[Federal Register Volume 62, Number 95 (Friday, May 16, 1997)]
[Notices]
[Pages 27097-27098]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12824]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38604; File No. SR-PTC-97-01]
Self-Regulatory Organizations; Participants Trust Company; Notice
of Filing and Order Granting Accelerated Approval of a Proposed Rule
Change Relating to Limited Cross-Guarantee Agreements
May 9, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on February 11, 1997, the
Participants Trust Company (``PTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change (File No.
SR-PTC-97-01) as described in items I and II below, which items have
been prepared primarily by PTC. The Commission is publishing this
notice and order to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The purpose of the proposed rule change is to amend PTC's rules to
permit PTC to enter into limited cross-guarantee agreements with other
clearing organizations.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, PTC 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. PTC has prepared summaries, set forth in sections A, B,
and C below, of the most significant aspects of such statements.\2\
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\2\ The Commission has modified the text of the summaries
prepared by PTC.
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A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
The purpose of the proposed rule change is to amend PTC's rules to
permit PTC to enter into limited cross-guarantee agreements contain a
guarantee from one clearing agency to another clearing agency that can
be invoked in the event of a default of a common member. The guarantee
provides that the resources of a defaulting common member remaining
after its obligations to the guaranteeing clearing agency have been
satisfied will be used to satisfy its obligations that remain
unsatisfied at the other clearing agency. The guarantee is limited to
the amount of a defaulting common member's resources remaining at the
guaranteeing clearing agency.
Generally, limited cross-guarantee agreements may be beneficial to
the clearing agency because amounts available under limited cross-
guarantee agreements may be applied to satisfy or reduce unpaid
obligations of the defaulting participant. With regard to PTC, these
amounts may reduce charges against the participants fund or amounts
borrowed from other participants or third party lenders or allocations
of losses to the original counterparties of a defaulting participant
under PTC's rules. The benefits generally accruing to the clearing
agencies from a limited cross-guarantee agreement are illustrated by
the following example: Participant A, a common participant of clearing
agency 1 and clearing agency 2, declares bankruptcy. Upon insolvency,
participant A owes clearing agency 1 $10 million and clearing agency 2
owes participant A $7 million. In the absence of an inter-clearing
agency limited cross-guarantee agreement, clearing agency 2 would be
obligated to pay $7 million to participant A's bankruptcy estate and
clearing agency 1 would have
[[Page 27098]]
a claim for $10 million against participant A's bankruptcy estate as a
general creditor with no assurance as to the extent of recovery.
However, an effective cross-guarantee arrangement would obligate
clearing agency 2 to pay clearing agency 1 an amount equal to
participant A's $7 million receivable from clearing agency 2 thereby
reducing clearing agency 1's net exposure from $10 million to $3
million. This approach would enable clearing agency 1 to secure earlier
payment and would allow clearing agency 2 to fulfill its obligations
without making an actual payment to participant A's bankruptcy estate.
PTC currently intends to enter into a limited cross-guarantee
agreement with MBS Clearing Corporation (``MBSCC''), a clearing agency
registered under the Act. At a later date, PTC may determine to enter
into limited cross-guarantee agreements with other clearing
organizations, subject to authorization by PTC's Board of Directors.
In order to allow PTC to enter into one or more limited cross-
guarantee agreements with other clearing organizations, the proposed
rule change will add new Rule 9, to Article IV of PTC's rules to govern
PTC's limited cross-guarantee agreements. As proposed, the rule will
authorize PTC to enter into limited cross-guarantee agreements, subject
to approval of PTC's Board of Directors. The rule also provides that
each participant will be liable to PTC for any payments that PTC is
required to make with respect to such participant pursuant to a limited
cross-guarantee agreement, and that securities, funds, or other
property of the participant to which PTC has a lien, other than
securities in the participants' proprietary or agency accounts, may be
applied in satisfaction of such obligation. In addition, the rule
provides that amounts received by PTC under any limited cross-guarantee
agreement will be applied to reduce the common participant's unpaid
obligations to PTC and assessments made in respect thereof under PTC's
rules.
PTC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act \3\ and the rules and
regulations thereunder because it is designed to assure the
safeguarding of securities and funds in the custody or control of PTC
or for which it is responsible and to foster cooperation and
coordination with persons engaged in the clearance and settlement of
securities transactions. The staff of the Board of Governors of the
Federal Reserve System (``Board of Governors'') has concurred with the
Commission's granting of accelerated approval.\4\
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\3\ 15 U.S.C. 78q-1.
\4\ Telephone conversation between Theo Lubke, Board of
Governors, and Jeffrey Mooney, Attorney, Division of Market
Regulation, Commission (May 8, 1997).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
PTC does not believe that the proposed rule change imposes any
burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
PTC has not solicited and does not intend to solicit comments on
this proposed rule change. PTC has not received any unsolicited written
comments from participants or other interested parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency be designed to assure the safeguarding of securities
and funds which are in the custody or control of the clearing agency or
for which it is responsible.\5\ The Commission believes that PTC's rule
change is consistent with its obligation to assure the safeguarding of
securities and funds in its custody or control because, as the
Commission found in several recently approved limited cross-guarantee
agreements,\6\ PTC's proposed limited cross-guarantee agreement is a
method to reduce the risk of loss due to a common member's default.
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\5\ 15 U.S.C. 78q-1(b)(3)(F).
\6\ Securities Exchange Act Release Nos. 37616 (August 28, 1996)
61 FR 46887. [File Nos. SR-MBSCC-96-02, SR-GSCC-96-03, and SR-ISCC-
96-04] (order approving proposed rule changes seeking authority to
enter into limited cross-guarantee agreements) and 38410 (Mary 17,
1997) 62 FR 13931 [File No. SR-OCC-96-18] (order granting approval
of proposed rule change to revise rules to include limited cross-
guarantee agreements).
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The Commission also believes the rule change is consistent with
PTC's obligation under Section 17A(b)(3)(F) to foster cooperation and
coordination with persons engaged in the clearance and settlement of
securities transactions. The Commission believes that by entering into
such cross-guarantee agreements, PTC and the other clearing agencies
can mitigate the systemic risks posed to them and to the national
clearance and settlement system that arises as a result of a defaulting
member.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after publication of the notice of
filing because accelerated approval will allow PTC to immediately
participate in a limited cross-guarantee agreement with MBSCC thereby
allowing both PTC and MBSCC to benefit from the reduction of risk that
results from this type of arrangement.
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, N.W., Washington, D.C. 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, N.W., Washington,
D.C. 20549. Copies of such filing will also be available for inspection
and copying at the principal office of PTC. All submissions should
refer to the file number SR-PTC-97-01 and should be submitted by June
6, 1997.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-PTC-07-01) be, and hereby
is, approved on an accelerated basis.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-12824 Filed 5-15-97; 8:45 am]
BILLING CODE 8010-01-M