[Federal Register Volume 69, Number 137 (Monday, July 19, 2004)]
[Notices]
[Pages 43042-43043]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16327]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50006; File No. SR-DTC-2004-03]
Self-Regulatory Organizations; The Depository Trust Company;
Order Granting Approval of Proposed Rule Change Relating to the
Processing of Deliveries in DTC's Money Market Instrument Program
July 12, 2004.
On March 18, 2004, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') proposed
rule change File No. SR-DTC-2004-03 pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposed
rule change was published in the Federal Register on May 20, 2004.\2\
No comment letters were
[[Page 43043]]
received. For the reasons discussed below, the Commission is now
granting approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 49709 (May 14, 2004), 69
FR 29155 (May 20, 2004).
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I. Description
The purpose of this filing is to allow DTC to modify its procedures
relating to how deliveries are processed in DTC's Money Market
Instrument (``MMI'') Program. Under DTC's current procedures applicable
to MMI transactions, early on the maturity date (generally around 2
a.m.)\3\ DTC initiates deliveries of maturing paper from the accounts
of participants having position in the maturing paper to the MMI
participant account of the Issuing/Paying Agent (``IPA''). These
transactions are processed as the equivalent of valued delivery orders
(``DO''). The IPA can ``refuse to pay'' for maturing paper of a
particular issuer by communicating that intention to DTC before 3 p.m.
on the maturity date. DTC will inform all participants of the IPA's
refusal to pay by broadcast message. DTC will then, among other things,
reverse any completed maturity presentments by recrediting them to
presenting participants.
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\3\ All times are Eastern Standard Time.
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The MMI procedures also provide for participants that are receivers
of new MMI issuance DOs (e.g., custodian banks) to have until 3:30 p.m.
to reclaim those DOs back to the IPA.\4\ Since the reclaim can be
``matched'' with a DO processed on the same day, the reclaim is
permitted to bypass the Receiver Authorized Delivery (``RAD'') system
and DTC's risk management controls (e.g., net debit cap and collateral
monitor) if the value of the DO is less than $15 million.\5\
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\4\ Reclaims, or reclamations, are the means by which receivers
can return erroneous deliveries.
\5\ RAD is a control mechanism that allows participants to
review transactions prior to completion of processing in order to
limit participants' exposure from misdirected or erroneously entered
DOs. The bypassing of DTC's risk management controls is designed to
address industry concern that the receiver not be ``stuck'' with a
delivery it should not have received because of DTC's risk
management controls.
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Although the current procedures have worked well, since the events
of September 11, 2001, participants in DTC's MMI program have been
working with DTC on changes that would reduce risk without introducing
processing inefficiencies. IPAs have raised concerns about potentially
having to fund an issuer's maturity at a level higher than anticipated
at the time IPA decides not to exercise a ``refusal to pay'' because
the IPA fails to receive the settlement credits associated with new
issuance DOs that are reclaimed after 3 p.m. As a result, IPAs are
forced to make ``refusal to pay'' decisions based on incomplete data
and are subject to increased exposure to individual issuers.
The rule change addresses these concerns by subjecting reclamations
of all new MMI issuance DOs received after 2:30 p.m. to RAD controls
and treating them as original transactions subject to DTC's normal risk
management controls.\6\ To reduce the potential impact of the change in
the processing of reclaims received after 2:30 p.m., the rule change
provides receivers of new issuance DOs with the option of having those
deliveries made subject to RAD at 2 p.m. thereby giving these
participants electing this option one-half hour to consider whether to
accept or reject the new issuance DOs.\7\ While the cutoff for the
Issuing/Paying agent (``IPA'') to exercise its ``refusal to pay''
option will remain at 3 p.m., the rule change clarifies that since
under certain circumstances DTC may extend the 2 p.m. and 2:30 p.m.
cutoffs referred to above, DTC may also extend the 3 p.m. cutoff.
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\6\ As a result, reclamations made after 2:30 p.m. will not be
eligible for processing during the exclusive reclaim period (3:20
pm. to 3:30 p.m.) and may not be ``re-reclaimed'' by the receiver.
\7\ All new issuance DOs processed after 2:00 p.m. will
automatically be subject to RAD unless the participant instructs DTC
to the contrary. DTC participants may opt-out of forced RAD by
completing the ``Forced MMI RAD Election Form'' and submitting it to
their DTC relationship manager. The election form is available on
DTC's website (www.dtc.org) as Attachment A to DTC Important Notice
5337. A participant that, at first, elected to opt out of
the forced RAD functionality may opt back in by submitting a new
completed election form to its DTC relationship manager.
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II. Discussion
Section 17A(b)(3)(F)\8\ of the Act requires that the rules of a
clearing agency be designed to remove impediments to and perfect the
mechanism of a national system for prompt and accurate clearance and
settlement of securities transactions. By moving up the cutoff for
reclamations for new MMI issuance DOs, DTC's proposed rule change will
enable IPAs to make more informed decisions on whether to provide
credit for a particular issuer and therefore to better manage their
intraday risk and liquidity exposures. As such, the proposed rule
change is consistent with DTC's statutory obligation to remove
impediments to and perfect the mechanism of a national system for
prompt and accurate clearance and settlement of securities
transactions.
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\8\ 15 U.S.C. 78q-1(b)(3)(F).
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III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
in particular Section 17A of the Act and the rules and regulations
thereunder.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\9\ that the proposed rule change (File No. SR-DTC-2004-03) be and
hereby is approved.
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\9\ 15 U.S.C. 78s(b)(2).
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-16327 Filed 7-16-04; 8:45 am]
BILLING CODE 8010-01-P