[Federal Register Volume 61, Number 178 (Thursday, September 12, 1996)]
[Notices]
[Pages 48187-48189]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23342]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37652; International Release No. 1017; File No. SR-DTC-
96-13]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of a Proposed Rule Change Relating to the Admission of
Foreign Entities As Depository Participants
September 5, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ Notice is hereby given that on July 12, 1996, The
Depository Trust Company (``DTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change (File No.
SR-DTC-96-13) 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) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
DTC proposes to amend its current participants admissions policy 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 DTC participants.
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.\2\
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\2\ 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
DTC Rules 2 and 3 set forth the basic standards for the admission
of DTC participants. The admission of an entity that is unable to meet
the financial obligations arising from its depository transactions can
directly affect all other participants. Accordingly, DTC's rules
provide that the admission of a participant is subject to an
applicant's demonstration that it meets reasonable standards of
financial responsibility, operational capability, and character.
Furthermore, DTC's rules require all participants to demonstrate to DTC
that these standards are met on an ongoing basis.
In determining whether to grant access to its services, DTC's 1990
``Policy Statement on the Admission of Participants'' (``1990 Policy
Statement'') considers whether the applicant is subject to
comprehensive U.S. federal or state regulation to be a critical
factor.\3\ Such regulation includes, among other things, capital
adequacy, financial reporting and recordkeeping, operating performance,
and business conduct of the applicant. Under the 1990 Policy Statement,
an applicant not subject to
[[Page 48188]]
state of federal regulatory oversight generally would not be eligible
to become a participant.\4\ However, since 1990 DTC has admitted a
small number of foreign entities as participants if their obligations
to DTC are guaranteed by participants deemed creditworthy by DTC.
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\3\ The 1990 Policy Statement is set forth in Securities
Exchange Act Release No. 27808 (March 16, 1990), 55 FR 11279 [SR-
DTC-90-01] (notice of filing of proposed rule change). For a
complete discussion of the 1990 Policy Statement, refer to
Securities Exchange Act Release No. 28754 (January 8, 1991), 56 FR
1548 (order approving proposed rule change).
\4\ However, DTC recognizes 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 could be eligible for
admission.
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Recently, certain participants have requested that DTC consider
changes in the admissions policy that would allow foreign affiliates of
DTC participants to become direct participants without first obtaining
financial guarantees. The purpose of the proposed rule change is to
establish, in lieu of requiring foreign entities to obtain such
guarantees, admissions criteria that will permit a well-qualified
foreign entity to obtain direct access to DTC's service while assuring
that the unique risks associated with the admission of foreign entities
are adequately addressed.\5\
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\5\ Certain of these criteria could be waived where
inappropriate to a particular applicant or class of applicants
(e.g., certain foreign governments or international or national
central securities depositories).
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The admission of foreign entities as participants raises a number
of unique risks and issues, including, without limitation, (i) the
level of state and federal regulation to which the foreign entity would
be subject, (ii) whether the operation of the laws of the entity's home
country and time zone differences \6\ may impede the successful
exercise of DTC's rights and remedies, particularly in the event of the
entity's failure to settle, and (iii) whether the financial information
regarding the foreign entity made available to DTC for monitoring
purposes would be less adequate than information received from U.S.
domestic entities.
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\6\ Time zone differences could complicate communications
between foreign participants and their correspondent U.S. settling
banks with respect to the timely payment of participants' net debit
to DTC or intraday demands for payment. These differences also could
delay DTC's receipt of information concerning a participant's
financial condition thereby placing DTC at a potential disadvantage
relative to other foreign creditors that already have received the
information because actions subsequently taken by DTC to protect
itself or its participants could be limited or foreclosed by the
prior actions of the foreign creditors.
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In an effort to address these issues and concerns, the proposed
rule change will require that the foreign entity, in addition to
executing the standard DTC Participants Agreement, enters into a series
of undertakings and agreements that are designed to address
jurisdictional concerns, sufficiency of collateral, and to assure that
DTC is provided with audited financial information that is acceptable
to DTC. With regard to the undertakings and agreements between the
foreign entity and DTC, jurisdictional issues, and waivers of rights or
immunity with regard to all collateral of the foreign entity deposited
with or pledged to DTC, DTC will require an opinion of counsel
satisfactory to DTC that states, among other things, that all such
undertakings, agreements, and waivers are legal and enforceable against
the foreign entity and will be recognized and given effect under the
laws of the foreign entity's home country.
The proposed rule change also will require that the foreign entity
(i) be subject to regulation in its home country, (ii) be in good
standing with its home country regulator, and (iii) if there is a
central securities depository established in the foreign entity's home
country, be eligible to become a member of that depository.
Furthermore, the proposed rule change will require that the home
country regulatory of the foreign entity have entered into a memorandum
of undertaking with the Commission to share or exchange information.
The proposal also sets forth special financial conditions for
foreign entities. Under the proposed rule change, foreign entities will
be required to have and maintain excess net capital equal to 1000% of
the excess net capital required of U.S. participants.\7\ Foreign
entities also will be required to deposit with or pledge to DTC special
collateral having a value equal to fifty percent of the entity's net
debit cap after the imposition of specified haircuts. Except for U.S.
Treasury securities, securities included in the special collateral
account will receive a haircut of fifty percent. In addition,
securities for which the foreign entity is the sole or a principal
market maker would not be acceptable as special collateral. Most
importantly, the foreign entity will not receive credit for the special
collateral in DTC's Collateral Monitor. Any net debit must be supported
by the value of other, non-special collateral (including any securities
received by the participant) reflecting DTC's customary haircuts. The
effect of these special collateral requirements will help to assure
that DTC does not suffer a loss even if the foreign entity fails to
settle and the market value of the collateral supporting its net debit
decreases by fifty percent or less.
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\7\ To qualify to be a DTC participant, DTC currently requires
that U.S. broker-dealers have and maintain a minimum of $500,000
excess net capital and that banks must have and maintain minimum
equity of $2 million. Therefore, under the proposal, foreign broker-
dealers would be required to have and maintain excess net capital of
$5 million and foreign banks would be required to have and maintain
equity of $20 million to qualify for admission. Telephone
conversation between Richard B. Nesson, Executive Vice President and
General Counsel, DTC, and Mark Steffensen, Special Counsel, Division
of Market Regulation, Commission (August 15, 1996).
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The central purpose of the special financial conditions is to
compensate for the fact that foreign entities are not subject to
regulatory oversight in the U.S. As such, information concerning
impending insolvency of foreign entities will not be available to DTC
through the information-sharing network that has been established among
U.S. self-regulatory organizations.\8\ After receipt of an early
warning from a domestic participant's regulator or from another
clearing agency of which the participant is a member, DTC can take
early measures to protect itself. For example, DTC can demand
additional collateral or permit the participant to effect transactions
on a ``cash and carry'' basis only. Because such information-sharing
will not necessarily be available for a foreign entity, DTC's proposed
financial conditions will require foreign participants to deposit this
special collateral before such participants are permitted to create a
net debit in DTC's settlement system.
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\8\ In 1988, DTC and other U.S. clearing agencies created the
Securities Clearing Group (``SCG''). The primary purpose of the SCG
was to establish formal procedures for the sharing of appropriate
financial, operational, and clearing information about common
members. For a complete description of SCG, refer to Securities
Exchange Act Release No. 27044 (July 18, 1989), 54 FR 30963 [File
Nos. SR-DTC-88-20, SR-MCC-88-10, SR-MSTC-88-07, SR-NSCC-88-09, SR-
OCC-89-02, SR-PHILADEP-89-01, and SR-SCCP-89-01].
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DTC believes that the proposed rule changes is consistent with the
requirements of Section 17A of the Act \9\ because the proposal does
not unfairly discriminate against foreign entities seeking admission as
participants. Instead, DTC believes the proposed rulechange
appropriately accounts for the unique risks to the depository raised by
their admission.
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\9\ 15 U.S.C. 78q-1 (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
While DTC acknowledges that the proposed rule change may impose an
additional burden for foreign entities due to the modified admissions
criteria, DTC believes that any such burden is necessary and
appropriate in furtherance of the purposes of the Act.
[[Page 48189]]
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
DTC has not sought or received comments 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 DTC 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, 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 Room, 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of such filing will also be available for inspection
and copying at the principal office of DTC. All submissions should
refer to the file number SR-DTC-96-13 and should be submitted by
October 3, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-23342 Filed 9-11-96; 8:45 am]
BILLING CODE 8010-01-M