The proposed amendments to Rule 15c3-3 announced in September were made, among other things, in response to fraudulent practices by non-registered and unregistered state brokers that included repurchase transactions in which brokers held the underlying securities (“Hold in re custodypo”). In a repo agreement, the broker-dealer sells securities and agrees to repurchase the same or similar securities at a later date. In a deposit deposit, the dealer-dealer receives the funds from the sale of the securities, but retains control of the securities. Some of the failed brokers would have used these securities in their operations, even though they had been sold to counterparties. These counterparties will be subject to a loss if coverage under the Securities Investor Protection Act of 1970 (“SIPA”) is not available.3 Securities Investor Protection Corporation`s position is that persons entering into pension and repurchase contracts are not clients of the broker within the meaning of SIPA and therefore do not fall under SIPA.4 With respect to the lending of securities , the objective is to temporarily maintain the warranty for other purposes. , for example. B for short positions or for use in complex financial structures. Securities are generally borrowed for a royalty, and securities borrowing transactions are subject to other types of legal agreements than deposits. Deposits with a specified maturity date (usually the next day or the following week) are long-term repurchase contracts. A trader sells securities to a counterparty with the agreement that he will buy them back at a higher price at a given time. In this agreement, the counterparty receives the use of the securities for the duration of the transaction and receives interest that is indicated as the difference between the initial selling price and the purchase price. The interest rate is set and interest is paid at maturity by the trader.
Although the transaction is similar to a loan and its economic effect is similar to a loan, the terminology is different from that of the loans: the seller legally buys the securities from the buyer at the end of the loan period. However, an essential aspect of rest is that they are legally recognized as a single transaction (important in the event of a counterparty`s insolvency) and not as a transfer and redemption for tax purposes. By structuring the transaction as a sale, a repot provides lenders with significant protection against the normal functioning of U.S. bankruptcy laws, such as. B automatic suspension and prevention of provisions. In accordance with the view that the custodian should retain control of the repurchase securities in a tripartite agreement, the department believes that the written agreement should contain a provision that in the event of a pension seller`s default, the purchaser of the pension has the right, either directly or by instruction to the custodian, to dispose of the securities and apply the product for the satisfaction of a seller on deposit.