[Federal Register Volume 63, Number 222 (Wednesday, November 18, 1998)]
[Notices]
[Pages 64135-64136]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30826]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40660; International Series Release No. 1170; File No. 
SR-DTC-98-19]


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

November 10, 1998.
    On September 15, 1998, The Depository Trust Company (``DTC'') Filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-DTC-98-19) pursuant to Section 10(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal 
was published in the Federal Register on September 23, 1998.\2\ The 
Commission received seven comment letters in response to the filing.\3\ 
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. 40445 (September 16, 
1998), 63 FR 50950.
    \3\ Infra note 6.
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I. Description

    Under the rule change, DTC will open an omnibus account at Deutsche 
Borse Clearing AG (``DBC'') in order to create a two-way interface 
between DTC and DBC. Presently, DBC has an omnibus account at DTC which 
enables DBC and its participants to effect book-entry deliveries at DTC 
to DTC participants. The current link between DTC and DBC allows DBC 
and its participants to use the custody, book-entry, and delivery 
services of DTC for transactions involving securities that are eligible 
in both systems. The current link permits a DTC participant to settle a 
cross-border transaction with a DBC counterparty by making a book-entry 
delivery, on a free of payment basis, 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.\4\ Cash settlement of the transaction will take place outside 
of DTC.
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    \4\ All deliveries of securities into or out of DBC's omnibus 
account at DTC are on a free of payment basis.
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    However, under the current link a DBC participant cannot make a 
book-entry delivery of securities held in its account at DBC to a DTC 
participant's account at DTC. In order for a DBC participant to make a 
delivery of securities to a DTC counterparty's account at DTC, the DBC 
participant must deliver the physical securities to DTC.
    The rule change will permit book-entry movements of securities from 
a DBC participant's account at DBC to a DTC counterparty's account at 
DTC. Thus, a DBC participant will be able to settle a cross-border 
transaction with a DTC counterparty by making a book-entry delivery, on 
a free of payment basis, 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.\5\ The receiving DTC 
participant can then redeliver the securities within DTC through a 
book-entry movement on either a free of payment or against payment 
basis.
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    \5\ All deliveries of securities into or out of DTC's omnibus 
account at DBC are on a free of payment basis.
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    If required, DBC will 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. Currently, DTC provides such services for securities held 
by DTC on behalf of DBC.

II. Comment Letters

    The Commission received seven comment letters in response to the 
notice of the proposed rule change.\6\ Five commenters, Credit Suisse 
First Boston Corporation, Salomon Smith Barney, Skadden Arps, Deutsche 
Bank, and BONY, expressed support for the proposed rule change. These 
comments stated generally that the proposed rule change would 
facilitate the efficient processing of cross-border securities 
transactions and would reduce risks and costs to participants of DTC 
and DBC.\7\
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    \6\ Letters from P. Howard Edelstein, President, Electronic 
Settlements Group, Thomson Financial Services (``Thomson'') (October 
14, 1998); Joseph D. Fashano, Director, Credit Suisse First Boston 
Corporation (October 20, 1998); Thomas L. Montrone, President, The 
Securities Transfer Association, Inc. (``STA'') (October 21, 1998); 
Simon M. Lorne, Managing Director, Salomon Smith Barney (October 23, 
1998); J. Michael Schell, Skadden, Arps, Slate, Meagher & Flom LLP 
(``Skadden Arps'') (October 23, 1998); Jurgen Rebouillon, Senior 
Vice President, and Thomas Klee, First Vice President, Deutsche Bank 
AG (``Deutsche Bank'') (October 23, 1998); Joseph M. Velli, Senior 
Executive Vice President, The Bank of New York (``BONY'') (October 
23, 1998).
    \7\ The comment letters submitted by Skadden Arps, Deutsche 
Bank, and BONY addressed the rule change with reference to the 
merger of Daimler-Benz Aktiengesellschaft and Chrysler Corporation 
into DaimlerChrysler AG. Skadden Arps is counsel to Daimler-Benz, 
and BONY and Deutsche Bank will serve as cotransfer agents for 
DaimlerChrysler ordinary shares.
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    The STA expressed concern that under the proposed rule change some 
U.S. investors may receive transfer services from transfer agents that 
are not fully subject to U.S. regulation. In response to the STA's 
letter, Skadden Arps noted that the transfer agents for DaimlerChrysler 
ordinary shares, BONY and Deutsche Bank, are registered under Section 
17A of the Act. Skadden Arps also stated that it believed that it is 
not necessary to subject all cross-border exchange links to Section 17A 
registration.
    Thomson expressed concern that the proposed rule change might 
result in an expansion of the scope of certain self-regulatory 
organization rules governing the confirmation and affirmation of 
institutional securities trades. Thomson requested that the Commission 
clarify that the proposed rule change would not affect the exemption in 
those rules for trades that settle outside the United States.\8\
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    \8\ Specifically, Thomson referenced National Association of 
Securities Dealers Rule 11860, New York Stock Exchange (``NYSE'') 
Rule 387(a)(5), Municipal Securities Rulemaking Board Rule G-
15(d)(ii), American Stock Exchange Rule 423(5), Chicago Stock 
Exchange Article XV, Rule 5, Pacific Exchange Rule 9.12(a)(5), and 
Philadelphia Stock Exchange Rule 274(b). Those rules require that 
for certain securities transactions the facilities of a securities 
depository be used for the confirmation, acknowledgment, and book 
entry settlement of the transactions. However, those rules also 
state that they are not applicable to transactions that are to be 
settled outside the United States. See, e.g., NYSE Rule 387(a)(5), 
Interpretation .10.
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III. Discussion

    Section 17A(b)(3)(F) of the Act \9\ requires, among other things, 
that the rules of a clearing agency be designed to promote the prompt 
and accurate clearance and settlement of securities transactions and to 
assure the safeguarding of securities and funds that are in its custody 
or control or for which it is responsible. The Commission believes that 
the proposed rule change is consistent with DTC's obligations under 
Section 17A(b)(3)(F).
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission believes that the rule change should increase 
efficiency in the movement of securities positions and in the 
settlement of securities transactions among participants of DTC and DBC 
by reducing the need for the movement of physical securities. The link 
should not

[[Page 64136]]

only reduce the time and expense associated with physical movements of 
securities positions but should also reduce the risk of loss and 
erroneous processing that always exists with physical movements. The 
Commission also believes that the procedures for the link between DTC 
and DBC are consistent with DTC's safeguarding obligation in that all 
movements into or out of DTC's omnibus account at DBC and into or out 
of DBC's omnibus account at DTC will be on a free of payment basis.\10\
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    \10\ In addition, DTC has obtained an opinion of counsel 
concerning German law and DTC's participation in DBC.
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    The Commission has taken account of the comment letters that it 
received in response to the proposed rule change. The Commission 
believes that the rule change should not affect the obligation of any 
entity to register as a transfer agent pursuant to Section 17A of the 
Act.\11\ In addition, the Commission believes that the rule change 
should not have any effect on the rules of any self-regulatory 
organization other than DTC.
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    \11\ The Commission notes that the entities that will perform 
transfer functions for shares in DaimlerChrysler are registered 
transfer agents.
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IV. 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 \12\ and the 
rules and regulations thereunder.
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    \12\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-DTC-98-19) be, and 
hereby is, approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-30826 Filed 11-17-98; 8:45 am]
BILLING CODE 8010-01-M