[Federal Register Volume 62, Number 43 (Wednesday, March 5, 1997)]
[Notices]
[Pages 10104-10105]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5370]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38340; File No. SR-DTC-22]


Self-Regulatory Organization's; The Depository Trust Company; 
Notice of Filing of a Proposed Rule Change To Amend DTC's Charge Back 
and Return of Funds Procedures

February 26, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 4, 1996, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-DTC-96-22) 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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change amends DTC's charge back and return of 
funds policies (``Policy'') \2\ to shorten from ten business days to 
one business day the period within which a paying agent can request 
that DTC return principal and income (``P&I'') payments that have been 
allocated to participants.
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    \2\ A copy of the Policy marked to show the specific changes to 
DTC's procedures is attached as Exhibit C to DTC's proposed rule 
change which is available for inspection and copying at the 
Commission's Public Reference Room or through DTC.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filings 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.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The Policy \4\ currently authorizes DTC to return P&I payments to 
paying agents after the funds have been credited to the accounts of DTC 
participants, which is commonly referred to as a ``clawback,'' if the 
paying agent notifies DTC in writing within ten business days of the 
payable date that: (i) The issuer has failed to provide the paying 
agent with sufficient funds to cover the payments; or (ii) the issuer 
has become bankrupt.\5\ The proposed rule change will reduce the period 
within which a paying agent can request DTC to return funds to such 
paying agent from ten business days to one business day.\6\ 
Furthermore, the Policy provides that if an agent requests the return 
of a P&I payment more than ten business days after a payable date, DTC 
will work with the agent and participate to resolve the matter. 
However, DTC will not return the allocated payments without the 
participant's consent.
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    \4\ For a complete description of the procedures relating to the 
Policy, refer to Securities Exchange Act Release Nos. 23219 (May 8, 
1986), 51 FR 17845 [SR-DTC-03] (notice of filing and immediate 
effectiveness on a temporary basis of a proposed rule change); 23686 
(October 7, 1986), 51 FR 37104 [SR-DTC-86-4] (order permanently 
approving proposed rule change); 26070 (September 9, 1988) 53 FR 
36142 [SR-DTC-88-17] (notice of filing and immediate effectiveness 
of proposed rule change clarifying that charge back proceedings 
apply to DTC's same-day funds settlement system and next-day funds 
settlement system); and 35452 (March 7, 1995), 60 FR 13743, [SR-DTC-
95-03] (notice of filing and immediate effectiveness of proposed 
rule change excluding money market instrument programs from DTC's 
charge back and return of funds procedures).
    \5\ The Policy also allows DTC to return previously credited 
payments upon written request from a paying agent within ten 
business days of the payable date due to an error by the paying 
agent. The proposed rule change does not alter this position of the 
Policy.
    \6\ Under the proposed rule change, although the time within 
which a paying agent can request a reversal of allocated funds will 
be reduced from ten business days to one business day following 
payable date, the actual reversal may take up to two or three 
business days after the payable date. For example, if a paying agent 
requests a reversal from DTC late in the day of the first business 
day after the payable (``P+1''), DTC would likely notify its 
participants' on the morning of the following business day 
(``P+2''). In the interest of fairness and pursuant to DTC's 
procedures, DTC must notify all affected participants one business 
day prior to the date on which DTC enters the reversal into its 
participant's daily settlement accounts. Accordingly, the actual 
reversal will not occur until P+3. Telephone conversation between 
Larry E. Thompson, Deputy General Counsel and Senior Vice President, 
DTC; Mark Steffensen, Special Counsel, Division of Market Regulation 
(``Division''), Commission; and Jeffrey Mooney, Attorney, Division, 
Commission (December 18, 1996).
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    PSA The Bond Market Trade Association (``PSA'') has expressed 
concern with the current policy and the associated risk of loss placed 
on DTC participants in the event a payment is returned to a paying 
agent.\7\ In response, DTC convened a joint working group of

[[Page 10105]]

paying agents, PSA representatives, and other interested parties.\8\ In 
October 1996, the working group concluded that DTC should reduce the 
period within which DTC may return funds to paying agent's from ten 
business days to one business day.
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    \7\ Letter from Heather L. Ruth, President, PSA to William F. 
Jaenike, Chairman of the Board and Chief Executive Officer, DTC 
(August 16, 1996).
    \8\ The working group is composed of representatives from the 
Corporate Trust Advisory Board of the American Bankers Association, 
the Bank Depository User Group, the Corporate Trust Advisory 
Committee of the Corporate Fiduciaries Association of New York City, 
the New York Clearing House--Securities Committee, PSA, the 
Securities Industry Association, and DTC.
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    DTC concurs with the working group's recommendation and proposes to 
amend the Policy accordingly. Although the current Policy may encourage 
paying agents to make more timely payments to DTC by offering them more 
flexibility with regard to the return of funds if an issuer defaults, 
DTC believes that it has received only one default-related return of 
funds request since the Policy was promulgated in 1986.\9\ Due to the 
Policy's infrequent use, DTC proposes to finalize P&I payments sooner 
and minimize the uncertainty and risk of loss that the Policy currently 
places on DTC's participants.\10\ DTC proposes to implement the 
proposed rule change for all P&I payments made after April 30, 1997.
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    \9\ In September 1996, a paying agent requested the return of a 
single payment $30,000 due to nonpayment by an issuer.
    \10\ DTC has notified its participants, paying agents, trustees, 
and issuers of the proposed rule change in DTC Important Notice B# 
2068-96 (November 26, 1996) and DTC Important Notice B# 2069-96 
(November 26, 1996), which are attached as Exhibit B to DTC's 
proposed rule change.
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    DTC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act \11\ and the rules and 
regulations thereunder because the proposal promotes the prompt and 
accurate clearance and settlement of transactions in securities. In 
addition, DTC believes that the proposed rule change will result in 
increased protection to investors by providing finality of payment 
within a substantially shorter period of time.
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    \11\ 15 U.S.C. 78q-1.
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(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

    The proposed rule change has been endorsed by the PSA and was 
recommended by a special industry working group comprised of PSA 
representatives, paying agents, and other interested parties.

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, NW., Washington, DC 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, NW., Washington, 
DC 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-96-22 and should be submitted by March 
26, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-5370 Filed 3-4-97; 8:45 am]
BILLING CODE 8010-01-M