[Federal Register Volume 63, Number 34 (Friday, February 20, 1998)]
[Notices]
[Pages 8725-8726]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4251]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39657; International Series Release No. 1116; File No. 
SR-DTC-97-22]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of a Proposed Rule Change Relating to Establishing an 
Omnibus Account at the Canadian Depository for Securities

February 12, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 30, 1997, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-DTC-97-22) 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).
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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 establish a DTC 
omnibus account at the Canadian Depository for Securities (``CDS'').

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

    Currently, DTC maintains a link with CDS that allows a CDS 
participant to establish an account at DTC or use CDS's omnibus account 
at DTC. The link permits CDS's participants to process book-entry 
transactions with other DTC participant. In addition, the link permits 
CDS and its participants to use DTC's custody, clearance, and 
settlement services for transactions involving securities eligible in 
both systems. However, the current link limits book-entry deliveries 
from a CDS participant to a DTC counterparty by requiring that the 
securities be physically held at DTC. As a result, a CDS participant is 
unable to deliver securities in its CDS account by book-entry 
movement.\3\
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    \3\ CDS participants sometimes represent U.S. investors or U.S. 
intermediaries who are in turn also adversely affected.
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    Occasionally, a CDS participant attempting to settle a trade with a 
DTC counterparty has sufficient inventory in its account at CDS to 
settle a transaction but does not have sufficient inventory in its DTC 
account. When this occurs, the CDS participant must physically withdraw 
the securities fro CDS to make a physical deposit a DTC.\4\ The costs 
and risks associated with withdrawing and physically transporting 
certificates for purpose of redepositing them at DTC, which involves 
reregistration and forwarding of certificates to the U.S., can be 
significant. In addition, due to overlapping processing deadlines 
between CDS withdrawals and DTC deposits, a CDS participant may not be 
able to obtain same-day credit at DTC so that it can avoid a failure to 
deliver. As a result, a participant may incur certain expenses 
associated with its failure to deliver. Similarly, CDS participants 
face the same difficulties when on occasion they need to physically 
withdraw Canadian securities from DTC in order to redeposit them at CDS 
for reasons other than trade settlement (e.g., to repatriate their 
holdings of Canadian securities for inventory management purposes).
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    \4\ As of October 1, 1997, new deposit procedures provide CDS 
participants same-day credit at DTC for securities deposited through 
DTC's deposit facilities in CDS offices in Vancouver, Toronto, 
Montreal, and Calgary. CDS, on behalf of DTC, arranges for the 
reregistration of Canadian securities into the name of Cede & Co. 
prior to sending them to DTC.
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    Under the proposed rule change, DTC will establish an omnibus 
account at CDS thereby creating a two-way interface between CDS and 
DTC. As a

[[Page 8726]]

result of the proposed rule change, a CDS participant will be able to 
settle a cross-border transaction with a DTC counterparty by making a 
book-entry delivery from its participant account at CDS to the DTC 
omnibus account at CDS.\5\ The CDS participant would identify which DTC 
participant account should be credited with the position. This 
transaction would then result in an immediate credit to the receiving 
DTC participant account on DTC's books. The receiving DTC participant 
could then redeliver on a free or versus payment basis within DTC. 
Thus, there would be no need for the physical transporting of 
certificates to DTC. The securities would remain at CDS unless 
withdrawn by DTC. DTC and CDS would conduct automated daily 
reconciliation to ensure balanced books. In addition, to minimize any 
subsequent physical movement of securities, DTC and CDS would engage in 
weekly netting. The netting would reduce on an omnibus basis the number 
of securities in the same issue held by each depository on behalf of 
the other.
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    \5\ International Depository & Clearing LLC, a subsidiary that 
DTC owns jointly with National Securities Clearing Corporation, is 
coordinating DTC's development of the proposed enhancement.
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    CDS would provide subcustody services as income collection, 
maturity presentments, and reorganization processing on securities held 
in DTC's omnibus account at CDS in accordance with CDS procedures (as 
DTC currently provides for securities held by DTC on behalf of CDS). 
Whether DTC is holding its underlying inventory in Canada or in the 
U.S., DTC services to participants will be the same as currently 
provided.
    DTC believes that the primary benefits of opening an omnibus 
account at CDS are: (i) The elimination of failed transactions on the 
trade settlement date that result from delays in the current process; 
(ii) the elimination of most physical movements of Canadian securities 
between CDS, DTC, and Canadian transfer agents, and the costs and risks 
associated with such movements; and (iii) the reduction of costs to DTC 
and CDS participants related to (i) and (ii). DTC believes that the 
realization of these benefits is consistent with DTC's objectives of 
providing efficient book-entry clearance and settlement facilities and 
reducing risk to DTC participants by immobilizing certificates.
    DTC believes that the proposed rule change is consistent with the 
requirements of Section 17A(b)(3)(F) of the Act \6\ and the rules and 
regulations thereunder applicable to DTC because the proposed 
enhancements will reduce risks and associated costs to DTC and CDS 
participants by streamlining the processing of crossborder securities 
transactions between U.S. and Canadian entities.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC perceives no adverse impact on competition by reason of the 
proposed rule change.

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

    The proposed rule change was developed through discussions with 
several participants. Written comments from DTC participants or others 
have not been solicited or received 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, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 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. Sec. 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-97-22 and should be 
submitted by March 13, 1998.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-4251 Filed 2-19-98; 8:45 am]
BILLING CODE 8010-01-M