[Federal Register Volume 64, Number 144 (Wednesday, July 28, 1999)]
[Notices]
[Pages 40925-40926]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-19263]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41640; File No. SR-DTC-99-18]


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

July 22, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 6, 1999, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule 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 who provide settlement information solely through DTC's 
proprietary Participant Terminal System (PTS) submit to DTC, no later 
than September 15, 1999, a Year 2000 compliance acknowledgment 
demonstrating their operational capability.

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 comments it received on the proposed rule change. The text of 
these statements may be examined at the places specified in Item IV 
below. DTC has prepared summaries, set forth in sections (A), (B), and 
(C) below, of the most significant aspects 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, we will experience the first century change 
since the advent of computers and related technology. Because certain 
computer programs may misinterpret the Year 2000 as 1900, the U.S. 
financial industry has undertaken efforts to prepare for the impending 
date change. As the new millennium approaches, DTC must assess its own 
Year 2000 readiness, as well as seek comfort as to 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

[[Page 40926]]

demonstrates the participant has satisfactory operational capability.
    DTC's Rule 2 has been interpreted to require participants who 
provide settlement input to DTC through a computer to computer link to 
conduct a Year 2000 validation test with DTC at some point during the 
first nine months of 1999.\3\ The validation test requires participants 
to process a series of scripted transactions and to balance with DTC's 
position and settlement statements. Each participant is being required 
to provide DTC with a standard testing acknowledgment signed by a 
senior internal auditor stating that it has balanced to the position 
and settlement statements and had done so in a Year 2000 compliance 
environment.\4\ The validation test is designed to test the Year 2000 
compliance of the computer to computer interface between DTC and the 
participant. The Year 2000 testing acknowledgment confirms the 
successful completion of the validation test and provides some comfort 
as to the ability of the participant to transact business with DTC in a 
Year 2000 compliant manner.
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    \3\ Securities Exchange Act Release No. 40696 (November 20, 
1998), 63 FR 65829 [File No. SR-DTC-98-18].
    \4\ 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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    Participants who provide settlement information solely through 
DTC's PTS \5\ are not required to perform validation testing as DTC has 
already tested PTS and found it to be Year 2000 compliant. Although DTC 
is comfortable that the interface used to communicate with PTS-only 
participants is Year 2000 compliant, under the proposed rule filing 
these participants will be required to submit to DTC, no later than 
September 15, 1999, a Year 2000 compliance acknowledgement which 
relates to their organization as a whole. The Year 2000 compliance 
acknowledgment is identical to that required from participants who are 
subject to the validation testing requirement except that the language 
regarding testing has been deleted.
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    \5\ References to PTS also include PTS Jr. PTS Jr. is a dial-up 
system (i.e., utilizing a PC, modem, and non-dedicated phone line) 
that offers all of the functionary (at reduced speed) of a regular, 
dedicated PTS terminal. PTS Jr. is designed for low-volume users or 
those participants who choose not to utilize a more costly, 
dedicated PTS terminal.
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    In DTC's view a participant's failure to provide DTC with a 
standard Year 2000 compliance acknowledgment will constitute a failure 
to demonstrate the sufficient operational capability required by DTC's 
Rule 2. DTC recognizes the importance in obtaining assurances that 
participants are individually prepared to operate normally before, 
during, and after the first few days of Year 2000. DTC believes that 
the industry as a whole has an interest in assuring itself that each 
participant (and/or participant's processing agent) can interact with 
and complete the depository's settlement process throughout the day in 
terms of both the participant's connectivity to the depository and also 
its internal processing systems and capabilities. Considering the 
potential for the widespread and detrimental consequences of a 
participant's failure to be adequately prepared for the impending date 
change, DTC believes that its rules can be reasonably interpreted as 
requiring an assurance that the participant is prepared for the Year 
2000 as set forth in the Year 2000 compliance acknowledgment.
    DTC believes that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
because the Year 2000 compliance acknowledgement will help ensure that 
DTC participants have sufficient operational capability.

(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 language contained in the Year 2000 testing acknowledgment, 
relating to DTC's validation testing requirement, was reviewed without 
comment by the Securities Industry Association's Legal and Compliance 
subcommittee, as well as the New York Clearing House Year 2000 
Committee. The Year 2000 compliance acknowledgment is identifical to 
the Year 2000 testing acknowledgment except that the language regarding 
testing has been deleted.

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

    Section 17A(b)(3)(F) of the Act \6\ requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions. The Commission 
finds that the proposed rule change is consistent with this obligation 
because the Year 2000 compliance acknowledgment should allow DTC to 
address any potential problems associated with the 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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    \6\ 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 to implement its requirement of a Year 2000 
compliance acknowledgment in a timely manner.

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 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 20549-0609. 
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-99-18 and should be submitted by August 18, 1999.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\7\that the proposed rule change (File No. SR-DTC-99-18) be and 
hereby is approved.
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    \7\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-19263 Filed 7-27-99; 8:45 am]
BILLING CODE 8010-01-M