[Federal Register Volume 60, Number 56 (Thursday, March 23, 1995)]
[Notices]
[Pages 15318-15320]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-7137]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35503; File No. SR-Phlx-94-55]


Self-Regulatory Organizations; the Philadelphia Stock Exchange, 
Inc., Order Approving Proposed Rule Change Relating to Implementation 
of a Three-Day Settlement Standard

March 16, 1995.
    On November 14, 1994, the Philadelphia Stock Exchange, Inc., 
(``Phlx'') filed a proposed rule change (File No. SR-Phlx-94-55) with 
the Securities and Exchange Commission (``Commission'') pursuant to 
Section 19(b) of the Securities Exchange Act of 1934 (``Act'').\1\ 
Notice of the proposal was published in the Federal Register on January 
9, 1995 to solicit comments from interested persons.\2\ The Commission 
received one comment letter.\3\ As discussed below, this order approves 
the proposed rule change.

    \1\15 U.S.C. 78s(b) (1988).
    \2\Securities Exchange Act Release No. 35176 (December 29, 
1994), 60 FR 2417.
    \3\Letter from Dr. Keith B. Jarrett, President, Thomson Trading 
Services, Inc., to Jonathan G. Katz, Secretary, Commission (January 
30, 1995).
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I. Description

    In October 1993, the Commission adopted Rule 15c6-1 under the 
Act\4\ which establishes three business days after the trade date 
(``T+3''), instead of five business days (``T+5''), as the standard 
settlement cycle for most securities transactions. The rule will become 
effective June 7, 1995.\5\ Several of the Phlx's rules are interrelated 
with the T+5 settlement time frame. The [[Page 15319]] purpose of the 
proposed rule change is to amend Phlx's rules to be consistent with a 
T+3 settlement standard for securities transactions.

    \4\17 CFR 240.15c6-1 (1994).
    \5\Securities Exchange Act Release Nos. 33023 (October 6, 1993), 
58 FR 52891 (order adopting Rule 15c6-1) and 34952 (November 9, 
1994), 59 FR 59137 (changing effective date from June 1, 1995, to 
June 7, 1995).
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    Rule 113(b), 114(b), and 115(b) specify the delivery date for 
regular way transactions in stocks, bonds, and convertible bonds, 
respectively. The time frames contained in each rule is being shortened 
to reflect a T+3 settlement environment. Similarly, Rules 113(c), 
114(c), and 115(b) are being amended to provide that a seller's option 
cannot require delivery in less than four days. Rule 114(b) also is 
being amended to provide that bonds sold for delayed delivery must be 
delivered on T+5. Under the amendments to rule 117 (a) and (b), a 
seller's notice of next day delivery of securities sold pursuant to a 
seller's option or regular way delayed delivery may not be given until 
the third day following the date of the contract.
    As amended, Rule 291 requires, unless otherwise agreed, securities 
loaned to be delivered on the third business day following the day of 
the loan, As amended, Rule 294 requires the return of securities loaned 
on the third full business day following the date the notice for the 
return is given.
    Under Rule 362, the contract price of bonds dealt in ``and 
interest'' and made regular way delayed delivery will include interest 
computed on up to but not including T+3. As amended, Rule 371 (a) and 
(b) provides that there will be a cash adjustment for coupons paid 
during the pendency of delayed delivery contracts and seller's option 
contracts in bonds dealt in ``and interest'' made prior to the third 
business day preceding the interest payment date and delivered on or 
after the interest payment date.
    Rule 431 is being amended to require transactions in stock to be 
ex-dividend or ex-rights on the second business day preceding the 
record date. With regard to a record date on other than a business day, 
the transaction will be ex-dividend or ex-right on the third preceding 
business day. Under Rule 432, the ex-warrant period will begin on the 
second business day preceding the date of expiration of warrants. When 
warrant expiration occurs on a day other than a business day, the ex-
warrant period will begin on the third business day preceding 
expiration date.
    Rule 823 is being amended to require all transactions effected on 
Phlx to be settled pursuant to the three day delivery plan which will 
require regular way transactions to settle on the third business day 
after the transaction. Rule 825(b) is being amended to state that the 
ex-dividend period for transactions in stock for which there exists a 
transfer facility in Philadelphia begins on the second business day 
preceding the record date. In the event the record date is not a 
business day, the ex-dividend date will be the third preceding business 
day. Under Rule 825(c), regular way transactions for stocks with 
transfer facilities only outside Philadelphia will be ex-dividend on 
the second business day preceding the equivalent Philadelphia record 
date.
    The Phlx has requested that the proposed rule change become 
effective on the same date as Rule 15c6-1. Rule 15c6-1 will become 
effective on June 7, 1995.\6\

    \6\The transition from five day settlement to three day 
settlement will occur over a four day period. Friday, June 2, will 
be the last trading day with five business day settlement. Monday, 
June 5, and Tuesday, June 6, will be trading days with four business 
day settlement. Wednesday, June 7, will be the first trading day 
with three business day settlement. As a result, trades from June 2 
and June 5 will settle on Friday, June 9. Trades from June 6 and 
June 7 will settle on Monday, June 12.
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II. Written Comment

    The Commission received one comment letter from Thomson Trading 
Services, Inc. (``Thomson'') suggesting that additional rule changes 
may be necessary to implement T+3 settlement.\7\ Thomson believes that 
the Phlx should amend Rule 274(b) which requires the use of the 
facilities of a registered securities depository for confirmation and 
acknowledgement of all payment on delivery transactions in depository-
eligible securities when the member organization, its agent, the 
customer, and its agent are participants in a securities depository.

    \7\Supra note 3.
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III. Discussion

    The Commission believes the proposal is consistent with the 
requirements of Section 6 of the Act.\8\ Specifically, Section 6(b)(5) 
states that the rules of the exchange must be designed to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, and processing information. The Phlx rules and 
other self-regulatory organizations' rules provide a standard time 
frame for settlement of securities transactions. On June 7, 1995, the 
new settlement cycle of T+3 will be established as mandated by the 
Commission's Rule 15c6-1. As a result, the Phlx's current rules 
providing for a T+5 settlement cycle will be inconsistent with the 
Commission's rule. This proposal will amend the Phlx's rules to 
harmonize them with the Commission's Rule 15c6-1 and a T+3 settlement 
cycle.

    \8\15 U.S.C. 78f (1988).
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    In addition, the Commission believes that the proposed rule change 
is consistent with Section 6(b)(5) of the Act in that it protects 
investors and the public interest by reducing risks to clearing 
corporations, their members, and public investors which are inherent in 
settling securities transactions. The reduction of the time period for 
settlement of most securities transactions will correspondingly 
decrease the number of unsettled trades in the clearance and settlement 
system at any given time. Thus fewer unsettled trades will be subject 
to credit and market risk, and there will be less time between trade 
execution and settlement for the value of those trades to 
deteriorate.\9\

    \9\The Commission release adopting Rule 15c6-1 stated that ``the 
value of securities positions can change suddenly causing a market 
participant to default on unsettled positions. Because the markets 
are interwoven through common members, default at one clearing 
corporation or by a major market participant or end-user could 
trigger additional failures resulting in risk to the national 
clearance and settlement system.'' Securities Exchange Act Release 
No. 33023 (October 6, 1993), 58 FR 52891.
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    While the Thomson letter supports the Phlx's efforts to shorten the 
settlement cycle for securities transactions, Thomson believes that the 
Phlx should amend Rule 274(b), which requires the use of the facilities 
of a registered securities depository for the confirmation and 
acknowledgement of all payment on delivery transactions in depository-
eligible securities when the member organization, its agent, the 
customer, and its agent are participants in a securities depository. 
The Commission believes that the issue raised by the Thomson letter 
need not be resolved prior to the approval of the proposed rule change. 
Discussions regarding Thomson's concerns are underway among the 
Commission, Thomson, and DTC. DTC has submitted a rule filing that will 
establish a linkage between DTC and vendors such as Thomson.\10\ The 
Commission intends to consider whether a self-regulatory organization 
rule should continue to preclude use of private vendor systems for 
confirmation/affirmation services in DVP/RVP trades. However, if the 
Phlx's proposed rule change being approved by this order is not 
approved prior to the June 7, 1995, effective date of Rule 15c6-1, the 
Phlx rules will conflict with Commission Rule 15c6-1.

    \10\Securities Exchange Act Release No. 35332 (February 3, 
1995), 60 FR 8102 (notice of filing of proposed rule change)
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    The Thomson letter suggests that approval of the proposed rule 
change without amendments to Rule 274(b) raises competitive concerns. 
Under the Act, the Commission's responsibility is [[Page 15320]] to 
balance the perceived anticompetitive effects of a regulatory policy or 
decision against the purpose of the Act that would be advanced by the 
policy or decisions and the costs associated therewith. The Commission 
notes that any anticompetitive effects pointed to by Thomson are not 
caused by the proposed rule change being approved by this order but 
rather by an existing Phlx rule. The Commission is reviewing Thomson's 
claim but does not believe that approval of this proposal will itself 
create any burdens on competition. Moreover, as discussed above, the 
rule advances fundamental purposes under the Act, namely the efficient 
clearance and settlement of securities.

IV. Conclusion

    For the reasons stated above, the Commission finds that Phlx's 
proposal is consistent with Section 6 of the Act.\11\

    \11\15 U.S.C. 78f (1988).
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    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (File No. SR-Phlx-94-55) be and 
hereby is approved and will become effective June 7, 1995.

    \12\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\13\

    \13\17 CFR 200.30(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-7137 Filed 3-22-95; 8:45 am]
BILLING CODE 8010-01-M