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Self-Regulatory Organizations; The Depository Trust Company; Order Granting Approval of a Proposed Rule Change Relating to Rule 4(A), Pledge of Property to the Corporation and Its Lenders

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Start Preamble July 3, 2003.

I. Introduction

On May 6, 2003, The Depository Trust Company (“DTC”) filed with the Securities and Exchange Commission (“Commission”) proposed rule change SR-DTC-2003-08 pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) [1] . Notice of the proposal was published in the Federal Register on May 21, 2003.[2] No comment letters were received. For the reasons discussed below, the Commission is granting approval of the proposed rule change.

II. Description

Each DTC participant pays or receives the net debit or net credit balance in its DTC money settlement account at the end of each day. DTC's principal risk is the possible failure of one or more participants to settle their net debit obligations. To assure that it is able to complete its settlement obligations each day, DTC maintains liquidity resources, including a committed line of credit (maximum amount of $1.75 billion) with a consortium of banks. This committed line of credit is part of a combined syndicated facility with National Securities Clearing Corporation (“NSCC”).

The line of credit matures annually. As part of the negotiations to extend the facility for the year beginning May 27, 2003, the lenders requested that Section 1 of DTC's Rule 4(A), “Pledge of Property to the Corporation and its Lenders,” be clarified.[3] That section currently provides that for the purpose of securing loans to DTC, DTC may pledge and repledge and grant its lenders a security interest in (i) cash deposits in the participants fund and all securities, repurchase agreements, or deposits in which such cash is invested, (ii) net additions, including any security entitlements of participants in net additions, and (iii) preferred stock. That section also provides that any such loan to DTC may be on such terms as DTC, in its discretion, may deem necessary or advisable and may be in amounts greater and extend for time periods longer than the obligations of any participant in DTC. It further provides that no lender shall be obligated to return any pledged collateral prior to the full repayment of any loan secured thereby.

DTC is adding language to Section 1 of Rule 4(A) to make clear what is implicit in the current rule that while there remain any outstanding obligations under any such loan, no participant may assert a claim against the lender for the return of any collateral pledged by DTC as security therefore.[4] Subject to the foregoing and the terms of any such loan, the obligation of DTC to return any items of pledged collateral to its participants or to permit substitutions and withdrawals thereof remains unaffected.

In addition, the rule change makes a technical correction to the definition of the term “pledge” in Rule 1 necessitated by the recent revisions to Article 9 of the New York Uniform Commercial Code (“NYUCC”). Currently, the definition of “pledge” refers to Section 9-115 of the NYUCC. The references to that specific section are deleted so DTC's definition refers to the NYUCC in general.

III. Discussion

Section 17A(b)(3)(F) of the Act requires, among other things, that the rules of a clearing agency be designed to assure the safeguarding of securities and funds which are in its custody or control or for which it is responsible.[5] By adding language, as requested by its lenders, to its rules to make clear the rights of DTC, lenders, and participants with respect to pledged deposits, the Start Printed Page 41667proposed rule change will help DTC maintain adequate liquidity resources and therefore should help assure DTC's ability to safeguard securities and funds.

IV. 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 with the requirements of section 17A of the Act and the rules and regulations thereunder applicable.

It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (File No. SR-DTC-2003-08) be and hereby is approved.

Start Signature

For the Commission by the Division of Market Regulation, pursuant to delegated authority.[6]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble


2.  Securities Exchange Act Release No. 47875 (May 15, 2003), 68 FR 27877.

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3.  The lenders made a similar request of NSCC which also resulted in the filing of a proposed rule change by NSCC. Securities Exchange Act Release No. 47874 (May 15, 2003), 68 FR 27881 (May 21, 2003) [File No. NSCC-2003-08].

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4.  The new language states, “No Participant shall have any right, claim or action against any secured Lender (or any collateral agent of such secured Lender) for the return, or otherwise in respect, of any such collateral Pledged by the Corporation to such secured Lender (or its collateral agent), so long as any loans made by such Lender to the Corporation or other obligations, secured by such collateral, are unpaid and outstanding.”

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5.  15 U.S.C. 78q-1(b)(3)(F).

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[FR Doc. 03-17710 Filed 7-11-03; 8:45 am]