[Federal Register Volume 60, Number 228 (Tuesday, November 28, 1995)]
[Notices]
[Pages 58693-58695]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28935]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36497; File No. SR-DTC-95-22]


Self-Regulatory Organizations; the Depository Trust Company; 
Notice of Filing of Proposed Rule Change Regarding Arrangement Between 
the Depository Trust Company and the Chicago Stock Exchange, 
Incorporated Relating to a Decision by the Chicago Stock Exchange, 
Incorporated to Withdraw from the Clearance and Settlement, Securities 
Depository, and Branch Receive Businesses

November 20, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 13, 1995, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No 
SR-DTC-95-22) 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.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The proposed rule change involves proposed arrangements relating to 
a decision by the Chicago Stock Exchange, Incorporated (``CHX'') to 
withdraw from the clearance and settlement, securities depository, and 
branch receive businesses. Parties to the proposed arrangements are 
DTC, CHX, Midwest Securities Trust Company (``MSTC''), the National 
Securities Clearing Corporation (``NSCC''), the Midwest Clearing 
Corporation (``MCC'') and Securities Trust Company of New Jersey 
(``STC/NJ'').\2\

    \2\ STC/NJ is a wholly-owned subsidiary of CHX that currently 
provides certain services, including a securities custody service. 
STC/NJ is not a clearing agency as defined in the Act and therefore 
is not required to register with the Commission.
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    The proposed arrangements as they relate to DTC would provide for 
the following:
    (1) DTC would offer sole MSTC participants an opportunity to become 
DTC participants if they meet DTC's qualifications.
    (2) DTC and MSTC would cooperate to assure the orderly transfer of 
securities from the custody of MSTC to the custody of DTC for (i) sole 
MSTC participants and (ii) dual DTC/MSTC participants which authorize 
such transfer.
    (3) DTC would acquire certain assets and assume certain lease and 
other contractual obligations of STC/NJ.
    (4) DTC would assume certain lease obligations of CHX.
    (5) DTC would make certain payments to CHX, MSTC, and STC/NJ.
    (6) In general, for a period of ten years CHX, MSTC, and STC/NJ 
would not engage in the businesses from which they have decided to 
withdraw (i.e., the securities depository and branch receive 
businesses). However, CHX and its subsidiaries would be free to provide 
specified securities depository-related services and products to CHX 
members and certain third-parties.
    The proposed rule change seeks to make conforming changes in DTC 
procedures to, among other things, (i) eliminate the service of 
providing fourth-party deliveries between participants of the 
Philadelphia Depository Trust Company (``Philadep'') and participants 
of MSTC through the facilities of DTC and (ii) allocate the DTC general 
refund to sole DTC participants to the extent necessary to equalize the 
benefit of the arrangements between sole DTC participants and dual DTC/
MSTC participants which will realize significant cost savings as a 
result of the proposed arrangements.

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 

[[Page 58694]]
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\

    \3\ The Commission has modified the text of the summaries 
prepared by DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    CHX has announced that it plans to close its clearance and 
settlement and securities depository businesses in order to focus its 
resources on the operations of the exchange. CHX has determined to take 
that action now to support the securities industry's efforts to 
eliminate redundant infrastructure. The proposed arrangements have been 
designed to permit CHX to achieve this objective while affording 
qualified sole MSTC participants an opportunity to become DTC 
participants and transfer their securities to DTC. DTC's primary 
purpose for entering into the proposed arrangements at this time is to 
facilitate the industry's planned conversion to same-day funds 
settlement.\4\ Additionally, DTC has stated that the proposal will 
result in substantial savings for DTC participants and the securities 
industry as a whole.

    \4\ The term ``same-day funds'' refers to payment in funds that 
are immediately available and generally are transferred by 
electronic means.
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    Currently, transactions in equities, corporate debt, and municipal 
debt are settled in next-day funds.\5\ Transactions in commercial paper 
and other money market instruments are settled in same-day funds. As 
the Commission is aware, DTC and NSCC have been working with the 
industry over the last few years to develop a system that will provide 
for the settlement of virtually all securities transactions in same-day 
funds. DTC's and NSCC's efforts have been encouraged by the Commission, 
the Board of Governors of the Federal Reserve System, and the Federal 
Reserve Bank of New York, and their plans have been monitored by the 
staffs of these regulatory bodies.\6\ Under the conversion plan, all 
issues currently settling in DTC's next-day funds settlement system 
will be transferred to DTC's same-day funds settlement system on a 
single day. Several months ago, a consensus was reached that the 
conversion date will be February 22, 1996.

    \5\ The term ``next-day funds'' refers to payment by means of 
certified checks that are for value on the following day.
    \6\ In approving certain modifications of DTC's existing system 
in order to accommodate the overall conversion to same-day funds 
settlement, the Commission stated that it believes that the overall 
conversion to a same-day settlement system will help reduce systemic 
risk by eliminating overnight credit risk. The same-day funds 
settlement system also will reduce risk by achieving closer 
conformity with the payment methods used in the derivatives markets, 
government securities markets, and other markets. Securities 
Exchange Act Release No. 35720 (May 16, 1995), 60 FR 27360 [File No. 
SR-DTC-95-06] (order granting accelerated approval to proposed rule 
change modifying the same-day funds settlement system).
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    Where there are interface between securities depositories, same-day 
funds settlement exposes each depository to certain risks, such as the 
failure of another depository to settle its net payment obligation 
because of a failure by one of the participants of such other 
depository to settle with it or because such other depository is 
experiencing a major systems problem. These risks cannot be entirely 
avoided with existing and available risk management controls. CHX's 
withdrawal from the securities depository business will eliminate the 
exposure of DTC and its participants to the payment system risks 
associated with the DTC-MSTC interface. Also, the interests of MSTC 
participants can be provided for in an orderly manner that will help 
assure successful integration in the process of converting to same-day 
funds settlement.
    The proposed arrangements should result in substantial savings for 
DTC participants and the securities industry. In connection with this 
proposal, former sole MSTC participants may become DTC participants if 
they qualify under DTC's participant standards. An increase in the 
number of DTC participants will result in higher DTC transaction 
volumes thereby reducing the per-unit service costs that must be 
recovered through DTC participant service fees.
    Moreover, interdepository interfaces involve the maintenance of 
substantial facilities, communications networks, and account and 
inventory reconciliation mechanisms. As a result of the proposal, the 
substantial costs incurred by both DTC and MSTC in operating an 
interface would be eliminated.
    In addition to the DTC costs savings that would be passed through 
to all DTC participants, dual DTC/MSTC participants would achieve 
special savings by discontinuing their payment of MSTC fees for largely 
redundant custody-related processing. DTC has a policy of refunding to 
its participants each year all revenues in excess of current and 
anticipated needs. In order to equalize the payback on DTC's investment 
in the arrangements as between dual DTC/MSTC participants and sole DTC 
participants, which would not obtain the special savings, DTC proposes 
to ``ear-mark'' a portion of its general refund for 1995 and to the 
extent necessary for 1996 and subsequent years for allocation to sole 
DTC participants only.
    DTC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act and the rules and regulations 
thereunder because the rule proposal will facilitate the industry's 
conversion of same-day funds settlement for virtually all securities 
transactions and thereby facilitate the prompt and accurate clearance 
and settlement of such transactions. The proposal also will provide 
qualified sole MSTC participants with access to DTC's facilities and 
will be implemented consistently with the safeguarding of securities 
and funds in DTC's custody and control.
    In addition, the proposed allocation of DTC's general refund will, 
consistent with the requirements of the Act, assure that DTC's costs 
associated with the proposed arrangements are equitably allocated among 
sole DTC participants and dual DTC/MSTC participants based upon DTC's 
estimate of the savings that each of these groups will obtain as a 
result of the proposed arrangements.
    Because CHX no longer will be operating a securities depository, 
certain changes will be required in DTC procedures, principally the 
elimination of fourth-party deliveries between MSTC participants and 
Philadep participants through the interfaces that DTC has maintained 
with MSTC and Philadep.\7\

    \7\ MSTC and Philadep never established their own interface.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed arrangements will have an 
impact on or impose a burden on competition. Securities depositories 
registered under section 17A of the Exchange Act are utilities created 
to serve members of the securities industry for the purpose of 
providing certain services that are ancillary to the businesses in 
which industry members compete with one another. Operating a securities 
depository requires a substantial and continuing investment in 
infrastructure, including securities vaults, telecommunications links 
with users, data centers, and disaster recovery facilities, in order to 
meet the increasing needs of participants and to respond to regulatory 
requirements.

[[Page 58695]]

    After consummation of the proposed arrangements, securities 
industry members will continue to have access to high-quality, low-cost 
depository services provided under the mandate of the Act. The overall 
cost to the industry of having such services available will be reduced 
thereby permitting a more efficient and productive allocation of 
industry resources. Furthermore, because most of a depository's 
interface costs must be mutualized, thereby requiring some participants 
to subsidize costs incurred by others, CHX's withdrawal from 
maintaining depository facilities will reduce costs to DTC participants 
and thereby remove impediments to competition. Finally, CHX's ability 
to focus its resources on the operations of its exchange should help 
enhance competition among securities markets.

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

    Written comments on the proposal from DTC Participants or others 
have not been solicited or received. The proposed arrangements are, 
however, consistent with recommendations made to the Boards of DTC and 
NSCC by the Vision 2000 Committee (``Committee''), a committee of 
industry representatives of the two Boards. The Committee's Report 
dated September 1994 states:

    The industry owns a number of utilities that provide services 
related to the comparison, clearing, settlement and safekeeping of 
U.S. (and to a lesser degree, international) securities. These 
utilities overlap in two ways.* * * We believe that the industry's 
and, as important, the investors', overall costs can be reduced and 
safety and soundness can be enhanced by eliminating these overlaps 
where there is no clear advantage to having specialization or 
competing development.

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 such 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, N.W., Washington, D.C. 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. Sec. 552, will be available for inspection and copying in 
the Commission's Public Reference Room, 450 Fifth Street, N.W., 
Washington, D.C. Copies of such filing also will be available for 
inspection and copying at the principal office of DTC. All submissions 
should refer to the file number SR-DTC-95-22 and should be submitted by 
December 19, 1995.

    For the Commission by the Division of market Regulation, 
pursuant to delegated authority.\8\

    \8\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-28935 Filed 11-27-95; 8:45 am]
BILLING CODE 8010-01-M