[Federal Register Volume 62, Number 200 (Thursday, October 16, 1997)]
[Notices]
[Pages 53847-53848]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27321]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39222; File No. SR-DTC-97-16]
Self-Regulatory Organization; The Depository Trust Company;
Notice of Filing of a Proposed Rule Change Relating to a Decision by
the Philadelphia Stock Exchange, Incorporated To Withdraw From the
Clearance and Settlement and Securities Depository Businesses
October 8, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on August 5, 1997, The
Depository Trust Company (``DTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change (File No.
SR-DTC-97-16) as described in Items I, II, and III below, which items
have been prepared primarily by DTC. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The proposed rule change involves proposed arrangements relating to
a decision by the Philadelphia Stock Exchange, Incorporated (``PHLX'')
to withdraw from the clearance and settlement and securities depository
businesses. Parties to the proposed arrangements are DTC, PHLX,
Philadelphia Depository Trust Company (``PHILADEP''), Stock Clearing
Corporation of Philadelphia (``SCCP''), and the National Securities
Clearing Corporation (``NSCC'').\2\ The proposed arrangements as they
relate to DTC will provide for the following:
---------------------------------------------------------------------------
\2\ These parties have entered into an agreement dated as of
June 18, 1997.
---------------------------------------------------------------------------
(1) DTC will offer sole PHILADEP participants an opportunity to
become DTC participants if they meet DTC's qualifications;
(2) DTC will make certain payments to PHLX, PHILADEP, and SCCP; and
(3) In general, for a period of five years PHLX, PHILADEP, and SCCP
will not engage in the clearance and settlement and securities
depository businesses. However, this prohibition will not apply to
PHLX's equity ownership interest in The Options Clearing Corporation.
In addition, SCCP may provide limited clearing and margin services to
PHLX equity specialists for their specialist and alternate specialist
transactions and for their propriety transactions in securities for
which they are not appointed as specialists or alternate specialists
and to certain PHLX members that are not PHLX equity specialists for
their propriety transactions in securities.\3\
---------------------------------------------------------------------------
\3\ A more detailed description of these proposed arrangements
is contained in Exhibit 2 to the filing. A copy of the filing and
all exhibits are available for copying and inspection in the
Commission's Public Reference Room.
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, DTC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments that it received on the proposed rule change.
The text of these statements may be examined at the places specified in
Item IV below. DTC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\4\
---------------------------------------------------------------------------
\4\ The Commission has modified the text of the summaries
prepared by DTC.
---------------------------------------------------------------------------
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
PHLX has announced that it is withdrawing form the clearance and
settlement and securities depository businesses in order to focus its
resources on the operations of the exchange. The proposed arrangements
have been designed to permit PHLX to achieve this objective while
affording qualified sole PHILADEP participants an opportunity to become
DTC participants and to transfer their securities to DTC. DTC believes
that the proposed arrangements will result in substantial risk
reduction and in increased savings for DTC participants and the
securities industry as a whole.
Where there are interfaces among the securities depositories, same-
day funds settlements \5\ exposes each depository to certain risks,
such as the failure of another depository to settle its net payment
obligation because of a failure by one of the participants of such
other depository to settle with it or because such other depository is
experiencing a major systems problem. These risks cannot be entirely
avoided with existing and available risk management controls. PHLX's
withdrawal from the securities depository business will eliminate the
exposure of DTC and its participants to
[[Page 53848]]
the payment system risks associated with the DTC-PHILADEP interface.
---------------------------------------------------------------------------
\5\ The term ``same-day funds'' refers to payment in funds that
are immediately available and generally are transferred by
electronic means.
---------------------------------------------------------------------------
In addition, the proposed arrangements should result in substantial
savings for DTC participants and the securities industry. In connection
with this proposal, former sole PHILADEP participants may become DTC
participants if they qualify under DTC's participant standards. An
increase in the number of DTC participants will result in higher DTC
transaction volumes there by reducing the per unit service costs that
must be recovered through DTC participant service fees.
Moreover, interdepository interfaces involve the maintenance of
substantial facilities, communications networks and account and
inventory reconciliation mechanisms. As a result of the proposal, the
substantial costs incurred by both DTC and PHILADEP in operating an
interface will be eliminated.
DTC believes the proposed rule change is consistent with the
requirements of Section 17A of the Act and the rules and regulations
promulgated thereunder because the rule proposal will help reduce the
risk associated with having interfaces, provide for more efficient and
less expensive clearing and depository services, and thereby facilitate
the prompt and accurate clearance and settlement of such transactions.
In addition, the proposal will provide qualified sole PHILADEP
participants with access to DTC's facilities and will be implemented
consistently with the safeguarding of securities and funds in DTC's
custody and control.
(B) Self-Regulatory Organization's Statement on Burden on Competition
DTC does not believe that the proposed arrangements will have an
impact on or impose a burden on competition. Securities depositories
registered under Section 17A of the Act are utilities created to serve
members of the securities industry for the purpose of providing certain
services that are ancillary to the businesses in which industry members
compete with one another. Operating a securities depository requires a
substantial and continuing investment in infrastructure, including
securities vaults, telecommunications links with users, data centers,
and disaster recovery facilities, in order to meet the increasing needs
of participants and respond to regulatory requirements.
After consummation of the proposed arrangements, securities
industry members will continue to have access to high quality, low cost
depository services provided under the mandate of the Act. The overall
cost to the industry of having such services available should be
reduced thereby permitting a more efficient and productive allocation
of industry resources. Furthermore, because most of a depository's
interface costs must be mutualized, thereby requiring some participants
to subsidize costs incurred by others, PHLX's withdrawal from
maintaining depository facilities should reduce costs to DTC
participants and thereby remove impediments to competition. Finally,
PHLX's ability to focus its resources on the operations of its exchange
should help enhance competition among securities markets.
Despite the dominant market position that DTC will acquire, DTC
believes that the current regulatory scheme and the very nature of the
clearing and depository industries provide appropriate checks on the
operations of DTC. DTC is owned by its members that utilize its
services and its board of directors is comprised of its members. DTC
must assure a fair representation of its members in the selection of
its directors and administrators. DTC's service fees are reviewed by
its board and subject to public notice and comment. Lastly, the
existence of independent depositories for special securities and the
potential for new clearing agency registrants offer significant checks
on DTC's power.
(C) Self-Regulatory Organization's Statement on Comments on the
proposed Rule Change Received From Members, Participants, or Others
Written comments on the proposal from DTC participants or others
have not been solicited or received. However, the proposed arrangements
are consistent with recommendations made to the boards of DTC and NSCC
by the Vision 2000 Committee (``Committee''), a committee on industry
representatives of the two boards. The Committee's Report dated
September 1994 states:
The industry currently owns a number of utilities that provide
services related to the comparison, clearing, settlement and
safekeeping of U.S. (and to a lesser degree, international)
securities. These utilities overlap in two ways. * * * We believe
that the industry's and, as important, the investors', overall costs
can be reduced and safety and soundness can be enhanced by
eliminating these overlaps where there is no clear advantage to
having specialization or competing development.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which DTC consents, the Commission will:
(A) by order approve such proposed rule change or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
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, NW., Washington, DC 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, NW., Washington,
DC. Copies of such filing will also be available for inspection and
copying at the principal office of DTC. All submissions should refer to
the File No. SR-DTC-97-16 and should be submitted by November 6, 1997.
For the Commission, by the Division of Market Regulation
pursuant to delegated authority.\6\
---------------------------------------------------------------------------
\6\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-27321 Filed 10-15-97; 8:45 am]
BILLING CODE 8010-01-M
