[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