Federal Register / Vol. 61, No. 7 / Wednesday, January 10, 1996 / Notices 745

6Telephone conversation between John R.

Rudolph, Board of Governors of the Federal Reserve

System, and Ari Burstein, Division of Market

Regulation, Commission (December 27, 1995).

7 15 U.S.C. § 78s(b)(2) (1988).

8 17 CFR 200.30–3(a)(12).

1 15 U.S.C. § 78s(b)(1) (1988).

2Letter from Keith Kessel, Compliance Officer,

Philadep and SCCP to Peter R. Geraghty, Esq.,

Division of Market Regulation, Commission

(December 14, 1995).

3 The text of these proposals is attached as

Exhibit B to File No. SR–Philadep–95–08. The file

is available for review in the Commission’s Public

Reference Room and at the principal office of

Philadep.

4The text of the proposed procedures are attached

as Exhibits B (3)–(6) to File No. SR–Philadep–95–

08. The file is available for review in the

Commission’s Public Reference Room and at the

principal office of Philadep.

the Federal Reserve System’s fedwire

should have no detrimental impact on

the settlement process. In addition, the

modifications to the opening of

processing activity for security

transactions were discussed and agreed

to by the Operations Committee, which

consists of participant representatives.

Participants also have had the

opportunity to comment on the proposal

during the pilot program and no written

comments were received by PTC or the

Commission. Finally, the Commission

believes that participants should have

the opportunity to become familiar with

the modification to the pilot program

which permits the return of securities

collateral to participant positions using

PTC’s CLF mechanism beginning at 7:00

a.m. (i.e., the prepilot program opening

time for return of securities collateral)

before the implementation of SPEED

Release 5.6 on January 8, 1996. The staff

of the Board of Governors of the Federal

Reserve System has concurred with the

Commission’s decision to grant

accelerated approval.6

III. Conclusion

On the basis of the foregoing, the

Commission finds that the proposed

rule change is consistent with the Act,

in particular with Section 17A of the

Act, and with the rules and regulations

thereunder.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,7 that the

proposed rule change (File No. SR–

PTC–95–08) be and hereby is approved

on an accelerated, permanent basis.

For the Commission by the Division

of Market Regulation, pursuant to

delegated authority.8

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–363 Filed 1–9–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–36681; File No. SR–

Philadep–95–08]

Self-Regulatory Organizations;

Philadelphia Depository Trust

Company; Notice of Filing of a

Proposed Rule Change Converting the

Settlement System for Securities

Transactions to a Same-Day Funds

Settlement System

January 4, 1996.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

November 3, 1995, the Philadelphia

Depository Trust Company (‘‘Philadep’’)

filed with the Securities and Exchange

Commission (‘‘Commission’’) the

proposed rule change (File No. SR–

Philadep–95–08) as described in Items I,

II, and III below, which items have been

prepared primarily by Philadep. On

December 19, 1995, Philadep filed an

amendment to the proposed rule

change.2 The Commission is publishing

this notice to solicit comments on the

proposed rule change from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Philadelphia Depository Trust

Company (‘‘Philadep’’) proposes to

amend Rules 1, 4, and 9 and adopt Rule

4(A) and certain Philadep Procedures.3

The proposed rule change reflects a

planned industry conversion to an

expanded same-day funds settlement

(‘‘SDFS’’) environment.

II. Self-Regulatory Organization’s

Statement of the Purpose of and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

Philadep 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.

Philadep 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

1. Introduction

The proposed rule change sets forth

the rules and procedures governing

Philadep’s SDFS system service.

Philadep intends to provide SDFS

depository services for all eligible

securities. Philadep has made a

substantial commitment to designing

and building the data processing and

computer network that will be the

foundation for Philadep’s SDFS system.

Throughout this major industry

conversion, Philadep has worked

closely with the Stock Clearing

Corporation of Philadep (‘‘SCCP’’), other

registered clearing agencies, the

Commission and the Board of Governors

of the Federal Reserve System (‘‘Federal

Reserve’’).

In accordance with the SDFS service,

Philadep will accept deposits of

securities certificates for safekeeping

and will provide the full range of SDFS

depository services which include, but

are not limited to, deposits, book-entry

delivery and receive orders,

withdrawals, pledges, trade

confirmations, affirmations, transfers

and dividend/interest payments. New

Philadep Rules and Procedures have

been created for, among other things,

pledging, failure to settle, transaction

processing, risk management and money

settlement in an expanded SDFS

environment. Philadep has made

substantial revisions to its current SDFS

Procedures Manual and has included

some of the salient procedural sections

as exhibits to this rule change.4

In assessing the impact of an

expanded SDFS environment, the

operational requirements, risk, liquidity

needs, among other matters, were

evaluated on a joint SCCP/Philadep

basis. Operationally, both whollyowned subsidiaries of the Philadelphia

Stock Exchange, Inc. (‘‘PHLX’’) are

integrally-related. Both registered

clearing as well as strategic business

objectives.

Many links or tie-ins between SCCP

and Philadep exist by by-law, rule and

agreement. For example, pursuant to a

long-standing joint agency agreement

between SCCP and Philadep, SCCP, on

behalf of Philadep, effects, among other

things, daily money settlements on

behalf of Philadep participants for

securities received into and delivered

out of their accounts; processing of CNS

movements from one participant to

another; processing of all SCCP/

Philadep dividend and reorganization

settlements; and the preparation,

rendering and collection of bills to

Philadep participants for depository

services.

In addition to these services,

Philadep, on behalf of SCCP, facilitates

book-entry movements through a joint

SCCP and Philadep allocation system in

order to assure continuous net

settlements for the accounts of SCCP

participants. Philadep also has
746 Federal Register / Vol. 61, No. 7 / Wednesday, January 10, 1996 / Notices

5The text of the new SDFS risk management

controls is attached as Exhibit B(4) to File No. SR–

Philadep–95–08. The file is available for review in

the Commission’s Public Reference Room and at the

principal office of Philadep.

6CNS and reclamation activity will be exempt

from risk management controls at the inception of

SDFS. In other words, SCCP/Philadep will still

process these activities. However, when a

participant exceeds the net debit cap as a result of

these activities, SCCP/Philadep may request

settlement prepayments to reduce the daily debit.

If SCCP/Philadep does not receive such

prepayments, Philadep may reverse unsettled bookentry receives previously accepted to attain a

positive collateral position, reducing the net debit

to an amount under the net debit cap.

contractually agreed to provide SCCP

with the means to pledge collateral to

banks so that SCCP may obtain secured

loans from such respective banks.

2. Risk Management Controls

Risk management controls play a

major role in the design of Philadep’s

SDFS system.5 Philadep’s risk

management controls are intended to

protect Philadep participants against the

inability of a participant to pay for its

settlement obligations. Philadep

employs two primary risk management

controls for securities processing;

specifically, the collateral monitor and

the net debit cap. As a result of the close

nexus between Philadep and SCCP,

Philadep’s collateral monitor and net

debit cap analysis incorporates SCCP

settlements with Philadep.

Philadep will utilize two features to

manage risk. The first involves

participant collateralization; the second

involves the regulation of net debits.

Philadep has designed the

collateralization aspect of SDFS to

assure that a participant will have

sufficient collateral in its account to

liquidate in the event that it (i) becomes

insolvent and/or (ii) fails to pay for its

settlement obligation. In addition to

collateralization, the procedures

governing operational activity would

prevent the completion of transactions if

their completion would cause a

participant’s individual net debit to

exceed its net debit cap. In this regard,

the net debit cap application helps to

assure that Philadep will have sufficient

cash liquidity to complete settlement if

any single participant fails to settle.

An individual participant’s net debit

cap is limited by Philadep’s established

maximum net debit cap. The largest net

debit cap is always set lower than

Philadep’s total available liquidity.

Presently, based on a planned SCCP/

Philadep total liquidity level of $60

million, the maximum net debit cap a

participant may incur is $40 million.

A. Collateralization

Philadep shall operate its SDFS

system on a fully collateralized basis.

Participants will be required to have

sufficient collateral in their accounts to

support their net settlement debits. If a

participant does not have sufficient

collateral in its account, the transaction

will not be completed. The respective

participant cannot allow its net debit to

exceed the total value of its collateral;

otherwise, these transactions are held

on a recycle (pend) queue until

sufficient collateral is generated to allow

their completion.

A participant may have several

sources of collateral. The primary

sources of collateral are the following:

(1) Deposits by the participant to the

Participants Fund;

(2) Proprietary or firm positions that

the participant designates as collateral;

(3) Securities received versus

payment, for which the participant has

not yet paid (includes CNS deliveries);

and

(4) Securities added to a participant’s

account, but not received versus

payment (e.g., deposits, free deliveries,

free pledge releases, release of

segregated securities) that the

participant designates as collateral.

Because collateralization is an integral

part in Philadep’s SDFS service,

Philadep will conservatively assign

values to various sources of collateral,

which will be subject to haircuts.

Securities designated as collateral by

participants are valued based on the

securities’ prior business day’s closing

market price, less an applicable haircut.

Philadep employs haircuts to protect

itself and its participants against price

fluctuations in collateral in the event

that Philadep must liquidate the

collateral of an insolvent participant.

Moreover, because Philadep may have

to finance a participant’s failure

overnight and borrow against a

participant’s collateral, Philadep’s

haircut structure takes into

consideration the haircuts imposed by

its lending institutions. Ordinarily,

banks will not assign the full market

value to securities used to collateralize

loans, rather banks will generally

consider the relative price volatility of

the collateral and impose a haircut

accordingly.

Philadep haircuts the value of

securities in a manner consistent with

industry standards and which will

satisfy the dual objectives of (i)

adequately protecting Philadep and its

participants from loss and (ii) enhancing

Philadep’s ability to secure sufficient

financing in the event of a failure to

settle situation. The haircut levels

configured by security type are as

follows:

Equities—10%

Corporate and Municipal Debt—5%

Money Market Instruments—2%, 5% or

up to 100%

(depending on their term and

investment grade rating)

Philadep may revisit its liquidity

needs at any time, including intraday.

Philadep reserves the right to reprice

and modify haircuts intraday if it

determines these changes to be in the

best interest of Philadep and its

participants.

B. Net Debit Caps

Net debit caps are central to

Philadep’s SDFS risk management

controls. Net debit caps limit the

amount of settlement net debits (amount

to be paid by the participant) that a

participant may incur at any point

during the processing day. Philadep will

apply a net debit cap to each

participant’s account, determined by

such participant’s net debit history at

Philadep and SCCP. Net debit caps are

dynamic and, accordingly, will

periodically adjust in relation to the

participant’s ongoing activity.

A participant may not allow its net

settlement debit to exceed its net debit

cap. If a participant’s net settlement

debit would exceed its respective net

debit cap for transactions that are

subject to risk management control,6 the

system will not allow the participant to

complete the transaction. The

transaction will be placed in a pending

queue until the account generates

sufficient offsetting credits from

subsequent account activity. Most

credits come from securities deliveries

versus payment; securities pledges for

value; principal, dividend or interest

allocations; or from received funds

(Settlement Progress Payments or

‘‘SPP’’) wired to Philadep’s account at

Philadep’s designated settling bank(s).

Philadep will calculate net debit caps

on daily net settlement activities and

may adjust these figures monthly. A

participant’s net debit cap will be

specifically determined by the following

steps:

(1) Philadep calculates a participant’s

average of the three highest end-of-day

net debit settlements over a rolling

three-month period to establish a ‘‘base

figure.’’ For purpose of calculating a

participant’s net debit settlement,

Philadep includes the net CNS

settlement.

(2) A participant’s base figure is then

multiplied by a factor to determine the

participant’s individual net debit cap,

which cannot exceed Philadep’s

currently established maximum net

debit cap of $40 million. Factors are
Federal Register / Vol. 61, No. 7 / Wednesday, January 10, 1996 / Notices 747

7Presently estimated at $3,500,000.

8The text of proposed Rule 4(A) is attached as

Exhibit B(2) to File No. SR–Philadep–95–08. The

file is available for review in the Commission’s

Public Reference Room and at the principal office

of Philadep.

9For example, if a participant had collateral

securities with a market value of $10,000, subject

to a 10% haircut, the value of the participant’s

collateral would be equal to $9,000. If the

participant also incurred a debit of $8,000, its

collateral monitor would equal $1,000

{($10,000¥[10%×$10,000]+(¥$8,000)}.

10The text of the new SDFS recycling procedure

is attached as Exhibit B(5) to File No. SR–Philadep–

95–08. The file is available for review in the

Commission’s Public Reference Room and at the

principal office of Philadep.

11A discussion of the collateral controls is

attached as Exhibit B(4) to File No. SR–Philadep–

95–08. The file is available for review in the

Commission’s Public Reference Room and at the

principal office of Philadep.

based on a sliding scale, ranging from 1

to 2, where lower base figures are

multiplied by larger factors and higher

base figures are multiplied by smaller

factors.

(3) Notwithstanding the specific net

debit cap calculated for any particular

participant in subparagraph (2) above,

all participants are subject to a

minimum net debit cap to be computed

based on 50% of the combined SCCP

and Philadep Participants Funds. The

minimum net debit cap 7 will be

recalculated and adjusted semiannually.

Despite the participant’s base figure,

Philadep reserves the right to make

adjustments to a participant’s net debit

cap. Philadep may effect such change

for a length of time deemed necessary

and appropriate by Philadep’s

management.

C. Proposed Rule 4(A)

Philadep proposes to adopt Rule 4(A)

in order to clarify that Philadep is

authorized to pledge, repledge,

hypothecate, transfer, create a security

interest, and/or assign (any of the

foregoing shall heretofore be termed a

‘‘pledge’’) any or all property received

by Philadep from its participants and

earmarked for Philadep to use as

collateral for participant’s unsatisfied

obligations.8

Philadep defines the following as

eligible collateral to secure unsatisfied

obligations: (i) deposits in the

Participants Fund; (ii) the securities or

repurchase agreements in which the

Participants Fund is invested overnight;

(iii) certain qualifying securities which

secure the open account indebtedness of

the participant; (iv) securities which

have been pledged to Philadep as a

voluntary deposit to the Participants

Fund; and (v) any or all securities

designated as collateral (collectively

‘‘allowable assets’’).

Philadep may pledge allowable assets

to a lender. For instance, Rule 4(A)

specifies that Philadep shall have the

right to pledge securities to lenders in

the event a participant fails to settle.

If Philadep pledges these allowable

assets, Philadep will make the

appropriate account entries, reflecting

the creation and transfer of the

respective security interest from the

participant to Philadep and from

Philadep to the lender. Likewise, if a

participant designates securities as net

additions, Philadep will record the

security interest on its books for such

net additions, reflecting the decrease in

the account of the pledging participant

and an increase in Philadep’s account

corresponding to such net additions.

Philadep will reverse these journal

entries upon the release and return of

any pledged assets, reflecting a decrease

in the account of any pledgee and an

increase in the account of the pledgor as

appropriate.

D. Use of the Collateral Monitor to

Measure Participants’ Available

Collateral

Philadep will monitor the collateral in

each of the participant’s accounts. The

mechanism to be used to regulate the

collateral is referred to as the ‘‘collective

monitor.’’ The collateral monitor cannot

become negative.

At the start of each business day,

Philadep credits each participant’s

collateral monitor with its respective

participants Fund deposit. The

collateral monitor reflects at all times

the amount by which the collateral in a

participant’s account secures the net

debit in its settlement account. Thus,

the collateral monitor equals the

arithmetic summation of the difference

of the value of the participant’s

collateral (less an applicable haircut)

and its net settlement obligation.9 In

other words, a participant’s collateral

(less an applicable haircut) must equal

or exceed a given participant’s net

settlement obligation.

Philadep continually verifies the

collateral value to assure that the

deliverer and receiver’s collateral

monitor would not become negative as

a result of Philadep processing an

incipient transaction. If the transaction

would cause either participant to be

under-collateralized, Philadep prevents

the transaction until the deficient

participant has infused sufficient

collateral into its account for the

transaction to complete.10

E. Methods of Controlling Collateral

Philadep’s SDFS system will provide

an on-line, real-time mechanism to

monitor and infuse intraday collateral.

Controls comprise: (i) classifying

collateral, (ii) updating collateral

valuations and (iii) furnishing new

collateral.11

With regard to collateral

classification, participants may

designate free (unpledged) securities

positions in participants’ accounts as

either collateral or non-collateral.

In addition to the opening free

positions, intraday positions have

collateral value. However, Philadep will

not provide the same latitude to

participants as described for free

positions to classify certain other types

of transactions. Specifically, Philadep’s

SDFS system will automatically

designate securities received versus

payment as collateral because they

represent incomplete transactions

(receiver-participants have not yet paid

for these securities).

With regard to updating the collateral

valuation, Philadep’s SDFS system will

credit a participant’s collateral monitor

with the collateral value; that is, its

market value, less the applicable

haircut.

With regard to both the classification

and infusion of additional collateral,

participants have several methods of

managing collateral in their accounts,

outlined as follows:

General Classification of Opening (Start-ofDay) Securities Positions as Collateral

Participants may give Philadep

instructions to designate all securities in the

participant’s account as collateral at the

opening of each business day. Philadep

would then designate all start-of-day

positions as collateral, and the respective

participant’s collateral monitor would be

credited with its collateral value.

Automatic Classification of Free Securities

Additions

Participants may give Philadep

instructions to designate all free securities

transactions to its collateral monitor (e.g.,

deposits, free delivery orders (‘‘DOs’’)

received).

Intraday Reclassification of Securities

Participants may submit instructions to

Philadep, to reclassify a specific quantity of

an issue as collateral, previously classified as

non-collateral, resulting in a collateral

monitor credit equal to the collateral value of

the securities reclassified. Conversely,

participants may request that Philadep

reclassify as non-collateral those securities

that have previously been classified as

collateral. However, Philadep would not

fulfill such instruction if such removal of

collateral from the participant’s account

would cause its collateral monitor to become

negative.
748 Federal Register / Vol. 61, No. 7 / Wednesday, January 10, 1996 / Notices

12An overview of the recycle process is attached

as Exhibit B(5) to File No. SR–Philadep–95–08. The

file is available for review in the Commission’s

Public Reference Room and at the principal office

of Philadep.

Settlement Progress Payments (‘‘SPPs’’)

Participants could increase their collateral

monitor by wiring SPPs to Philadep’s

account at its designated settling bank(s). The

participant’s collateral monitor, as well as its

settlement account, would be credited for the

amount of the SPP; thus, a participant’s

actual net debit would be reduced.

In summary, Philadep is building a

computerized system that will

continuously track the value of each

participant’s collateral on a real-time,

on-line basis, to ensure that the

collateral’s value is equal to or exceeds

the participant’s current net settlement

debit. If a participant does not have

sufficient collateral to cover the

resulting net settlement debit from a

proposed transaction, the participant

may pledge more collateral or cash to

enable Philadep to act on the

transaction instructions; otherwise, such

transaction will not be completed and

pend in the system until Philadep

receives sufficient collateral on the

participant’s behalf. Participants may

wire funds to Philadep intraday to

satisfy their collateral requirements.

3. Pending Transactions—Recyle

Algorithm

If an incoming delivery order would

cause a participant to exceed its net

debit cap and/or create insufficient

collateral, Philadep will place such

transactions in a recycle (pending)

queue and prioritize it accordingly.12

Transactions that continue to pend at

the close of the processing day will be

purged from the system and must be

subsequently re-entered by the

participant that initially entered it.

4. Settlement and Failure to Settle

Procedures

At the end of the processing day,

Philadep will provide each participant

with a net settlement amount, which

will be the aggregate of the end-of-theday net debits and credits in the

participant’s SCCP and/or Philadep

accounts. Money settlements will occur

daily with immediately available funds

in the form of fed wire transfers into and

out of Philadep’s account at its

designated settling bank(s).

In the event a participant or its

representative bank/depository

institution fails to settle, Philadep will

utilize its liquidity resources to finance

such participant’s unsettled net debit.

Philadep will prioritize the order in

which it will use the resources.

Philadep will first use cash from the

Participants Fund and other

immediately available internal sources

prior to drawing upon its external bank

credit facilities. In the event that

Philadep must use external lines of

credit to secure an extension of credit in

connection with the defaulting

participant, Philadep shall secure the

participant’s assets as collateral as

described earlier in subsections 2 (D)

and (E).

When and if the participant settles by

10:00 A.M., Eastern Time, the next

morning, Philadep will use the

settlement payment received to repay

the principal and finance charges of the

lending bank. Philadep will then return

the pledged collateral to the participant.

For example, if the defaulting

participant is solvent and pays its net

debit balance and interest charge in

same-day funds on the day after the

default, Philadep would generally

reverse the procedures followed on the

day of the default. Philadep would

repay lenders and restore pledged

securities.

If, on the other hand, the defaulting

participant remains in default the next

business day, Philadep may take the

following steps in successive order: (1)

apply the defaulting participant’s

Clearing Fund deposit to satisfy the

participant’s obligation; (2) apply

collateral of the defaulting participant

which are the subject of incomplete

transactions; (3) apply any other

collateral of the defaulting participant,

including collateral which are not

subject to incomplete transactions; (4) if

the participant’s collateral is exhausted,

apply pro rata net credit reductions to

all participants who delivered securities

to the defaulting participant on the day

of the default, such reductions being

limited to the amount of the net credit

balance of each participant resulting

from transactions with the defaulting

participant; (5) in the alternative to such

net credit reductions, resell to the

delivering participant securities that

were sold to the defaulting participant

on the day of the default; and (6) make

pro rata net credit reductions to all

participants with net credit balances,

including those participants that did not

make deliveries to the defaulting

participant on that day.

5. Paying Agent Charge-Back Procedures

With respect to principal, dividend,

interest and corporate reorganization

payment obligations (‘‘P&I payments’’)

under the proposed rule change,

Philadep will pay such amounts when

paid. Specifically, Philadep will pay

participants in same-day funds upon

receipt of payment by paying agents of

such distributions in same-day funds in

accordance with Philadep’s operating

procedures. Philadep worked diligently

to affect paying agents’ timely

disbursement of P&I payments to

Philadep by payable dates. Philadep has

witnessed dramatic improvement over

the past year in paying agents’ timely

disbursement of P&I payments in sameday funds to Philadep. Philadep

remains steadfastly committed to

working closely with the industry, the

Commission and the Federal Reserve,

among others, in educating paying

agents and assuring their maximum

adherence to the higher standards of

payment performance required under

the SDFS environment.

In order to induce the delivery of P&I

payments in same-day funds from

paying agents that would not otherwise

receive such payments from issuers in

same-day funds on payable date,

Philadep may agree to provide rebates to

such paying agents. Philadep will act as

the conduit, passing along such rebate

costs to those participants benefiting

from receiving same-day P&I payments

that would have otherwise received

payment in next-day funds.

Philadep will be authorized to

immediately charge-back participants

that were previously credited with

payments. In order to charge-back

participants, the paying agent must

furnish Philadep a written request

within ten (10) business days of the

payable date and may do so for several

reasons: (1) an error by the paying agent;

(2) a failure by the issuer to provide the

paying agent with sufficient funds to

cover the payments; (3) the bankruptcy

of the issuer on or prior to the payable

date; or (4) other paying agent default.

Additionally, Philadep may also

charge-back participants for any errors

made by Philadep, including errors as a

result of erroneous announcements or

payment calculations credited to

participants in anticipation of payments

which Philadep has not received. For

either charge-back method, Philadep

reserves the right to impute and recover

interest from the respective participant.

With regard to charge-backs initiated

by the paying agent, Philadep shall

notify the participant one (1) business

day prior to the date Philadep enters the

charge-back in the participant’s daily

settlement account. Although Philadep

usually verifies the facts stated in the

notice from the paying agent, Philadep

does not have any obligation to do so.

If the paying agent notifies Philadep

more than ten (10) business days after

payment date, Philadep is not required

to charge-back the participant’s account,

but will cooperate with the paying agent

and the participant to resolve the

matter. For Philadep initiated charge-
Federal Register / Vol. 61, No. 7 / Wednesday, January 10, 1996 / Notices 749

13See Exhibits B(1) and B(3) attached to File No.

SR–Philadep–95–08. The file is available for review

in the Commission’s Public Reference Room and at

the principal office of Philadep.

14For Philadep participants that utilize the RIO

interface for settlement, half of the SCCP Clearing

Fund deposit requirement shall be allocated to

Philadep’s Participants Fund to protect against

potential settlement defaults for securities not

eligible for the RIO interface. Similarly, those

Philadep participants that clear and settle through

CNS accounts at SCCP shall have their respective

Philadep and SCCP Participants Fund deposits

combined and then divided equally and allocated

between Philadep and SCCP to satisfy the Fund

deposit requirement at each clearing corporation.

15For Philadep Inactive Participants that are also

SCCP Inactive Participants, the Philadep

Participants Fund deposit shall be $5,000. For

Philadep Inactive Participants that are also SCCP

Active Participants, no additional Philadep

Participants Fund deposit will be required.

16As of the date of this filing, SCCP/Philadep has

secured $30 million in such credit lines and

projects to secure $20 to $40 million in additional

lines.

backs, Philadep generally will give

participants one (1) day notice of the

charge-back.

6. Revised Participants Fund

To compensate for the risks in a SDFS

environment and to respond to

Philadep’s increased liquidity needs,

Philadep will modify its Participants

Fund in its form and size. Philadep will

maintain an all cash Participants Fund.

The all cash requirement applies to

both the minimum and any additional,

voluntary deposits. If participants

decide to make voluntary, additional

deposits, they will accomplish two

objectives: first, it allows them to

increase the level of settlement activities

that may occur without potential

disruption and, second, they will

receive interest rebates from SCCP/

Philadep for deposits in excess of

$50,000 in accordance with SCCP/

Philadep’s procedures.

Each Philadep participant must

deposit a minimum amount of

$10,000.13 Whereas some inactive

participants will only maintain a

required deposit of $10,000, many

participants will have to deposit

additional amounts based upon the type

and extent of their clearing and

depository activities. In order to effect

the transition of Philadep and its

participants to the SDFS environment,

Philadep will implement these changes

on or before February 1996.

Philadep will calculate the required

cash deposit according to a participant’s

activity 14 in accordance with the

following formulae [formulae (a), (b)

and (c) below are not additive; a

participant shall be only responsible for

making the highest deposit amount

required by any single formula below]:

(a) Inactive Accounts: $10,000.00 15

(less than $100 of average monthly

billings)

(b) Specialized Services:

(maximum $50,000 required with

$100 or greater in average monthly

billings for either Deposit or

Transfer activity)

—Deposit Activity: $25,000.00 plus

—Transfer Activity: $25,000.00

(c) Participants not doing Specialized

Service activity with service fees of

$100 or greater in average monthly

billions The greater of either:

(1) $25,000, or;

(2) 1% of the average of the three

highest net debits over the past

three months, if higher than the

SCCP required deposit (rounded to

the next $5,000 increment).

Philadep will recalculate the

Participants Fund deposit requirements

at the end of each month based on the

previous three months prior to the most

recent month. Philadep will notify its

participants of any required deposit

increases and the amount of such

additional deposit within ten (10)

business days of the end of the month.

Participants whose deposit

requirements have decreased will be

notified at least quarterly, although they

may inquire and withdraw excess

deposits monthly. In this way,

participants may leave excess cash

deposits in the participants fund and

reduce the level of monthly

administration that would otherwise be

necessary. As previously stated,

Philadep will also accept voluntary

excess fund deposits to reduce

administrative burdens.

Philadep estimates that at the time of

implementing the foregoing

modifications to the risk management

controls, SCCP and Philadep will have

combined liquidity resources of over

$60 million, comprising $7 million in

combined cash deposits to the

Participants Fund (under the revised

formulae), $4.7 million in unrestricted

capital and $50 million in lines of

credit,16 altogether designed to support

the new SDFS system. SCCP/Philadep

will routinely monitor these amounts

and assess the need to increase them

over time based on SCCP and Philadep

activity levels. Considering SCCP/

Philadep’s risk and liquidity structure,

Philadep’s net debit cap levels are

conservative, having been set in

accordance with such combined

liquidity resources and with due regard

to SCCP’s long-standing margin account

financing program.

Philadep believes that the proposed

rule change is consistent with Section

17A of the Act because it promotes the

prompt and accurate clearance and

settlement of securities transactions in

securities and funds in Philadep’s

custody and under its control. Philadep

believes that with the development of

the new SDFS system and its attendant

risk management controls, Philadep and

its participants are protected from the

risk of a material loss. Philadep’s Rules

and Procedures are designed to promote

efficiencies and protect Philadep and its

participants in an expanded SDFS

environment.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

Philadep does not believe that the

proposed rule change will impact or

impose a burden on competition.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

No written comments have been

solicited or received. Philadep will

notify the Commission of any written

comments received by Philadep.

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 Philadep 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
750 Federal Register / Vol. 61, No. 7 / Wednesday, January 10, 1996 / Notices

17 17 CFR 200.30–3(a)(12) (1994).

Section, 450 Fifth Street, NW.,

Washington, DC 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of Philadep. All submissions

should refer to the file number SR–

Philadep–95–08 and should be

submitted by January 31, 1996.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.17

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–364 Filed 1–9–96; 8:45 am]

BILLING CODE 8010–01–M

[Rel. No. IC–21651; File No. 812–9674]

M Fund, Inc., et al.

January 3, 1996.

AGENCY: U.S. Securities and Exchange

Commission (‘‘SEC’’).

ACTION: Notice of Application for

Exemption under the Investment

Company Act of 1940 (the ‘‘1940 Act’’).

APPLICANTS: M. Fund, Inc. (‘‘Company’’)

and M Financial Investment Advisers,

Inc. (‘‘Adviser’’).

RELEVANT ACT SECTIONS: Order requested

under Section 6(c) for exemptions from

the provisions of Sections 9(a), 13(a),

15(a) and 15(b) of the 1940 Act and

Rules 6e–2(b)(15) and 6e–3(T)(b)(15)

thereunder.

SUMMARY OF APPLICATION: Applicants

seek an order granting exemptions to the

extent necessary to permit shares of any

current or future series of the Company

and shares of any other investment

company that is offered as a funding

medium for insurance products, and for

which the Adviser or any of its affiliates

may in the future serve as manager,

investment adviser, administrator,

principal underwriter or sponsor (the

Company and such other investment

companies are hereinafter referred to

collectively as the ‘‘Funds’’), to be sold

and held by: (i) variable annuity and

variable life insurance company

separate accounts of both affiliated and

unaffiliated life insurance companies

(‘‘Participating Insurance Companies’’);

and (ii) certain qualified pension and

retirement plans outside the separate

account context (‘‘Plans’’).

FILING DATE: The Application was filed

on July 18, 1995, and amended on

October 19, 1995. Applicants will

amend during the notice period to make

certain representations herein.

HEARING OR NOTIFICATION OF HEARING: An

order granting the Application will be

issued unless the SEC orders a hearing.

Interested persons may request a

hearing by writing to the Secretary of

the SEC and serving Applicants with a

copy of the request, personally or by

mail. Hearing requests should be

received by the SEC by 5:30 p.m. on

January 29, 1996, and should be

accompanied by proof of service on

Applicants in the form of an affidavit or,

for lawyers, a certificate of service.

Hearing requests should state the nature

of the writer’s interest, the reason for the

request, and the issues contested.

Persons who wish to be notified of a

hearing may request notification by

writing to the Secretary of the SEC.

ADDRESSES: SEC, Secretary, 450 Fifth

Street, N.W., Washington, D.C. 20549.

Applicants, M Fund Inc., c/o David F.

Byrne, President, River Park Center, 205

S.E. Spokane Street, Portland, Oregon

97202.

FOR FURTHER INFORMATION CONTACT:

Edward P. Macdonald, Staff Attorney, or

Patrice M. Pitts, Special Counsel, Office

of Insurance Products, Division of

Investment Management, at (202) 942–

0670.

SUPPLEMENTARY INFORMATION: The

following is a summary of the

Application. The complete Application

may be obtained for a fee from the

Public Reference Branch of the SEC.

Applicants’ Representations

1. The Company is a Maryland

corporation registered under the 1940

Act as an open-end diversified

management investment company. The

Company currently is composed of four

separate portfolios; additional portfolios

may be added in the future.

2. The Adviser for each of the

Company’s portfolios is a Colorado

corporation registered with the SEC

under the Investment Advisers Act of

1940. The Adviser is wholly-owned by

the Management Partnership, an Oregon

general partnership. The Adviser has

engaged other registered investment

advisers (‘‘Sub-Advisers’’) to conduct

the investment programs of each

portfolio and has entered into

investment sub-advisory agreements

with each Sub-adviser. The Subadvisers are not affiliated with the

Adviser or the Company.

3. The Company intends to offer its

shares to variable annuity and variable

life separate accounts (‘‘Separate

Accounts’’) of both affiliated and

unaffiliated insurance companies in

support of variable annuity and variable

life insurance contracts (‘‘Contracts’’).

Insurance companies whose separate

accounts will own shares of one or more

portfolios of the Funds are referred to

herein as ‘‘Participating Insurance

Companies.’’ Each Participating

Insurance Company will have the legal

obligation of satisfying all requirements

applicable to it under the federal

securities laws in connection with any

variable contract which it issues.

4. The Company also intends to offer

one or more portfolios of its shares

directly to Plans. The Funds’ shares sold

to Plans which are subject to the

Employee Retirement Income Security

Act of 1984, as amended, may be held

by the trustee(s) of the Plan.

5. The Adviser has no plans to offer

investment advisory services to Plans or

Plan participants, and will not act as

investment adviser to any of the Plans

that will purchase shares of the

Company.

Applicants’ Legal Analysis

1. In connection with the funding of

scheduled premium variable life

insurance contracts issued through a

separate account registered under the

1940 Act as a unit investment trust

(‘‘UIT’’), Rule 6e–2(b)(15) provides

partial exemptions from Sections 9(a),

13(a), 15(a) and 15(b) of the 1940 Act.

The relief provided by Rule 6e–2 is

available to a separate account’s

investment adviser, principal

underwriter, and sponsor or depositor.

The exemptions granted by Rule 6e–

2(b)(15) are available only where the

management investment company

underlying the UIT offers its shares

‘‘exclusively to variable life insurance

separate accounts of the life insurer, or

of any affiliated life insurance

company.’’ The use of a common

management investment company as the

underlying investment medium

(‘‘Underlying Fund’’) for both variable

annuity and variable life insurance

separate accounts of a single insurance

company (or of two or more affiliated

insurance companies) is referred to as

‘‘mixed funding.’’ The use of a common

management investment company as the

underlying investment medium for

variable annuity and variable life

insurance separate accounts of

unaffiliated insurance companies is

referred to as ‘‘shared funding.’’ ‘‘Mixed

and shared funding’’ denotes that use of

a common management investment

company to fund the variable annuity

and variable life insurance separate

accounts of affiliated and unaffiliated

insurance companies. The relief granted

by Rule 6e–2(b)(15) is not available with

respect to a scheduled premium variable

life insurance separate account that

owns shares of an underlying fund that

offers its shares to a variable annuity

separate account of the same company

or of any other affiliated or unaffiliated