Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of a Proposed Rule Change Relating to the Reversal of Reclamations by Issuing and Paying Agents

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38007; File No. SR-DTC-96-21]

Self-Regulatory Organizations; The Depository Trust Company;

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

Reclamations by Issuing and Paying Agents

December 2, 1996.

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

(``Act''),\1\ notice is hereby given that on November 5, 1996, The

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

Exchange Commission (``Commission'') the proposed rule change (File No.

SR-DTC-96-21) 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 purpose of the proposed rule change is to put in place a new

service which will allow for Issuing and Paying Agents (``IPA'') to

direct DTC to reverse all matched reclamations for a particular program

made after 3:00 p.m. which are attributable to issuer failure.

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.\2\

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\2\ 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 filed the proposed rule change because it has identified a

substantial potential risk to IPAs in connection with money market

instruments (``MMIs'') which DTC wants to eliminate as soon as

possible. The risk is brought about by the interplay between two

different services available to DTC participants which were developed

in order to serve two different functions.

Under DTC's MMI program, IPAs act as agents for MMI issuers. As

such, IPAs issue MMIs on the issuers' behalf, and DTC automatically

processes income and maturity payments to the IPAs' accounts. Both the

credits generated from the issuances and the debits generated from

income and maturity payments are netted into the IPA's DTC settlement

obligation. An IPA may issue MMIs and make periodic payments of income,

redemption, or other proceeds on MMIs upon presentment throughout the

day while also being able to reverse transactions for a particular

program in the event of the ``issuer failure'' by giving notice to DTC

by 3:00 p.m. of the IPA's ``refusal to pay.''

This reversal mechanism is designed to make the MMI market more

efficient by allowing IPAs to make issuances and payments with respect

to a particular MMI program throughout the day while still affording

the IPAs the protection of being able to reverse these transactions

until 3:00 p.m. in the event that it becomes apparent that the issuer

will be unable to honor its obligations under the particular program

due to insolvency of default under a particular program.\3\ If this

mechanism were not in place, IPAs would have to wait until they had

received funds from the issuers before making any payments or be at

risk for the funds they had distributed throughout the day. In such a

case, credits for payments on the MMIs would not be available to be

used throughout the day by participants having positions in the MMIs as

is currently the case.\4\

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\3\ The ``refusal to pay'' deadline was set at 3:00 p.m. by the

industry during the period when deliveries of MMIs were made

physically.

\4\ Currently, throughout the processing day a participant is

allowed to use all payment credits it has received that day in

connection with MMI programs, other than the single largest net

payment, in order to meet its net debit cap and collateral monitor

requirements.

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In anticipation of the conversion to the same day funds settlement

(``SDFS''), DTC implemented a new processing schedule. As part of the

new processing schedule, DTC introduced an extended reclamation period

that allowed participants to process reclaims of deliveries until 3:30

p.m.\5\ The reclamation procedure is designed to provide the recipient

of a delivery with the opportunity to reject the delivery.

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\5\ The end of the reclamation period is approximately 3:30, but

this deadline may vary slightly depending upon the timing of the

release of other DTC controls.

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The potential risk to IPAs comes about in the situation where

information regarding an issuer's insolvency becomes available after

the 3:00 p.m. refusal to pay deadline but before the end of the

reclamation period at approximately 3:30 p.m. Under these

circumstances, participants could unwind through the reclamation

process issuances previously made by the IPA. However, the IPA would be

unable to unwind income and maturity payments since these transactions

can only be unwound through the refusal to pay procedure. As a result,

an IPA's settlement balance would be debited by an amount equal to the

reclaimed issuances. Depending upon the settlement procedures in place

between the issuer and the IPA, this situation could result in a direct

exposure to the IPA.

The proposed rule change is designed to restore the IPA's refusal

to pay opportunity with respect to reclamations made to its account

between 3:00 p.m. and the end of the reclamation period. The proposed

rule change will allow IPAs to instruct DTC to reverse those reclaims

that are processed after 3:00 p.m. in the event that the IPA believes

the reclaims are associated with the issuer's insolvency. The IPA will

be able to request the reversal of these reclamations by giving DTC

oral notice within fifteen minutes after the end of the reclamation

period. Subsequently, the IPA will be required to provide DTC within

thirty minutes after the end of the reclamation period with written

notice on the basis of which DTC could treat the issuer as insolvent

under its rules.\6\ A copy of the

[[Page 64775]]

IPAs written notice would then be provided to all participants.

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\6\ DTC's Rule 12 which governs insolvency provides: ``An issuer

of MMI securities subject of any transaction in the MMI Program

shall be treated by [DTC] in all respects as insolvent in the event

that the issuer is determined to be insolvent by any agency which

regulates such issuer or in the event of the entry of a decree or

order by a court having jurisdiction in the premises adjudging the

issuer a bankrupt or insolvent, or approving as properly filed a

petition seeking reorganization, arrangement, adjustment or

composition of or in respect of the issuer under the Federal

Bankruptcy Code or any other applicable Federal or State law or

appointing a receiver, liquidator, assignee, trustee, sequester (or

other similar official) of the issuer or of any substantial part of

its property, or ordering the winding up or liquidation of its

affairs or the institution by the issuer of proceedings to be

adjudicated a bankrupt or insolvent or the consent by it to the

institution of bankruptcy or insolvency proceedings against it, or

the filing by it of a petition or answer or consent seeking

reorganization or relief under the Federal Bankruptcy Code or any

other applicable Federal or State law, or the consent by it to the

filing of any such petition or to the appointment of a receiver,

liquidator, assignee, trustee, sequester (or other similar official)

of the issuer or of any substantial part of its property, or the

admission by it in writing of its inability to pay its debts

generally as they become due, or the taking of corporate action by

the issuer in furtherance of any such action and, notwithstanding

the foregoing, upon the filing by the issuer of a petition seeking

reorganization, arrangement, adjustment or composition of or in

respect of the issuer under the Federal Bankruptcy Code or any other

applicable Federal or State law, or the filing against it or any

such petition, at any time [DTC] receives notice thereof, either

written or oral and from whatsoever source and, without awaiting any

further adjudication, consent thereto, acceptance or approval of

such filing, determines to its reasonable satisfaction that such has

occurred.''

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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 eliminate risks to IPAs

present in the existing system and will therefore promote a more

efficient marketplace. DTC believes that this new service will not

affect the safeguarding of securities and funds in DTC's custody or

control or for which it is responsible.

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

DTC does not believe that the proposed rule change will impact or

impose a burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received From Members, Participants, or Others

The substance of the proposed rule change has been presented to the

Public Securities Association MMI Task Force, which has given its

support to providing a new service to IPAs. No written comments have

been solicited or received from DTC participants. 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 DTC consents, the Commission will:

(a) By order approve such 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, N.W., Washington, D.C. 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 Room, 450 Fifth Street, N.W., Washington,

D.C. 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-96-21 and

should be submitted by December 27, 1996.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\7\

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\7\ 17 CFR 200.30-3(a)(12) (1996).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96-31077 Filed 12-5-96; 8:45 am]

BILLING CODE 8010-01-M