[Federal Register Volume 64, Number 172 (Tuesday, September 7, 1999)]
[Notices]
[Pages 48690-48692]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23107]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41799; File No. SR-DTC-99-20]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing and Order Granting Accelerated Approval of a Proposed
Rule Change Implementing a Freeze on New Participant Accounts and a
Contingency Plan for Withdrawal by Transfer Transactions
August 27, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(Act),\1\ notice is hereby given that on August 19, 1999, The
Depository Trust Company (DTC) filed with the Securities and Exchange
Commission (Commission) the proposed rule change as described in Items
I and II below, which items have been prepared primarily by DTC. The
Commission is publishing this notice and order to solicit comments from
interested persons and to grant accelerated approval of the proposal.
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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
The proposed rule change provides that generally, DTC will not
activate any new participant accounts after September 15, 1999, and
until reasonably practicable in January 2000.\2\ In addition, DTC will
temporarily implement a contingency plan for the processing of
withdrawal by transfer (WT) transactions in the unlikely event that
participant's customers seek to withdraw security positions from
participants due to concerns regarding systems problems related to the
century date change.
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\2\ The proposed rule change is also applicable to DTC's
Mortgage Backed Securities Division.
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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.\3\
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\3\ 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
September 15th New Participant Account Freeze
The proposed rule change provides that generally DTC will not
activate any new participant accounts after September 15, 1999 (the end
of the participant validation testing period),\4\ and until reasonably
practicable in January, 2000. DTC announced in its June 3, 1999,
Important Notice that ``[a]ny organization currently seeking admission
as a direct Participant should plan to complete the admission process
by [September 15], or defer activation of its account until after the
century date change. Similarly, Participants wishing to switch to
computer-to-computer input of settlement-related transactions or switch
to another mode of computer-to-computer input for transactions must
have completed implementation of the changes (and complete the
necessary validation testing) by September 15.''
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\4\ Securities Exchange Act Release No. 40696 (November 20,
1998), 63 FR 65829 (Commission order approving DTC's validation
testing requirement).
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DTC's Rule 2 provides in part that:
The Corporation may decline to accept the application of any
applicant upon a determination by the Corporation that the
Corporation does not have adequate personnel, space, data processing
capacity or other operational capability at that time to perform its
services for additional Participants without impairing the ability
of the Corporation to provide services for its existing
Participants, to assure the prompt, accurate and orderly processing
and settlement of Securities transactions, to safeguard the funds
and Securities held by or for the Corporation for Participants or
Pledgees or otherwise to carry out its functions; provided, however,
that applicants whose applications are denied pursuant to this
paragraph shall be approved as promptly as the capabilities of the
Corporation permit in the order in which their applications were
filed with the Corporation.
DTC believes that continuing to activate numerous new participant
accounts or allowing participants to change their mode of settlement-
related computer input after September 15th could potentially be
disruptive to the rest of its Year 2000 efforts. Specifically, DTC will
be devoting a great deal of resources to its second internal
certification test in October and November of 1999. The internal
certification test involves the testing of DTC's mainframe applications
and systems in order to confirm their Year 2000 readiness.
Additionally, DTC would like to ensure that it has enough time to deal
with any unanticipated issues that arise before the end of the calendar
year.
Withdrawal By Transfer Contingency Plan
In response to concerns expressed by some participants and in
consultation with the Securities Industry Association and the
Securities Transfer Association, DTC will temporarily implement a
contingency plan to deal with the processing of an increased number of
WT transactions (WT contingency plan). The concerns stem from the
possibilitly that customers will seek to withdraw security positions
from participants due to fears relating to the century date change in
spite of customer education campaigns by participants and industry
groups. Should a potential substantial increase in volume materialize,
the WT contingency plan will enable DTC to process as many as 30,000 WT
transactions daily, over triple the current volume of 9,000 WTs daily.
Because WT processing and the related direct mail service \5\ are
highly labor intensive operations for DTC and transfer agents alike,
the WT contingency plan also provides a
[[Page 48691]]
mechanism for curbing volume in the unlikely event it exceeds 30,000 WT
requests on any given day. As described in more detail below, this
aspect of the contingency plan will potentially affect only
participants whose volumes grow substantially higher than their present
day volumes.
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\5\ DTC's direct mail service is comprised of two components,
direct mail by the agent (DMA) and direct mail by DTC (DMD).
Participants may elect to use either DMA or DMD to have their newly
issued WT securities mailed directly to customers by transfer agents
or DTC, respectively.
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The WT contingency plan will be implemented and remain in effect
during the fourth quarter of 1999.\6\ The WT contingency plan is
primarily comprised of (1) an internal task force of employees
available to process increased volumes and (2) system changes to DTC's
automated WT (AWT) system, which commences the WT processing stream.
The AWT system changes described below are designed to prevent daily WT
volume from exceeding 30,000 items in a manner that is fair and
equitable to all participants and requires no programming changes by
participants.
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\6\ In the unlikely event that DTC experiences sustained volumes
of 30,000 WTs daily into the first quarter of the Year 2000, DTC
will keep the WT contingency plan in effect until such time as
volumes return to normal levels.
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DTC has established a database showing the maximum allowable amount
of WTs for each participant. The maximum allowable amount is based on
participants' daily average WT volume for the three month period of
February through April 1999. The maximum allowable amounts will be
triggered only if the aggregate number of WTs submitted by participants
exceeds the threshold of 30,000 on any day in the fourth quarter. A
participant exceeding its maximum allowable amount will not be limited
in its WT volume as long as fewer than 30,000 WTs are requested in
total.
During the fourth quarter, the AWT system will initially process WT
requests as normal, collecting WT requests transmitted by participants
and sending them to the account transaction processor (ATP) to perform
account updating. The WTs are processed in the same sequence as
transmitted by participants. This process is usually finished each day
by 9:30 a.m. Eastern Time (ET).
Under the proposed rule change a new procedure will be introduced
in which AWT will count the aggregate number of items successfully
processed by ATP to determine whether the overall cap of 30,000 items
was exceeded, and the excess amount (total reversal amount). If the cap
is exceeded, procedures will begin to automatically identify and
reverse the required number of WTs to lower the day's total to 30,000
items. To accomplish this, AWT will identify the participants that
surpassed their maximum allowable amounts and will record the excess
items that were processed after their maximum allowable amounts were
reached. The excess items will be stored on a temporary file, sorted in
last in first out order by participant. The system will then select one
excess item per participant from the temporary file and will
continuously repeat this process until enough excess items have been
selected to meet the total reversal amount. WT reversal transactions
will then be created and processed to reverse the chosen excess WTs.
This WT reversal process will be finished by approximately 9:45 a.m.
(ET). Normal processing for WTs not reversed will then resume with DTC
preparing certificates and transfer registration instructions for
delivery to transfer agents.
Under the proposed rule change DTC will not automatically pend WTs
that were reversed by the above procedure. Participants will therefore
be required to submit new WT requests the following business day.
DTC believes that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder. In
particular, the proposed rule change is consistent with Section
17A(b)(3)(F) of the Act \7\ which requires that the rules of a clearing
agency be designed to promote the prompt and accurate clearance and
settlement of securities transactions and, in general, to protect
investors and the public interest.
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\7\ 15 U.S.C. 78q-1(b)(3)(F).
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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 purpose of the Act.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received from Members, Participants, or Others
No comments were solicited or received on the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Section 17A(b)(3)(F) of the Act \8\ requires that the rules of a
clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions. The Commission
finds that the proposed rule change is consistent with this obligation
because the proposed modifications to DTC's Year 2000 policies will
permit DTC sufficient time before year end to complete its Year 2000
preparations. In addition, the implementation of the proposed WT
contingency plan will enable DTC to deal with any substantial increase
in the processing of WT transactions. As a result, DTC should be able
to continue to provide prompt and accurate clearance and settlement of
securities transactions before, on, and after Year 2000 without
interruption.
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\8\ 15 U.S.C. 78q-1(b)(3)(F).
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DTC requested that the Commission find good cause for approving the
proposed rule change prior to the thirtieth day after the publication
of notice of the filing. The Commission finds good cause for approving
the proposed rule change prior to the thirtieth day after the
publication of notice of the filing because such approval will allow
DTC to better prepare for a smooth Year 2000 transition.
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 20549-0609.
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 20549. 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-99-20 and should be submitted by September
28, 1999.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\9\ that the proposed rule change (File No. SR-DTC-99-20) be and
hereby is approved.
\9\ 15 U.S.C. 78s(b)(2).
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[[Page 48692]]
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-23107 Filed 9-3-99; 8:45 am]
BILLING CODE 8010-01-M
