[Federal Register Volume 60, Number 102 (Friday, May 26, 1995)]
[Notices]
[Pages 27994-27996]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12986]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 33-7170; 34-35750; IC-21086]
Securities Transactions Settlement
AGENCY: Securities and Exchange Commission.
ACTION: Grant of exemption.
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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is exempting certain transactions in foreign securities from
Rule 15c6-1 under the Securities Exchange Act of 1934, which requires
settlement of transactions in three days.
EFFECTIVE DATE: The exemption from rule 15c6-1 for certain transactions
in foreign securities will be effective on June 7, 1995.
FOR FURTHER INFORMATION CONTACT:
Jerry W. Carpenter, Assistant Director, or Christine Sibille, Senior
Counsel, at 202/942-4187, Office of Securities Processing Regulation,
Division of Market Regulation, Securities and Exchange Commission, 450
Fifth Street, NW., Mail Stop 5-1, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: On October 6, 1993, the Commission adopted
Rule 15c6-1\1\ which establishes three business days after the trade
date (``T+3'') instead of five business days (``T+5'') as the standard
settlement time frame for most broker-dealer securities transactions.
Rule 15c6-1 becomes effective June 7, 1995.\2\
\1\17 CFR 240.15c6-1 (1994).
\2\As adopted, Rule 15c6-1 was to become effective June 1, 1995.
In order to provide for an efficient conversion, the Commission
changed the effective date to June 7, 1995. Securities Exchange Act
Release No. 34952 (November 9, 1994), 59 FR 59137.
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Rule 15c6-1 covers all securities other than exempted securities
(including government securities and municipal securities),\3\
commercial paper, bankers' acceptances, or commercial bills. In
addition, the rule contains specific exemptions for sales of unlisted
limited partnership interests and for sales of securities pursuant to a
firm commitment offering.\4\
\3\The Commission approved a proposed rule change of the
Municipal Securities Rulemaking Board that requires transactions in
municipal securities to settle by T+3. Securities Exchange Act
Release No. 35427 (February 28, 1995), 60 FR 12798.
\4\On May 10, 1995, the Commission adopted amendments to Rule
15c6-1 that eliminated the exemption for firm commitment offerings.
Securities Exchange Act Release No. 35705 (May 10, 1995), 60 FR
26604.
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As adopted, Rule 15c6-1 covers purchases and sales of securities
between U.S. broker-dealers and their [[Page 27995]] customers even if
these securities do not generally trade in the United States. This may
create difficulties for broker-dealers that purchase or sell securities
in foreign markets to satisfy their obligations to their customers for
transactions in the United States because the purchase or sale executed
in the foreign market will settle in accordance with the local market's
settlement period. If this period is longer than three business days,
the broker-dealer will be unable to meet its obligations to its
customer in the United States by T+3.
The Securities Industry Association (``SIA'') has requested that
the Commission permit broker-dealers to settle trades of certain
foreign securities executed in a foreign market in accordance with the
standard settlement cycle in such foreign market.\5\ According to the
SIA, customers with delivery vs. payment (``DVP'') accounts expect to
settle transactions in accordance with local settlement time frames.
With respect to all other customers, the SIA states, ``The general
practice with these accounts is that, once settlement under local rules
is agreed as the norm, the trades are automatically booked and
confirmed for settlement on the foreign market settlement date.''
\5\Letter from Michael T. Reddy, Adviser to the Clearance and
Settlement Committee, SIA, to Jonathan Kallman, Associate Director,
Commission (October 17, 1994).
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The Commission notes that many securities that are commonly
considered to be foreign securities are settled in the United States
because the securities are eligible for deposit at a registered
securities depository or there are transfer agents for the securities
in the U.S. (i.e., transfer or delivery facilities exist for the
securities in the U.S.).\6\ Even if there are transfer or delivery
facilities in the U.S. available for a security, however, a broker-
dealer may be required to purchase and settle the security in a foreign
market because there is limited trading in the U.S. in such security.
\6\For example, a security listed on an exchange or quoted on
Nasdaq must have transfer facilities in the U.S. Under Section 6 of
the New York Stock Exchange's (``NYSE'') Listed Company Manual, an
issuer listed on the exchange must provide facilities in New York
City for the transfer of securities, and such facilities must
complete routine transfers within 48 hours. Under Schedule D, Part
V, Section 7 of the National Association of Securities Dealers'
(``NASD'') By-laws, all market makers must use the facilities of a
registered clearing corporation to clear trades in securities quoted
on the Nasdaq Stock Market or on the OTC Bulletin Board.
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The Commission believes that it is appropriate to provide a limited
exemption for securities that do not generally trade in the U.S. from
the scope of Rule 15c6-1. Under the exemption, all transactions in
securities that do not have transfer or delivery facilities in the U.S.
will be exempt from the scope of Rule 15c6-1.\7\ Furthermore, if less
than 10% of the annual trading volume in a security that has U.S.
transfer or delivery facilities occurs in the U.S., transactions in
such security will be exempted from Rule 15c6-1\8\ unless the parties
clearly intend T+3 settlement to apply. If a foreign security is not
exempted from Rule 15c6-1 under either of these two exemptions, the
parties may arrange to settle the transaction in more than three
business days if the parties expressly agree to the alternate
settlement time frame at the time of the transaction pursuant to
paragraph (a) of Rule 15c6-1.
\7\For purposes of this order, a depository receipt will be
considered a separate security from the underlying security. Thus,
if there are no transfer facilities in the U.S. for a foreign
security but there are transfer facilities for a depository receipt
based on such foreign security, only the foreign security and not
the depositary receipt will be exempt from Rule 15c6-1. A depositary
receipt is a security which represents an ownership interest in a
specified number of securities that have been deposited with a
depositary. Such securities are sometimes called American Depositary
Receipts or Global Depositary Receipts.
\8\Broker-dealers may calculate the annual trading volume once a
year based on publicly available figures and rely on such
calculation for the following year. Most foreign exchanges provide
data on trading volume in securities listed on such exchanges.
The Commission also is granting an exemption to make clear that
Rule 15c6-1 does not apply to transactions that occur outside the
United States. For example, if a U.S. broker-dealer were to execute a
trade on a foreign exchange with a U.S. or foreign broker-dealer, the
contract will not be subject to the rule.\9\
\9\It is important to note that this exemption only applies to
the contract between the U.S. broker-dealer and the foreign broker-
dealer. If the U.S. broker-dealer is executing the trade on the
foreign exchange to satisfy its obligations to a U.S. customer, the
contract with the U.S. customer is still subject to T+3 settlement
unless that contract also is exempted. Such contract may come under
the exemptions discussed above or may have an alternate settlement
cycle by agreement of the two parties.
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Nevertheless, if the parties intend a transaction to be executed on
a registered securities exchange or through a registered securities
association, the transaction will be subject to both the rules of the
exchange or association and Rule 16c6-1.\10\ Further, such transaction
will still be subject to the provisions in Regulation T\11\ for
obtaining customer payment for purchases of foreign securities.\12\
\10\Effective June 7, 1995, the rules of all registered
securities exchanges and the NASD will establish three business days
as the settlement cycle for all transactions executed as ``regular
way.''
\11\12 CFR 220.1 et seq.
\12\Under Section 220.8(b) of Regulation T, a creditor (i.e., a
broker-dealer) generally must obtain full cash payment for customer
purchases in a cash account within one payment period of the date
any security was purchased. A ``payment period'' is defined as the
number of days in the standard securities settlement cycle in the
United States, as defined in Rule 15c6-1, plus two business days.
Until June 1, 1995, payment period means seven business days. 12 CFR
220.2(w). However, in the case of a purchase of a foreign security,
a creditor must obtain full cash payment within one payment period
of the date of purchase or by the date on which settlement is
required to occur by the rules of the foreign securities market
provided that this period does not exceed the maximum time permitted
by Regulation T for delivery against payment transactions (i.e.,
thrity-five days).
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It is hereby ordered that a contract for the purchase or sale of
securities for which there is no transfer agent in the United States
and which is not eligible for deposit at a registered clearing agency
(collectively referred to as ``transfer or delivery facilities'') shall
be exempt from the requirements of Rule 15c6-1.
It is further ordered that if there exists transfer or delivery
facilities both in the United States and outside of the United States
for a security, a contract for the purchase or sale of such security
shall be exempt from the requirements of Rule 15c6-1 if annual trading
in such securities in the United States constitutes less than 10% of
the aggregate worldwide trading volume.
It is further ordered that a contract executed by a United States
broker-dealer outside of the United States for the purchase or sale of
securities the terms of which provide for delivery or payment outside
of the United States shall be exempt from the requirements of Rule
15c6-1.
This order does not apply to any contract or class of contracts for
the purchase or sale of a security which is intended by the parties to
be executed by the broker-dealer on a registered securities exchange or
through the facilities of a registered securities associations subject
to the rules of a national securities exchange or registered securities
association and settled through the facilities of a registered clearing
organization.
These exemptions are subject to modification or revocation at any
time the Commission determines that such modification or revocation is
consistent with the public interest or the protection of investors.
Dated: May 22, 1995.
[[Page 27996]] By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 95-12986 Filed 5-25-95; 8:45 am]
BILLING CODE 8010-01-M