[Federal Register Volume 59, Number 119 (Wednesday, June 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15142]
[[Page Unknown]]
[Federal Register: June 22, 1994]
=======================================================================
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\1\15 U.S.C. 78s(b)(1) (1988).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\3\These comment letters, all of which were favorable, are cited
in Exhibit 5 to the filing.
---------------------------------------------------------------------------
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