[Federal Register Volume 60, Number 84 (Tuesday, May 2, 1995)]
[Notices]
[Pages 21575-21577]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10790]
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[[Page 21576]]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35649; File No. SR-DTC-94-19]
Self-Regulatory Organizations; The Depository Trust Company;
Order Approving a Proposed Rule Change Regarding Implementation of New
Guidelines Regarding Principal and Income Payments in a Same-Day Funds
Environment
April 26, 1995.
On December 5, 1994, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change (File No. SR-DTC-94-19) under Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'').\1\ As filed, the proposal
consisted of changes to the depository-eligibility requirements for
securities issues to require that principal and income distributions be
made in same-day funds and provided for the use of a ``Blanket Letter
of Representations'' in lieu of individual letters of representations
for each securities issue.\2\ Notice of the proposal was published in
the Federal Register on February 14, 1995.\3\ On April 3, 1995, DTC
amended the proposed rule change by requesting that the Commission
withdraw from consideration the portion of the proposed rule change
that related to implementing the use of a Blanket Letter of
Representations for making securities depository-eligible.\4\ The
Commission received one comment letter opposing a part of DTC's
proposal.\5\ For the reasons discussed below, the Commission is
approving the proposed rule change.
\1\15 U.S.C. 78s(b)(1) (1988).
\2\Same-day funds, which are also known as ``Fed funds,'' are
immediately available for redelivery on the day of receipt.
\3\Securities Exchange Act Release No. 35342 (February 8, 1995),
60 FR 8434.
\4\Letter from Piku Thakkar, Assistant Counsel, DTC, to Peter
Geraghty, Senior Counsel, Division of Market Regulation, Commission
(April 3, 1995).
\5\Letter from Terrence Hassett, President, North East
Securities Transfer Association, Inc. (``NESTA''), to Jonathan Katz,
Secretary, Commission (March 16, 1995). NESTA opposes the part of
DTC's proposal that would deny depository eligibility to issues
brought to market by agents who fail to make principal and income
payments in same-day funds. In response, DTC stated that agents will
not be penalized for isolated incidents of a failure to pay DTC in
same-day funds on payment date and that the sanction of denying
depository eligibility to an issue would be a last resort mechanism
used in very limited circumstances. Furthermore, DTC indicated that
it will make efforts to accommodate the needs of issuers and agents
and will work closely with them in converting to a same-day funds
payment standard for principal and income payments. Telephone
conversation between Piku Thakkar, Assistant Counsel, DTC and
Katherine Horan, Attorney, Commission (April 11, 1995).
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I. Description
A. Background
In 1988, the Group of Thirty\6\ determined that international
agreement on a set of practices and standards for clearance and
settlement systems was desirable. Accordingly, a Working Committee
appointed by the Group of Thirty issued a report in March 1989
containing nine recommendations to reduce risk, improve efficiency, and
reduce costs in the world's clearance and settlement systems.\7\ One
recommendation called for making payments associated with the
settlement of securities transactions consistent across instruments and
markets by adopting a same-day funds payment convention. The U.S.
Working Committee of the Group of Thirty\8\ concluded that payment for
settlements among financial intermediaries and between financial
intermediaries and their institutional customers should be made using
same-day funds. In particular, the U.S. Working Committee concluded
that payments for dividends, interest, redemptions, and
reorganizations, commonly referred to as ``principal and income
payments,'' also should be made using same-day funds.
\6\The Group of Thirty, established in 1978, is an
international, nonprofit organization charged with broadening the
understanding of international economic and financial issues,
exploring the international repercussions of decisions taken in
public and private sectors, and examining the choices available to
policymakers.
\7\Group of Thirty, Clearance and Settlement Systems in the
World's Securities Markets, New York and London, March 1989.
\8\The U.S. Working Committee of the Group of Thirty is an
organization made up of representatives from broker-dealers, banks,
and financial intermediaries charged with analyzing the existing
clearance and settlement systems in the U.S. in light of the Group
of Thirty's nine recommendations.
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Thereafter, the U.S. Working Committee encouraged DTC and the
National Securities Clearing Corporation (``NSCC'') to focus on
developing a same-day funds settlement system for U.S. trades in equity
securities and corporate and municipal debt. Accordingly, in June 1992,
DTC and NSCC published a memorandum entitled ``A Same-Day Funds
Settlement System Proposal for Industry Evaluation.'' In response to
the memorandum, issues were raised regarding the appropriate handling
of principal and income payments in a same-day funds settlement
environment. Accordingly, a task force comprised of issuers, trustees,
paying agents, depositories, depository participants and their
customers, and the respective representative organizations for these
various groups was formed (``Same-Day Funds Task Force'' or ``Task
Force'') to explore ways that principal and income payments could be
made to a depository for pass through to participants in same-day funds
on payment date.\9\
\9\In the current next-day funds settlement (``NDFS'') system,
paying agents make payments in same-day funds to depositories for
corporate income payments (e.g., interest and dividends) and
reorganization actions (e.g., tenders and exchanges) for the
majority of issues. Although corporate and municipal redemption
payments and municipal income payments may be paid in next-day
funds, generally paying agents make these payments in same-day funds
on payment date to ensure their timely arrival at the depositories.
DTC invests these funds overnight and rebates to the paying agents
interest on the deposits as compensation for holding the funds
overnight.
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The Task Force determined that converting to a same-day funds
settlement system for principle and income payments would have a
significant impact on industry participants, including a change in the
timing of payments to depositories by paying agents. Paying agents will
have to make payments to depositories earlier in the day so that
depositories can settle with their participants before the Fedwire
closes.
The Task Force recommended that several principles be adopted in
order to convert to a same-day funds settlement system for principal
and income payments. As discussed below, DTC proposes to incorporate
the relevant provisions in its operational arrangements memorandum.
B. Proposed Rule Change
DTC's operational arrangements that are necessary for securities
issues to be eligible for DTC services are designed to maximize the
number of issues that can be made depository-eligible while ensuring
orderly processing and timely payments to participants. DTC's
experience demonstrates that when issuers, underwriters, and their
counsel are aware of DTC's requirements those requirements can be met
almost without exception.\10\ The purpose of the rule change is to
incorporate in DTC's operational arrangements memorandum
[[Page 21577]] principles for the processing of principal and income
payments in same-day funds.\11\ Towards this end, the operational
arrangements memorandum incorporates the relevant provisions of the
``Standards for Principal and Income Payments Guidelines'' established
by the U.S. Working Committee of the Group of Thirty. Pursuant to this
rule change, the relevant provisions of these principles, as set forth
below, will become a part of DTC's income and reorganization/redemption
payments standards.
\10\During 1993, a total of 392,000 new issues were made
eligible for DTC's services. This was 99.94% of all new issues
submitted to DTC's Underwriting Department for eligibility
determinations. These figures include equity, corporate debt,
municipal debt, and U.S. Government and Agency securities. In the
unusual circumstance where the processing characteristics of a new
issue that is being structured would not meet DTC's operational
arrangements, if contacted early enough in the planning process DTC
staff often is able to assist in suggesting restructuring
alternatives that would permit the issue to be made depository
eligible.
\11\DTC's operational arrangements were published in a June 1987
memorandum and were updated in both June 1988 and February 1992. For
a complete description of the operational arrangements memorandum,
refer to Securities Exchange Act Release No. 24818 (August 19,
1987), 52 FR 31833 [File No. SR-DTC-87-10] (order approving the
implementation of DTC's operational arrangements for the eligibility
of security issues), and Securities Exchange Act Release No. 30625
(April 30, 1992), 57 FR 18534 [File No. SR-DTC-92-06] (order
approving modifications to DTC's operational arrangements).
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First, all new issues are required to meet depository-eligibility
requirements and must be structured so that all payments to
depositories of principal and income are made in same-day funds on
payment date by 2:30 p.m. Eastern Standard time.
Second, for all depository-eligible issues already outstanding,
paying agents must remit to DTC all principal and income payments in
same-day funds on payment date by 2:30 p.m. Eastern Standard time
according to existing arrangements between the paying agent and DTC.
Recognizing that paying agents for certain issues may need to modify
their current business arrangements to account for this change, DTC
will continue through July 31, 1996, to pay the same rebates it now
pays to paying agents that pay municipal interest and municipal and
corporate redemptions to DTC in same-day funds on payment date.\12\
\12\Supra note 9.
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However, once DTC converts to same-day funds settlement for all
security transactions, DTC will make all payments to its participants
on payment date in same-day funds. As a result, DTC will not have funds
resulting from overnight investing available to rebate to paying
agents. Recognizing that participants will benefit by receiving all
their expected payments in same-day funds on payment date DTC will
charge participants in proportion to their holdings in each issue for
which a rebate applies the funds needed to pay the rebate from the date
of the conversion to same-day funds settlement for all security
transactions until July 31, 1996. With respect to payments made on or
after August 1, 1996, these charges to participants will no longer be
required. The rebate will not be applied to payments of corporate
interest, dividends, and reorganizations for which the paying agents
already pay DTC in same-day funds on payment date and which currently
are not subject to interest earnings rebates. However, DTC will require
that 100% of corporate interest, dividend, and reorganization payments
to paid to DTC in same-day funds on payment date by 2:30 p.m. Eastern
Standard time.
Third, DTC will require paying agents to provide DTC with the CUSIP
numbers for each issue for which payment is being sent as well as the
dollar amount of the payment for each issue no later than noon Eastern
Standard time on the payment date. Notification of payment details
should be made using automated communications.
Finally, if an issuer or agent continually fails to make payment as
called for in DTC's guidelines, DTC may decide to systematically
prevent the allocation of such payments to participants on the payable
date. Eventually, DTC also may elect to deny depository-eligibility to
issues brought to market by noncomplying issuers or agents.
II. Discussion
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 foster
cooperation and coordination with persons engaged in the clearance and
settlement of securities transactions. The Commission believes that the
proposed rule change is consistent with Section 17A(b)(3)(F) because it
provides a framework for the conversion of principal and income
payments to same-day funds. Making principal and income payments in
same-day funds is consistent with the goal of prompt and accurate
clearance and settlement because it will give participants same-day
access to their funds. Requiring paying agents to provide DTC with the
corresponding CUSIP numbers for each issue for which payment is being
made will make the processing of such payments more accurate. The
Commission also believes that the guidelines for converting to a same-
day funds payment standard for principal and interest payments are
consistent with the goal of fostering cooperation and coordination
among persons engaged in the clearance and settlement of securities
transactions. Specifically, in order to allow paying agents time to
modify their current business practices, DTC will continue to pay
rebates through July 31, 1996, to those paying agents currently making
payments to DTC in same-day funds on payment date for municipal
interest and municipal and corporate redemption payments.
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
in particular with Section 17A of the Act and the rules and regulations
thereunder.
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (File No. SR-DTC-94-19) be, and
hereby is, approved.
\13\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.\14\
\14\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-10790 Filed 5-1-95; 8:45 am]
BILLING CODE 8010-01-M