[Federal Register Volume 63, Number 229 (Monday, November 30, 1998)]
[Notices]
[Pages 65829-65830]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31815]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40696; File No. SR-DTC-98-18]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Regarding Year 2000 Validation Testing

November 20, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 1, 1998, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as change 
as described in Items I and II below, which items have been prepared 
primarily by DTC. The Commission is publishing this notice and order to 
solicit comments from interested persons and to grant accelerated 
approval of the proposal.
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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 require that its 
participants successfully complete a Year 2000 validation test.

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 III below. DTC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspect 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

    On January 1, 2000, certain computer programs may misinterpret the 
Year 2000 as the Year 1900. Because DTC depends on computer technology 
to allow its participants to input and retrieve settlement transaction 
reports and to complete the daily settlement of securities 
transactions, such a misinterpretation could have serious

[[Page 65830]]

consequences for DTC and its participants. Accordingly, DTC is 
assessing its own Year 2000 readiness as well as the Year 2000 
readiness of all its participants.
    Under the proposed rule change, DTC is setting forth a policy 
statement with respect to DTC's Rule 2. That rule provides the 
standards and obligations that entities must meet to become DTC 
participants and to retain their status as participants. Pursuant to 
Rule 2, a participant must furnish to DTC upon DTC's request 
information that demonstrates the participant has satisfactory 
operational capability.
    In accordance with Rule 2, DTC will require participants that 
provide input to DTC through a computer to computer link to conduct a 
Year 2000 validation test directly with DTC at some point during the 
first nine months of 1999. Because DTC recognizes the importance in 
obtaining assurances that participants are individually prepared to 
receive settlement transaction reports from DTC, input settlement 
transactions to DTC, and complete settlement, DTC's validation testing 
process will focus on a limited number of scripted transactions in 
certain settlement-related areas. The validation test will require 
participants to process a series of scripted transactions and to 
balance with DTC's position and settlement statements. DTC will require 
that each participant provide DTC with a standard testing 
acknowledgment, signed by a senior internal auditor, that the 
participant has balanced to the position and settlement statements and 
has done so in a Year 2000 compliant environment.\3\
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    \3\ If a participant does not have an internal auditor, the 
testing acknowledgment may be executed by a senior compliance 
officer or other equivalent officer.
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    In DTC's view, a participant's failure to successfully complete the 
Year 2000 validation test will constitute a failure to demonstrate the 
sufficient operational capability required by Rule 2.
    DTC believes that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
because the proposed validation testing will reduce the risk of 
participant failures caused by computer programs that misinterpret the 
Year 2000 as the Year 1900. The Year 2000 validation test will help 
ensure that DTC participants have sufficient operational capability to 
properly interface with DTC before, on, and after the Year 2000.

(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.

    The Year 2000 validation test requirement has been received 
positively by the Securities Industry Association (``SIA'') Year 2000 
Steering Committee. A draft testing acknowledgment has been reviewed 
without comment by SIA's Legal and Compliance subcommittee as well as 
the New York Clearing House Year 2000 Committee.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Section 17A(b)(3)(F) of the Act \4\ 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 the proposed rule change is consistent with this 
obligation because the Year 2000 validation test should allow DTC to 
address any potential problems associated with its participants' Year 
2000 readiness. As a result, DTC should be able to continue to provide 
for the prompt and accurate clearance and settlement of securities 
transactions before, on, and after Year 2000 without interruption.
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    \4\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the publication of notice of 
the filing. Approving prior to the thirtieth day after publication of 
notice should allow DTC and its participants to immediately begin to 
prepare for DTC's Year 2000 validation testing.

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 Room, 450 Fifth Street, NW, Washington, 
DC 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 No. SR-DTC-98-18 and should be submitted by December 
21, 1998.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\5\ that the proposed rule change (File No. SR-DTC-98-18) be and 
hereby is approved.

    \5\ 15 U.S.C. 78s(b)(2).
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    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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-31815 Filed 11-27-98; 8:45 am]
BILLING CODE 8010-01-M