[Federal Register Volume 63, Number 70 (Monday, April 13, 1998)]
[Notices]
[Pages 18062-18065]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9595]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39832; File No. SR-DTC-95-23]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving a Proposed Rule Change Implementing the Matching 
Feature in the Institutional Delivery System

April 6, 1998.
    On November 8, 1995, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-DTC-95-23) under Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ to implement a matching 
feature in DTC's Institutional Delivery (``ID'') system. Notice of the 
proposal was published in the Federal Register on January 19, 1996.\2\ 
The Commission received 39 comment letters. For the reasons discussed 
below, the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78(b)(1).
    \2\ Securities Exchange Act Release No. 36685 (January 5, 1996), 
61 FR 1417.
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I. Description

    In a previous filing with the Commission, DTC described several 
additional features that it planned to add to the ID system, one of 
which was a matching feature.\3\ The purpose of DTC's present rule 
filing is to obtain approval of implementation of the matching feature.
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    \3\ Securities Exchange Act Release No. 33466 (January 12, 
1994), 59 FR 3139 [File No. SR-DTC-93-07] (order approving proposed 
rule change relating to the ID system).
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    The matching feature is an enhancement to the current procedures 
for confirmation and affirmation processing in the ID system. 
Currently, when a broker-dealer executes a trade on behalf of an 
institution, it can use the ID system to notify the institution of the 
execution of the trade (``notification of order execution''). After 
receiving a notification of order execution, the institution then can 
use the ID system to furnish the broker-dealer with instructions for 
the proper allocation of the trade among the institution's different 
accounts (``allocation instructions'').\4\ Using the allocation 
instructions, the broker-dealer furnishes the ID system with the 
information necessary (``trade data'') for the ID system to produce a 
confirmation, which then is delivered through the ID system to the 
institution. If the

[[Page 18063]]

confirmation accurately represents the institution's requested trade 
and the proper allocation, the institution or its designated affirming 
party affirms the trade (i.e., acknowledges that it will settle the 
trade on settlement date) by sending an affirmed confirmation to the 
broker-dealer through the ID system. The trade then goes into DTC's 
settlement process.
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    \4\ Use of the ID system by DTC participants for notice of order 
execution and allocation instructions is optional.
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    Under the rule change, if a broker-dealer and an institution elect 
to use the matching feature the ID system will compare trade data 
submitted by the broker-dealer with allocation instructions submitted 
by the institution. If the trade data and allocation instructions match 
and if the institution also is the affirming party, the ID system will 
produce a matched affirmed confirmation. At this point, the trade will 
go into DTC's settlement process. If the trade data and allocation 
instructions match but the institution is not the affirming party, the 
ID system will produce a matched confirmation and will send it to the 
designated affirming party to be affirmed.\5\
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    \5\ In the ID system, the affirming party may be the 
institution, the institution's agent, or another party designated by 
the institution (i.e., an ``interested party'').
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    Throughout the day, broker-dealers and institutions will be able to 
use the ID system's inquiry capabilities to view any unmatched items. 
At the end of the day, an ``unmatched report'' will be generated for 
each broker-dealer and institution. This report will list all broker-
dealer trade data and allocation instructions that were not matched by 
the end of the day. Unmatched trades appearing on the unmatched report 
will be carried over from day to day unless the broker-dealer or 
institution cancels its instruction or the institution affirms the 
trade.

II. Comment Letters

    The Commission received 39 comment letters in response to the 
filing.\6\ In its comment letter, Thomson commended DTC for its efforts 
to improve the efficiency of the domestic securities market, but 
expressed concern over the potentially anticompetitive impact of the 
proposed rule change on unregistered entities that provide confirmation 
and affirmation services. Specifically, Thomson stated that it is 
concerned that approval of DTC's proposed matching feature ``will 
impose a serious and unwarranted burden on competition if certain 
antiquated self-regulatory organization (SRO) rules are interpreted in 
a way that prevents Thomson from providing its own matching service to 
its clients.'' \7\ Thomson requested the Commission not to approve 
DTC's proposed matching feature ``unless assurance is obtained that the 
SROs will not interpret their rules in such an anticompetitive 
fashion.'' Thomson stated that ``[b]efore approving DTC's current 
proposal, the Commission should ensure that the combination of 
allocations and confirmations into one step does not result in an 
unintended expansion of the scope of the antidiluvian SRO Rules [to 
regulate the communication of allocation information between 
institutions and their brokers].''\8\
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    \6\ Letters from: P. Howard Edelstein, President, Thomson 
Electronic Settlements Group, Thomson Trading Services, Inc., 
(``Thomson'') (February 9, 1996); Harold L. Johnson, Deputy General 
Counsel, Municipal Securities Rulemaking Board (``MSRB'') (February 
28, 1996); George J. Minnig, Managing Director, Pershing, (May 23, 
1996); Walter Psaila, Senior Vice President, Director of Clearance 
and Settlement, Paine Webber, (May 22, 1996); Vito DiMattia, Senior 
Vice President, NatWest Securities (``NatWest'') (May 23, 1996); 
Patrick K. Blackburn, Senior Vice President, The Chicago Corporation 
(``TCC'') (May 22, 1996); J. Phillip Smith, President, Lewco 
Securities Corp. (``Lewco'') (May 28, 1996); John J. Sanders, Jr., 
Principal, Robertson Stephens & Company (``Robertson'') (May 29, 
1996); Arthur Quartermaine, Director, Global Operations, Goldman, 
Sachs & Co. (``Goldman'') (May 22, 1996); Philip Lanz, Managing 
Director, Bear Stearns, (May 29, 1996); Nicholas Sariano, First Vice 
President, Dean Witter Reynolds, Inc. (``Dean Witter'') (May 31, 
1996); Richard A. Bednarz, Managing Director & Product Manager, 
Princeton Financial Systems, Inc. (``Princeton Financial'') (June 4, 
1996); James R. Hiatrides, Managing Director, Scudder, Stevens & 
Clark, Inc. (``Scudder'') (June 5, 1996); Frank J. Simonds, Vice 
President, Investment Management Services, Trust Operations, NBD 
Bank (``NBD'') (June 3, 1996); Neil C. Carfora, Vice President, 
State Street Bank and Trust Company (``State Street'') (June 6, 
1996); Arthur L. Thomas, Senior Vice President, Director, Global 
Operations Services, Merrill Lynch, (June 14, 1996); Ernest A. 
Pittarelli, Managing Director, UBS Securities LLC (``UBS'') (June 6, 
1996); Peter J. Murray, Director, CS First Boston (``CS First'') 
(June 21, 1996); Jenny Mastragelo, Equity Trading, Operations, Eaton 
Vance Management (``Eaton'') (June 13, 1996); George J. Minnig, 
Chairman, Regulatory and Clearance Committee, Securities Industry 
Association (``SIA'') (June 24, 1996); Ed Brands, Chairperson, Bank 
Depository User Group (``BDUG'') (June 28, 1996); Dennis J. 
Donnelly, Senior Managing Director, McDonald & Company Securities, 
Inc. (``McDonald'') (June 28, 1996); Denise R. Youngblood, Munder 
Capital Management (``Munder'') (June 22, 1996); Jill M. Considine, 
President, New York Clearing House, (July 3, 1996); Richard F. 
Woerner, Controller, Merganser Capital Management Corporation 
(``Merganser'') (June 26, 1996); Robert Donovan, Senior Vice 
President, Legg Mason Wood Walker, Inc. (``Legg Mason'') (May 28, 
1996); Jerome J. Clair, Senior Vice President, Smith Barney, (July 
9, 1996); Stephen L. Zeitz, Director, Investment Operations, 
Providian Capital Management (``Providian'') (July 10, 1996); Ronald 
L. Grooms, Sr. Vice President & Treasurer, Invesco Funds Group, Inc. 
(``Invesco Funds'') (July 8, 1996); Dennis J. Donnelly, Senior 
Managing Director, McDonald & Company Securities, Inc. 
(``McDonald'') (June 28, 1996); John E. Nolan, Senior Vice 
President, Raymond James & Associates, Inc. (``Raymond James'') 
(June 12, 1996); Roselyn Kracov, State Street Bank & Trust Company, 
Co-Chair, Industry Standardization for Institutional Trade 
Communication (``ISITC'') (July 31, 1996); Dan O'Keefe, Senior Vice 
President, The Northern Trust Company (``Northern Trust'') (August 
30, 1996); Stephen M. Wellman, Vice President/Director of 
Operations, Pilgram Baxter & Associates (``Pilgrim Baxter'') (August 
23, 1996); Jean Hendrick, Senior Vice President, Asset Management 
Services, Barnett Bank (``Barnett'') (September 11, 1996); Jennifer 
Parker, SAFECO Asset Management (``SAFECO'') (November 22, 1996); 
Operations Advisory Committee, to The Honorable Arthur Levitt, Jr., 
Commission (December 12, 1996); Debra P. Turner, Wedge Capital 
Management (``Wedge Capital'') (February 5, 1997); Wendy A. Laidlaw, 
Administrative Manager, R.M. Davis, Inc., (``R.M. Davis'') (February 
28, 1997).
    \7\ The exchanges, the National Association of Securities 
Dealers, (``NASD''), and the Municipal Securities Rulemaking Board 
(``MSRB'') currently have rules that prohibit broker-dealers from 
accepting delivery versus payment and receipt versus payment (``DVP/
RVP'') orders from their customers unless a customer or its agent 
uses the facilities of a registered clearing agency for the 
confirmation acknowledgment (i.e., affirmation), and book entry 
settlement of all depository eligible securities (``SRO confirmation 
rules''). The SRO confirmation rules are: American Stock Exchange 
Rule 423(5); Chicago Stock Exchange Article XV, Rule 5; New York 
Stock Exchange (``NYSE'') Rule 387(a)(5); Pacific Exchange Rule 
9.12(a)(5), Philadelphia Stock Exchange Rule 274(b); NASD Rule 
11860(a)(5); and MSRB Rule G-15(d)(ii).
    \8\ Currently, the SRO confirmation rules preclude broker-
dealers and institutions from using Thomson's services for the 
confirmation and affirmation of DVP/RVP trades in depository 
eligible securities settling in the United States because Thomson is 
not a registered clearing agency. However, the SRO confirmation 
rules do not prevent broker-dealers from using Thomson's trade 
allocation or certain other services.
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    The remaining 38 commenters supported Commission approval of adding 
the matching feature to the ID system.\9\ Many of these commenters 
expressed multiple reasons why the matching feature should be approved. 
Twenty-five commenters stated that they believe that approval of the 
matching feature will streamline the settlement process and allow it to 
occur more expeditiously.\10\ Nine commenters stated that they believe 
that the matching feature will reduce risk in the settlement cycle and 
will promote safety and soundness in the clearance and settlement of 
securities transactions.\11\ Twenty-two commenters stated that they 
believe that the matching feature is

[[Page 18064]]

an essential step towards a shorter settlement cycle.\12\ Fifteen 
commenters stated that they believe that the electronic trade 
confirmation vendors for DVP/RVP trades should be regulated entities 
and voiced concern over potential changes to the SRO confirmation rules 
and the use of unregulated systems for the confirmation/affirmation of 
securities transactions.\13\
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    \9\ In December 1996, Thomson filed a petition with the 
Commission requesting that the Commission use its authority to amend 
the SRO confirmation rules to allow Thomson to offer confirmation/
affirmation services. Many of the comment letters that the 
Commission received in response to Thomson's petition also expressed 
support for approving DTC's matching feature.
    \10\ Pershing, Paine Webber, TCC, Robertson, Goldman, Bear 
Stearns, Princeton Financial, State Street, Merrill Lynch, CS First, 
BDUG, SIA, Munder, New York Clearing House, Legg Mason and Smith 
Barney, Providian, Invesco Funds, Raymond James, ISITC, Northern 
Trust, Pilgrim Baxter, Barnett, SAFECO, Operations Advisory 
Committee, Wedge Capital, R.M. Davis.
    \11\ Pershing, UBS, SIA, BDUG, New York Clearing House, and Bear 
Stearns, Providian, Pilgrim Baxter, Operations Advisory Committee; 
R.M. Davis.
    \12\ Pershing, Paine Webber, TCC, Robertson, Princeton 
Financial, Scudder, State Street, Merrill Lynch, Eaton, McDonald, 
Munder, New York Clearing House, Merganser, and Legg Mason, 
Providian, Invesco Funds, Raymond James, McDonald, ISITC, Northern 
Trust, Pilgrim Baxter, Operations Advisory Committee, Wedge Capital.
    \13\ MSRB, Pershing, Paine Webber, TCC, Robertson, CS First, 
Bear Stearns, Dean Witter, SIA, BDUG, NBD, State Street, UBS, Smith 
Barney, Barnett.
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    Two commenters stated that they believe that the issue of DTC's 
matching proposal is separate from the issue of whether multiple 
electronic trade confirmation systems are appropriate.\14\ One of these 
commenters stated that it believes that the importance of DTC's 
matching procedure outweighs any anticompetitive effects it would have 
on other trade confirmation systems and that its implementation should 
not be delayed.\15\
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    \14\ New York Clearing House, Operations Advisory Committee.
    \15\ New York Clearing House.
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III. Discussion

    Under Section 19(b)(2) of the Act, \16\ the Commission must approve 
a proposed rule change filed by an SRO (including a clearing agency) 
unless the Commission finds that the proposed rule change is 
inconsistent with the requirements of the Act and the regulations 
thereunder applicable to the SRO. Sections 17A(b)(3)(A), (F), and (I) 
of the Act \17\ require, among other things, that a clearing agency be 
organized and its rules be designed to facilitate and promote the 
prompt and accurate clearance and settlement of securities transactions 
and that the rules not impose any burden on competition not necessary 
or appropriate in furtherance of the purposes of the Act.
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    \16\ 15 U.S.C. 78s(b)(2).
    \17\ 15 U.S.C. 78q-1(b)(3)(A), (F), and (I).
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    The Commission believes that DTC's matching feature should promote 
efficiencies in the clearance and settlement of securities transactions 
by combining some of the steps that normally are required for the 
settlement of institutional trades under traditional confirmation/
affirmation processing. The Commission believes further that this 
combination of steps should streamline the clearance and settlement 
process which in turn should reduce the likelihood of errors and the 
number of trades that settle late because presettlement steps have not 
been completed by settlement time.
    The Commission notes that although combining processing steps by a 
matching intermediary enhances processing efficiency, it also focuses 
processing risk and eliminates a separate affirmation step that would 
allow the broker-dealer or its customer to detect errors that could 
delay settlement or cause the trade to fail. However, DTC is a 
registered clearing agency and therefore is subject to statutory and 
regulatory risk control requirements and to the Commission's 
supervision. As a result, the Commission believes that DTC's proposal 
is consistent with its obligations under the Act, including its 
responsibility to facilitate the prompt and accurate clearance and 
settlement of securities transactions.
    In reviewing the proposed rule change, the Commission has also 
considered the impact that it would have on competition.\18\ The 
Commission notes that the use of the matching feature by DTC 
participants is optional and that the SRO confirmation rules do not 
require the use of the matching feature in the confirmation and 
affirmation of securities transactions. The Commission believes that 
the proposed rule change itself does not impose any inappropriate 
burden on competition. Rather, any possible burden on competition 
identified by Thomson arises from potential interpretations of SRO 
rules governing member use of confirmation and affirmation services.
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    \18\ The Commission has also considered the proposed rule's 
impact on efficiency and capital formation.
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    In response to Thomson's concerns, the Commission has postponed 
approving DTC's matching feature while the effort to resolve issues 
relating to the operation of the SRO confirmation rules has been 
ongoing. The NYSE, the NASD, and the MSRB recently have filed proposed 
rule changes with the Commission to amend their SRO confirmation 
rules.\19\ Under these proposed rule changes, broker-dealers would be 
permitted to use the services of certain qualified entities that are 
not registered clearing agencies to carry out the type of confirmation/
affirmation processing now handled by the ID system. These qualified 
entities would be required to submit affirmed confirmations to a 
registered clearing agency for trade settlement. The Commission 
believes that these rule changes should increase competition in the 
business of traditional confirmation/affirmation processing.
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    \19\ Securities Exchange Act Release Nos. 39830 (April 6, 1998) 
[File No. SR-NYSE-98-07], 39831 (April 6, 1998) [File No. SR-NASD-
98-20], and 39833 (April 6, 1998) [File No. SR-MSRB-98-06].
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    The proposed changes to the SRO confirmation rules do not address 
whether entities other than registered clearing agencies may provide 
matching services. The Commission has carefully examined the legal and 
policy issues that are raised in connection with matching services and 
has concluded that matching trade data and allocation instructions for 
institutional securities trades should be considered a clearing agency 
function under Sections 3(a)(23) and 17A of the Act.\20\ Under the 
Commission's interpretation, registration as a clearing agency or a 
conditional exemption from registration would be required to conduct 
matching services. The Commission has issued a release that presents 
its analysis of this issue.\21\
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    \20\ 15 U.S.C. 78c(a)(23) and 78q-1.
     \21\ Securities Exchange Act Release No. 39829 (April 6, 1998).
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    On approval of its rule filing, DTC may provide matching services 
because it is a registered clearing agency. This approval will continue 
irrespective of the Commission's ultimate decision on whether or not 
matching is a clearing agency function. The Commission notes that DTC's 
matching proposal itself does not impose anticompetitive burdens on 
others but rather offers improved services to all DTC users. 
Furthermore, the Commission believes that DTC's proposal does not have 
an anticompetitive effect. Under the Commission's interpretation 
outlined above, any entity wishing to compete with DTC will either 
register as a clearing agency or will obtain an exemption from 
registration and will then offer a similar matching service. Therefore, 
the Commission believes that approval of the proposed rule change 
should not be delayed on competition grounds.
    Because the Commission finds that DTC's matching feature is 
designed to facilitate the prompt and accurate clearance and settlement 
of securities transactions by enhancing the conformation/affirmation 
process in DTC's ID system and otherwise is consistent with Section 
17A(b)(3) of the Act, the Commission is approving DTC's proposed rule 
change.

IV. Conclusion

    The Commission finds that DTC's proposal is consistent with the 
requirements of the Act and particularly

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with Section 17A 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-95-23) be, and hereby 
is, approved.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-9595 Filed 4-10-98; 8:45 am]
BILLING CODE 8010-01-M