[Federal Register Volume 62, Number 95 (Friday, May 16, 1997)]
[Notices]
[Pages 27086-27087]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12887]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38600; International Release No. 1078; File No. SR-DTC-
96-13]
Self-Regulatory Organizations; The Depository Trust Company;
Order Temporarily Approving a Proposed Rule Change Relating to the
Admission of Non-U.S. Entities as Direct Depository Participants
May 9, 1997.
On July 12, 1996, The Depository Trust Company (``DTC'') filed with
the Securities and Exchange Commission (``Commission'') a proposed rule
change (File No. SR-DTC-96-13) pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') to establish standards for
the admission of non-U.S. participants.\1\ Notice of the proposal was
published in the Federal Register on September 12, 1996.\2\ On May 5,
1997, DTC filed an amendment to the proposed rule change.\3\ No comment
letters were received. For the reasons discussed below, the Commission
is temporarily approving the proposed rule change through May 31, 1998.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 37652 (September 5,
1996), 61 FR 48187.
\3\ Letter from Larry E. Thompson, Senior Vice President and
Deputy General Counsel, DTC, (May 5, 1997). This amendment was
technical in nature and did not require republication of notice.
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I. Description
The rule change amends DTC's current participant admissions policy
to permit entities that are organized in a country other than the
United States and that are not otherwise subject to U.S. federal or
state regulation (``non-U.S. entities'') to be eligible to become
direct DTC participants.\4\ Under the rule change, DTC will require
that the non-U.S. entity execute the standard DTC participants
agreement and enter into an additional series of undertakings \5\ 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.\6\
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\4\ In determining whether to grant access to its services,
DTC's 1990 ``Policy Statement on the Admission to Participant's''
(``1990 Policy Statement'') considers whether the applicant is
subject to comprehensive U.S. federal or state regulation to be a
critical factor. See Securities Exchange Act Release No. 28754
(January 8, 1991), 56 FR 1548 (order approving proposed rule change
regarding 1990 Policy Statement). 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 state or federal regulatory oversight generally would not have
been eligible to become a participant. However, since 1990 DTC has
admitted a small number of non-U.S. entities as participants if
their obligations to DTC are guaranteed by participants deemed
creditworthy by DTC. In lieu of requiring non-U.S. entities to
obtain such guarantees, the rule change establishes admissions
criteria that will permit a well-qualified non-U.S. entity to obtain
direct access to DTC's services. To the extent that the 1990 Policy
Statement is inconsistent with the rule change, the rule change
amends the 1990 Policy Statement.
\5\ These undertakings and agreements include irrevocably
waiving all immunity from DTC's attachment of the non-U.S. entity's
assets, submitting to the jurisdiction of a U.S. court, and waiving
any objection to venue in a U.S. court. In addition, the non-U.S.
entity must designate an agent in New York to receive service of
process, provide DTC with all regulatory filings made in the non-
U.S. entity's home country, and furnish DTC with all financial
reports or other information as requested by DTC, with all fiscal
information presented in U.S. dollar equivalents. The additional
undertakings and agreements are set forth in DTC's Policy on
Admissions of Foreign Entities which is set forth in Exhibit B to
DTC's filing and is available for review and copying at the
principal office of DTC and the Commission's Public Reference Room.
\6\ DTC Rules 2 and 3 set forth the basic standards for the
admission of DTC participants. These rules provide, among other
things, 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 at
the time of its application and on an ongoing basis thereafter.
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In connection with a non-U.S. firm executing the participants
agreement and entering into such undertakings, DTC will require
appropriate opinions of counsel, satisfactory to DTC, that state, among
other things, that all such undertakings and agreements are legal and
enforceable against the non-U.S.
[[Page 27087]]
entity and will be recognized and given effect under the laws of the
United States and the non-U.S. entity's home country as appropriate.
The rule change also requires that the non-U.S. entity (i) Be
subject to applicable securities or banking 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
non-U.S. entity's home country, be eligible to become a member of that
depository. Additionally, the rule change requires that the home
country regulator of the non-U.S. entity have entered into a memorandum
of undertaking with the Commission to share or exchange information.
The rule change sets forth special financial conditions for non-
U.S. entities. The central purpose of these special financial
conditions is to compensate for the fact that U.S. authorities have
limited oversight of non-U.S. entities and that these entities are
subject to regulatory oversight and requirements that are different
from those of U.S. entities. As such, information concerning financial
difficulties or the impending insolvency of non-U.S. entities may not
be available to DTC as such information is for U.S. entities.\7\
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\7\ Rule 17a-11 (17 CFR 240.17a-11) under the Act requires
broker-dealers to give notice to the Commission and to the broker-
dealers' designated examining authority when, among other things,
the broker-dealers' net capital (i) declines below the minimum
amount required by Rule 15c3-1 (17 CFR 240.15c3-1) under the Act or
(ii) is less than 120% of the broker-dealer's required minimum net
capital.
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Under the special financial conditions, non-U.S. entities will be
required to have and to maintain excess net capital equal to
US$5,000,000 if the entity is a broker-dealer and US$20,000,000 if the
entity is a bank.\8\ In addition to the standard deposit requirements
applicable to all DTC participants, non-U.S. entities also will be
required to deposit with or pledge to DTC ``special collateral'' with a
value after imposing specified haircuts equal to 50 percent of the
entity's net debit cap.\9\ Except for U.S. Treasury securities,
securities included in the special collateral account will receive a
haircut of 50 percent.\10\ In addition, the non-U.S. entity will not
receive credit for the special collateral in DTC's collateral monitor.
Any net debit must be supported by the value of collateral other than
the special collateral. Such special collateral requirements are
designed to help assure that DTC will not suffer a loss even if the
non-U.S. entity fails to settle and the market value of the collateral
supporting its net debit declines.
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\8\ DTC's notice of the proposed rule change provided that non-
U.S. entities would be required to have and to maintain 1000% of the
excess net capital (for broker-dealers) or the minimum equity (for
banks) required of U.S. participants. Under the rule change as
originally proposed, the minimum capital requirements for non-U.S.
broker-dealers and banks would have been US$5,000,000 and
US$20,000,000, respectively. To avoid confusion, DTC amended the
proposed rule change to require that non-U.S. entities have and
maintain excess net capital of US$5,000,000 if a broker-dealer and
minimum equity of US$20,000,000 if a bank instead of basing its
capital standards for non-U.S. entities on a multiple of the minimum
capital requirements of U.S. broker-dealers and banks.
\9\ DTC will require non-U.S. participants to deposit all
necessary collateral with DTC before such participants are permitted
to create a net debit in DTC's settlement system.
\10\ Non-U.S. entities can pledge only DTC-eligible securities
as special collateral. Securities for which the non-U.S. entity is
the sole or a principal market maker are not acceptable as special
collateral.
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II. Discussion
Section 17A \11\ of the Act, among other things, requires that the
rules of a clearing agency be designed to assure the safeguarding of
securities and funds which are in the custody or control of the
clearing agency or for which it is responsible. The Commission believes
that the rule change is consistent with DTC's obligations under this
section. Specifically, by requiring non-U.S. applicants to execute the
standard participants agreement, enter into additional undertakings
with DTC, and provide DTC with opinions of counsel as to these matters,
the rule change should serve to bind non-U.S. entities to DTC's rules
and procedures in a manner similar to U.S. domestic participants.
Additionally, the participants agreement and undertakings, as supported
by the opinions of counsel, should lessen or eliminate the negative
effects that jurisdictional issues could have on DTC's exercise of its
rights and remedies against a non-U.S. entity if such entity fails to
settle.
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\11\ 15 U.S.C. 78q-1.
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To further protect DTC and its participants from the potential
risks posed by non-U.S. participants, the rule change limits direct
participation in DTC to those non-U.S. entities that are operationally
capable and well-capitalized. The rule change imposes substantial
capital requirements on non-U.S. entities. Moreover, because each non-
U.S. entity must maintain special collateral having a value equal to 50
percent of its net debit cap after haircuts and will not receive credit
for such special collateral in its collateral monitor, the rule change
should protect DTC and its participants against a firm's failure to
settle even if there is a significant drop in the value of the
collateral supporting a firm's settlement activities.
Accordingly, the Commission believes that by requiring non-U.S.
entities to (i) Execute the standard DTC participants agreement and
abide by DTC's rules and procedures, (ii) enter into the additional
undertakings, (iii) provide DTC with opinions of counsel regarding the
foregoing, and (iv) be subject to the special financial conditions, the
rule change should assist DTC in assuring the safeguards of securities
and funds which are in its custody, control, or for which it is
responsible.
The Commission is temporarily approving the proposed rule change
through May 31, 1998, so that DTC can gain experience with its new
admissions standards for non-U.S. entities and the unique risks posed
by the settlement activities of these firms as direct DTC participants.
Temporary approval also should offer both the Commission and DTC an
opportunity to observe whether the admissions criteria, procedures, and
additional capital and collateralization requirements applicable to
non-U.S. entities adequately protect DTC and its participants, and
whether any adjustments are necessary. During the temporary approval
period, DTC will be expected to monitor the adequacy and soundness of
the rule change as necessary in order to protect securities and funds.
III. Conclusion
On the basis of the foregoing the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act and the
rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-DTC-96-13) be and hereby is
approved on a temporary basis through May 31, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-12887 Filed 5-15-97; 8:45 am]
BILLING CODE 8010-01-M