Document ID: SEC-2008-1152-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2008-08-19T04:00Z

[Federal Register: August 19, 2008 (Volume 73, Number 161)]
[Notices]               
[Page 48411-48413]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19au08-74]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58345; File No. SR-DTC-2007-16]

 
Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Approval of a Proposed Rule Change Relating to the 
Admission of Foreign Entities as Direct Depository Participants

August 12, 2008.

I. Introduction

    On November 16, 2007, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') and on 
February 5, 2008, amended proposed rule change SR-DTC-2007-13 pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ Notice of the proposal was published in the Federal 
Register on March 7, 2008.\2\ No comment letters were received. For the 
reasons discussed below, the Commission is granting approval of the 
proposed rule change as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 57392 (February 27, 
2008), 73 FR 12485.
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II. Description

    The proposed rule change amends DTC's policy statement regarding 
the admission of participants to permit entities that are organized in 
a foreign country and are not subject to U.S. federal or state 
regulation (``foreign entities'') to become eligible to become direct 
DTC participants (``Foreign Entity Policy Statement'').\3\
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    \3\ The National Securities Clearing Corporation (``NSCC'') 
filed and the Commission has approved a similar proposed rule change 
that would permit NSCC to adopt a similar policy statement with 
respect to the admission of foreign entities as members. Securities 
Exchange Act Release No. 58344 (August 12, 2008) (File No. SR-NSCC-
2007-15).
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    In 1990, DTC adopted a Policy Statement on the Admission of 
Participants (``1990 Policy Statement'') to make clear that in 
determining whether to grant access to its services, DTC regards as a 
critical factor that an applicant is subject to comprehensive U.S. 
federal or state regulation relating to, among other things, capital 
adequacy, financial reporting and recordkeeping, operating performance, 
and business conduct.\4\ Generally under the 1990 Policy Statement, 
unless an applicant is subject to U.S. federal or state regulatory 
agency oversight, the applicant would not be eligible to become a DTC 
participant.\5\ Since 1990, DTC has admitted a small number of foreign 
entities where their obligations to DTC have been guaranteed by 
creditworthy DTC participants.
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    \4\ Securities Exchange Act Release No. 28754 (January 8, 1991), 
56 FR 1548 (January 15, 1991) (File No. SR-DTC-90-01).
    \5\ DTC recognized, however, that any person designated by the 
Commission pursuant to Section 17A(b)(3)(B)(vi) of the Act, even if 
not subject to such regulatory oversight, would be eligible for 
admission. The 1990 Policy Statement was approved by the Commission 
on January 8, 1991.
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    The purpose of the proposed Foreign Entity Policy Statement is to 
establish admissions criteria that will permit well-qualified foreign 
entities to become participants of DTC and to obtain direct access to 
DTC's services while assuring that the unique risks associated with the 
admission of foreign entities are adequately addressed.\6\
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    \6\ DTC's proposed ``Policy Statement on the Admission of Non-
U.S. Entities as Direct Depository Participants'' is attached as 
Exhibit 5 to its filing, which can be found at http://www.dtcc.com/
downloads/legal/rule_filings/2007/dtc/2007-16.pdf.
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    The admission of foreign entities as participants raises a number 
of unique risks and issues, including that (1) the entity is not 
subject to U.S. federal or state regulation, (2) that the operation of 
the laws of the entity's home country and time zone differences \7\ may 
impede the successful exercise of DTC's rights and remedies 
particularly in the event of the entity's failure to settle, and (3) 
financial information about the foreign entity made available to DTC 
for monitoring purposes may be less adequate than the financial 
information about U.S.-based entities.
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    \7\ Time zone differences may complicate communications between 
a foreign participant and its U.S. Settling Bank with respect to the 
timely payment of the participant's net debit to DTC including 
intraday demands for payment. These differences may also delay DTC's 
receipt of information available in the foreign participant's home 
country to others including its other creditors about the foreign 
participant's financial condition on the basis of which DTC would 
have taken steps to protect the interests of DTC and its 
participants.
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    The Foreign Entity Policy Statement requires that in addition to 
executing the standard DTC Participation Agreement the foreign entity 
enter into a series of undertakings and agreements that are designed to 
address jurisdictional concerns and to assure that DTC is provided with 
audited financial information that is acceptable to DTC.\8\ The 
proposed policy statement would also require that the foreign entity 
(1) be subject to regulation in its home country and (2) be in good

[[Page 48412]]

standing with its home country regulator.
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    \8\ In the Foreign Entity Policy Statement, DTC has reserved the 
right to waive certain of these criteria where such criteria are 
inappropriate to a particular applicant or class of applicants 
(e.g., a foreign government or international or national central 
securities depositories).
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    The Foreign Entity Policy Statement was previously approved by the 
Commission on a temporary basis in 1997.\9\ As currently proposed, the 
Foreign Entity Policy Statement would retain all the requirements of 
the previous version with the exception of the ``special financial 
conditions'' requirements, as explained below. It would also include 
new requirements with respect to non-U.S. GAAP financial statements and 
anti-money laundering (``AML'') risk.
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    \9\ Securities Exchange Act Release Nos. 38600 (May 9, 1997), 62 
FR 27086 (May 16, 1997) (File No. SR-DTC-96-13); 40064 (June 3, 
1998), 63 FR 31818 (June 10, 1998) (File No. SR-DTC-98-11); 41466 
(May 28, 1999), 64 FR 30077 (June 4, 1999) (File No. SR-DTC-99-12); 
42865 (May 30, 2000), 65 FR 36188 (June 7, 2000) (File No. SR-DTC-
00-07); 44470 (June 22, 2001), 66 FR 34972 (July 2, 2001) (File No. 
SR-DTC-2001-10). Approval of the Foreign Entity Policy Statement as 
previously filed and temporarily approved by the Commission extended 
through May 31, 2002.
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    The Foreign Entity Policy Statement previously included ``special 
financial conditions'' requirements applicable to participants that 
were foreign entities. The special financial conditions requirements 
mandated that a foreign entity have and maintain minimum net capital of 
1000% of the minimum net capital for the admission of a U.S. entity. A 
foreign entity was also required to have additional ``special 
collateral'' in its account equal to fifty percent of its net debit 
cap. Any net debit of the foreign entity had to be supported by the 
value of other, non-special collateral including securities received by 
the participant valued in accordance with DTC's customary haircuts. 
Except for U.S. Treasury securities, which received a haircut of 2 
percent, securities posted as special collateral received a haircut of 
50% of their market value. The foreign entity did not receive credit 
for special collateral in DTC's collateral monitor. DTC now believes 
that its net debit cap, collateral monitor, and other risk management 
controls and procedures applicable to all participants together with 
the other requirements of the Foreign Entity Policy Statement would 
adequately limit DTC's exposure in the event of a failure to settle and 
insolvency of a foreign participant without the need for the special 
financial conditions requirement.\10\
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    \10\ Additionally, in the Foreign Entity Policy Statement, DTC 
has reserved the right to require a foreign entity to deposit 
additional amounts to DTC's participants fund and the right to 
require a letter of credit as the form of participant fund 
collateral where DTC in its sole discretion believes the entity 
presents legal risk.
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    The Foreign Entity Policy Statement also previously required 
foreign entities to provide to DTC for financial monitoring purposes 
audited financial statements prepared in accordance with U.S. generally 
accepted accounting principles (``GAAP'') or other generally accepted 
accounting principles that were satisfactory to DTC. As proposed, the 
Foreign Entity Policy Statement will provide for the submission of 
audited financial statements other than U.S. GAAP, but to address the 
risk presented by accepting financial statements prepared in non-U.S. 
GAAP, DTC would increase the existing minimum financial requirements 
for any foreign entity submitting its financial statements in non-U.S. 
GAAP by a premium. The premiums would be as follows:
    (i) 1\1/2\ times the existing requirement for a foreign entity 
submitting financial statements prepared in accordance with 
International Financial Reporting Standards (``IFRS''), the Companies 
Act of 1985 (``UK GAAP''), or Canadian GAAP;
    (ii) 5 times the existing requirement for a foreign entity 
submitting financial statements prepared in accordance with a European 
Union (``EU'') country GAAP other than UK GAAP; and
    (iii) 7 times the existing requirement for a foreign entity 
submitting financial statements prepared in accordance with any other 
type of GAAP.
    Finally, DTC is proposing to add a new requirement to the Foreign 
Entity Policy Statement that a foreign entity must provide sufficient 
information to DTC so that DTC can evaluate AML risk.

III. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible.\11\ When the Commission previously 
approved DTC's Foreign Entity Policy Statement it found that the policy 
statement was designed to address the jurisdiction differences in 
regulatory structure and in business operations of non-U.S. entities 
with respect to risk control and management. Additionally, the 
Commission found that the policy statement was designed to bind non-
U.S. entities to DTC's rules and procedures in a manner similar to 
domestic participants and was designed to lesson or eliminate the 
negative effects that jurisdictional issues could have on DTC's 
exercise of its rights against non-U.S. entities. The proposed rule 
change adopts a Foreign Entity Policy Statement that is substantially 
similar to the one previously approved by the Commission. DTC has 
eliminated the special financial conditions that were included in the 
earlier policy statement and has added a new requirement to increase 
the minimum financial requirements if the foreign participant submits 
audited financial statements prepared using non-U.S. GAAP. The 
multiples used to calculate the premiums DTC will charge for non-U.S. 
GAAP are identical to those the Commission previously approved for the 
Government Securities Division and MBS Division of the Fixed Income 
Clearing Corporation.\12\ Although DTC will collect less collateral 
than was required under the earlier policy statement, we are satisfied 
with DTC's explanation that its other financial controls, such as in 
its discretion requiring a letter of credit, are sufficiently designed 
to limit risk of loss to DTC or its participants as a result of a 
foreign participant's insolvency. In addition, recent changes in 
bankruptcy law have raised questions about whether DTC could enforce 
its rights to a participant's collateral in non-U.S. jurisdictions. The 
changes with respect to the participants' minimum financial 
requirements should help to ensure that all foreign participants have 
sufficient financial resources to be participants in and meet their 
settlement obligations to DTC. Accordingly, based on this and the 
earlier findings, we find that the Foreign Entity Policy Statement is 
designed assure the safeguarding of securities and funds which are in 
which are in the custody or control of DTC or for which it is 
responsible.
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
    \12\ Securities Exchange Act Release No. 51385 (March 16, 2005), 
70 FR 14736 (March 23, 2005) (File No. SR-FICC-2004-14).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 17A of the Act and the rules and regulations 
thereunder.\13\
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    \13\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-2007-16), as modified by 
Amendment No. 1, be and hereby is approved.

[[Page 48413]]

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-19133 Filed 8-18-08; 8:45 am]

BILLING CODE 8010-01-P