[Federal Register Volume 63, Number 184 (Wednesday, September 23, 1998)]
[Notices]
[Pages 50950-50951]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-25370]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40445; International Series Release No. 1157; File No.
SR-DTC--98-19]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of a Proposed Rule Change Relating to the Enhancement of the
Current Link With Deutsche Borse Clearing AG
September 16, 1998.
Pursant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'''),\1\ notice is hereby given that on September 15, 1998, The
Depository Trust Company (``DTC'') filed with the Securities and
Exchange Commission (``Commission'') a proposed rule change 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 from interested persons on the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
Under the proposed rule change, DTC will open a free of payment
omnibus account at Deutsche Borse Clearing AG (``DBC''), which
currently has a participant account at DTC, in order to create a two-
way interface between DTC and DBC.
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 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.\2\
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\2\ The Commission has modified the text of the summaries
prepared by DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The purpose of the proposed rule change is to facilitate the
efficient processing of cross-border securities transactions between
participants of DTC and DBC. Under the proposed rule change, DTC will
open an omnibus account at DBC in order to create a two-way interface
between DBC and DTC. This will enable efficient inventory positioning
by participants of DTC and DBC that is needed to settle securities
transactions at either DTC or DBC.\3\ The two-way interface would
allow, but would not require, DTC positions in DBC-eligible issues to
be held in DTC's account at DBC.
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\3\ Currently, the only DTC-eligible German issues are in the
form of American Depositary Receipts or Global Depositary Receipts.
However, DTC anticipates that the securities of DaimlerChrysler AG,
the successor company formed by the proposed merger of Daimler-Benz
Aktiengesellschaft and Chrysler Corporation, will be made DTC-
eligible prior to November 1998.
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Under the existing link between DTC and DBC, DBC has an omnibus
account at DTC which enables DBC to effect book-entry transactions with
other DTC participants. The current link allows DBC and its
participants to use the custody, book-entry, and delivery services of
DTC for transactions involving securities eligible in both systems. The
current link allows a DTC participant to settle, on a free of payment
basis, a cross-border transaction with a DBC counterparty by making a
book-entry delivery 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. However, the
current link limits book-entry deliveries from a DBC participant to a
DTC counterparty by requiring that the securities be physically held at
DTC. A DBC participant is therefore not able to deliver by book-entry
means positions held in its account at DBC.
DTC anticipates that once German ordinary shares are made DTC-
eligible, the existing link between DTC and DBC will be inadequate. A
DBC participant attempting to deliver such shares in settlement of a
trade with a DTC counterparty may have sufficient position in its
account at DBC, but unless DBC has sufficient position in its account
at DTC, settlement could not occur through the existing link. The DBC
participant would be required to physically withdraw the securities
from DBC in order to make a physical deposit at DTC. Unless
participants of DTC and DBC are able to interconnect their respective
inventories at the two depositories via book-entry movements, same-day
delivery of securities may not be possible. As a result, a participant
may incur certain expenses associated with its failure to deliver.
Additionally, the costs and risks associated with physically
withdrawing and transporting certificates for purposes of redepositing
them at DTC, which involves reregistration and forwarding of
certificates to the U.S., can be significant.
The proposed enhancement (i.e., opening a DTC free of payment
omnibus account at DBC and thereby creating a two-way interface) would
substitute book-entry movements for physical movement of securities
when west-bound movements of securities occur between DBC and DTC and
would eliminate costs and risks associated with physical movement. A
DBC participant would be able to settle, on a free of payment basis, a
cross-border
[[Page 50951]]
transaction with a DTC counterparty by making a book-entry delivery
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. The receiving DTC participant could then
redeliver on a free or versus payment basis within DTC. There would be
no need for transporting physical certificates to DTC.
Under the proposal, DBC would, if required, 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 as DTC currently does on
securities held by DTC on behalf of DBC. Whether DTC is holding its
underlying inventory in Germany or in the U.S., DTC services to
participants would be the same as currently provided.
According to DTC, the primary benefits of opening an omnibus
account at DBC are: (i) avoidance of failed transactions on the trade
settlement date as a result of delays resulting from the current link;
\4\ (ii) elimination of most physical movements of German securities
between DBC, DTC, and U.S. and German transfer agents and the costs and
risks associated with such movements; and (iii) reduction of costs to
DTC and DBC participants related to (i) and (ii). The realization of
these benefits is consistent with DTC's objectives of providing
efficient book-entry clearance and settlement facilities and of
reducing risk to DTC participants by immobilizing certificates.
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\4\ As noted above, DTC anticipates that this will become a
problem once German securities are made DTC-eligible.
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DTC believes that the proposed rule change is consistent with the
requirements of Section 17A(b)(3)(A) of the Act \5\ and the rules and
regulations thereunder because the proposed enhancements will reduce
risks and associated costs to participants of DTC and DBC by
streamlining the processing of cross-border securities transactions
between U.S. and German entities.
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\5\ 15 U.S.C. 78q-1(b)(3)(A).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
DTC does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
Written comments from DTC participants have not been solicited or
received on the proposed rule change.
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, including whether the proposed rule
change is consistent with the Act. 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 Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing also will be available for
inspection and copying at the principal office of DTC. All submissions
should refer to File No. SR-DTC-98-19 and should be submitted by
October 14, 1998.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-25370 Filed 9-22-98; 8:45 am]
BILLING CODE 8010-01-M
