[Federal Register Volume 59, Number 152 (Tuesday, August 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19375]


[[Page Unknown]]

[Federal Register: August 9, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34480; File No. SR-DTC-94-10]

 

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of a Proposed Rule Change Establishing a Fee Schedule 
for Certain Inter-Depository Deliveries

August 2, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 7, 1994, 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 groups.
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    \1\15 U.S.C. Sec. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    DTC is proposing the following changes in its fee schedule:

------------------------------------------------------------------------
          Service                Present fee            Proposed fee    
------------------------------------------------------------------------
XVIII.                                                                  
    Inter-Depository                                                    
     Delivery Fees to                                                   
     Participants:                                                      
        Valued      $.77*................  No Change.           
         (third-party).                                                 
        Free        None*................  $.64*.               
         delivery.                                                      
        Fourth-     None.................  $.32* to each        
         party delivery.                            depository.         
------------------------------------------------------------------------
*In addition to the regular Deliver Order fee charged to a Participant  
  for each item delivered, received or reclaimed.                       

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 that 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.

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 make changes to the 
fee schedule for inter-depository deliveries. DTC maintains interfaces 
with two other registered securities depositories, the Midwest 
Securities Trust Company (``MSTC'') and Philadelphia Depository Trust 
Company (``Philadep''). DTC processes four types of inter-depository 
deliveries: Regional Interface Operations (``RIO'') deliveries, Valued 
(``Third-Party'') deliveries, Free deliveries, and Fourth-Party 
deliveries. Currently, DTC charges fees for RIO and Third-Party 
deliveries.\2\
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    \2\In 1977, DTC filed a proposed rule change under Section 
19(b)(2) of the Act seeking Commission approval to impose a 
surcharge on participants that deliver or receive securities through 
interface accounts (i.e., RIO or Third-Party). Securities Exchange 
Act Release No. 14109 (October 27, 1977), 42 FR 58991 [File No. SR-
DTC-77-10] (notice of filing of proposed rule change). Subsequently, 
the Commission issued two orders instituting proceedings to 
determine whether to approve or disapprove Fine No. SR-DTC-77-10. 
Securities Exchange Act Release Nos. 20461 (December 7, 1983), 48 FR 
55654 and 23083 (March 31, 1986), 51 FR 12421. Pending Commission 
action on File No. SR-DTC-77-10, DTC filed a separate proposed rule 
change under Section 19(b)(2) of the Act seeking approval for Third-
Party delivery fees. Securities Exchange Act Release No. 14655 
(April 11, 1978), 43 FR 16576 [File No. SR-DTC-78-6] (notice of 
filing of proposed rule change). Subsequently, DTC amended File No. 
SR-DTC-78-6 to change it from a filing under Section 19(b)(2) of the 
Act to a filing under Section 19(b)(3)(A) of the Act. As a result, 
the Third-Party delivery fees became effective immediately. 
Securities Exchange Act Release No. 14835 (June 9, 19978), 15 SEC 
Docket 4 (June 27, 1978).
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    RIO deliveries are interregional clearing corporation deliveries 
related to continuous net settlement deliveries into or out of the 
National Securities Clearing Corporation's (``NSCC'') account at DTC. A 
RIO delivery represents the net of all trades in a security settling 
that day on DTC's books between two clearing corporations. Valued 
(Third-Party) deliveries occur when a DTC participant delivers to or 
receives from a counterparty that is a participant only in another 
depository. Free deliveries typically relate to a DTC participant's 
moving a securities position to or from its DTC account from or to its 
account at another depository. Fourth-Party deliveries are deliveries 
between MSTC and Philadep participants that are routed through DTC. The 
deliveries occur through DTC because the interface between MSTC and 
Philadep is through DTC.
    DTC incurs both internal and external expenses in operating the 
interfaces. The Internal expenses include computer usage and support; 
dividend, reorganization, and redemption processing; reconciliation of 
positions; and certificate inventory management. The external costs to 
DTC are fees imposed by the other depositories as agreed to by DTC and 
each depository.
    DTC now recovers some interface expenses from the RIO and Third-
Party delivery fees. Each of these fees is designed to recover DTC's 
estimated annual internal expense for the service. In DTC's 1994 fee 
schedule, the RIO delivery fee is $.70, up from $.42 in 1993; the 
Third-Party delivery fee is $.77, up from $.49 in 1993.\3\ DTC has 
received no adverse comment on the RIO or Third-Party fees in recent 
years.
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    \3\Securities Exchange Act Release No. 33985 (May 2, 1994), 59 
FR 23905 [File No. SR-DTC-94-03] (notice of Filing and immediate 
effectiveness of proposed rule change setting forth DTC's 1994 fee 
schedule).
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    DTC's proposed rule change will establish new fees for Free 
deliveries and Fourth-Party deliveries at a level that will recover 
DTC's estimated internal 1994 service cost based on budgeted 
transaction volumes. Under the proposed rule change, the Free delivery 
fee will be $.64, which is in addition to the regular Deliver Order 
fee, and the Fourth-Party delivery fee charged to each depository will 
be $.32 plus the regular Deliver Order fee. Establishment of these two 
fees at these levels will raise DTC's interface cost recovery from 
inter-depository delivery fees from 29% to 59%.\4\ Subject to 
Commission approval of the proposed rule change, DTC will seek in a 
subsequent proposed rule filing to reduce DTC's Deliver Order fee by 
$.03 because $.03 of interface expenses will be recovered from the 
actual interface users through the proposed new fees for Free and 
Fourth-Party deliveries.\5\ The average Deliver Order fee is now $.30 
in the Next-Day Funds Settlement system.
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    \4\During each of the two years following Commission approval of 
the subject proposed fees, DTC will file with the Commission under 
Section 19(b)(2) of the Act proposed changes in those fees that will 
have the effect of gradually increasing its interface cost recovery 
from interface fees to 100%. During this period, DTC also intends to 
continue its practice of including changes in the fees for valued 
inter-depository deliveries in the schedules of revised DTC services 
that are filed annually under Section 19(b)(3)(A) of the Act.
    \5\Telephone Conversation between Richard B. Nesson, General 
Counsel, DTC, and Margaret J. Robb, Staff Attorney, Division of 
Market Regulation, Commission (July 18, 1994).
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    The policy of the Board of Directors of DTC has always been that 
DTC's costs arising from use of the interfaces between DTC and other 
securities depositories should be translated into DTC fee charges to 
those who actually use the interfaces. Because depositories have a more 
diverse set of participants, many of whom never use such interfaces and 
most who do use the interfaces do so infrequently, interface costs are 
not mutualized at depositories as they are at clearing corporations. 
For example, an analysis of inter-depository deliveries during the 
first four months of 1994 shows that while Free deliveries (largely 
self-deliveries) between participants' MSTC or Philadep accounts and 
their DTC accounts were made by 62% of DTC participants, 3% of DTC 
participants account for 80% of all such deliveries.
    Some participants making self-deliveries deposit certificates in 
another depository and make self-deliveries of positions back to their 
DTC accounts. This leaves DTC to deal with the consequences that the 
physical certificates are still on deposit at the other depository. 
Those consequences affect all DTC participants by increasing DTC 
service fees, delaying reorganization activity, and reducing dividend, 
interest, and reorganization investment income refunds to DTC 
participants due to later receipt of payments. Other adverse 
consequences for all DTC participants occur when DTC's access to 
securities underlying the positions moved to DTC by book-entry is 
limited.
    DTC believes the proposed rule change is consistent with DTC's 
obligations under Section 17A(b)(3)(D)\6\ of the Act which authorizes 
DTC to provide for the equitable allocation of reasonable fees among 
its participants.
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    \6\15 U.S.C. Sec. 78q-1(b)(3)(D) (1988).
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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. The proposed rule change will 
more equitably allocate DTC's costs between DTC participants that use 
the interfaces and participants that do not.
    Among other things, inter-depository interfaces allow companies in 
one or more geographic areas to do business with companies in another 
geographic area at a small fraction of the cost they would incur if 
they were dealing with physical securities even after paying depository 
interface fees. Such is the extraordinary cost savings and competitive 
effect derived from securities immobilization and book-entry delivery. 
So long as interface fees do not exceed interface costs, such fees are 
not only fair but fully justified.

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

    DTC has not solicited comments on the proposed rule change. DTC 
will send a memorandum to its participants concerning this proposal and 
the rationale for DTC recovery of its interface costs from cost-based 
fees charged to interface users. Any comments received by DTC will be 
forwarded to the Commission for inclusion in the Commission's public 
file 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington DC 20549. 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 Section, 450 Fifth Street NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal offices of DTC. All submissions 
should refer to File No. SR-DTC-94-10 and should be submitted by August 
30, 1994.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\17 CFR 200.30-3(a) (12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-19375 Filed 8-8-94; 8:45 am]
BILLING CODE 8010-01-M