[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]


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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.
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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 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:
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    \2\ These parties have entered into an agreement dated as of 
June 18, 1997.
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    (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\
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    \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.
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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 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\
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    \4\ 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

    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.
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    \5\ The term ``same-day funds'' refers to payment in funds that 
are immediately available and generally are transferred by 
electronic means.
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    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\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-27321 Filed 10-15-97; 8:45 am]
BILLING CODE 8010-01-M