[Federal Register Volume 66, Number 91 (Thursday, May 10, 2001)]
[Notices]
[Pages 23956-23957]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-11804]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44260; File No. SR-DTC-2001-03]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change to Make Foreign Securities 
Eligible for Depository Services

May 4, 2001.

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on, February 23, 2001, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the 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 on the proposed rule change from interested parties.

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change
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    \1\ 15 U.S.C. 78s(b)(1).
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    The proposed rule change would allow DTC to make eligible for 
depository services foreign securities that are presently eligible for 
the National Securities Clearing Corporation's (``NSCC'') foreign 
security comparison and netting service.

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 these 
statements.

(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 provide DTC and NSCC 
participants who are presently using NSCC's foreign securities clearing 
services the use, if applicable, of depository services at DTC for 
these securities. These securities are generally foreign ordinary 
equities that have been assigned security numbers (CINS) and NASD 
symbols to automate the comparison process. Most trades in foreign 
ordinary shares that are executed between two U.S. broker-dealers are 
forwarded to NASD's Automated Confirmation Transaction system and 
submitted as locked-in trades to NSCC.
    Today, through NSCC's Foreign Securities Comparison and Netting 
system, foreign securities are compared and netted on a bilateral basis 
in a standardized and automated fashion through NSCC's over-the-counter 
system. Receive and deliver instructions are automatically generated by 
NSCC and are distributed to participants on the morning after 
comparison, which expedites the settlement process for non-U.S. equity 
transactions. Trades are netted on a bilateral participant-to-
participant basis thereby reducing the number of deliveries for 
settlement in the local market. NSCC does not currently and will not 
under the proposed rule change guarantee the ultimate settlement of 
these transactions or the clearance cash adjustment.
    Given the increase in activity over the last few years, U.S. 
broker-dealers have become concerned about the number of potential risk 
and operational issues associated with the current process, such as the 
lack of straight through processing (``STP'') from the point of trade 
to settlement. It is DTC's plan to enhance the settlement part of the 
process and to deliver an automated approach to complete the STP 
process from trade to settlement. In doing so, many operational issues 
will be minimized or eliminated.
    Today, there is a separation between the physical movement of these 
foreign securities and the money settlement of the trades (i.e., there 
is no delivery versus payment (``DVP'') as there is true for U.S. 
trades). The delivery of the

[[Page 23957]]

securities occurs in the foreign markets and then some time later the 
payment is made in the U.S.
    Currently, trades in these foreign securities executed in the U.S. 
must settle in the local market without the benefit of any of DTC's 
infrastructure. Therefore, U.S. based broker-dealers who trade in 
foreign securities in the U.s. must set up correspondent relationships 
in the local market. Additionally, the U.S. broker-dealers must each 
deal separately with the inherent inefficiencies, such as large time-
zone differences, in this structure. Also, the need to set up such 
correspondent relationships puts smaller broker-dealers at a 
disadvantage because many smaller broker-dealers do not have the 
resources or trading volumes to justify such relationships and 
therefore must enlist a large broker-dealer to perform such services 
for their clients. As a result, trading costs for the underlying 
investors are increased.
    DTC's plan is to open a custodial account in a local market with an 
agent bank or central securities depository (``CSD'') (collectively 
``custodian'') that will hold shares on DTC's behalf. DTC's 
participants will be able to communicate with DTC with respect to 
foreign securities as they do today with respect to currently eligible 
U.S. securities. Due to differences in local market practice from that 
in the U.S., the eligibility procedures for foreign securities will 
likely differ from those currently used by DTC for eligible U.S. 
securities. However, participants will be made aware of this fact and 
of the eligibility criteria and procedures. These securities will be 
``tagged'' in DTC's system in order for DTC participants to readily 
identify them.
    DTC's first such link will be with Citibank N.A., Hong Kong Branch, 
acting as DTC's custodian.\2\ Through the custodian, a participant 
would move overseas inventory from its current custodian into DTC's 
account at DTC's foreign custodian. Upon notification from its 
custodian that the foreign securities are being held in its account, 
DTC would update the participant's securities position at DTC. Once the 
position is on DTC's books and records, the participant would be able 
to move the position by book-entry DVP if desired. In addition, other 
activities, such as automated customer account transfer services and 
stock loan, that are currently available for U.S. securities would also 
be available for foreign securities once they are made DTC eligible.
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    \2\ DTC will submit a proposed rule change under Section 19(b) 
before establishing any new link with any foreign custodian.
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    The DTC Risk Management Committee will review this service before 
DTC goes live with it. The committee will use the same due diligence 
template that it has used on all ``outward bound'' links with foreign 
CSDs.
    The principal benefits that will attend DTC's making these foreign 
securities eligible for certain depository services are: (1) connecting 
the delivery to the settlement on a DVP basis; (2) accelerating the 
speed of settlement of cross-border transactions in these foreign 
securities; (3) eliminating most physical movements of these foreign 
securities; (4) reducing costs and risks to DTC participants (DTC's 
providing these benefits to its participants is consistent with DTC's 
objective of providing efficient book-entry clearance and settlement 
facilities while at the same time reducing risks to its participants.); 
and (5) making these services available to a large number of U.S. 
entities (i.e., DTC participants and their clients and customers).
    The proposed rule change is consistent with the requirements of 
Section 17A(b)(3)(A) and (F) of the Act and the rules and regulations 
thereunder applicable to DTC because the proposed rule change will 
reduce risks and associated costs to DTC participants. Further, the 
proposed rule change will be implemented and designed to promote the 
prompt and accurate clearance and settlement of securities transactions 
and to assure safeguarding of securities and funds that are in the 
custody or control of DTC or for which DTC is responsible.

(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, in the public interest, and for 
the protection of investors.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received from Members, Participants or Others

    This concept was presented to the operations and planning committee 
of DTC and DTC Board of Directors. A number of DTC firms have voiced 
strong support of this project at the Board level.

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 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, N.W., Washington, D.C. 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, N.W., Washington, 
D.C. 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-2001-03 and should be submitted by May 31, 
2001.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-11804 Filed 5-9-01 8:45 am]
BILLING CODE 8010-01-M