Federal Register / Vol. 62, No. 203 / Tuesday, October 21, 1997 / Notices 54663

14 17 CFR 200.30–3(a)(12).

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

2Securities Exchange Act Release No. 38868 (July

23, 1997), 62 FR 40872.

3According to DCC, the market for repo

transactions in mortgage-backed securities is

estimated to be approximately 25% to 40% of the

size of of the market for repo transactions in

Treasury securities. DCC also states that this

estimate suggests that the outstanding notional size

of the market is between $250 billion to $400

billion with daily turnover at 10% of the notional

size. For a description of DCC’s procedures

regarding the clearance and settlement of repos on

Treasury securities, refer to Securities Exchange Act

Release No. 36367 (October 13, 1997), 60 FR 54095

[File No. SR–DGOC–94–06] (order approving

implementation of new procedures allowing for the

clearance and settlement of repos on Treasury

Securities).

4The Procedures refer to mortgage-backed

securities as ‘‘mortgage securities.’’

5For the definitions of these terms, refer to

Schedule A of DCC’s filing which is attached as

Exhibit A.

6Sample indices include: (1) The CD rate, which

is the weekly average of secondary market interest

rates on six month negotiable certificates of deposit

as published by the Federal Reserve Board in its

Statistical Release H. 15 (519), Selected Interest

Rates; (ii) the LIBOR rate, which is a rate which

banks charge others banks for U.S. dollar deposits

outside the United States for a specified period; (iii)

the 11th District cost of funds index, which is the

index made available monthly by the Federal Home

Loan Bank Board of the cost of funds to members

of the Federal Home Loan Bank 11th District; and

(iv) the Treasury index, which is the weekly average

yield of the benchmark Treasury securities as

published by the Federal Reserve Bank. A sample

ARMS could bear interest at LIBOR plus 50 basis

points with LIBOR adjusting periodically as

specified by the terms of the security.

7These transactions are referred to the Procedures

as novated repos. Securities Exchange Act Release

No. 39065 (September 12, 1997), 62 FR 49547 [File

No. SR–DCC–97–03] (order approving proposed

rule change).

provide that calculations of exposure

limit and MPSE are to be determined on

an aggregate system-wide basis and that

liquidation of a participant’s positions

will be conducted through one account.

By ensuring that Delta has access to all

of a participant’s assets held at Delta,

the proposed rule change assists Delta

in the safeguarding of securities and

funds which are in Delta’s control or for

which it is responsible.

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 Section 17A of the Act and

the rules and regulations thereunder.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act, the proposed

rule change (File No. SR–DCC–97–04)

be and hereby is approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.14

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–27756 Filed 10–20–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39241; File No. SR–DCC–

97–06]

Self-Regulatory Organizations; Delta

Clearing Corp.; Order Approving a

Proposed Rule Change Relating to the

Clearance and Settlement of MortgageBacked Securities Repurchase

Agreements

October 14, 1997.

On April 7, 1997, the Delta Clearing

Corp. (‘‘DCC’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’) the proposed rule

change (File No. SR–DCC–97–06)

pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’).1 On May 12, May 29, June 18,

and July 9, 1997, DCC amended the

proposed rule change. Notice of the

proposal was published in the Federal

Register on July 30, 1997.2 No comment

letters were received. For the reasons

discussed below, the Commission is

approving the proposed rule change.

I. Description

The proposal amends DCC’s

Procedures for the Clearing of Securities

and Financial Instrument Transactions

(‘‘Procedures’’) to allow DCC to clear

and settle repurchase agreements and

reverse repurchase agreements (‘‘repos’’)

in which the underlying collateral is

book-entry, mortgage-based securities

issued by the Federal National Mortgage

Association (‘‘FNMA’’) or the Federal

Home Loan Mortgage Corporation

(‘‘FHLMC’’). Currently, DCC provides

clearance and settlement services for

repos in which the underlying collateral

is a U.S. Treasury security.3

A. Definition of Mortgage-Backed

Security

Under the rule change, a mortgagebacked security 4 is defined as a bookentry security which is directly issued

by FNMA or FHLMC and whose

underlying value is represented by a

pool of mortgages accumulated by

FNMA or FHLMC through its mortgage

origination program and which is

designed to receive principal payments

using a predetermined principal balance

schedule. In addition, the following

securities are excluded from the

definition of mortgage-backed securities:

(i) Securities which are issued in

registered or bearer form and therefore

cannot be transferred through the Board

of Governors of the Federal Reserve

System’s FedWire communication

system, (ii) securities which are not

issued or guaranteed directly by FNMA

or FHLMC, (iii) securities for which the

underlying assets are mortgage-backed

securities rather than a pool of

mortgages, and (iv) notional, interest

only, principal only, accrual, and partial

accrual securities and floaters and

inverse floaters.5

A mortgage-backed security may be

either a fixed rate mortgage-backed

security or an adjustable rate mortgagebacked security. A fixed rate mortgagebacked security is defined as a

mortgage-backed security whose coupon

rate is a fixed rate of interest. An

adjustable rate mortgage-based security

(‘‘ARMS’’) is defined as a mortgagebacked security whose coupon rate is a

variable rate of interest consisting of an

index and a spread to such index and

whose underlying collateral consists of

adjustable rate mortgages with indices

and spreads that parallel those of the

ARMS.6

B. The Clearing Process

Mortgage-backed securities repo

transactions involve two settlement

dates. The first settlement date (‘‘ondate’’) is the date on which one

participant (‘‘selling participant’’)

delivers participant’’) in exchange for

the delivery of cash (‘‘delivery money’’)

by the purchasing participants to the

selling participant. The second

settlement date (‘‘off-date’’) is the date

on which the purchasing participant

returns to the selling participant the

mortgage-backed securities delivered on

the on-date in exchange for the return

by the selling participant of the delivery

money together with interest based

upon a rate agreed to by the participants

(‘‘repo rate’’). DCC generally clears both

the on-date and off-date portion of a

repo transaction. However, there may be

certain repo transactions where DCC

clears only the off-date portion of the

transaction.7

1. Execution and Reporting of Trades

Mortgage-backed securities repo

transactions to be cleared by DCC may

be entered into directly between the two

participants to a transaction and

reported to DCC by the participants, or

they may be entered into between two

participants through the facilities of an

authorized broker and reported to DCC

by the authorized broker. The terms of

the mortgage-backed securities repo

transactions will be agreed to by the

participants prior to the submission of
54664 Federal Register / Vol. 62, No. 203 / Tuesday, October 21, 1997 / Notices

8The trade reports for each mortgage-backed

securities repo transaction must set forth the

identity of the parties to the transaction, including

which party is the selling participant and which

party is the purchasing participant; the CUSIP

number or numbers for the mortgage-backed

securities being delivered in connection with the

repo transaction; the par amount of the securities

being delivered; the delivery money being delivered

by the purchasing participant; the trade date and

time; the on-date and off-date for the transaction;

and any details relating to any rights of substitution,

including the number of rights of substitution to be

permitted and any restrictions on rights of

substitution.

9A participant’s exposure limit is the limit

prescribed for each participant by DCC based on the

incremental margin due to DCC by the participant.

trade reports to DCC.8 There is an

existing practice among mortgagebacked security traders in which the

parties to a transaction may agree to a

trade amount subject to the right of the

delivering party to adjust the amount of

the trade by over-delivering mortgagebacked security collateral within a

specified percentage of the amount

initially agreed to by the parties (i.e.,

variance). DCC requires that such

adjustments be made prior to the

submission of trade reports to DCC and

be reflected in the trade reports

submitted to DCC.

Mortgage-backed securities repo

transactions with an on-date later than

the trade date will need to be reported

to DCC prior to 6:00 p.m. on the trade

date. Mortgage-backed securities repo

transactions with an on-date on the

trade date will need to be reported to

DCC: (i) Within one-half hour after the

transaction occurs if the transaction

occurs prior to 1:30 p.m.; (ii) within five

minutes after the transaction occurs if

the transaction occurs between 1:30

p.m. and 2:15 p.m.; and (iii) as soon as

possible but in no event later than five

minutes after the transaction if the

transaction occurs after 2:15 p.m.

With respect to mortgage-backed

securities repo transactions entered into

directly between two participants, each

participant will forward a trade report to

DCC. If DCC does not receive a trade

report from one of the participants to

the transaction, DCC will contact that

participant within one half-hour of

receipt of the trade report to confirm the

terms of the trade reported by the other

participant. When DCC receives trade

reports from both participants, it will

match the two trade reports. In order for

a transaction to be accepted for

clearance, the details of the trade reports

for the transaction must agree. If the

details of the trade reports do not match,

DCC will contact the parties regarding

the transaction. Matching of mortgagebacked securities repo transactions will

be done continuously throughout the

day and at the close of each trading day

at 2:30 p.m. All trade reports received

through an authorized broker will be

confirmed by DCC either orally or via

facsimile with the participants to the

transaction.

2. Acceptance of Trades

DCC will be deemed to have accepted

a transaction for clearance when DCC

has matched and verified all the

information on the trade reports.

However, DCC may reject any

transaction if it causes a participant to

exceed its exposure limit 9 of if the

participant has been suspended from

DCC’s clearing system. If a transaction is

accepted by DCC, DCC will interpose

itself as the counterparty to both sides

of the transaction. Therefore, for any

mortgage-backed securities repo

transactions, DCC will assume the

position of the purchasing participant

with respect to the selling participant

and assume the position of the selling

participant with respect to the

purchasing participant. Prior to 8:00

a.m. each business day, participants will

receive a written activity report

indicating such participant’s

transactions which were accepted by

DCC the previous business day and

indicating all transactions due to settle

that day.

3. Clearing and Failures to Deliver or

Receive

The details of each transaction

accepted by DCC will be sent to DCC’s

clearing bank. Each participant will

need to maintain a bank account in one

or more correspondent banks for margin

and trade settlements. Because the

mortgage-backed securities which DCC

proposes to clear repos must be

maintained in book-entry accounts at

Federal Reserve Banks and will be

delivered through the FedWire, the

selected correspondent bank must be a

depository institution with access to the

FedWire.

DCC has established delivery cut-off

times. For example, the selling

participant on the on-date of a mortgagebacked securities repo transactions and

the purchasing participant on the offdate of a mortgage-backed securities

repo transaction must deliver mortgagebacked securities to the clearing bank

against payment no later than one

minute prior to the close of the FedWire

system for delivery of securities on the

settlement date. The clearing bank will

redeliver such securities to the

purchasing participant on the on-date or

the selling participant on the off-date.

If the delivering participant fails to

deliver mortgage-backed securities on

the settlement date by one minute prior

to the close of the FedWire system or

the receiving participant does not accept

all of the mortgage-backed securities on

the settlement date by one half-hour

after the close of the FedWire system,

DCC has the option to buy-in or sell-out

the securities with the cost of buy-in or

sell-out being charged to the defaulting

participant. If DCC effects a buy-in or

sell-out, DCC will give the defaulting

participant written notice of the buy-in

or sell-out which will describe the

security, quantity, and price.

4. Netting

As a general rule, repo transactions in

mortgage-backed securities will be

cleared on a delivery versus payment

basis. Therefore, the delivery of

mortgage-backed securities will be

required on settlement date. However, if

a participant has a repo and reverse repo

agreement with the same underlying

collateral and the same on-date or offdate, as applicable, the participant’s

payment and delivery obligations with

respect to such agreements will be

netted. Payment obligations for such

transactions including repo interest will

also be netted.

Section 2207 of DCC’s Procedures

requires the purchasing participant to

forward coupon interest with respect to

U.S. Treasury securities or mortgagebacked securities to DCC absent an

agreement of the parties to the contrary,

and upon receipt, DCC will forward the

coupon interest to the selling

participant. In the event that repo

interest on a repo transaction is due

from the selling participant on the same

day that coupon interest with respect to

the same transaction is required to be

paid by the purchasing participant, such

payments will be netted. If repo interest

has accrued but is not yet due with

respect to a transaction, payments of

coupon interest which are received by

the purchasing participant will not be

netted against repo interest; instead, the

coupon interest will be forwarded to

DCC and then to the selling participant.

Unlike U.S. Treasury securities,

mortgage-backed securities involve

principal payments as well as payments

of coupon interest. DCC’s Procedures

provide that principal payments, like

coupon payments, will be forwarded by

the purchasing participant upon receipt

to DCC and then forward by DCC to the

selling participant. In the event that a

principal payment on a mortgagebacked security is received by the

purchasing participant on the same date

on which a payment of repo interest is

due from the selling participant with

respect to a repo transaction on such

mortgage-backed security, the principal
Federal Register / Vol. 62, No. 203 / Tuesday, October 21, 1997 / Notices 54665

10Section 2201 of DCC’s Procedures.

11The MPSE is designed to limit the amount of

liability that DCC is exposed to from the positions

of all of its participants. Pursuant to DCC’s rules,

MPSE cannot exceed one third of the amount of

DCC’s credit enhancement facility. For a complete

discussion of MPSE, refer to Securities Exchange

Act Release No. 38646 (May 15, 1997), 62 FR 28085

(order granting approval of proposed rule change

relating to definitions of trading limits and MPSE).

12For U.S. Treasury securities, the standard

deviation is based upon the volatility during the

100 day period ending February 19, 1980, or any

subsequent period of 100 days in which volatility

was higher than the 100 day period ending

February 19, 1980.

13Letter from Stephen K. Lynner, President, DCC

(July 16, 1997).

14See supra note 4.

15See Letter from Stephen K. Lynner, President,

DCC (September 15, 1997).

payment and the repo interest payments

will be netted.

C. Margin

DCC has adapted its existing

margining methodology for U.S.

Treasury security repos to incorporate

exposures from mortgage-backed

securities repo transactions. Under

DCC’s current margin system,10 every

participant is obligated to maintain a

margin account for the benefit of DCC at

DCC’s clearing bank. Margin will be

calculated every business day using a

generally available source of mortgagebacked security prices. With respect to

term repos, margin will be based on a

mark-to-market amount and an amount

based on an estimated shortfall from the

liquidation of positions on the next day.

For overnight repos, margin will be

based on an intraday mark-to-market

amount.

D. Exposure Limits and MPSE for

Mortgage-Backed Securities

The definition of maximum potential

system exposure (‘‘MPSE’’) is revised to

provide that with respect to positions in

repo transactions, the MPSE for the

DCC’s clearance and settlement system

shall include net exposure in mortgagebacked securities adjusted to reflect a

hypothetical adverse movement in the

aggregate of six standard deviations in

market prices of mortgage-backed

securities.11 The standard deviation is

based upon the volatility represented by

the greatest of the following three

amounts: (i) The standard deviation of

equivalent U.S. Treasury securities for

the period of 100 consecutive trading

days ending on February 19, 1980, (ii)

the standard deviation of equivalent

U.S. Treasury securities for any

subsequent period of 100 consecutive

trading days, and (iii) the standard

deviation of mortgage-backed securities

during any period of 100 consecutive

trading days subsequent to January 1,

1990.12

For purposes of clauses (i) and (ii)

above, DCC will look to U.S. Treasury

securities which are generally accepted

equivalents to the applicable mortgagebacked securities. For example, DCC

will to treat repo transaction in

mortgage-backed securities where the

underlying collateral are FNMA and

FHLMC securities with original stated

maturities of thirty years as equivalent

to ten year U.S. Treasury securities.

When the underlying collateral are

FNMA and FHLMC securities with

original stated maturities of fifteen

years, DCC will treat these repo

transactions as equivalent to five year

U.S. Treasury securities. Finally, DCC

will treat repo transaction in ARMS as

equivalent to one year U.S. Treasury

securities.13

E. Substitution of Mortgage-Backed

Securities as Underlying Collateral

The proposed rule change establishes

rights of substitution for both repos on

U.S. Treasury securities and for

mortgage-backed securities. The right of

a selling participant to substitute

underlying collateral is subject to

various conditions and restrictions. For

repo transactions in U.S. Treasury

securities, the following requirements

apply: (i) A Treasury note or a Treasury

bond may be substituted for another

Treasury note or Treasury bond; (ii) a

Treasury bill may be substituted for a

Treasury bill; and (iii) a Treasury note

or Treasury bond may not be substituted

for a Treasury bill, and a Treasury bill

may not be substituted for a Treasury

note or Treasury bond. For mortgagebacked securities repo transactions, the

following requirements apply: a fixed

rate mortgage-backed security may be

substituted for a fixed or floating rate

mortgage-backed security, but a floating

rate mortgage-backed security may only

be substituted for a floating rate

mortgage-backed security.

In addition to the foregoing

requirements, substitution is subject to

any restrictions on substitution which

have been agreed to by the parties at the

time of the trade, including restrictions

on the number of rights of substitution.

The right of substitution is also subject

to the agreement of DCC and the

purchasing participant that the fair

market value of the collateral which the

selling participant proposes to provide

in place of the existing underlying

collateral for a transaction is at least

equal to the fair market value of the

existing underlying collateral for such

transaction. In order to obtain the

consent of the purchasing participant,

DCC will notify the purchasing

participant of all details of the proposed

substitution prior to 12:15 p.m. New

York time on the day of the proposed

substitution.

II. Discussion

Section 17A(b)(3)(F) of the Act and

the rules and regulations thereunder

require that the rules of a clearing

agency be designed to promote the

prompt and accurate clearance and

settlement of securities transactions and

to remove impediments to and perfect

the mechanism of a national system for

the prompt and accurate clearance and

settlement of securities transactions.

The Commission believes that DCC’s

proposed clearance system will assist in

the development of the national

clearance and settlement system by

providing a clearance mechanism for

transactions that are currently settled

outside the facilities of a registered

clearing agency. These trades may

benefit from DCC’s margining and other

risk reduction procedures which should

decrease the likelihood of failure to

settle. Furthermore, the number of

securities movements may be reduced

because of DCC’s netting of transactions.

This should result in increased

efficiency and promote the prompt and

accurate clearance and settlement of

mortgage-backed repo transactions. The

Commission therefore believes that the

proposed rule change is consistent with

the Act.

Because of the novelty and

complexity of clearing repos on U.S.

Treasury securities, the Commission

initially limited the average principal

amount of outstanding repos on U.S.

Treasury securities in DCC’s system

over a ten day moving period to $45

billion.14 With this limitation, the

Commission found that DCC has the

capacity to facilitate the prompt and

accurate clearance and settlement of

repo transactions in U.S. Treasury

securities in a safe and sound manner.

Since the Commission’s approval, DCC

has implemented several enhancements

to its clearance and settlement

procedures.15 Nevertheless, the

Commission believes that due to the

novelty and complexity of mortgagebacked repo transactions that, initially,

the average principal amount of

outstanding repos and reverse repos in

mortgage-backed securities in DCC’s

system over a ten day moving period

may reach but not exceed $45 billion. If,

as the volume of DCC’s clearance and

settlement of mortgage-backed repo

transactions nears $45 billion, DCC

desires to exceed the $45 billion

limitation, it must file a proposed a rule
54666 Federal Register / Vol. 62, No. 203 / Tuesday, October 21, 1997 / Notices

16 17 CFR 200.30–3(a)(12).

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

2The Commission has modified the text of the

summaries prepared by DTC.

3For a complete description of PEX, refer to

Securities Exchange Act Release No. 28123 (June

13, 1990), 55 FR 25188 [File No. SR–DTC–89–21]

(order approving proposed rule change establishing

PEX).

4 DTC attached a detailed description of the

method by which LOFFs will be added to PEX as

Exhibit B to its filing, which is available for review

and copying at the Commission’s Public Reference

Room and through DTC.

5 12 CFR 220.

6 DTC has informed the Commission that

participants initially will be able to exchange

LOFFs through PEX only by way of PTS. At some

later point, participants will be able to exchange

LOFFs by way of mainframe dual host or computerto-computer facility.

7Although LOFF notices will not generate tickets,

receiving brokers will be able to view LOFF notices

through PTS.

change pursuant to Section 19(b)(2) of

the Act. The proposed rule change may

request either an increase in the volume

limitation or removal of all volume

limitations.

III. Conclusion

On the basis of the foregoing, the

Commission finds that the proposal is

consistent with the requirements of the

Act and in particular with the

requirements of Section 17A of the Act

and the rules and regulations

thereunder.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act, that the

proposed rule change (File No. SR–

DCC–97–06) be and hereby is approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.16

Margaret H. McFarland,

Deputy Secretary.

Exhibit A—Schedule A to Delta

Clearing Corp; Procedures for the

Clearing of Securities and Financial

Instrument Transactions

Excluded Classes of Mortgage

Securities

Notional—A class having no principal

balance and bearing interest on the

related notional principal balance.

Interest Only—A class that receives

some or all of the interest payments

made on the underlying mortgage or

other assets of a series trust and little or

no principal. Interest only classes have

either a nominal or a notional principal

balance.

Principal Only—A class that does not

bear interest and is entitled to receive

only payments of principal.

Accrual—A class that accretes the

amount of accrued interest otherwise

distributable on such class, which

amount will be added as principal to the

principal balance of such class on each

applicable distribution date. Such

accretion may continue until some

specified event has occurred or until

such accrual class is retired.

Partial Accrual—A class that accretes

a portion of the amount of accrued

interest thereon, which amount will be

added to the principal balance of such

class on each applicable distribution

date, with the remainder of such

accrued interest to be distributed

currently as interest on such class. Such

accretion may continue until a specified

event has occurred or until such partial

accrual class is retired.

Floater—A class other than an

adjustable rate mortgage security with

an interest rate that resets periodically

based upon a designated index and that

varies directly with changes in such

index.

Inverse Floater—A class other than an

adjustable rate mortgage security with

an interest rate that resets periodically

based upon a designated index and that

varies inversely with changes in such

index.

[FR Doc. 97–27818 Filed 10–20–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–3932; File No. SR–DTC–

97–18]

Self-Regulatory Organizations; The

Depository Trust Company; Notice of

Filing and Immediate Effectiveness of

Proposed Rule Change Regarding the

Participant Exchange Service

October 10, 1997.

Pursuant to Section 19(b)(1) 1 of the

Securities Exchange Act of 1934

(‘‘Act’’), notice is hereby given that on

August 15, 1997, 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 from interested

persons on the proposed rule change.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The proposed rule change will

expand DTC’s participant exchange

service system (‘‘PEX’’) to add an

additional notice, letters of free funds

(‘‘LOFFs’’), to the menu of notices

currently available.

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.2

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

PEX is an on-line system that enables

DTC participants to use DTC’s

automated network to send and to

respond to various notices required by

other self-regulatory organizations.3 The

purpose of the proposed rule change is

to automate the exchange of LOFFs by

adding LOFFs to the menu of notices

that can be transmitted through PEX.4

LOFFs are notices exchanged between

the receiving and delivering brokers of

two party customer trades. Currently,

LOFFs are sent in hardcopy (i.e., on

paper), usually through the mail or by

facsimile. The delivering broker sends a

LOFF to the receiving broker requesting

the receiving broker to verify that the

customer has sufficient funds to settle

the trade pursuant to Regulation T

under the Act.5 The receiving broker

confirms the existence of the funds and

returns the LOFF to the delivering

broker.

Under the proposed rule change, a

delivering broker will be able to send

LOFF notices by entering the notice

information into DTC’s participant

terminal system (‘‘PTS’’).6 LOFF notices

that do not contain any errors will be

stored in a DTC database in open status

pending a response from the receiving

broker. Each LOFF sent using PEX will

be assigned a unique control number.

Open notices will be available for

browsing and reply through PTS.

Receiving brokers will be able to use

PEX to respond to each LOFF notice by

its control number.7 Upon receiving a

response, DTC will match its control

number to that of an open LOFF notice

and mark that notice as either (i) having

sufficient funds, (ii) not having

sufficient funds, (iii) being rejected, or

(iv) having a prime broker relationship

with the delivery broker.

All open LOFF notices will be kept on

a DTC database for ninety days from the