[Federal Register Volume 63, Number 222 (Wednesday, November 18, 1998)]
[Notices]
[Pages 64135-64136]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30826]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40660; International Series Release No. 1170; File No.
SR-DTC-98-19]
Self-Regulatory Organizations; The Depository Trust Company;
Order Approving a Proposed Rule Change Relating to Enhancement of the
Current Link With Deutsche Borse Clearing AG
November 10, 1998.
On September 15, 1998, The Depository Trust Company (``DTC'') Filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change (File No. SR-DTC-98-19) pursuant to Section 10(b)(1) of the
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal
was published in the Federal Register on September 23, 1998.\2\ The
Commission received seven comment letters in response to the filing.\3\
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. 40445 (September 16,
1998), 63 FR 50950.
\3\ Infra note 6.
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I. Description
Under the rule change, DTC will open an omnibus account at Deutsche
Borse Clearing AG (``DBC'') in order to create a two-way interface
between DTC and DBC. Presently, DBC has an omnibus account at DTC which
enables DBC and its participants to effect book-entry deliveries at DTC
to DTC participants. The current link between DTC and DBC allows DBC
and its participants to use the custody, book-entry, and delivery
services of DTC for transactions involving securities that are eligible
in both systems. The current link permits a DTC participant to settle a
cross-border transaction with a DBC counterparty by making a book-entry
delivery, on a free of payment basis, from its participant account at
DTC to the DBC omnibus account at DTC and by identifying the DBC
participant account to which the delivered securities should be
credited.\4\ Cash settlement of the transaction will take place outside
of DTC.
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\4\ All deliveries of securities into or out of DBC's omnibus
account at DTC are on a free of payment basis.
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However, under the current link a DBC participant cannot make a
book-entry delivery of securities held in its account at DBC to a DTC
participant's account at DTC. In order for a DBC participant to make a
delivery of securities to a DTC counterparty's account at DTC, the DBC
participant must deliver the physical securities to DTC.
The rule change will permit book-entry movements of securities from
a DBC participant's account at DBC to a DTC counterparty's account at
DTC. Thus, a DBC participant will be able to settle a cross-border
transaction with a DTC counterparty by making a book-entry delivery, on
a free of payment basis, from its participant account at DBC to the DTC
omnibus account at DBC and by identifying the DTC participant account
to which the delivered shares should be credited.\5\ The receiving DTC
participant can then redeliver the securities within DTC through a
book-entry movement on either a free of payment or against payment
basis.
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\5\ All deliveries of securities into or out of DTC's omnibus
account at DBC are on a free of payment basis.
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If required, DBC will provide subcustody services such as income
collection, maturity presentments, and reorganization processing on
securities held in DTC's omnibus account at DBC in accordance with DBC
procedures. Currently, DTC provides such services for securities held
by DTC on behalf of DBC.
II. Comment Letters
The Commission received seven comment letters in response to the
notice of the proposed rule change.\6\ Five commenters, Credit Suisse
First Boston Corporation, Salomon Smith Barney, Skadden Arps, Deutsche
Bank, and BONY, expressed support for the proposed rule change. These
comments stated generally that the proposed rule change would
facilitate the efficient processing of cross-border securities
transactions and would reduce risks and costs to participants of DTC
and DBC.\7\
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\6\ Letters from P. Howard Edelstein, President, Electronic
Settlements Group, Thomson Financial Services (``Thomson'') (October
14, 1998); Joseph D. Fashano, Director, Credit Suisse First Boston
Corporation (October 20, 1998); Thomas L. Montrone, President, The
Securities Transfer Association, Inc. (``STA'') (October 21, 1998);
Simon M. Lorne, Managing Director, Salomon Smith Barney (October 23,
1998); J. Michael Schell, Skadden, Arps, Slate, Meagher & Flom LLP
(``Skadden Arps'') (October 23, 1998); Jurgen Rebouillon, Senior
Vice President, and Thomas Klee, First Vice President, Deutsche Bank
AG (``Deutsche Bank'') (October 23, 1998); Joseph M. Velli, Senior
Executive Vice President, The Bank of New York (``BONY'') (October
23, 1998).
\7\ The comment letters submitted by Skadden Arps, Deutsche
Bank, and BONY addressed the rule change with reference to the
merger of Daimler-Benz Aktiengesellschaft and Chrysler Corporation
into DaimlerChrysler AG. Skadden Arps is counsel to Daimler-Benz,
and BONY and Deutsche Bank will serve as cotransfer agents for
DaimlerChrysler ordinary shares.
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The STA expressed concern that under the proposed rule change some
U.S. investors may receive transfer services from transfer agents that
are not fully subject to U.S. regulation. In response to the STA's
letter, Skadden Arps noted that the transfer agents for DaimlerChrysler
ordinary shares, BONY and Deutsche Bank, are registered under Section
17A of the Act. Skadden Arps also stated that it believed that it is
not necessary to subject all cross-border exchange links to Section 17A
registration.
Thomson expressed concern that the proposed rule change might
result in an expansion of the scope of certain self-regulatory
organization rules governing the confirmation and affirmation of
institutional securities trades. Thomson requested that the Commission
clarify that the proposed rule change would not affect the exemption in
those rules for trades that settle outside the United States.\8\
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\8\ Specifically, Thomson referenced National Association of
Securities Dealers Rule 11860, New York Stock Exchange (``NYSE'')
Rule 387(a)(5), Municipal Securities Rulemaking Board Rule G-
15(d)(ii), American Stock Exchange Rule 423(5), Chicago Stock
Exchange Article XV, Rule 5, Pacific Exchange Rule 9.12(a)(5), and
Philadelphia Stock Exchange Rule 274(b). Those rules require that
for certain securities transactions the facilities of a securities
depository be used for the confirmation, acknowledgment, and book
entry settlement of the transactions. However, those rules also
state that they are not applicable to transactions that are to be
settled outside the United States. See, e.g., NYSE Rule 387(a)(5),
Interpretation .10.
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III. Discussion
Section 17A(b)(3)(F) of the Act \9\ requires, among other things,
that the rules of a clearing agency be designed to promote the prompt
and accurate clearance and settlement of securities transactions and to
assure the safeguarding of securities and funds that are in its custody
or control or for which it is responsible. The Commission believes that
the proposed rule change is consistent with DTC's obligations under
Section 17A(b)(3)(F).
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\9\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission believes that the rule change should increase
efficiency in the movement of securities positions and in the
settlement of securities transactions among participants of DTC and DBC
by reducing the need for the movement of physical securities. The link
should not
[[Page 64136]]
only reduce the time and expense associated with physical movements of
securities positions but should also reduce the risk of loss and
erroneous processing that always exists with physical movements. The
Commission also believes that the procedures for the link between DTC
and DBC are consistent with DTC's safeguarding obligation in that all
movements into or out of DTC's omnibus account at DBC and into or out
of DBC's omnibus account at DTC will be on a free of payment basis.\10\
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\10\ In addition, DTC has obtained an opinion of counsel
concerning German law and DTC's participation in DBC.
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The Commission has taken account of the comment letters that it
received in response to the proposed rule change. The Commission
believes that the rule change should not affect the obligation of any
entity to register as a transfer agent pursuant to Section 17A of the
Act.\11\ In addition, the Commission believes that the rule change
should not have any effect on the rules of any self-regulatory
organization other than DTC.
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\11\ The Commission notes that the entities that will perform
transfer functions for shares in DaimlerChrysler are registered
transfer agents.
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IV. 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 \12\ and the
rules and regulations thereunder.
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\12\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (File No. SR-DTC-98-19) be, and
hereby is, approved.
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\13\ 15 U.S.C. 78s(b)(2).
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-30826 Filed 11-17-98; 8:45 am]
BILLING CODE 8010-01-M
