27360 Federal Register / Vol. 60, No. 99 / Tuesday, May 23, 1995 / Notices

1 15 U.S.C. 78s(b)(1) (1988).

2Securities Exchange Act Release No. 35613

(April 17, 1995), 60 FR 19971.

3The term ‘‘next-day funds’’ refers to payment by

means of certified checks that are for value on the

following day.

4The term ‘‘same-day funds’’ refers to payment in

funds that are immediately available and generally

are transferred by electronic means.

5For a description of the SDFS system, refer to

Securities Exchange Act Release Nos. 24689 (July 9,

1987), 52 FR 26613 [File No. SR–DTC–87–04] (order

granting temporary approval to DTC’s SDFS

settlement service); 26051 (August 31, 1988), 53 FR

34853 [File No. SR–DTC–88–06] (order granting

permanent approval to DTC’s SDFS settlement

service); 33958 (April 22, 1994), 59 FR 22878 [SR–

DTC–93–12] (order temporarily approving DTC’s

MMI settlement program through April 1, 1994);

and 35655 (April 30, 1995), 60 FR 22423 [File No.

SR–DTC–95–05] (order temporarily approving

DTC’s MMI settlement program through April 30,

1996).

6The Depository Trust Company and National

Securities Clearing Corporation, Memorandum (July

1, 1992) (‘‘1992 Memorandum’’); The Depository

Trust Company and National Securities Clearing

Corporation, Memorandum (July 26, 1993) (‘‘1993

Memorandum’’); The Depository Trust Company

and National Securities Clearing Corporation,

Memorandum (July 29, 1994) (‘‘1994

Memorandum’’).

7The Group of Thirty was established in 1978 as

an independent, nonpartisan, nonprofit

organization composed of international financial

leaders whose focus is on international economic

and financial issues.

8 Group of Thirty, Clearance and Settlement

Systems in the World’s Securities Markets (March

1989) (‘‘Group of Thirty Report’’).

9Only one DTC Participants Fund will be needed

when the NDFS system and the SDFS system are

combined into a new SDFS system.

10Supra note 6 and accompanying text.

11Currently, the SDFS system Participants Fund

consists of approximately $253 million in cash and

$567 million in pledged securities.

12Under the conversion plan, the SDFS system

Participants Fund will consist of $400 million in

cash. Based on current activity levels, DTC believes

that a $400 million cash-only Participants Fund

will provide sufficient protection against present

liquidity and credit risks. Pursuant to its rules, DTC

may change the formulas used to determine a

participant’s required deposit or require a

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the publication of

this notice in the Federal Register or

within such other period (i) as the

Commission may designate up to 90

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 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, 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. 552, will be

available for inspection and copying at

the Commission’s Public Reference

Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of the Exchange. All submissions

should refer to File No. SR–CHX–92–11

and should be submitted by June 13,

1995.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–12519 Filed 5–22–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35720; File No. SR–

DTC–95–06]

Self-Regulatory Organizations; The

Depository Trust Company; Order

Granting Accelerated Approval of a

Proposed Rule Change Modifying the

Same-Day Funds Settlement System to

Accommodate the Overall Conversion

to Same-Day Funds Settlement for

Securities Transactions

May 16, 1995.

On March 22, 1995, The Depository

Trust Company (‘‘DTC’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) a proposed rule change

(File No. SR–DTC–95–06) pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’).1 Notice

of the proposal was published in the

Federal Register on April 21, 1995.2 No

comment letters were received. For the

reasons discussed below, the

Commission is granting accelerated

approval of the proposed rule change.

I. Description of the Proposal

DTC currently processes the money

settlements related to different types of

securities transactions in either the

next-day funds 3 settlement (‘‘NDFS’’)

system or the same-day funds 4

settlement (‘‘SDFS’’) system. The NDFS

system is used primarily for the money

settlement of equity, corporate debt, and

municipal debt issue transactions. The

SDFS system began operation in 1987

and is used primarily for the money

settlement of transactions in commercial

paper and other money market

instruments (‘‘MMIs’’).5

DTC and the National Securities

Clearing Corporation (‘‘NSCC’’) jointly

have issued three memoranda which

describe DTC’s and NSCC’s respective

plans for converting their payment

systems to SDFS.6 DTC’s sections of the

memoranda describe its plan to combine

its NDFS and SDFS systems into a

single system which will be based on

the design of the current SDFS system

with some modifications. DTC’s and

NSCC’s plans are in accord with the

1989 recommendation of the

international Group of Thirty 7 that all

securities transactions should settle in

same-day funds.8

Under the conversion plan, all issues

currently settling in DTC’s NDFS system

will be transferred to the SDFS system

on a single day, which DTC anticipates

will occur in the fourth quarter of 1995

or the first quarter of 1996.9 In order to

assure an efficient conversion, certain

modifications to the current SDFS

system will be implemented at various

times during 1995 prior to the overall

conversion date. The purpose of the

current rule change is to convert DTC’s

current SDFS system Participants Fund

to an all cash fund and to modify certain

risk management controls and other

features of the SDFS system. The

Participants Fund for the NDFS system

will not be affected by this rule change.

The rule change implements a number

of the modifications described in the

1994 Memorandum.10

Currently, the SDFS system

Participants Fund consists of cash and

securities and has separate components

for money market instruments and for

other SDFS system securities.11 The rule

change converts DTC’s SDFS system

Participants Fund to an all-cash fund

with no separate component for the

MMI Program.12 The rule change also
Federal Register / Vol. 60, No. 99 / Tuesday, May 23, 1995 / Notices 27361

participant to make additional deposits to the

Participants Fund.

13The new SDFS system will monitor the levels

of a participant’s net settlement debits during each

day and will record the highest net debit

experienced by that participant. This measure of

liquidity is referred to as the participant’s ‘‘intraday

debit peak.’’

14For example, assume DTC had three

participants, A, B, and C, and had established

$400,000,000 as the size of the SDFS system

Participants Fund. Each participant’s minimum

deposit would be $10,000 for a total of $30,000

which leaves $399,970,000 as the incremental fund

deposit amount needed for the Participants Fund.

In order to allocate the $399,970,000 among the

three participants, their respective average intraday

net debit peaks would be used. Assume Participant

A’s average net debit peak is $300,000,000,

Participant B’s is $500,000,000, and Participant C’s

is $500,000,000. Since all incurred net debit peaks

of at least $300,000,000, each created liquidity

needs of $300,000,000 and would contribute

equally to provide DTC’s first $300,000,000. Each

would be responsible for a $10,000 minimum

deposit plus a $99,990,000 incremental deposit

bringing the total to $100,000,000 for each

participant and $300,000,000 in total. Participants

B and C would be assigned an additional

$100,000,000 increment since they were

responsible for creating liquidity needs up to

$500,000,000. Together, A, B, and C would be

assigned incremental amounts totaling

$499,970,000. Since the goal is to create a

$400,000,000 Participants Fund, the $499,970,000

must be prorated downward to 399,970,000, the

amount needed in addition to their minimum

contributions to achieve $400,000,000. Each

participant’s increments would be reduced by

applying a factor of .799988 (i.e., 399,970,000/

499,970,000). Their required deposits would then

be as follows:

A: $10,000 + ($99,990,000 ×

.799988)=$80,000,800

B: $10,000 + ($199,990,000 ×

.799988)=$159,999,600

C: $10,000 + ($199,990,000 ×

.799988)=$159,999,600

Total: $400,000,000

15A participant’s net debit cap will be based on

an average of the participant’s three highest

intraday net debit peaks over a rolling three-month

period multiplied by factors ranging from 1 to 2

based on a sliding scale relative to the size of the

participant’s net debit peaks. Net debit caps will be

determined by and will be applied to a participant’s

simulated net debit balances caused by the Largest

Provisional Net Credit (‘‘LPNC’’) procedure describe

below.

16 DTC will subtract the amount of a participant’s

largest provisional net credit due to transactions in

any single issuer’s MMIs from the participant’s

collateral monitor (‘‘simulated collateral monitor’’)

and net debit or credit balance (‘‘simulated

balance’’). If a transaction will cause the simulated

collateral monitor to turn negative (i.e., the

participant’s collateral would be insufficient to

cover its simulated net debit after the transaction)

or the resulting net debit balance to exceed the

participant’s net debit cap, the transaction will be

blocked. Blocked transactions will be recycled until

credits from other transactions in MMIs of issuers

other than those of the largest provisional net credit

cause the simulated collateral monitor to be

positive or the resulting net debit to be within the

net debit cap limits.

17A reclamation is the return of a delivery order

or a payment order by a participant.

18RAD allows participants to review and either

approve or cancel incoming deliveries before they

are processed in DTC’s system.

19 DTC’s Account Transfer Processor system

provides for the recycling or pending of

transactions that cannot be completed due to a

participant’s insufficient positions or violations of

risk management controls (i.e., Net Debit Cap and

Collateral Monitor).

20Under Options 1 and 2, CNS deliveries are

always given the highest priority on the recycle

queue.

21 15 U.S.C. 78q–1(b)(3)(F) (1988).

decreases the minimum deposit to the

SDFS system Participants Fund from

$200,000 to $10,000 and changes the

method of calculating a participant’s

required deposit.

The new SDFS Participants Fund

formula bases each participant’s

required deposit on the amount of

liquidity that the participant uses in the

system. A participant’s liquidity use

will be determined using a sixty day

rolling average of the participant’s

intraday net debit peaks.13 The rule

change requires a participant to deposit

in the SDFS Participants Fund an

amount equal to that participant’s

proportional liquidity needs.14

In addition, the rule change modifies

certain risk management controls in the

SDFS system. The method used to

calculate the net debit cap for each

participant is being changed 15 and the

maximum net debit cap for each

participant is being increased to

$900,000,000 from approximately

$580,000,000 today. The rule change

also adds the Largest Provisional Net

Credit (‘‘LPNC’’) calculation control

which is designed to protect DTC

against the combined failure of an issuer

of MMIs and a participant. The LPNC

control creates a provisional net balance

by withholding a participant’s largest

net settlement credit due to transactions

in any single issuer’s MMIs. DTC’s risk

management controls will be applied to

the provisional net balance that is

created by the LPNC procedure, and

transactions that cause the provisional

net balance to violate those risk

management controls will not be

completed.16

The rule change also modifies certain

aspects of DTC’s Participant Operating

Procedures on reclamations 17 for both

the NDFS and the SDFS system, the

Receiver Authorized Delivery (‘‘RAD’’)

service 18 and the recycle algorithm for

deliver orders.19 The modified

procedures provide for the validation of

all reclaims by DTC’s system. When a

participant submits a reclaim for

processing in DTC’s NDFS or SDFS

systems, DTC’s system will verify that a

corresponding original delivery that was

completed on the same day exists for

every reclaim presented for processing.

The modified procedures also

establish a minimum threshold of

$15,000,000 for bilateral RAD limits.

Participants currently are permitted to

set individual dollar limits against other

possible contra-participants so that

deliveries with a settlement value

exceeding the specified limit will not be

processed until the receiver-participant

has reviewed and approved the

delivery. To limit the number of

transactions subject to RAD,

participants will not be able to set RAD

limits at an amount less than $15

million.

The new recycle algorithm for deliver

orders will offer SDFS system users a

second recycle options for deliver

orders. Transactions that are recycled

because of insufficient positions or

violations of risk management controls

are currently prioritized based on

transaction type and then on transaction

size (‘‘Option 1’’). The new option

(‘‘Option 2’’) provides participants with

the ability to choose whether pending

transactions caused by an insufficient

position will be recycled in the order in

which they were entered (i.e., first in,

first out) or in the Option 1

prioritization schedule.20

Most of the modifications to be

implemented by the rule change will be

effective on dates to be specified by DTC

in the second quarter of 1995. The

control involving the LPNC calculation

and the $15,000,000 threshold for

bilateral RAD limits will be made

effective on dates to be specified by DTC

in the third quarter of 1995.

II. Discussion

Section 17A(b)(3)(F) requires that the

rules of a clearing agency be designed to

promote the prompt and accurate

clearance and settlement of securities

transactions and to assure the

safeguarding of securities and funds in

the custody or control of the clearing

agency or for which it is responsible.21

As discussed below, the Commission

believes that DTC’s proposed rule

change is consistent with DTC’s

obligations under the Act.

The Commission believes that DTC’s

SDFS system rules and procedures

provides certain protections for DTC

and its participants from financial loss

associated with member defaults and

insolvencies. The rule change contains

a number of protections designed to

decrease the chance of member default

and to limit loss in the event of a

default. Those protections include an

all-cash SDFS Participants Fund, a new

Participants Fund formula based on

liquidity use, a new net debit cap

formula, a new fixed net debit cap of

$900 million, and the application of the

LPNC control.

The new SDFS Participants Fund will

be comprised of approximately $400
27362 Federal Register / Vol. 60, No. 99 / Tuesday, May 23, 1995 / Notices

22The current SDFS Participants Fund consists of

approximately $253 million in cash contributions,

$50 million in internal sources, $500 million in

external lines of credit and $500 million in

additional external lines of credit exclusively

dedicated to the MMI program.

23 ‘‘Federal Reserve Policy Statement on Private

Delivery-Against-Payment Systems,’’ Board of

Governors of the Federal Reserve System (June 15,

1989).

24A participant’s net debit cap currently is the

least of the following: (1) An amount which is a

multiple of the participant’s mandatory and

voluntary deposits in the fund; (2) an amount equal

to 75% of DTC’s lines of credit; (3) an amount, if

any, determined by the participant’s settling bank;

or (4) an amount, if any, determined by DTC.

25Because a participant’s current adjustable net

debit cap is based on the participant’s mandatory

fund deposit, it will only change on a monthly basis

as the required deposit changes. However, a

participant may choose to increase its adjustable net

debit cap at any time by making voluntary deposits.

26Supra note 15. 27 17 CFR 200.30–3(a)(12) (1994).

million in cash deposit and $700

million in committed line(s) of credit.22

In the event that a participant fails to

settle for any reason, the all-cash fund

in most cases should provide enough

immediate liquidity to complete

settlement without causing DTC to use

its lines of credit. The size of the fund,

$400 million in cash, was designed to

provide sufficient liquidity to cover all

but a few of DTC’s largest participants’

individual net settlement debits. The

$700 million in committed lines of

credit should provide additional

liquidity sufficient to cover the large

end-of-day net debits expected to be

produced by these few largest

participants with the application of a

new net debit cap of $900 million.

Although the minimum deposit to the

Participants Fund has been decreased

from $200,000 to $10,000, participants

will be required to deposit additional

amounts based on the size of their

intraday net debits weighted against

other participants’ net debits. As a

result, the cash deposits in the SDFS

system fund will be increased from $210

to $400 million. The allocation under

the new Participants Fund formula will

apportion fund deposits among

participants in proportion to the

liquidity requirements they generate in

the system. The new Participants Fund

formula also will more accurately reflect

each participant’s liquidity

requirements because it is based on a

participant’s net debit peaks for the

prior sixty days. The current fund

formula is based on a participant’s

average gross debits and credits only for

the prior month. While the use of gross

debits and credits reflects a participant’s

activity levels, the use of net debit peaks

reflects a participants actual liquidity

needs.

The changes to DTC’s risk

management controls also are intended

to protect DTC and its participants

against the inability of one or more

participants to fulfill its or their

settlement obligations. DTC’s risk

management controls are based on the

Board of Governors of the Federal

Reserve System’s guidelines for bookentry securities systems that settle over

Fedwire.23 The new net debit cap

formula establishes a single net debit

cap as opposed to the several adjustable

and fixed net debit caps currently used

in the SDFS system.24 The new net debit

cap will better reflect the participants

most recent liquidity needs and not just

its liquidity needs for the prior month25

because it will be calculated daily using

a 90-day rolling average.26 By requiring

participants to have sufficient collateral

to support their net debits and by

ensuring that their net debits do not

exceed their net debit caps, the new

LPNC procedure should help to ensure

that the occurrence of a combined MMI

issuer’s default and a participant’s

failure to settle does not expose DTC to

loss and liquidity risks. The application

of the LPNC procedure to both the net

debit cap and the collateralization

procedures should result in a failing

participant’s net debit remaining

collateralized and within its net debit

cap if the MMI issuer in which it has the

largest net credit also defaulted.

The rule change implements certain

modifications to DTC’s current SDFS

system to provide for an efficient

conversion to SDFS environment for all

securities transactions. The Commission

believes that the overall conversion to a

SDFS system will help reduce systemic

risk by eliminating overnight credit risk.

The SDFS system also will reduce risk

by achieving closer conformity with the

payment methods used in the

derivatives markets, government

securities markets and other markets.

For the reasons described above, the

Commission believes that DTC’s

proposed rule change fulfills the

requirements of Section 17A(b)(3)(F) of

the Act because the proposal assures the

safeguarding of securities and funds in

the custody and control of DTC.

Furthermore, the proposed rule change

facilitates the overall conversion of

DTC’s payment system to an SDFS

system which should facilitate the

prompt and accurate clearance and

settlement of securities transactions.

DTC has requested that the

Commission find good cause for

approving the proposed rule change

prior to the thirtieth day after the date

of publication of notice of the filing. The

Commission finds good cause for so

approving the proposed rule change

because the modifications implemented

by the rule change are part of the

planned conversion of DTC’s entire

money settlement system to an SDFS

system. The Commission believes that

participants should have the

opportunity to become familiar with the

SDFS system capability and the new

risk management controls prior to the

complete conversion to an SDFS system

for securities transactions.

III. Conclusion

On the basis of the foregoing, the

Commission finds that the proposal is

consistent with the requirements of the

Act, particularly with Section

17A(b)(3)(F) 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–

DTC–95–06) be, and hereby is,

approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.27

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–12520 Filed 5–22–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. IC–21075; 812–9530]

Northern Life Insurance Company, et

al.; Notice of Application

May 16, 1995.

AGENCY: Securities and Exchange

Commission (‘‘SEC’’).

ACTION: Notice of application for an

Order under the Investment Company

Act of 1940 (the ‘‘Act’’).

APPLICANTS: Northern Life Insurance

Company (‘‘Northern Life’’), Separate

Account One (the ‘‘Separate Account’’),

and Washington Square Securities, Inc.

(the ‘‘Distributor’’).

RELEVANT ACT SECTIONS: Order requested

under section 6(c) of the Act granting an

exemption from sections 26(a)(2)(C) and

27(c)(2) of the Act.

SUMMARY OF APPLICATION: Applicants

request an order permitting Northern

Life to deduct a mortality and expense

risk charge from the assets of the

Separate Account in connection with

the offering of certain flexible premium

individual deferred variable annuity

contracts.

FILING DATE: The application was filed

on March 20, 1995.

HEARING OR NOTIFICATION OF HEARING: An

order granting the application will be