[Federal Register Volume 60, Number 52 (Friday, March 17, 1995)]
[Notices]
[Pages 14473-14474]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6572]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35469; File No. SR-DTC-95-01]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of a Proposed Rule Change Seeking to Establish a 
Procedure to Buy-in Securities to Eliminate Participants' Short 
Positions Older than Ninety Days

March 10, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on January 13, 1995, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-DTC-95-01) 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.

    \1\15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    DTC proposes to establish a buy-in procedure to eliminate 
participants' short positions that are outstanding for more than ninety 
calendar days.

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 that it received on the proposed rule change. 
The test 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.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    DTC currently employs procedures to help eliminate short positions 
caused by book entry deliveries of callable securities made between the 
call publication date and the lottery processing date and procedures to 
help eliminate short positions caused by rejected deposits.\2\ Under 
DTC rules when DTC participants have short positions in their accounts, 
DTC debits the participants' accounts by an amount equal to 130% of the 
market value of the short position as determined by DTC. DTC believes 
collecting 130% of the value of the short position protects DTC against 
risk and provides participants with an incentive to cover short 
positions promptly. the charge is marked to the market until the short 
position is covered or matures.

    \2\For a complete description of DTC's procedures, refer to 
Securities Exchange Act Release No. 35034 (December 8, 1994), 59 FR 
63396 [File Nos. SR-DTC-94-08 and SR-DTC-94-09] (order granting 
temporary approval of procedures to recall certain deliveries which 
have created short positions as a result of call lotteries and 
rejected deposits). [[Page 14474]] 
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    DTC is proposing procedures that will permit DTC to use the short 
position charge as a funding source to attempt to buy-in securities to 
cover short positions which have not been covered by participants 
within ninety days. Under the proposed procedures, once a short 
position has aged beyond ninety calendar days DTC will broadcast to 
participants that have long positions in the security an Invitation to 
Cover Short Request (``ICSR'') using the Participant Terminal System 
(``PTS'') operated by DTC.
    The invitations will be offered at premiums above market value on a 
sliding scale set according to the following table:

                          Short Position Value                          
                             [Market value]                             
------------------------------------------------------------------------
                                                        Maximum possible
     Minimum            Maximum        Premium percent       premium    
------------------------------------------------------------------------
$1...............        $50,000                 12            $6,000   
50,001...........        100,000                  8             8,000   
100,001..........        300,000                  5            15,000   
300,001..........        500,000                  3            15,000   
500,001..........             UP                  2             (\1\)   
------------------------------------------------------------------------
\1\Unlimited.                                                           

    If DTC is unsuccessful in finding a seller through the ICSR 
function, long participants will be contacted by telephone. DTC may 
elect to use the services of a broker to obtain the securities at a 
price not to exceed the current market value plus the premium based 
upon the value of the short position.
    If DTC is able to buy-in some or all of the securities needed to 
cover a participant's short position, DTC will: (1) credit the 
securities to the participant's account, (2) reduce the short position 
charges by the amount of the purchase price of the securities together 
with the expenses of the cover transaction including any brokerage fee 
or other administrative expense, and (3) if the short position has been 
eliminated entirely, credit the account of the participant with the 
balance, if any, of the short position charge.
    DTC believes the proposal is consistent with its obligation under 
Section 17A of the Act to assure the safeguarding of securities and 
funds which are in its custody or control or for which it is 
responsible because the procedures are modelled on existing DTC 
procedures used to eliminate short positions of participants whose DTC 
accounts have been closed.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change will have an 
impact on or impose a burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    Written comments from DTC participants concerning an earlier 
version of the proposed buy-in procedures were solicited by a DTC 
Important Notice dated July 29, 1994. DTC received comment letters from 
eleven organizations. Seven respondents opposed the earlier proposed 
version of the buy-in procedures. The commentators raised concerns 
about the potential risk of monetary loss that their organizations and 
clients could incur because of the procedures as proposed. Five 
commentators viewed the offering price range of 110-130% of market 
value as excessive and/or felt that the tiered approach (i.e., 
offerings starting from 110% after ninety days, 120% after 120 days, 
and 130% after 150 days) would be counterproductive as sellers would 
``hold out'' for the higher rate.
    DTC revised the earlier version of the buy-in procedure to address 
the concerns raised with respect to seller ``hold-outs.'' The three-
step invitation to tender successively at 110% of the current market 
value after 90 days, 120% after 120 days, and 130% after 150 days has 
been replaced by a single invitation after 90 days to tender at the 
current market value plus a premium ranging from 2-12% depending upon 
the current market value of the short position.

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-95-01 and should be submitted by April 
7, 1995.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\3\

    \3\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-6572 Filed 3-16-95; 8:45 am]
BILLING CODE 8010-01-M