[Federal Register Volume 63, Number 197 (Tuesday, October 13, 1998)]
[Notices]
[Pages 54739-54740]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-27360]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40523; International Series Release No. 1160; File No.
SR-DTC-97-22]
Self-Regulatory Organizations; The Depository Trust Company;
Order Approving a Proposed Rule Change Relating to Establishing an
Omnibus Account at the Canadian Depository for Securities
October 6, 1998.
On October 30, 1997, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change (File No. SR-DTC-97-22) 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 February 20, 1998.\2\ The
Commission received no comment letters in response to the filing. For
the reasons discussed below, the Commission is approving the proposed
rule change.
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\1\ 15 U.S.C. 78s(b)(1)
\2\ Securities Exchange Act Release No. 39657 (February 12,
1998), 63 FR 8725.
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I. Description
Currently, DTC maintains a link with The Canadian Depository for
Securities (``CDS'') that allow a CDS participant to establish an
account at DTC or to use CDS's omnibus account at DTC. The Link permits
CDS participants to process book-entry transactions with other DTC
participants. In addition, the link permits CDS and its participants to
use DTC's custody, clearance, and settlement services for transactions
involving securities eligible in both systems. However, the current
link limits book-entry deliveries from a CDS participant to a DTC
counterparty by requiring that the securities be physically held at
DTC. As a result, a CDS participant is unable to deliver to a DCT
account securities held in its account at CDS by book-entry
movement.\3\
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\3\ CDS participants sometimes represent U.S. investors or U.S.
intermediaries that are in turn also adversely affected.
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Occasionally, a CDS participant attempting to settle a trade with
DTC counterparty has sufficient inventory in its account at CDS to
settle the transaction but does not have sufficient inventory in its
DTC account. When this occurs, the CDS participant must physically
withdraw the securities from CDS and must physically deposit them at
DTC.\4\ The costs and risks associated with physically withdrawing and
transporting certificates for the purpose of redepositing them at DTC,
which also involves reregistration of the certificates into DTC nominee
name, can be significant. In addition, the time involved in making
physical movements can cause a CDS participant to not deliver
securities to DTC in time for settlement and to incur certain expenses
associated with its failure to deliver.
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\4\ As of October 1, 1997, new deposit procedures provide CDS
participants same-day credit at DTC for securities deposited through
DTC's deposit facilities in CDS offices in Vancouver, Toronto,
Montreal, and Calgary. CDS, on behalf of DTC, arranges for the
reregistration of Canadian securities into DTC's nominee name prior
to sending them to DTC.
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The rule change allows DTC to establish an omnibus account at CDS
in order to create a two-way interface between CDS and DTC. As a result
of the two-way interface, there will be no need to physically move
certificates between DTC and CDS in order to settle transactions. Using
the interface, a CDS participant will be able to settle a cross-border
transaction with a DTC counterparty by making a book-entry delivery
from its participant account at CDS to the DTC omnibus account at
CDS.\5\ The CDS participant will identify whic DTC participant account
should be credited with the position, and DTC will immediately credit
the position to the
[[Page 54740]]
receiving DTC participant account on DTC's books. The receiving DTC
participant can then redeliver the position on a free basis or on an
against payment basis within DTC . The securities, though, will remain
at CDS. DTC and CDS will conduct automated, daily reconciliation to
ensure their books balance.
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\5\ All book-entry movements of security positions into or out
of the DTC omnibus account at CDS will be on a free basis and not on
an against payment basis.
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To minimize any subsequent physical movement of securities that
could occur between DTC and CDS, DTC and CDS will engage in weekly
meeting. The netting will reduce on an omnibus basis the number of
securities in the same issue held by each depository on behalf of the
other.
CDS will provide subcustody services such as income collection,
maturity presentments, and reorganization processing on securities held
in DTC's omnibus account at CDS in accordance with CDS procedures (as
DTC currently provides for securities held by DTC on behalf of CDS).
Whether DTC is holding its underlying inventory in Canada or in the
U.S., DTC services to participants will be the same as currently
provided.
II. Discussion
Section 17A(b)(3)(F) \6\ of the Act requires that the rules of a
clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions. The Commission
believes that DTC's rule change is consistent with DTC's obligations
under the Act because the two-way link should help reduce the number
failed trades and should help reduce the need for physical movements of
Canadian securities among CDS, DTC, and Canadian transfer agents. As a
result, trades in Canadian securities can be cleared and settled more
efficiently, and DTC participants can avoid the expenses associated
with failed trades and physically moving securities.
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\6\ 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
proposal 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.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-DTC-97-22) be, and hereby
is, approved.
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. 98-27360 Filed 10-9-98; 8:45 am]
BILLING CODE 8010-01-M
