[Federal Register Volume 64, Number 92 (Thursday, May 13, 1999)]
[Notices]
[Pages 25948-25950]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-12138]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41377; File No. 600-31]
Self-Regulatory Organizations; Thomson Financial Technology
Services, Inc.; Order Approving Application for Exemption From
Registration as a Clearing Agency
May 7, 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 \2\ for exemption from
registration as a clearing agency pursuant to Section 17A of the
Securities Exchange Act of 1934 (Exchange Act) \3\ and Rule 17Ab2-1
thereunder.\4\ Notice of TFTS's application was published in the
Federal Register on February 4, 1999.\5\ The Commission received one
comment letter in response to the notice of TFTS's exemption
request.\6\ This order grants TFTS an exemption from registration as a
clearing agency to offer an electronic trade confirmation (ETC) service
and a central matching service subject to the conditions and
limitations described below.
---------------------------------------------------------------------------
\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\ Copies of TFTS's application are available for inspection
and copying at the Commission's Public Reference Room in File No.
600-31. TFTS submitted a document entitled ``Application for
Exemptive Order'' with its Form CA-1. That document was not
considered in the evaluation of TFTS's application.
\3\ 15 U.S.C. 78q-1.
\4\ 17 CFR 240.17Ab2-1.
\5\ Securities Exchange Act Release No. 41003 (January 29,
1999), 64 FR 5691 (notice of filing of application for exemption
from registration as a clearing agency).
\6\ Letter from Frank Denaro, Senior Vice President, Salomon
Smith Barney (March 5, 1999). The letter is available for inspection
and copying in the Commission's Public Reference Room in File No.
600-31.
---------------------------------------------------------------------------
II. Description of TFTS's Services
TFTS will be permitted to offer two types of services under this
order: (1) an ETC service where TFTS will transmit messages among
broker-dealers, customers, and custodian banks regarding the terms of a
trade executed for the customer and (2) a central matching service
where TFTS will act as an intermediary in the confirmation/affirmation
process by comparing a broker-dealer's trade data with a customer's
allocation instructions to produce an affirmed confirmation.
The parties to institutional trades use ETC services to transmit
electronically the messages (e.g., the institution's allocation
instructions to the broker-dealer and the broker-dealer's submission of
trade data to the institutional customer) necessary to confirm and
affirm the trades. TFTS's ETC service is designed to be used by
institutional customers, broker-dealers, and custodian banks to
communicate the terms and acknowledgment of their securities trades.\7\
---------------------------------------------------------------------------
\7\ The Commission has approved proposed rule changes by the
Municipal Securities Rulemaking Board (MSRB), the National
Association of Securities Dealers (NASD), and the New York Stock
Exchange (NYSE) under which their broker-dealer members are
permitted to use ETC services provided by an entity that has
received an exemption from clearing agency registration to provide
confirmation and affirmation services. Securities Exchange Act
Release No. 41378 (May 7, 1999) [File Nos. SR-MSRB-98-06, SR-NASD-
98-20, and SR-NYSE-98-07]. Previously, those rules required broker-
dealers to use ETC services provided by a registered clearing
agency.
---------------------------------------------------------------------------
Matching services are a recent development in institutional trade
processing. A matching service produces an affirmed confirmation of the
trade by independently performing some of the steps in confirming and
affirming an institutional trade. It thereby reduces the number of
messages that have to be sent among the parties to the trade. TFTS's
matching service will compare the broker-dealer's trade data submission
to the institution's allocation instructions and will produce an
affirmed confirmation of the trade if the two descriptions match.\8\
---------------------------------------------------------------------------
\8\ The notice of TFTS's application contains a detailed
description of both the confirmation/affirmation process for
institutional trades and TFTS's matching service. Securities
Exchange Act Release No. 41003, supra note 5.
---------------------------------------------------------------------------
[[Page 25949]]
III. Comment Letter
We received one comment letter in response to the notice of filing
of TFTS's application.\9\ The commenter generally supported TFTS's
application.
---------------------------------------------------------------------------
\9\ Letter from Salomon Smith Barney, supra note 6.
---------------------------------------------------------------------------
The Commenter expressed concern with the scope of TFTS's
undertakeing to develop fair and reasonable linkages between its
matching service and The Depository Trust Company (DTC). Specifically,
the commenter stated that vendors may require direct linkages for
matching and confirmation services and that it did not want to incur
charges to connect with each new vendor. The commenter stated that it
believes that broker-dealers and banks that have links to DTC should be
able to use those links to communicate with matching and confirmation
service providers.
The commenter also noted TFTS's undertaking that it will give us 20
business days' advance notice of any material changes to its matching
service. The commenter stated that TFTS, like DTC, should be required
to give participants a comment period before making changes to its
matching system.
IV. Discussion
A. Statutory Standards
Section 17A(b)(1) of the Exchange Act requires all clearing
agencies to register with us.\10\ On April 6, 1998, we issued an
interpretive release in which we conclude that an entity that provides
matching services as an intermediary between broker-dealers and
institutional customers is a clearing agency \11\ and is subject to the
registration requirements of Section 17A(b)(1) (Matching Release).\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 a 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, including the prompt and accurate
clearance and settlement of securities transactions and the
safeguarding of securities and funds. For the reasons set forth below,
we believe that an exemption for TFTS from full clearing agency
registration is consistent with Section 17A
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78q-1(b)(1).
\11\ Section 3(a)(23) of the Exchange Act, 15 U.S.C. 78c(a)(23),
defines the term clearing agency as, among other things:
[A]ny 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 data respecting the terms of
settlement of securities transactions, to reduce the number of
settlements of securities transactions, or for the allocation
securities settlement responsibilities.
\12\ Securities Exchange Act Release No. 39829 (April 6, 1998),
64 FR 17943. Specifically the Meeting Release concluded that
matching constitutes ``comparison of data respecting the term of
settlement of securities transactions.''
---------------------------------------------------------------------------
B. Evaluation of TFTS's Application for Exemption
We have previously granted three conditional exemptions from
clearing agency registration.\13\ In those cases, we reviewed the
applicants' risk management procedures, operational capacity and
safeguards, corporate structure, and ability to comply with the
requirements of Section 17A in order to assure that the fundamental
goals of that section (i.e., the safety and soundness of the national
clearance and settlement system) were furthers.\14\
---------------------------------------------------------------------------
\13\ Securities Exchange Act Release Nos. 36573 (December 12,
1995), 60 FR 65076 (order approving applications for exemption from
clearing agency registration for the Clearing Corporation for
Options and Securities); 38328 (February 24. 1997), 62 JR 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 Moran Guaranty Trust Company of New York, Brussels
Office, as operator of the Euroclear System).
\14\ Specifically, the applications were considered against
standards that the Commission's Division of Market Regulation has
published for the evaluation of applications for clearing agency
registration. Securities Exchange Act Release No. 16900 (June 17,
1980), FR 45 49102.
---------------------------------------------------------------------------
In our consideration of TFTS's application, we noted that the
matching service would be the only clearing agency function that TFTS
would perform under an exemptive order. In addition, we recognized that
while TFTS's matching service could have a significant impact on the
national clearance and settlement system, all of the concerns raised by
an entity that performs a wider range of clearing agency functions are
not raised in TFTS's situation.\15\ Also in our review, we took into
account that TFTS had represented in its Form CA-1 that it would comply
with certain conditions that we would impose under an exemptive order.
Therefore, we have decided not to require TFTS to satisfy all of the
standards normally required of registrants under Section 17A.\16\ As a
result, in addition to considering the public interest and the
protection of investors, the primary factor in our consideration of
TFTS's application was whether TFTS is so organized and has the
capacity to be able to facilitate prompt and accurate matching
services.\17\
---------------------------------------------------------------------------
\15\ TFTS specifically represented 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. In addition, in its Form CA-1
TFTS (1) represents that it will not handle funds or securities and
(2) states that it 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.
\16\ Accordingly, TFTS will not be subject to the requirements
of Section 17A which require a registered clearing agency to:
(1) Fairly represent the clearing agency's shareholders in the
selection of the clearing agency's directors. Section 17A(b)(3)(C),
15 U.S.C. 78q-1(b)(3)(C).
(2) Limit the categories of persons that are potentially
eligible for clearing agency services. Section 17A(b)(3)(B), 15
U.S.C. 78q-1(b)(3)(B).
(3) Equitably allocate reasonable dues, fees, and other charges
among clearing agency participants. Sections 17A(b)(3)(D) and (E),
15 U.S.C. 78q-1(b)(3)(D) and (E).
(4) Enforce compliance by its participants with its rules.
Sections 17A(b)(3)(A), (G) and (H), 15 U.S.C. 78q-1(b)(3)(A), (G)
and (H). Because we are granting TFTS an exemption from clearing
agency registration, TFTS will not be a self-regulatory organization
and therefore will not be required to file rule changes in
accordance with Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b).
Furthermore, we are not requiring TFTS to comply with the rule
change filing requirements of section 19(b) as a condition of its
exemption.
\17\ See Section 17A(b)(3)(A) of the Exchange Act, 15 U.S.C.
78q-1(b)(3)(A).
---------------------------------------------------------------------------
C. Terms of TFTS's Exemption
1. Scope of Exemption
This order grants TFTS an exemption from registration as a clearing
agency under Section 17A of the Exchange Act to provide a matching
service where it will 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.
The exemption is granted subject to conditions that we believe are
necessary and appropriate in light of the statutory requirements of the
Section 17A objective of promoting a safe and efficient national
clearance and settlement system and in light of TFTS's structure and
operation. This exemptive order and the conditions and limitations
contained in it are consistent with our statement in the Matching
Release that an entity that limits its clearing agency functions to
providing matching services does not have to be subject to the full
range of clearing agency regulation.
2. Conditioning of Exemption
We are including specific conditions in our order exempting TFTS
from clearing agency registration. As noted above, these conditions are
designed to promote a safe and efficient national clearance and
settlement system and to
[[Page 25950]]
enable us to monitor the operation of TFTS's matching service.
1. Before beginning the commercial operation of its central
matching service, TFTS must provide us with an audit report that
addresses all the areas discussed in our Automation Review Policies
(ARPs).\18\ In order to verify that TFTS is organized and has the
capacity to be able to facilitate prompt and accurate matching
services, the exemption contained in this order will take effect thirty
days after our staff has received an acceptable audit report pursuant
to this condition.
---------------------------------------------------------------------------
\18\ Securities Exchange Act Release Nos. 27445 (November 16,
1989), 54 FR 48703; and 29185 (May 9, 1991), 56 FR 22490. In
addition, Form CA-1 requires applicants to attach its most recent
balance sheet and statement of income and expenses. TFTS did not
include this information with its Form CA-1 but represented in its
Form CA-1 that it will provide us with a current balance sheet and
income statement before beginning operations.
---------------------------------------------------------------------------
2. TFTS must provide the Commission (beginning in the central
matching service's second year of operation) with annual reports and
any associated field work prepared by competent, independent audit
personnel that are generated in accordance with the annual risk
assessment of the areas set forth in the ARPs.
3. TFTS must provide the Commission with twenty business days'
advance notice of any material changes that TFTS makes to its matching
service. These changes will not require our approval before they are
implemented.\19\
---------------------------------------------------------------------------
\19\ While the commenter expressed concern with this condition,
we believe that receiving advance notice of material changes to
TFTS's matching service is sufficient for the purposes of this
exemption. TFTS must file with the Commission a request to modify
this order if it makes any changes in its operations as summarized
in this order, in its Form CA-1, dated January 11, 1999, or in any
subsequently filed amended Form CA-1, that would change the
fundamental nature of its matching service.
---------------------------------------------------------------------------
4. TFTS must provide the Commission with prompt notification of
systems outages lasting more than thirty minutes.
5. TFTS must respond to requests from the Commission for additional
information relating to its matching service and 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. The requests for information shall be
made and the 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. TFTS must 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 institutions
that utilize TFTS's matching service.\20\
---------------------------------------------------------------------------
\20\ For purposes of this condition, we designate DTC as agent
for receipt of the periodic reports.
---------------------------------------------------------------------------
7. TFTS must 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 compliant received from
a customer, all of which pertain to the operation of TFTS's matching
service.\21\ TFTS must retain these records for a period of not less
than five years, the first two years in an easily accessible place.
---------------------------------------------------------------------------
\21\ All electronic messages that are sent through TFTS's
systems will originate at the sender's (i.e., the broker-dealer's or
the customer's) 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.
---------------------------------------------------------------------------
8. TFTS must develop fair and reasonable linkages between the
matching service and DTC and other central matching services that are
regulated by the Commission or that receive an exemption from clearing
agency registration from the Commission. At this time, we are not
specifying the type of linkages that TFTS must develop. Our staff will
consult with TFTS and industry participants to ensure that appropriate
linkages are developed in a timely fashion. However, we believe that at
a minimum the linkages should allow parties to trades that are
processed through one or more matching services to communicate through
one or more appropriate and effective interfaces with clearing agencies
and other matching services. For example, a broker-dealer that has a
link to DTC should be able to transmit trade data through that link to
an institutional customer that uses TFTS's services without having to
establish a separate link with TFTS.
3. Modification of Exemption
The Commission may modify by order the terms, scope, or conditions
of TFTS's exemption from registration as a clearing agency if we
determine that such modification is necessary or appropriate in the
public interest, for the protection of investors, or otherwise in
furthernace of the purposes of the Exchange Act. Furthermore, we may
limit, suspend, or revoke this exemption if we find that TFTS has
violated or is unable to comply with any of the provisions set forth in
this order if such action is necessary or appropriate in the public
interest, for the protection of investors, or otherwise in furtherance
of the purposes of the Exchange Act
V. Conclusion
Pending the receipt of TFTS's initial audit report, we believe that
TFTS will have sufficient operational and processing capability to
facilitate prompt and accurate matching services. In particular, we
note that TFTS's exemption will be subject to conditions that are
designed to enable us to monitor TFTS's operational and processing
capability with respect to its matching service. Therefore, the
Commission finds that TFTS's application for exemption from
registration as a clearing agency meets the standards and requirements
deemed appropriate for such an exemption.
It is therefore ordered, pursuant to Section 19(a)(1) of the
Exchange Act, that the request for exemption from registration as a
clearing agency filed by Thomson Financial Technology Services, Inc.
(File No. 600-31) be, and hereby is, granted subject to the conditions
contained in this order.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-12138 Filed 5-12-99; 8:45 am]
BILLING CODE 8010-01-M