[Federal Register Volume 63, Number 197 (Tuesday, October 13, 1998)]
[Notices]
[Pages 54739-54740]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-27360]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40523; International Series Release No. 1160; File No. 
SR-DTC-97-22]


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

October 6, 1998.
    On October 30, 1997, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-DTC-97-22) pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal 
was published in the Federal Register on February 20, 1998.\2\ The 
Commission received no comment letters in response to the filing. For 
the reasons discussed below, the Commission is approving the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1)
    \2\ Securities Exchange Act Release No. 39657 (February 12, 
1998), 63 FR 8725.
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I. Description

    Currently, DTC maintains a link with The Canadian Depository for 
Securities (``CDS'') that allow a CDS participant to establish an 
account at DTC or to use CDS's omnibus account at DTC. The Link permits 
CDS participants to process book-entry transactions with other DTC 
participants. 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 to a DCT 
account securities held in its account at CDS by book-entry 
movement.\3\
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    \3\ CDS participants sometimes represent U.S. investors or U.S. 
intermediaries that are in turn also adversely affected.
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    Occasionally, a CDS participant attempting to settle a trade with 
DTC counterparty has sufficient inventory in its account at CDS to 
settle the transaction but does not have sufficient inventory in its 
DTC account. When this occurs, the CDS participant must physically 
withdraw the securities from CDS and must physically deposit them at 
DTC.\4\ The costs and risks associated with physically withdrawing and 
transporting certificates for the purpose of redepositing them at DTC, 
which also involves reregistration of the certificates into DTC nominee 
name, can be significant. In addition, the time involved in making 
physical movements can cause a CDS participant to not deliver 
securities to DTC in time for settlement and to incur certain expenses 
associated with its failure to deliver.
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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 DTC's nominee name prior 
to sending them to DTC.
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    The rule change allows DTC to establish an omnibus account at CDS 
in order to create a two-way interface between CDS and DTC. As a result 
of the two-way interface, there will be no need to physically move 
certificates between DTC and CDS in order to settle transactions. Using 
the interface, 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 will identify whic DTC participant account 
should be credited with the position, and DTC will immediately credit 
the position to the

[[Page 54740]]

receiving DTC participant account on DTC's books. The receiving DTC 
participant can then redeliver the position on a free basis or on an 
against payment basis within DTC . The securities, though, will remain 
at CDS. DTC and CDS will conduct automated, daily reconciliation to 
ensure their books balance.
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    \5\ All book-entry movements of security positions into or out 
of the DTC omnibus account at CDS will be on a free basis and not on 
an against payment basis.
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    To minimize any subsequent physical movement of securities that 
could occur between DTC and CDS, DTC and CDS will engage in weekly 
meeting. The netting will reduce on an omnibus basis the number of 
securities in the same issue held by each depository on behalf of the 
other.
    CDS will provide subcustody services such 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.

II. Discussion

    Section 17A(b)(3)(F) \6\ of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions. The Commission 
believes that DTC's rule change is consistent with DTC's obligations 
under the Act because the two-way link should help reduce the number 
failed trades and should help reduce the need for physical movements of 
Canadian securities among CDS, DTC, and Canadian transfer agents. As a 
result, trades in Canadian securities can be cleared and settled more 
efficiently, and DTC participants can avoid the expenses associated 
with failed trades and physically moving securities.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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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-97-22) be, and hereby 
is, approved.

    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. 98-27360 Filed 10-9-98; 8:45 am]
BILLING CODE 8010-01-M