[Federal Register Volume 59, Number 111 (Friday, June 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14125]
[[Page Unknown]]
[Federal Register: June 10, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34166; File No. SR-DTC-94-01]
Self-Regulatory Organizations; The Depository Trust Company;
Order Approving a Proposed Rule Change to Add a Standing Instruction
Database to the Institutional Delivery System
June 6, 1994.
On January 31, 1994, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change (File No. SR-DTC-94-01) under Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'')\1\ to implement the standing
instruction database feature of the enhanced institutional delivery
(``ID'') system.\2\ Notice of the proposal was published in the Federal
Register on March 4, 1994.\3\ The Commission received three comment
letters supporting implementation of the proposal.\4\ The Commission
also received one comment letter that discussed the structure of
current self-regulatory organization (``SRO'') confirmation/
acknowledgement rules and a response to the comment letter from DTC.\5\
For the reasons discussed below, the Commission is approving the
proposed rule change.
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\1\15 U.S.C. 78(b)(1) (1988).
\2\The Commission recently approved the overall concept of the
enhanced ID system. Securities Exchange Act Release No. 33466
(January 12, 1994), 59 FR 3139 [File No. SR-DTC-93-07]. The approval
order sets forth a description and discussion of the enhancements
being made to the ID system and requires DTC to submit for each
principal new feature the finalized rules and procedures in a
proposed rule change filing under Section 19(b)(2) of the Act.
\3\Securities Exchange Act Release No. 33679 (February 24,
1994), 58 FR 59283.
\4\Letters from John Zupan, Chairperson, Bank Depository User
Group, to Secretary, Commission (April 28, 1994), from George J.
Minnig, Chairman, Securities Operations Division, Regulatory &
Clearance Committee of the Securities Industry Association, to
Jonathan G. Katz, Secretary, Commission (April 29, 1994), and from
Lawrence Morillo, Senior Vice President, Pershing, Division of
Donaldson, Lufkin & Jenrette Securities Corporation, to Jonathan G.
Katz, Secretary, Commission (May 12, 1994).
\5\In its comment letter, Thomson Financial Services
(``Thomson'') agreed that DTC's proposal is consistent with Section
17A of the Act but also asserts that the current self-regulatory
organization rules that require the use of the facilities of a
registered securities depository for the confirmation and
acknowledgement of all depository eligible transactions and DTC's
status as a registered securities depository preclude vendors from
competing with DTC in supplying electronic trade confirmation
services. Letter from Dr. Keith B. Jarrett, President, Thomson
Trading Services, Inc. (A Thomson Financial Services Company), to
Jonathan A. [sic] Katz, Secretary, Commission (March 25, 1994)
(``Thomson letter'').
DTC's response to the Thomson letter disputed the statement that
DTC's status as a registered securities depository creates an
anticompetitive environment and precludes Thomson from providing
electronic trade confirmation services. DTC also stressed that the
Commission's review of the standing instruction database feature of
the enhanced ID system was not the proper forum for the initial
consideration of the propriety of SRO rules that require the use of
a registered securities depository for the confirmation and
acknowledgment of transactions in depository eligible securities.
Letter from Carl H. Urist, Deputy General Counsel and Vice
President, DTC, to Jonathan G. Katz, Secretary, Commission, (April
15, 1994) (``DTC's response'').
The Commission believes that the issues raised by the Thomson
letter and DTC's response need not be resolved prior to the approval
of the standing instruction database feature of the enhanced ID
system. The Commission understands that discussions regarding
Thomson's concerns are underway among Thomson, DTC, and the
Securities Industry Association.
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I. Description
The standing instruction database is a central repository for
customer account and settlement information furnished by institutions,
agents, and broker-dealers. The information contained therein includes
items such as the agent for an institutional customer, the agent's
internal account number for the institutional customer, and interested
parties. Using the standing instruction database, a broker-dealer can
link its internal account numbers for its institutional customers with
the institutional customers' internal account numbers. When entering
trade data into the ID system, a broker-dealer can simply refer to its
internal account number in the standing instruction database, and the
ID system will extract the necessary information (such as customer
name, agent, interested parties, and settlement related information)
from the database and automatically will add the information to the
confirmation. The standing instruction database will eliminate the need
for the broker-dealer to provide such information each time that the
broker-dealer enters trade data into the ID system.
The standing instruction database is an account level optional
feature for ID users. A broker-dealer with many institutional accounts
can designate that only specified accounts access the standing
instruction database. If an account is not designated to access the
standing instruction database, the broker-dealer will provide the ID
system with the type of information that is contained in the database.
However, once a broker-dealer links its internal customer account
number with account information furnished to the database by the
institutional customer, the data will be used for certain fields in ID
system processing when the broker-dealer submits trade data for that
institutional customer's trades regardless of whether the broker-dealer
submits data for those fields. Participants will have the ability to
enter a standing instruction database change with a specific effective
date by specifying on which date the addition, change, or deletion
should take effect.
II. Discussion
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency, such as DTC, be designed to promote the prompt and
accurate clearance and settlement of securities transactions.\6\ As
discussed below, the Commission believes that DTC's proposed rule
change is consistent with this obligation.
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\6\15 U.S.C. 78q-1(b)(3)(F).
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The institutional delivery system provides an effective electronic
communication network that replaces the written documents that used to
be passed among broker-dealers, investment managers, and custodian
banks in order for these parties to settle transactions within the
regular-way (five business day) settlement cycle. In order to
facilitate timely settlement of institutional trades, which constitute
a significant percentage of all market trades, several self-regulatory
organizations amended their rules in 1982 to require broker-dealers
that extend delivery versus payment credit privileges on transactions
in depository eligible securities to use the facilities of a registered
securities depository for the confirmation, affirmation, and settlement
of these transactions.\7\ Those changes were designed to facilitate
routine trading volume of 100 million shares. In the twelve years since
the use of a registered securities depository for generating
confirmations and affirmations became mandatory, the U.S. securities
markets have handled unprecedented volume and routinely settle trading
of 300-400 million shares daily.
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\7\For a discussion of the necessity of such SRO rules, see
Securities Exchange Act Release Nos. 19227 (November 9, 1982), 47 FR
51658 and 33515 (January 24, 1994), 59 FR 4295 (orders approving
proposed rule changes).
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DTC's proposal expands the range of functions available to users of
the ID system. In particular, the proposal will allow broker-dealers,
institutions, and agents to leave with DTC certain trade settlement
information that routinely appears on each confirmation and to draw on
that information quickly when formatting confirmations. This will
promote the prompt and accurate clearance and settlement of securities
transactions consistent with Section 17A of the Act.
During the last twelve years, private vendors have offered services
that are based on the ID system and encompass some of the features that
DTC now proposes to offer its participants. One such service provides
database features which allow institutions to advise broker-dealers how
to allocate trades among institutional clients and which supply that
data to DTC's ID system to be used in generating confirmation and
affirmations. The Commission is satisfied that these private vendors
will be able to continue to provide these services and supply data to
ID.
The standing instruction databases, along with the other
enhancements to DTC's ID system,\8\ also will facilitate the industry's
conversion to a three business day settlement cycle which will be the
standard settlement time for most broker-dealer trades beginning June
1, 1995.\9\
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\8\Supra note 2.
\9\For a detailed description and discussion of the conversion
to a three business day settlement cycle, see Securities Exchange
Act Release No. 33023 (October 13, 1993), 58 FR 52891 [File No. S7-
5-93] (adopting Commission Rule 15c6-1).
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III. 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 with the requirements of Section 17A of the Act and the
rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule change (File No. SR-DTC-94-01) be, and
hereby is, approved.
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\10\15 U.S.C. 78s(b)(2).
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\17 CFR 200.30-3(a)(12) (1993).
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Jonathan G. Katz,
Secretary.
[FR Doc. 94-14125 Filed 6-9-94; 8:45 am]
BILLING CODE 8010-01-M