reclaim matching period is the period in which DTC's system

will search for the original securities delivery or payment order being

reclaimed in order to determine whether the reclaim should be processed

as a matched reclaim or as an unmatched reclaim. The original version

of the revised reclaim procedures provided for a reclaim matching

period of sixty business days in certain cases. DTC later concluded

that almost all reclaims are likely to be matched using two business

days, and any complications presented by a longer period for matching

reclaims are unnecessary. Therefore, under the porposed rule change DTC

will attempt to match reclaims to transactions processed either on the

same day the reclamation is entered or on the prior business day. All

reclaims with a corresponding orginal transaction that completed on the

current or the preceding business day will be processed as ``matched

reclaims.''

Matched SDFS reclaims will not be subject to Receiver-Authorized

Delivery (``RAD'') processing, which means that the receiver of a

matched SDFS reclaim will not have the opportunity to review and

approve the reclaim before it is processed. All matched SDFS reclaims

with a settlement value less than $15 million will not be subject to

participants' risk management controls (i.e., collateral monitor and

net debit caps). Matched SDFS reclaims with a settlement value of $15

million or more will be subject to normal risk management controls.

The receiver of a matched reclaim will not be able to enter a

reclaim reversal through DTC's automated reclamation facility. If a

matched reclaim needs to be reversed, it must be entered through the

free form mode and it will be treated as an unmatched reclaim.\6\

\6\ A reclaim submitted in a free form mode refers to a reversal

submitted as a deliver order or a payment order through either

Mainframe Dual Host, Computer-to-Computer Facility, or Participant

Terminal System and identified as a reclaim by its reason code,

which returns the securities or payment order to the original

delivering party.

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Under the proposed rule change, DTC will process unmatched reclaims

subject to certain controls instead of rejecting them. Unmatched

reclaims are those that cannot be matched to a completed original

transaction. Unmatched reclaims also include partial reclaims, reclaims

received by DTC during the night cycle, and reclaims of transactions

that were processed more than one business day prior to the day on

which the reclaim is submitted. All unmatched SDFS reclaims will be

subject to RAD processing, which means the receiver of an unmatched

reclaim will have an opportunity to review and approve the reclaim

before it is processed. Unmatched SDFS reclaims also will be subject to

participants' collateral and risk management controls regardless of the

settlement value.

DTC believes the proposed rule change is consistent with the

requirements of Section 17A of the Act and the rules and regulations

thereunder because the rule proposal will facilitate the processing of

reclaims of securities deliveries and payment orders which were made

through DTC's facilities. DTC believes the proposed rule change will be

implemented consistently with the safeguarding of securities and funds

in DTC's custody and control or for which it is responsible because the

proposed rule change modifies DTC's existing reclamation procedures.

(B) Self-Regulatory Organization's Statement on Burden on Competition

DTC perceives no adverse 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 informed participants of the proposed revisions to the

reclamation procedures by a DTC Important Notice dated June 22, 1995.

No written comments have been received.

[[Page 57730]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for

Commission Action

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 and to assure the

safeguarding of securities and funds which are in the custody or

control of the clearing agency or for which it is responsible.\7\ The

Commission believes that DTC's reclamation procedures are consistent

with DTC's obligations under section 17A(b)(3)(F) to promote the prompt

and accurate clearance and settlement of securities transactions

because the proposed procedures extend the period in which reclaims are

matched and processed from one business day to two business days, which

should reduce the number of unmatched or rejected reclaims. DTC

believes that almost all reclaims will be processed within the two

business day period. In addition, under the proposal DTC will process

unmatched reclaims subject to certain risk management controls rather

than rejecting them thus further reducing the number of rejected

reclaims.

\7\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).

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The Commission also believes the proposal is consistent with DTC's

obligation to safeguard securities and funds in its custody or control

or for which it is responsible because the processing of matched

reclaims with settlement values exceeding $15 million will be subject

to DTC's risk management controls and unmatched reclaims will be

subject to DTC's risk management controls and RAD processing. Matched

reclaims with settlement values exceeding $15 million and all unmatched

reclaims that violate receiving or delivering participants' net debit

caps or collateral monitors will not be completed and will await

processing until sufficient collateral or credits are applied to the

participants' accounts. Unmatched reclaims also will be subject to RAD

processing. Therefore, receiving participants will have the opportunity

to review and approve unmatched reclaims of $15 million or more before

they are processed.

DTC has requested that the Commission find good cause for approving

the proposed rule change prior to the thirtieth day after the date of

publication of notice of the filing. The Commission finds good cause

for so approving the proposed rule change because accelerated approval

will allow DTC participants to benefit from the expanded reclamation

matching period and the processing of unmatched reclaims subject to

certain controls immediately upon implementation of the necessary

system changes. The Commission also believes that accelerated approval

will provide DTC participants with ample time to become familiar with

the new reclamation procedures prior to final implementation of SDFS on

February 22, 1996.

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 will also be available for

inspection and copying at the principal office of DTC. All submissions

should refer to the File Number SR-DTC-95-16 and should be submitted by

December 8, 1995.

It is therefore ordered, pursuant to section 19(b)(2) of the Act,

that the proposed rule change (File No. SR-DTC-95-16) be, and hereby

is, approved.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\8\

\8\ 17 CFR 200.30-3(a)(12) (1994).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-28397 Filed 11-16-95; 8:45 am]

BILLING CODE 8010-01-M