Document ID: SEC-2008-0364-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Company
Posted Date: 2008-03-07T05:00Z

[Federal Register: March 7, 2008 (Volume 73, Number 46)]
[Notices]               
[Page 12485-12487]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07mr08-133]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57392; File No. SR-DTC-2007-16]

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

February 27, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 16, 2007, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') and on February 5, 2008, amended 
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 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 would amend 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'').\2\
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    \2\ The National Securities Clearing Corporation (``NSCC'') has 
filed 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. 57391 
(February 27, 2008) (File No. SR-NSCC-2007-15).
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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 parts of these statements.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    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 a well-qualified foreign 
entity to become a participant 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 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 Participant Policy Statement would require 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 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 Participant Policy Statement was previously approved by 
the Commission on a temporary basis in 1997.\9\ As currently proposed, 
the

[[Page 12486]]

Foreign Participant 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 Participant 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 
100% 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 the 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 Participant 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 or other generally accepted accounting 
principles that are satisfactory to DTC. As it is currently proposed, 
the Foreign Entity Policy Statement retains this requirement 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.
    The proposed rule change is consistent with the requirements of 
Section 17A(b)(3)(F) of the Act. The proposed policy does not unfairly 
discriminate against foreign entities seeking admission as participants 
because it appropriately takes into account the unique risks to DTC 
raised by their admission.

B. Self-Regulatory Organization's Statement on Burden on Competition

    DTC perceives no impact on competition by reason of the proposed 
rule change.

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

    Written comments from DTC participants or others 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 the self-regulatory organization consents, 
the Commission will:
    (a) By order approve the 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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-DTC-2007-16 on the subject line.

Paper Comments:

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
All submissions should refer to File Number SR-DTC-2007-16. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). 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, 100 F Street, NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of DTC. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-DTC-2007-16 and should be 
submitted on or before March 28, 2008.

[[Page 12487]]

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-4401 Filed 3-6-08; 8:45 am]

BILLING CODE 8011-01-P