[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