[Federal Register Volume 59, Number 179 (Friday, September 16, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-22915]
[[Page Unknown]]
[Federal Register: September 16, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34652; File No. SR-DTC-94-12] September 12, 1994.
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
Relating to DTC's Enhancement of its Repo Tracking System
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934, as amended, (``Act'')\1\ notice is hereby given that on July 27,
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.
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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 proposed rule change consists of two enhancements to DTC's Repo
Tracking System (``RTS''). The first enhancement enables a participant
of DTC to instruct DTC to eliminate that participant's obligation to
DTC for a specific payment date on a CUSIP and to eliminate the
corresponding entitlement of the participant's counterparty on that
payment date. The second enhancement replaces the single ``catchall''
Repo position for each participant with a series of Repo position memo
accounts, one for each counterparty of that participant.
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
Statutory Basis for, the Proposed Rule Change
The purpose of this proposed rule change is to provide a repo buyer
an instruction to inform DTC to inhibit the buyer's debit for a
specific income payment on a CUSIP and to inhibit the corresponding
income payment to the counterparty. DTC's current RTS procedures
include a Repo Deliver Order instruction (``DO'' with Reason Code 81),
a Repo Reclaim instruction (also Reason Code 81), and a Repo Adjustment
instruction.\2\ The first two instructions effect book-entry transfer
of securities and also instruct DTC to adjust certain accounts, called
``Repo positions,'' of participants. The third instruction, which can
be issued only by a participant that is forfeiting the right to receive
future distributions, instructs DTC to adjust Repo positions without
effecting book-entry transfers of securities.
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\2\For a detailed description of the Repo Deliver Order
instruction, Repo Reclaim instruction, and Repo Adjustment
instruction, refer to Securities Exchange Act Release No. 28579, 55
FR 45896 [File No. SR-DTC-90-10] (order approving rule changes
relating to procedures and processing repurchase transactions).
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DTC's existing procedures provide for the participant obligated for
future distributions (i.e., the repo buyer) to instruct DTC to negate
that obligation.\3\ DTC will eliminate the participant's obligation on
future distributions and the counterparty's (i.e., the repo seller)
entitlement to the future distributions upon receipt of a letter of
instruction in a prescribed form from the obligated participant. The
proposed rule change provides that DTC will eliminate the participant's
obligation on a specific distribution and the counterparty's
corresponding entitlement to the specific distribution upon receipt of
a letter of instruction in a prescribed form from the obligated
participant.
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\3\For a description of DTC's procedures, refer to Securities
Exchange Act Release No. 3135 (November 30, 1992) 57 FR 57519 [File
No. SR-DTC-92-18] (order approving rule changes relating to DTC's
enhancement to its Repo Tracking System).
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DTC will accept the instructions from two days before the
distribution payment date until 11:30 a.m. (Eastern) on the
distribution payment date. DTC will require the instructing participant
to notify the counterparty participant, and the non-participant
counterparty where applicable, of the instructions to DTC.
After DTC receives an instruction, on distribution payment date it
will process a cash adjustment offsetting the RTS entry through the
cash adjustment (``CADJ'') function on participants terminal system
(``PTS''). The repo seller will receive an unsolicited message
describing the offsetting adjustment over the PTS network. This
information also will be accessible through the CADJ inquiry
capability. The repo buyer's daily settlement statement on payment date
will show a debit automatically effected by RTS and a credit of equal
amount effected by CADJ, and the repo seller's daily settlement
statement on payment date will show an RTS credit offset by a CADJ
debit. The CADJ adjustment will be final and will not be reversed if
the repo seller fails to settle with DTC that day.\4\
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\4\DTC's Rule 9, including the amendments made to Rule 9 by SR-
DTC-90-10, authorizes this procedure.
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When DTC receives instructions to eliminate the obligated
participant's obligation with respect to a specific distribution, DTC
will implement the instructing participant's instructions without
making any determination about the parties' legal obligations to each
other. The parties to the repo transaction will then be responsible for
settling that particular distribution payment outside of RTS. DTC will
not be responsible for processing any further entries on the payment.
The repo buyer's instructions will apply only to that particular
distribution, and subsequent distributions will be tracked in RTS as
usual.
Currently, RTS has a single catchall repo position in which all of
a participant's obligations and entitlements are aggregated. The
proposed rule change will establish a separate repo position memo
account for each participant with each of its counterparties. The
purpose of the proposed rule change is to give participants easier
access to information about their RTS obligation and entitlements.
If any participant of DTC becomes insolvent or DTC ceases to act on
its behalf, DTC's existing RTS procedures will unwind all of the
participant's Repo positions to eliminate any DTC obligations to
automatically allocate future distributions created by past RTS
transactions with the terminated participant (without affecting the
courterparties' legal obligations of right with respect to the
terminated participant). Before permitting a participant to voluntarily
retire, DTC will verify that the retiring participant has closed out
all its entitlements and obligations for future distributions created
by past Repo instructions.
The proposed rule change is consistent with the requirements of the
Act, specifically with section 17A of the Act, and the rules and
regulations thereunder because it facilitates the prompt and accurate
clearance and settlement of securities transactions by giving users of
DTC's RTS the same degree of control over income on securities that
they have outside DTC and by improving RTS users' access to information
about their RTS obligations and entitlements.
(B) Self-Regulatory Organization's Statement on Burden on Competition
DTC does not believe that the proposed rule change will impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.
(C) Shelf-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received from Members, Participants or Others
DTC developed the specific payment date RTS inhibition in response
to participants' requests to add this flexibility to existing RTS.
Under the existing RTS, returns of principal on securities that return
principal in periodic payments until maturity, such as collateralized
mortgage obligations (CMOs), are paid to the repo sellers with the
exception of the final payment at maturity. The final payment at
maturity and redemption proceeds on other types of securities are paid
to the repo buyers regardless of RTS status. In addition, a repo buyer
may direct that all future distributions on a security be paid to it
rather than the seller, consistent with the Master Repurchase Agreement
of the Public Securities Association.
However, participants perceived a need for specific single payment
date RTS inhibition in cases such as when a CMO periodic payment before
the final payment includes a principal component large enough to
significantly affect the value of the collateral securing the repo.
This can happen because of the volume of mortgage prepayments. For
example, on a multi-tranche CMO a particular tranche might not be
receiving any principal payments (with those payments allocated to
earlier tranches), but then due to prepayments paying down the earlier
tranches that tranche might suddenly receive a sizeable prepayment of
principal. One participant reported incidents where the prepayment
amounted to 50% or more of the value of the tranches. DTC's review of
its records spotted numerous prepayments exceeding 10% of tranche value
with some as high as 85%. Although the tranche remains outstanding, its
value as repo collateral is dramatically decreased, and the repo buyer
is exposed to significant credit risk until the mark-to-the-market
payment is received.
While a repo buyer faced with risk because of a large intermediate
principal paydown could eliminate the risk by instructing DTC to
redirect all future distributions on the CUSIP to the repo buyer
instead of the repo seller,\5\ such action would deprive both the repo
buyer and the repo seller of the advantages of RTS for future
distributions on the CUSIP. Participants thus requested a more
restricted method of inhibiting an RTS payout. The proposed rule change
was developed after a number of conference with participants. DTC
received a written comment from the Dividend Division of the Securities
Industry Association supporting the proposed amendment to Repo
tracking.\6\
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\5\For a detailed description of redirecting future
distributions, refer to Securities Exchange Act Release No. 32395
(June 1, 1993), 58 FR 32162 [File No. SR-DTC-92-18] (order approving
rule changes relating to DTC's enhancement of its Repo Tracking
System).
\6\Letter from Stephen Hopkins, President, Dividend Division of
Securities Industry Association, to Donald Donahue, Operator and
Reorganization Officer, DTC (January 17, 1994).
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The software to support individual repo position memo accounts for
each participant-counterparty combination was developed for stock loan
income tracking, a proposed rule change that was filed separately.\7\
Once the programming was done, it was cost-effective to import it into
RTS to improve participants's access to RTS information.
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\7\Securities Exchange Act Release No. 34218 (June 15, 1994),
[File No. SR-DTC-94-07] (notice of filing of a proposed rule change
relating to the establishment of the stock loan income-tracking
system).
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(iii) of the Act and Rule 19b-4(e)(4) thereunder because it
effects a change in an existing service of DTC that does not adversely
affect the safeguarding of securities or funds in the custody or
control of DTC or for which DTC is responsible and does not
significantly affect the respective rights or obligations of DTC or its
participants. At any time within sixty days of the filing of such
proposed rule change, the Commission may summarily abrogate such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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. Sec. 552, will be available for inspection and copying in
the Commission's Public Reference Room at the address above.
Copies of such filing also will be available for inspection and
copying at the principal office of DTC. All submissions should refer to
the file Number SR-DTC-94-12 and should be submitted by October 7,
1994.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\17 CFR 200.30-3(a)(12) (1993).
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[FR Doc. 94-22915 Filed 9-15-94; 8:45 am]
BILLING CODE 8010-01-M