[Federal Register Volume 64, Number 23 (Thursday, February 4, 1999)]
[Notices]
[Pages 5691-5693]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2661]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41003; File No. 600-31]
Self-Regulatory Organizations; Thomson Financial Technology
Services, Inc.; Notice of Filing of Application for Exemption From
Registration as a Clearing Agency
January 29, 1999.
I. Introduction
On January 11, 1999, Thomson Financial Technology Services, Inc.
(TFTS) \1\ filed with the Securities and Exchange Commission
(Commission) an application on Form CA-1 for exemption from
registration as a clearing agency pursuant to Section 17A of the
Securities Exchange Act of 1934 (Exchange Act) \2\ and Rule 17Ab2-1
thereunder.\3\ TFTS is requesting an exemption from clearing agency
registration in connection with its proposal to offer two services: an
electronic trade confirmation (ETC) service and a central matching
service. The Commission is publishing this notice to solicit comments
on the exemption request.\4\
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\1\ TFTS is a wholly owned subsidiary of Thomson Information
Services, Inc., which is indirectly owned by the Thomson
Corporation. The Thomson Corporation is a public company
incorporated under the laws of Ontario, Canada.
\2\ 15 U.S.C. 78q-1.
\3\ 17 CFR 240.17Ab2-1.
\4\ Copies of TFTS's Form CA-1 are available for inspection and
copying at the Commission's Public Reference Room in File No. 600-
31. TFTS also submitted a document entitled ``Application for
Exemptive Order'' which we do not consider part of the Form CA-1.
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II. Background
A. Confirmation and Affirmation of Institutional Securities
Transactions
The confirmation/affirmation process is used to communicate the
terms and acknowledgment of trades among institutional customers,
broker-dealers, and custodian banks. Securities trades for
institutional customers generally involve greater sums of money,
greater amounts of securities, and more participants than trades for
retail customers. As a result, there are more steps between order entry
and final settlement in an institutional transaction than in a retail
transaction.
Typically, in an institutional trade, the institution's investment
manager places an order with a broker-dealer. After the broker-dealer
executes the trade, it advises the institution of the execution
details. The institution then informs the broker-dealer how the trade
should be allocated among its accounts. The broker-dealer then sends
confirmations of the allocated trades back to the institution. The
institution reviews the confirmations, and if they are accurate, the
institution affirms the trade with the broker-dealer by sending an
affirmed confirmation. Generally, the parties involved in an
institutional trade use an ETC service to transmit the messages
necessary to confirm and affirm the trade,\5\ The trade is then ready
[[Page 5692]]
for the settlement process (i.e., the transfer of securities and money
for completion of the trade).
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\5\ Currently, the rules of certain self-regulatory
organizations (SROs) require their broker-dealer members to use the
facilities of a registered clearing agency for the electronic
confirmation and affirmation of transactions where the broker-dealer
provides delivery-versus-payment (DVP) or receive-versus-payment
(RVP) privileges to its customer. See, e.g., Municipal Securities
Rulemaking Board (MSRB) Rule G-15(d)(ii); National Association of
Securities Dealers (NASD) Rule 11860(a)(5); and New York Stock
Exchange (NYSE) Rule 387(a)(5). Broker-dealers generally extend DVP
and RVP privileges only to their institutional customers. As a
practical matter, the SROs' confirmation rules require broker-
dealers to use The Depository Trust Company's (DTC) Institutional
Delivery (ID) system because it is the only ETC service offered by a
registered clearing agency.
The Commission has published notice of proposed rule changes by
the MSRB, NASD, and NYSE under which broker-dealers would be able to
use ETC services provided by an entity that has received an
exemption from clearing agency registration to provide confirmation
and affirmation services. See Securities Exchange Act Release Nos.
39830 (April 6, 1998), 63 FR 18060 [File No. SR-NYSE-98-07]; 39831
(April 6, 1998), 63 FR 18057 [File No. SR-NASD-98-20]; and 39833
(April 6, 1998), 63 FR 18055 [File No. SR-MSRB-98-06] The Commission
expects to act on the proposed rule changes in the near future.
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B. The Commission's Interpretive Release on Matching
The development of ``matching services'' has been a recent step in
the evolution of the confirmation/affirmation process. The term
matching in this context describes a process in which an intermediary
compares the broker-dealer's trade data submission with the
institution's allocation instructions to determine whether the two
descriptions agree. If the trade data and allocation instructions
match, the intermediary produces an affirmed confirmation. Matching
services eliminate the separate steps of producing a confirmation from
the trade data, review of the confirmation by the institution, and
issuance of an affirmed confirmation by the institution.\6\
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\6\ The Commission has approved a proposed rule change filed by
DTC that allows DTC to provide matching services. Securities
Exchange Act Release No. 39832 (April 6, 1998), 63 FR 18062 [File
No. SR-DTC-95-23]. Currently, only DTC offers a matching service
where it acts as an intermediary between broker-dealers and
institutional customers for U.S. trades.
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On April 6, 1998, we issued an interpretive release regarding
matching services (Matching Release).\7\ In the Matching Release, we
concluded that an entity that provides matching services as an
intermediary between broker-dealers and institutional customers is a
clearing agency within the meaning of Section 3(a)(23) of the Exchange
Act \8\ and is subject to the registration requirements of Section 17A
of the Exchange Act.\9\
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\7\ Securities Exchange Act Release No. 39829 (April 6, 1998),
63 FR 17943 [File No. S7-10-98]. The Matching Release contains a
detailed description of the confirmation/affirmation process as it
currently operates through DTC's ID system.
\8\ 15 U.S.C. 78c(a)(23). Section 3(a)(23) defines the term
clearing agency as, among other things. [A] person who acts as an
intermediary in making payments or deliveries or both in connection
with transactions in securities or who provides facilities for
comparison of data respecting the terms of settlement of securities
transactions, to reduce the number of settlements of securities
transactions, or for the allocation of securities settlement
responsibilities.
\9\ Specifically, the Commission concluded that matching
constitutes ``comparison of data respecting the terms of settlement
of securities transactions.'' Exhibit S to TFTS's Form CA-1 contains
a statement that it disagrees with the Matching Release's
conclusion. In addition, on June 4, 1998, Thomson Information
Services, Inc. (TIS), an affiliate of TFTS, filed a petition with
the United States Court of Appeals for the District of Columbia
Circuit (D.C. Circuit) to review and set aside the part of the
Matching Release that concludes that broker-to-customer matching is
a clearing agency function under the Exchange Act.
In a settlement agreement with the Commission dated December 22,
1998, TIS stated that it would withdraw its petition before the D.C.
Circuit if the Commission approved TFTS's application for exemption
from clearing agency registration within 120 days of the filing of
its application. Our consideration of TFTS's application is
consistent with the statement in the Matching Release that matching
is a clearing agency function and that we would consider granting
matching services conditional exemptions from clearing agency
registration. Our consideration of TFTS's application is independent
of and will not be influenced by TIS's petition to the D.C. Circuit.
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III. TFTS's Request for Exemption
A. TFTS's Proposed Service
TFTS would offer two types of services under an exemption from
clearing agency registration. First, TFTS would offer an ETC service
that would transmit messages among broker-dealers, customers, and
custodian banks regarding the terms of a trade executed for the
customer. As noted above, ETC services are usually used to confirm and
affirm securities trades for institutional investors. Second, TFTS
would offer a central matching service under which it would act as an
intermediary in the confirmation/affirmation process to compare a
broker-dealer's trade data with a customer's allocation instructions to
produce an affirmed confirmation.
All electronic messages that are sent through TFTS's systems will
originate at the sender's (i.e., the broker-dealer or the customer)
computer terminal and will be routed through TFTS's data center. TFTS's
data center will copy and store the data that passes through it. In its
Form CA-1, TFTS represents that it will not perform other functions of
a clearing agency such as net settlement, maintaining a balance of open
positions between buyers and sellers, or marking securities to the
market.\10\
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\10\ Exhibit J to TFTS's Form CA-1.
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TFTS has agreed to certain undertakings as a condition of obtaining
an exemption from clearing agency registration:
(1) To make available to the Commission prior to the commercial
operation of its central matching service an audit report that
addresses all the areas discussed in the Commission's Automation
Review Policies (ARPs);\11\
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\11\ Securities Exchange Act Release Nos. 27445 (November 16,
1989), 54 FR 48703; and 29185 (May 9, 1991), 56 FR 22490.
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(2) To make available to the Commission on an annual basis
(beginning in the central matching service's second year of
operation) reports prepared by competent, independent audit
personnel that are generated in accordance with the annual risk
assessment of the areas set forth in the ARPs, and field work
associated therewith;
(3) To provide the Commission with twenty business days' advance
notice of any material changes that TFTS makes to its matching
service, provided that such changes shall not be subject to
regulatory approval;
(4) To provide the Commission with prompt notification of
significant systems outages, to be defined as outages lasting more
than thirty minutes;
(5) To respond to the Commission's requests for additional
information relating to TFTS's matching service and to provide
access to the Commission to conduct on-site inspections of all
facilities (including automated systems and systems environment),
records, and personnel related to the matching service, provided
that such requests for information shall be made and such
inspections shall be conducted solely for the purpose of reviewing
the matching service's operations and compliance with the federal
securities laws and the terms and conditions of TFTS's exemptive
order;
(6) To supply the Commission or its designee with periodic
reports regarding the affirmation rates for depository-eligible
transactions that settle in the United States effected by
institutional investors that utilize TFTS's matching service;
(7) To preserve a copy or record of all trade details,
allocation instructions, central trade matching results, reports and
notices sent to customers, reports regarding affirmation rates that
are sent to the Commission or its designee, and any complaint
received from a customer, all of which pertain to the operation of
the matching service, for a period of not less than five years, the
first two years in an easily accessible place; and
(8) To develop fair and reasonable linkages between the matching
service and the Depository Trust Company and other central matching
services regulated by the Commission.
B. Statutory Standards
Section 17A(b)(1) of the Exchange Act requires all clearing
agencies to register with us before performing any of the functions of
a clearing agency.\12\ However, Section 17A(b)(1) also states that,
upon our own motion or upon a clearing agency's application, we may
conditionally or unconditionally exempt the clearing agency from any
provisions of Section 17A or the rules or regulations thereunder if we
find that such exemption is consistent with the public interest, the
protection of investors, and the purposes of Section 17A. TFTS believes
that the undertakings it has proposed as a condition of obtaining an
exemption from clearing agency registration will allow it to protect
the public interest and strike the appropriate balance between safety
and soundness and the need to foster efficiency, competition, and
capital formation.
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\12\ 15 U.S.C. 78q-1(b)(1).
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We have exercised our authority to conditionally exempt an
applicant from
[[Page 5693]]
clearing agency registration on three prior occasions.\13\ In those
cases, the applicants requesting exemption from clearing agency
registration were required to meet standards substantially similar to
those required of registrants under Section 17A in order to assure that
the fundamental goals of that section were furthered (i.e., safety and
soundness of the national clearance and settlement system).
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\13\ Securities Exchange Act Release Nos. 36573 (December 12,
1995 60 FR 65076 (order approving application for exemption from
clearing agency registration for the Clearing Corporation for
Options and Securities); 38328 (February 24, 1997), 62 FR 9225
(order approving application for exemption from clearing agency
registration for Cedel Bank); and 39643 (February 11, 1998), 63 FR
8232 (order approving application for exemption from clearing agency
registration by Morgan Guaranty Trust Company of New York, Brussels
Office, as operator of the Euroclear System).
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In the Matching Release, we stated that an entity that limited its
clearing agency functions to providing matching services might not have
to be subject to the full range of clearing agency regulation. In
addition, we stated that an entity seeking an exemption from clearing
agency registration for matching would be required to: (1) provide us
with information on its matching services and notice of material
changes to its matching services; (2) establish an electronic link to a
registered clearing agency that provides for the settlement of its
matched trades; (3) allow us to inspect its facilities and records; and
(4) make periodic disclosures to us regarding its operations.
TFTS's matching service would be the only clearing agency function
that it would perform under an exemptive order. While we believe that
TFTS's matching services could have a significant impact on the
national clearance and settlement system, we do not believe that TFTS's
matching services raise all of the concerns raised by an entity that
performs a wider range of clearing agency functions. TFTS represents in
its Form CA-1 that as a condition of its exemption it will comply with
the conditions suggested by the Commission in the Matching Release.
Therefore, we believe that it may not be necessary to require TFTS to
satisfy all of the standards required of registrants under Section
17A.\14\
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\14\ For example, TFTS's Form CA-1 (1) represents that TFTS will
not handle funds or securities and (2) states that TFTS will not
impose prohibitions or limit access to its service by potential
customers but that it might terminate a subscription for failure to
pay fees. In addition, TFTS will provide us with a current balance
sheet and income statement before beginning operations which will
enable us to assess TFTS's financial capability.
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We anticipate that in addition to considering the public interest
and the protection of investors, the primary factor in our
consideration of TFTS's Application will be whether TFTS is so
organized and has the capacity to be able to facilitate prompt and
accurate matching services subject to the specific conditions that it
has proposed.\15\ In particular, TFTS has represented that, among other
things, it will provide us with (1) an independent audit report that
addresses all the areas discussed in the Commission's ARPs prior to
beginning commercial operations and annually thereafter, (2) on-site
inspection rights, and (3) a current balance sheet and income statement
prior to beginning operations.\16\
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\15\ See Section 17A(b)(3)(A) of the Exchange Act, 15 U.S.C.
78q-1(b)(3)(A).
\16\ See Section III.A, supra.
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We expect that any exemption from clearing agency registration for
TFTS would contain all of the conditions that TFTS has proposed in its
Form CA-1. We request comment on whether these conditions are
sufficient to promote the purposes of Section 17A and to allow us to
adequately monitor the effects of TFTS's proposed activities on the
national system for the clearance and settlement of securities
transactions. In addition, we invite commenters to address whether
granting TFTS an exemption from clearing agency registration would
impose any burden on competition that is not necessary or appropriate
in furtherance of the Exchange Act.
IV. Solicitation of Comments
Comments are due by March 8, 1999. These comments will be
considered in deciding whether to grant TFTS's application for
exemption from registration as a clearing agency. Six copies of the
comments should be filed with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Comments
also may be submitted electronically at the following E-mail address:
[email protected]. All comment letters should refer to File No.
600-31; this file number should be used on the subject line if E-mail
is used. Copies of the application and all written comments will be
available for inspection and copying at the Commission's Public
Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a0(16).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2661 Filed 2-3-99; 8:45 am]
BILLING CODE 8010-01-M