Self-Regulatory Organizations; the Philadelphia Stock Exchange, Inc., Order Approving Proposed Rule Change Relating to Implementation of a Three-Day Settlement Standard

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35503; File No. SR-Phlx-94-55]

Self-Regulatory Organizations; the Philadelphia Stock Exchange,

Inc., Order Approving Proposed Rule Change Relating to Implementation

of a Three-Day Settlement Standard

March 16, 1995.

On November 14, 1994, the Philadelphia Stock Exchange, Inc.,

(``Phlx'') filed a proposed rule change (File No. SR-Phlx-94-55) with

the Securities and Exchange Commission (``Commission'') pursuant to

Section 19(b) of the Securities Exchange Act of 1934 (``Act'').\1\

Notice of the proposal was published in the Federal Register on January

9, 1995 to solicit comments from interested persons.\2\ The Commission

received one comment letter.\3\ As discussed below, this order approves

the proposed rule change.

\1\15 U.S.C. 78s(b) (1988).

\2\Securities Exchange Act Release No. 35176 (December 29,

1994), 60 FR 2417.

\3\Letter from Dr. Keith B. Jarrett, President, Thomson Trading

Services, Inc., to Jonathan G. Katz, Secretary, Commission (January

30, 1995).

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I. Description

In October 1993, the Commission adopted Rule 15c6-1 under the

Act\4\ which establishes three business days after the trade date

(``T+3''), instead of five business days (``T+5''), as the standard

settlement cycle for most securities transactions. The rule will become

effective June 7, 1995.\5\ Several of the Phlx's rules are interrelated

with the T+5 settlement time frame. The [[Page 15319]] purpose of the

proposed rule change is to amend Phlx's rules to be consistent with a

T+3 settlement standard for securities transactions.

\4\17 CFR 240.15c6-1 (1994).

\5\Securities Exchange Act Release Nos. 33023 (October 6, 1993),

58 FR 52891 (order adopting Rule 15c6-1) and 34952 (November 9,

1994), 59 FR 59137 (changing effective date from June 1, 1995, to

June 7, 1995).

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Rule 113(b), 114(b), and 115(b) specify the delivery date for

regular way transactions in stocks, bonds, and convertible bonds,

respectively. The time frames contained in each rule is being shortened

to reflect a T+3 settlement environment. Similarly, Rules 113(c),

114(c), and 115(b) are being amended to provide that a seller's option

cannot require delivery in less than four days. Rule 114(b) also is

being amended to provide that bonds sold for delayed delivery must be

delivered on T+5. Under the amendments to rule 117 (a) and (b), a

seller's notice of next day delivery of securities sold pursuant to a

seller's option or regular way delayed delivery may not be given until

the third day following the date of the contract.

As amended, Rule 291 requires, unless otherwise agreed, securities

loaned to be delivered on the third business day following the day of

the loan, As amended, Rule 294 requires the return of securities loaned

on the third full business day following the date the notice for the

return is given.

Under Rule 362, the contract price of bonds dealt in ``and

interest'' and made regular way delayed delivery will include interest

computed on up to but not including T+3. As amended, Rule 371 (a) and

(b) provides that there will be a cash adjustment for coupons paid

during the pendency of delayed delivery contracts and seller's option

contracts in bonds dealt in ``and interest'' made prior to the third

business day preceding the interest payment date and delivered on or

after the interest payment date.

Rule 431 is being amended to require transactions in stock to be

ex-dividend or ex-rights on the second business day preceding the

record date. With regard to a record date on other than a business day,

the transaction will be ex-dividend or ex-right on the third preceding

business day. Under Rule 432, the ex-warrant period will begin on the

second business day preceding the date of expiration of warrants. When

warrant expiration occurs on a day other than a business day, the ex-

warrant period will begin on the third business day preceding

expiration date.

Rule 823 is being amended to require all transactions effected on

Phlx to be settled pursuant to the three day delivery plan which will

require regular way transactions to settle on the third business day

after the transaction. Rule 825(b) is being amended to state that the

ex-dividend period for transactions in stock for which there exists a

transfer facility in Philadelphia begins on the second business day

preceding the record date. In the event the record date is not a

business day, the ex-dividend date will be the third preceding business

day. Under Rule 825(c), regular way transactions for stocks with

transfer facilities only outside Philadelphia will be ex-dividend on

the second business day preceding the equivalent Philadelphia record

date.

The Phlx has requested that the proposed rule change become

effective on the same date as Rule 15c6-1. Rule 15c6-1 will become

effective on June 7, 1995.\6\

\6\The transition from five day settlement to three day

settlement will occur over a four day period. Friday, June 2, will

be the last trading day with five business day settlement. Monday,

June 5, and Tuesday, June 6, will be trading days with four business

day settlement. Wednesday, June 7, will be the first trading day

with three business day settlement. As a result, trades from June 2

and June 5 will settle on Friday, June 9. Trades from June 6 and

June 7 will settle on Monday, June 12.

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II. Written Comment

The Commission received one comment letter from Thomson Trading

Services, Inc. (``Thomson'') suggesting that additional rule changes

may be necessary to implement T+3 settlement.\7\ Thomson believes that

the Phlx should amend Rule 274(b) which requires the use of the

facilities of a registered securities depository for confirmation and

acknowledgement of all payment on delivery transactions in depository-

eligible securities when the member organization, its agent, the

customer, and its agent are participants in a securities depository.

\7\Supra note 3.

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III. Discussion

The Commission believes the proposal is consistent with the

requirements of Section 6 of the Act.\8\ Specifically, Section 6(b)(5)

states that the rules of the exchange must be designed to foster

cooperation and coordination with persons engaged in regulating,

clearing, settling, and processing information. The Phlx rules and

other self-regulatory organizations' rules provide a standard time

frame for settlement of securities transactions. On June 7, 1995, the

new settlement cycle of T+3 will be established as mandated by the

Commission's Rule 15c6-1. As a result, the Phlx's current rules

providing for a T+5 settlement cycle will be inconsistent with the

Commission's rule. This proposal will amend the Phlx's rules to

harmonize them with the Commission's Rule 15c6-1 and a T+3 settlement

cycle.

\8\15 U.S.C. 78f (1988).

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In addition, the Commission believes that the proposed rule change

is consistent with Section 6(b)(5) of the Act in that it protects

investors and the public interest by reducing risks to clearing

corporations, their members, and public investors which are inherent in

settling securities transactions. The reduction of the time period for

settlement of most securities transactions will correspondingly

decrease the number of unsettled trades in the clearance and settlement

system at any given time. Thus fewer unsettled trades will be subject

to credit and market risk, and there will be less time between trade

execution and settlement for the value of those trades to

deteriorate.\9\

\9\The Commission release adopting Rule 15c6-1 stated that ``the

value of securities positions can change suddenly causing a market

participant to default on unsettled positions. Because the markets

are interwoven through common members, default at one clearing

corporation or by a major market participant or end-user could

trigger additional failures resulting in risk to the national

clearance and settlement system.'' Securities Exchange Act Release

No. 33023 (October 6, 1993), 58 FR 52891.

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While the Thomson letter supports the Phlx's efforts to shorten the

settlement cycle for securities transactions, Thomson believes that the

Phlx should amend Rule 274(b), which requires the use of the facilities

of a registered securities depository for the confirmation and

acknowledgement of all payment on delivery transactions in depository-

eligible securities when the member organization, its agent, the

customer, and its agent are participants in a securities depository.

The Commission believes that the issue raised by the Thomson letter

need not be resolved prior to the approval of the proposed rule change.

Discussions regarding Thomson's concerns are underway among the

Commission, Thomson, and DTC. DTC has submitted a rule filing that will

establish a linkage between DTC and vendors such as Thomson.\10\ The

Commission intends to consider whether a self-regulatory organization

rule should continue to preclude use of private vendor systems for

confirmation/affirmation services in DVP/RVP trades. However, if the

Phlx's proposed rule change being approved by this order is not

approved prior to the June 7, 1995, effective date of Rule 15c6-1, the

Phlx rules will conflict with Commission Rule 15c6-1.

\10\Securities Exchange Act Release No. 35332 (February 3,

1995), 60 FR 8102 (notice of filing of proposed rule change)

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The Thomson letter suggests that approval of the proposed rule

change without amendments to Rule 274(b) raises competitive concerns.

Under the Act, the Commission's responsibility is [[Page 15320]] to

balance the perceived anticompetitive effects of a regulatory policy or

decision against the purpose of the Act that would be advanced by the

policy or decisions and the costs associated therewith. The Commission

notes that any anticompetitive effects pointed to by Thomson are not

caused by the proposed rule change being approved by this order but

rather by an existing Phlx rule. The Commission is reviewing Thomson's

claim but does not believe that approval of this proposal will itself

create any burdens on competition. Moreover, as discussed above, the

rule advances fundamental purposes under the Act, namely the efficient

clearance and settlement of securities.

IV. Conclusion

For the reasons stated above, the Commission finds that Phlx's

proposal is consistent with Section 6 of the Act.\11\

\11\15 U.S.C. 78f (1988).

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It Is Therefore Ordered, pursuant to Section 19(b)(2) of the

Act,\12\ that the proposed rule change (File No. SR-Phlx-94-55) be and

hereby is approved and will become effective June 7, 1995.

\12\15 U.S.C. 78s(b)(2) (1988).

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For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\13\

\13\17 CFR 200.30(a)(12) (1994).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-7137 Filed 3-22-95; 8:45 am]

BILLING CODE 8010-01-M