[Federal Register Volume 63, Number 184 (Wednesday, September 23, 1998)]
[Notices]
[Pages 50950-50951]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-25370]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40445; International Series Release No. 1157; File No. 
SR-DTC--98-19]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of a Proposed Rule Change Relating to the Enhancement of the 
Current Link With Deutsche Borse Clearing AG

September 16, 1998.
    Pursant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'''),\1\ notice is hereby given that on September 15, 1998, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') a proposed rule change 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 from interested persons on the proposed rule change.
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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

    Under the proposed rule change, DTC will open a free of payment 
omnibus account at Deutsche Borse Clearing AG (``DBC''), which 
currently has a participant account at DTC, in order to create a two-
way interface between DTC and DBC.

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

    The purpose of the proposed rule change is to facilitate the 
efficient processing of cross-border securities transactions between 
participants of DTC and DBC. Under the proposed rule change, DTC will 
open an omnibus account at DBC in order to create a two-way interface 
between DBC and DTC. This will enable efficient inventory positioning 
by participants of DTC and DBC that is needed to settle securities 
transactions at either DTC or DBC.\3\ The two-way interface would 
allow, but would not require, DTC positions in DBC-eligible issues to 
be held in DTC's account at DBC.
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    \3\ Currently, the only DTC-eligible German issues are in the 
form of American Depositary Receipts or Global Depositary Receipts. 
However, DTC anticipates that the securities of DaimlerChrysler AG, 
the successor company formed by the proposed merger of Daimler-Benz 
Aktiengesellschaft and Chrysler Corporation, will be made DTC-
eligible prior to November 1998.
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    Under the existing link between DTC and DBC, DBC has an omnibus 
account at DTC which enables DBC to effect book-entry transactions with 
other DTC participants. The current link allows DBC and its 
participants to use the custody, book-entry, and delivery services of 
DTC for transactions involving securities eligible in both systems. The 
current link allows a DTC participant to settle, on a free of payment 
basis, a cross-border transaction with a DBC counterparty by making a 
book-entry delivery from its participant account at DTC to the DBC 
omnibus account at DTC and by identifying the DBC participant account 
to which the delivered securities should be credited. However, the 
current link limits book-entry deliveries from a DBC participant to a 
DTC counterparty by requiring that the securities be physically held at 
DTC. A DBC participant is therefore not able to deliver by book-entry 
means positions held in its account at DBC.
    DTC anticipates that once German ordinary shares are made DTC-
eligible, the existing link between DTC and DBC will be inadequate. A 
DBC participant attempting to deliver such shares in settlement of a 
trade with a DTC counterparty may have sufficient position in its 
account at DBC, but unless DBC has sufficient position in its account 
at DTC, settlement could not occur through the existing link. The DBC 
participant would be required to physically withdraw the securities 
from DBC in order to make a physical deposit at DTC. Unless 
participants of DTC and DBC are able to interconnect their respective 
inventories at the two depositories via book-entry movements, same-day 
delivery of securities may not be possible. As a result, a participant 
may incur certain expenses associated with its failure to deliver. 
Additionally, the costs and risks associated with physically 
withdrawing and transporting certificates for purposes of redepositing 
them at DTC, which involves reregistration and forwarding of 
certificates to the U.S., can be significant.
    The proposed enhancement (i.e., opening a DTC free of payment 
omnibus account at DBC and thereby creating a two-way interface) would 
substitute book-entry movements for physical movement of securities 
when west-bound movements of securities occur between DBC and DTC and 
would eliminate costs and risks associated with physical movement. A 
DBC participant would be able to settle, on a free of payment basis, a 
cross-border

[[Page 50951]]

transaction with a DTC counterparty by making a book-entry delivery 
from its participant account at DBC to the DTC omnibus account at DBC 
and by identifying the DTC participant account to which the delivered 
shares should be credited. The receiving DTC participant could then 
redeliver on a free or versus payment basis within DTC. There would be 
no need for transporting physical certificates to DTC.
    Under the proposal, DBC would, if required, provide subcustody 
services such as income collection, maturity presentments, and 
reorganization processing on securities held in DTC's omnibus account 
at DBC in accordance with DBC procedures as DTC currently does on 
securities held by DTC on behalf of DBC. Whether DTC is holding its 
underlying inventory in Germany or in the U.S., DTC services to 
participants would be the same as currently provided.
    According to DTC, the primary benefits of opening an omnibus 
account at DBC are: (i) avoidance of failed transactions on the trade 
settlement date as a result of delays resulting from the current link; 
\4\ (ii) elimination of most physical movements of German securities 
between DBC, DTC, and U.S. and German transfer agents and the costs and 
risks associated with such movements; and (iii) reduction of costs to 
DTC and DBC participants related to (i) and (ii). The realization of 
these benefits is consistent with DTC's objectives of providing 
efficient book-entry clearance and settlement facilities and of 
reducing risk to DTC participants by immobilizing certificates.
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    \4\ As noted above, DTC anticipates that this will become a 
problem once German securities are made DTC-eligible.
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    DTC believes that the proposed rule change is consistent with the 
requirements of Section 17A(b)(3)(A) of the Act \5\ and the rules and 
regulations thereunder because the proposed enhancements will reduce 
risks and associated costs to participants of DTC and DBC by 
streamlining the processing of cross-border securities transactions 
between U.S. and German entities.
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    \5\ 15 U.S.C. 78q-1(b)(3)(A).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    Written comments from DTC participants 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, NW., Washington, DC 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. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of DTC. All submissions 
should refer to File No. SR-DTC-98-19 and should be submitted by 
October 14, 1998.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-25370 Filed 9-22-98; 8:45 am]
BILLING CODE 8010-01-M