Document ID: SEC-2005-0009-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Depository Trust Co.
Posted Date: 2005-09-21T04:00Z

[Federal Register: September 21, 2005 (Volume 70, Number 182)]
[Notices]               
[Page 55435-55436]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21se05-130]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52446; File Nos. SR-DTC-2005-04, SR-FICC-2005-10, and 
SR-NSCC-2005-05]

 
Self-Regulatory Organizations; The Depository Trust Company, 
Fixed Income Clearing Corporation, and National Securities Clearing 
Corporation; Order Approving Proposed Rule Change To Establish a Fine 
for Members Failing To Conduct Connectivity Testing

September 15, 2005.

I. Introduction

    On May 13, 2005, May 3, 2005, and on May 4, 2005, respectively, The 
Depository Trust Company (``DTC''), the Fixed Income Clearing 
Corporation (``FICC''), and the National Securities Clearing 
Corporation (``NSCC'') filed with the Securities and Exchange 
Commission (``Commission'') proposed rule changes SR-DTC-2005-04, SR-
FICC-2005-10, and SR-NSCC-2005-05 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ On June 7, 2005, NSCC 
amended its proposed rule change. Notice of the proposals, as amended, 
was published in the Federal Register on July 21, 2005.\2\ No comment 
letters were received. For the reasons discussed below, the Commission 
is approving the proposed rule changes.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 52403 (July 15, 2005), 
70 FR 42122.
---------------------------------------------------------------------------

II. Description

    DTC, FICC, and NSCC are imposing a fine on any member that is 
required to conduct connectivity testing for business continuity 
purposes and fails to do so.
    In the aftermath of September 11, 2001, and in conjunction with a 
financial industry white paper, DTC, FICC, and NSCC require 
connectivity testing each year for critical (``Top Tier'') members.\3\ 
The criteria used by DTC, FICC, and NSCC to identify their respective 
Top Tier members were revenues, clearing fund contributions, settlement 
amounts, and trading volumes. Connectivity testing for the Top Tier 
members was initiated on January 1, 2004. Due to the critical 
importance of being able to assess whether a Top Tier member has 
sufficient operational capabilities, DTC, FICC, and NSCC have 
determined that they need the ability to fine any Top Tier member that 
does not test.\4\
---------------------------------------------------------------------------

    \3\ The Federal Reserve, Office of the Comptroller of the 
Currency, and the Commission issued ``Interagency Paper on Sound 
Practices to Strengthen the Resilience of the U.S. Financial 
System.'' [68 FR 17809 (April 11, 2003)]. This document provided 
guidelines that required core clearing and settlement organizations, 
such as DTC, FICC, and NSCC, and others in the financial industry to 
manage business continuity capabilities. DTC, FICC, and NSCC 
developed their testing of Top Tier firms based on the guidelines 
outlined in the white paper.
    \4\ Pursuant to DTC Rule 2, ``Participants and Pledgees,'' 
participants must furnish, upon DTC's request, information 
sufficient to demonstrate operational capability. In addition, DTC 
Rule 21, ``Disciplinary Sanctions,'' allows DTC to impose fines on 
participants for any error, delay or other conduct detrimental to 
the operations of DTC.
    Pursuant to GSD Rule 3, ``Responsibility, Operational 
Capability, and Other Membership Standards of Comparison-Only 
Members and Netting Members,'' the GSD may require members to 
fulfill operational testing requirements as the GSD may at any time 
deem necessary. Pursuant to MBSD Rule 1, Section 3 of Article III, 
all MBSD applicants and members agree to fulfill operational testing 
requirements and related reporting requirements that may be imposed 
to ensure the continuing operational capability of the applicant.
    Pursuant to NSCC Rule 15, ``Financial Responsibility and 
Operational Capability,'' members must furnish to NSCC adequate 
assurances of their financial responsibility and operational 
capability as NSCC may at any time deem necessary. In addition, NSCC 
Rule 48, ``Disciplinary Procedures,'' allows NSCC to impose a fine 
on participants for any error, delay, or other conduct that is 
determined to be detrimental to the operations of NSCC.
---------------------------------------------------------------------------

    Currently, each member of DTC, FICC, and NSCC that is designated as 
Top Tier is advised of this status and is provided with information on 
the testing requirements. Under DTC, FICC, and NSCC's current 
procedures, if testing is not completed by a Top Tier member by the end 
of June, a reminder notice is sent to the member. Thereafter, another 
reminder notice is sent in October and, if necessary, again in 
December.
    The reminder notice sent in December will advise that if testing is 
not completed by December 31, a fine of $10,000 will be imposed. These 
fines will be collected from members in January of the following year. 
The Membership and Risk Management Committee will be notified of all 
members that were fined for failing to complete connectivity testing.
    In the event that any member fails to complete connectivity testing 
for two successive years, the fine that will be imposed at that time 
will be $20,000. Failure to complete testing for more than two 
successive years will result in disciplinary action, including 
potential termination of membership.

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.\5\ The Commission finds that DTC, FICC, 
and NSCC's proposed rule changes are consistent with this requirement 
because the implementation of the fines should help DTC, FICC, and NSCC 
to enforce compliance with their connectivity testing rules for 
business continuity purposes and as a result should better enable them 
to ensure the safeguarding of securities and funds which are in their 
custody or control.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule changes are consistent with the requirements of the Act 
and in particular Section 17A of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule changes (File Nos. SR-DTC-2005-04, SR-FICC-2005-
10, and SR-NSCC-2005-05) be and hereby are approved.

[[Page 55436]]

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\
---------------------------------------------------------------------------

    \6\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. 05-18763 Filed 9-20-05; 8:45 am]

BILLING CODE 8010-01-P