[Federal Register Volume 61, Number 218 (Friday, November 8, 1996)]
[Notices]
[Pages 57938-57940]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28696]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37918; File No. SR-Philadep-96-17]


Self-Regulatory Organizations; Philadelphia Depository Trust 
Company; Notice of Filing and Order Granting Accelerated Approval on a 
Temporary Basis of a Proposed Rule Change To Appoint the Canadian 
Depository for Securities as a Correspondent Depository

November 1, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 17, 1996, the 
Philadelphia Depository Trust Company (``Philadep'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I and II below, which Items have been 
prepared primarily by Philadep. On October 28, 1996, Philadep filed an 
amendment to the proposed rule change to amend its procedures and to 
attach as an exhibit to its original filing a copy of the correspondent 
depository agreement.\2\ On October 31, 1996, Philadep filed an 
amendment to the proposed rule change to make certain technical 
changes.\3\ The Commission is publishing this notice and order to 
solicit comments from interested persons and to grant accelerated 
approval of the proposed rule change through April 30, 1997.
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    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Letter from J. Keith Kessel, Compliance Officer, Philadep, 
to Jerry Carpenter, Assistant Director, Division of Market 
Regulation (``Division''), Commission (October 28, 1996).
    \3\ Letter from J. Keith Kessel, Compliance Officer, Philadep, 
to Jerry Carpenter, Assistant Director, Division, Commission 
(October 31, 1996).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The purpose of the proposed rule change is to allow Philadep to 
appoint The Canadian Depository for Securities Limited (``CDS'') as 
Philadep's nonexclusive agent and custodian in receiving securities 
deposited by CDS-sponsored participants for delivery to Philadep. 
Currently, the West Canada Depository Trust Company (``WCDTC'') serves 
as Philadep's correspondent depository.\4\ On November 1, 1996, CDS 
will assume the operations of WCDTC and the West Canada Clearing 
Corporation (``WCCC''), WCDTC's affiliated clearing corporation.
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    \4\ Securities Exchange Act Release No. 36782 (January 26, 
1996), 61 FR 3956 [File No. SR-Philadep-96-01] (order granting 
accelerated approval on a temporary basis of a proposed rule change 
to appoint the WCDTC as a correspondent depository); Securities 
Exchange Act Release No. 37383 (June 28, 1996), 61 FR 35292 [File 
No. SR-Philadep-96-09] (order granting accelerated approval on a 
temporary basis through December 31, 1996 of a proposed rule change 
seeking permanent approval of the designation of the WCDTC as a 
correspondent depository).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Philadep 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. Philadep has prepared summaries, set forth in sections 
(A), (B), and (C) below, of the most significant aspects of such 
statements.\5\
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    \5\ The Commission has modified the text of the summaries 
prepared by Philadep.

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[[Page 57939]]

(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 allow Philadep to 
authorize CDS to act as a nonexclusive agent and custodian for Philadep 
in receiving securities deposited by certain CDS-sponsored participants 
for credit to their respective subaccounts in CDS's omnibus account at 
Phkladep. The custodial arrangement will be effectuated by contracts 
executed between Philadep and CDS, and CDS will become a participant of 
Philadep pursuant to Philadep's rules and procedures.
    At or before 12:45 p.m. (Eastern Standard Time) on any business day 
Philadep is open, CDS will notify Philadep by facsimile transmission or 
through Philadep's Automated Deposit System of initiated and pending 
instructions to Canadian transfer agents to transfer various Canadian 
securities held by CDS into Philadep's nominee name. Philadep will 
credit CDS's account(s) for Canadian issues at the time of this 
notification. Philadep will credit CDS's account(s) for incoming 
deposits of U.S. issues (received by CDS and designated for physical 
delivery and deposit to its Philadep account) at the time of their 
physical receipt by Philadep. Philadep has the functionality whereby 
CDS can enter certificate details into Philadep's Automated Deposit 
System in order to reduce the processing time upon receipt of U.S. 
issues. As a result Philadep is able to grant CDS credit upon receipt 
of the U.S. securities.
    With regard to Canadian issues, CDS will instruct Canadian transfer 
agents to reregister the issues in Philadep's nominee name and to 
deliver them to CDS as agent and custodian of Philadep. With respect to 
acting as Philadep's agent for interfacing with Canadian transfer 
agents, CDS has more direct knowledge of and familiarity with Canadian 
transfer agents. CDS has a Canadian address and is expected to obtain 
receipt of certificates faster than Philadep would obtain receipt 
through the international postal system. Earlier receipt of 
certificates means earlier certainty with respect to the value and 
validity of deposited certificates. This is a benefit to Philadep 
because the earlier Philadep receives notice of defects in a 
certificate, the sooner it can reverse the credit to the CDS account 
and the better it can limit the risk that the securities will have been 
transferred out of the account before the reversal of the credit can 
take place.
    For Canadian issues returning to CDS from the Canadian transfer 
agent, CDS will safeguard the deposited securities and will hold them 
with deposit tickets attached and segregated from other securities held 
by CDS until forwarded to Philadep by licensed air courier or by other 
carrier agreed upon by the parties. Securities held overnight will be 
deposited in CDS's value. If CDS fails to deliver these securities to 
Philadep, Philadep will institute certificate replacement procedures. 
For fails to deliver resulting from settled CNS transactions, Philadep 
will short CDS's CNS account with Stock Clearing Corporation of 
Philadelphia (``SCCP''), Philadep's affiliated clearing corporation. 
SCCP will mark to market all short positions and collect marks daily.
    If the deposited securities are U.S. securities, CDS will forward 
the securities directly to Philadep on the day the securities were 
reported to Philadep. Securities will be shipped to Philadep by 
licensed air courier or by other carrier agreed upon by the parties.
    CDS and Philadep have agreed that securities placed within the 
custody and control of CDS on behalf of Philadep will not be subject to 
any right, charge, security interest, lien, or claim of any kind in 
favor of CDS or any person claiming through CDS. CDS and Philadep have 
further agreed that CDS will have no legal or equitable right, title, 
or interest in or to such securities, including, but not limited to, 
any right, title, or interest in or to any principal or interest 
coupons, redemption proceeds, payments, or payable mounts relating to 
any securities. In addition, CDS will maintain adequate insurance 
coverage with respect to any securities which are in custody on behalf 
of Philadep. Furthermore, CDS will make a participants fund 
contribution of $1 million, which is in excess of the minimum amount 
required under the applicable participants fund formula, and CDS will 
maintain a letter of credit in the amount of $5 million (Canadian) 
issued to Philadep securing CDS's guaranty obligations.
    Philadep believes the proposed rule change is consistent with the 
requirements of Section 17A of Act and the rules and regulations 
thereunder because the rule proposal fosters cooperation and 
coordination with persons engaged in the clearance and settlement of 
securities transactions and further assures the safeguarding of 
securities and funds which are in the custody or control of Philadep or 
for which it is responsible.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    Philadep does not believe that the proposed rule change will impact 
or impose a burden on competition.

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

    Written comments were neither solicited nor received with respect 
to the proposed rule change. Philadep will notify the Commission of any 
written comments received by Philadep.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to foster cooperation and coordination with 
persons engaged in the clearance and settlement of securities 
transactions.\6\ The Commission believes that Philadep's designation of 
CDS as Philadep's non-exclusive agent and custodian in receiving 
securities deposited by CDS-sponsored participants for delivery to 
Philadep is consistent with Philadep's obligations under Section 
17A(b)(3)(F) because the proposed rule change should help foster 
cooperation and coordination between the U.S. and Canadian clearance 
and settlement systems by facilitating a link between Philadep and CDS.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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    On January 26, 1996, the Commission granted approval to Philadep's 
proposal that it be allowed to appoint WCDTC as its nonexclusive agent 
and custodian in receiving certain securities deposits.\7\ In 
connection with this proposed rule filing to allow Philadep to appoint 
CDS as its nonexclusive agent and custodian in order to allow CDS to 
continue the correspondent depository activities of WCDTC, Philadep has 
requested that the Commission grant Philadep the latitude to modify the 
extra financial protections that are currently being applied to the 
WCDTC account (i.e., $1 million participants fund deposit and $5 
million (Canadian) in a letter of credit). Philadep contends that a 
decrease in the financial protections Philadep receives from CDS is 
justified given (1) Philadep's belief that the short selling activity 
in the account may decrease when CDS assumes the operations of WCDCT 
and WCCC; (2) that SCCP filed a proposed rule change with the 
Commission to modify the participant's fund formula to account for 
short selling activity; (3) Philadep's belief that CDS is

[[Page 57940]]

better capitalized than WCDTC and WCCC; and (4) Philadep's belief that 
CDS has comprehensive and formalized risk management controls. However, 
Philadep has not provided the Commission with any supporting 
documentation regarding its assertion that there will be a reduction in 
short selling activity, that CDS is better capitalized than WCDTC and 
WCCC, or that CDS has comprehensive and formalized risk management 
controls. Additionally, the Commission is currently reviewing SCCP's 
proposed rule change to modify its participants fund formula and has 
not granted its approval to the proposal.\8\ Therefore, it is the 
Commission's position that the extra financial protections that are 
currently being applied to the WCDTC account (i.e., $1 million 
participants fund deposit and $5 million (Canadian) in a letter of 
credit) should remain in place at the same levels.
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    \7\ Supra. note 4.
    \8\ File No. SR-SCCP-96-08.
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    Philadep has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after the 
date of publication of notice of the filing. The Commission finds good 
cause for approving the proposed rule change prior to the thirtieth day 
after the date of publication of notice of filing because accelerated 
approval will allow Philadep to immediately appoint CDS as its 
nonexclusive agent and custodian thus allowing CDS to continue the 
correspondent depository activities currently being performed by WCDTC. 
Effective November 1, 1996, CDS will assume the operations of WCDTC and 
WCCC. The staff of the Board of Governors of the Federal Reserve System 
have concurred with the Commission's granting of accelerated 
approval.\9\
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    \9\ Telephone conversation between John Rudolph, Supervisory 
Trust Analyst, Board of Governors of the Federal Reserve Board, and 
Chris Concannon, Staff Attorney, Division, Commission (October 31, 
1996).
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    On June 28, 1996, the Commission extended the temporary approval of 
Philadep's custodial arrangement with WCDTC until December 31, 1996, so 
that Philadep and the Commission could further monitor, review, and 
analyze this custodial arrangement.\10\ Accordingly, the Commission is 
granting temporary approval of the proposed rule change through April 
30, 1997, so that the Commission can continue to monitor and analyze 
the development of CDS as Philadep's nonexclusive agent and custodian. 
During this period, Philadep will monitor the nonexclusive agent and 
custodian arrangement between Philadep and CDS to ensure that proper 
risk management procedures are in place. In this regard, the Commission 
requests that Philadep continue to file monthly reports analyzing 
activity in CDS's omnibus account and subaccounts. Therefore, the 
Commission is temporarily approving the proposed rule change through 
April 30, 1997.
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    \10\ Supra. note 4.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submission 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of the submissions, 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 filings will also be available for 
inspection and coping at the principal office of Philadep. All 
submissions should refer to file number SR-Philadep-96-17 and should be 
submitted by November 29, 1996.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-Philadep-96-17) be, and 
hereby is, approved through April 30, 1997.

    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) (1996).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-28696 Filed 11-7-96; 8:45 am]
BILLING CODE 8010-01-M