[Federal Register Volume 65, Number 223 (Friday, November 17, 2000)]
[Notices]
[Pages 69582-69585]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-29447]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43540; File No. 600-32]


Self-Regulatory Organizations; Global Joint Venture Matching 
Services--US, LLC; Notice of Filing of Application for Exemption From 
Registration as a Clearing Agency

November 9, 2000.

I. Introduction

    On September 21, 2000, the Global Joint Venture Matching Services--
US, LLC (``GJVMS'') filed with the Securities and Exchange Commission 
(``Commission'') an application on Form CA-1 \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\ GJVMS is requesting an exemption from clearing agency 
registration in connection with its proposal to offer an electronic 
trade confirmation service and a matching service. The Commission is 
publishing this notice to solicit comments on the exemption request.
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    \1\ Copies of GJVMS's Form CA-1 are available for inspection and 
copying at the Commission's Public Reference Room in File No. 600-
32.
    \2\ 15 U.S.C. 78q-1.
    \3\ 17 CFR 240.17Ab2-1.
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II. Background

A. Structure of the GJVMS

    The GJVMS is a limited liability company which prior to the 
commencement of its operations will become a wholly-owned subsidiary of 
the Global Joint Venture. The Global Joint Venture is a proposed joint 
venture between The Depository Trust & Clearing Corporation 
(``DTCC''),\4\ Thomson Institutional Services Inc. (``TISI''),\5\ and 
Interavia, A.G., a Swiss corporate affiliate of TISI. Within the Global 
Joint Venture, the institutional trade processing services currently 
offered by DTC will be combined with the institutional trade processing 
services currently offered by Thomson Financial ESG.\6\ While the 
Global Joint Venture will have several lines of business, it will 
conduct its domestic electronic trade confirmation (``ETC'') service 
and matching service wholly through the GJVMS.
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    \4\ DTCC was created in 1999 as a holding company for The 
Depository Trust Company (``DTC'') and the National Securities 
Clearing Corporation (``NSCC''). DTC and NSCC are registered with 
the Commission as clearing agencies.
    \5\ TISI is a wholly owned subsidiary of Thomson Financial, a 
Thomson Corporation subsidiary. Thomson Corporation is a global 
electronic information company.
    \6\ Thomson Financial ESG is a wholly owned subsidiary of 
Thomson Financial, a Thomson Corporation subsidiary.
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    Initially, the automated facilities and systems environment 
necessary to operate the ETC and matching services will be provided to 
the GJVMS by DTC pursuant to a services agreement between DTCC and the 
Global Joint Venture. Also pursuant to the services agreement, DTCC 
will provide to the Global Joint Venture legal and regulatory, audit, 
accounting, and human resources services, and the Global Joint Venture 
will make these services available to the GJVMS. It is anticipated that 
there will also be a services agreement between the Global Joint 
Venture and the GJVMS.
    As explained in detail below, DTC and Thomson Financial ESG's 
institutional trade processing services are the two principal systems 
used by broker-dealers and institutional investors for post-trade, 
presettlement processing of trades. The merger of these two services 
would link the two largest providers of institutional post-trade, 
presettlement processing services, and as a result, would establish a 
core building block for straight-through processing (``STP'') \7\ and 
T+1.\8\
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    \7\ STP is the completion of presettlement and settlement 
processes based on trade data that each party to a transaction 
enters only once into an automated system.
    \8\ T+1 refers to an industry initiative to reduce the 
settlement cycle for securities transactions from three days (T+3) 
to one day (T+1). It is anticipated that the settlement cycle will 
be shortened from T+3 to T+1 during 2004.
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    DTCC will transfer to the Global Joint Venture DTC's TradeSuite 
which consists of the following services: TradeMessage, TradeMatch, 
TradeSettle, and TradeHub.

[[Page 69583]]

    1. TradeMessage provides for the automated exchange of post-trade 
messages between broker-dealers, custodians, and institutions, 
including messages such as block-trade notices of execution, allocation 
instructions, trade confirmations, and affirmations.
    2. TradeMatch electronically compares investment managers' 
allocations with broker-dealers' trade confirmations.
    3. TradeSettle supplies allocations, trade confirmations, and 
settlement messages with account and settlement data from DTC's 
Standing Instructions Database (``SID'') and routes settlement 
instructions to custodian banks and broker-dealers' clearing agents. 
SID is a database of customer relationship information and settlement 
data that is shared by investment managers, broker-dealers, and 
custodians.
    4. TradeHub is a real-time global message switch which routes 
messages between parties using different communications protocols, 
message formats, and firm and securities identifiers.
    TISI will transfer to the Global Joint Venture the following 
services of Thomson Financial ESG: ALERT, OASYS, OASYS Global, 
MarketMatch, and ITM Benchmarks.
    1. ALERT is a database of customer relationship information and 
settlement data that is shared by investment managers, broker-dealers, 
and custodians.
    2. OASYS provides for the electronic communication and acceptance 
or rejection of allocation instructions between investment managers and 
broker-dealers.
    3. OASYS Global provides for the electronic communication of 
allocation instructions and confirmations between investment managers 
and broker-dealers.
    4. MarketMatch streamlines the matching of trade details with 
broker counterparties around the world, leading to lower processing 
costs, improved trade management, and shorter settlement times.
    5. ITM Benchmarks is a suite of services that provide operational 
statistics relating to trade processing. These include statistics on 
average response times, the number of attempts it takes to make 
settlement, and the percentage of trades ready for settlement at 
particular points in time.

B. Current Institutional Trade Settlement Processes

    The institutional trade process typically starts when an 
institution or its agent places an order to buy or sell securities with 
its broker-dealer. After the broker-dealer executes the trade, the 
broker-dealer will advise the institution of the details of the 
executed trade. This is generally called a notice of execution. Once 
received, the institution advises the broker-dealer how the trade 
should be allocated among its various accounts.
    When the broker-dealer completes allocating the shares among the 
institution's accounts, the broker-dealer submits trade data reflecting 
its distribution to each of the institution's accounts. DTC's 
TradeSuite service forwards the trade data in the form of a 
confirmation for each account to the institution, the broker-dealer, 
and other interested parties (e.g., correspondent banks or trustees). 
The institution reviews the confirmation for accuracy (i.e., compares 
the confirmation to its allocation instructions). For each confirmation 
that is accurate, the institution will send an information message to 
DTC. DTC will generate and send an affirmed confirmation to the broker-
dealer and to the institution's settlement agent. At this point, the 
trade is sent into DTC's settlement system. (DTC's TradeSuite service 
is not a settlement system in that no money or securities move through 
it.) The trade also must be authorized by the party obligated to 
deliver the securities (i.e., the selling party) before settlement can 
occur.

C. The Commission's Interpretive Release on Matching

    On April 6, 1998, the Commission issued an interpretive release 
regarding matching services (``Matching Release'').\9\ Matching is the 
term used to describe the process whereby an intermediary independently 
determines whether trade data submitted by a broker-dealer (i.e., 
confirmation information) matches the trade data submitted from the 
broker-dealer's institutional customer (i.e., allocation information). 
If the information matches, the intermediary generates an affirmed 
confirmation to the broker-dealer and the institution. In the Matching 
Release, the Commission concluded that matching constitutes a clearing 
agency function, specifically the ``comparison of data respecting the 
terms of settlement of securities transactions,'' within the meaning of 
Section 3(a)(23)(A) of the Exchange Act.\10\ Therefore, any person 
providing independent matching services must either register with the 
Commission as a clearing agency or obtain an exemption from 
registration pursuant to Section 17A of the Exchange Act and Rule 
17Ab2-1 thereunder.\11\
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    \9\ Securities Exchange Act Release No. 39829 (April 6, 1998), 
63 FR 17943 [File No. S7-10-98].
    \10\ 15 U.S.C. 78c(a)(23)(A).
    \11\ 15 U.S.C. 78q-1; 17 CFR 240.17Ab2-1. 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]. The Commission 
has also granted Thomson Financial Technology Services, Inc., a 
wholly owned subsidiary of TISI, an exemption from registration as a 
clearing agency. Securities Exchange Act Release No. 41377 (May 7, 
1999), 64 FR 25948 [File No. 600-31].
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III. GJVMS's Request for Exemption

A. Introduction

    The purpose of the GJVMS will be to introduce significant 
efficiencies into institutional trade processing by combining the 
complementary post-trade, presettlement services of DTC and Thomson 
Financial ESG to offer the securities industry an integrated system for 
post-trade, presettlement processing of institutional trades. This 
should assist firms in dealing with the ever growing and unprecedented 
levels of securities trading. The GJVMS will also be a positive 
response to the expected move to T+1.
    According to ``Paving The Way To Straight Through Processing'' 
(July 2000), a white paper published by DTCC, as trading volumes have 
continued their dramatic upward climb over the past decade, securities 
industry executives are focusing their attention on the transformation 
the industry must undergo to cope with these volumes and the potential 
for even greater increases in the years ahead. According to DTCC and 
the Securities Industry Association (``SIA''), 250 million 
institutional trade confirmations were processed in 1999.
    The industry has concluded that the current post-trade 
presettlement processing system for institutional trades will need 
major changes if a shorter settlement period is to be achieved. Even in 
a T+3 environment, the current system is showing signs of strain under 
the increasing volumes of trades. Today, institutional trades are 
primed for settlement through a series of sequential and repetitive 
steps, using a process developed when the volume of trades was far 
lower than it is today and when settlement occurred on T+5.
    To deal with this increasing volume, the industry has embraced the 
concept of straight-through processing or STP which, in its most basic 
form, is the process of seamlessly passing information to all parties 
without manual handling or redundant processing. Concurrent with this 
objective, the industry is seeking to reduce risk, by shortening the 
time between trade date and settlement date.

[[Page 69584]]

    Many in the industry believe that changing the institutional post-
trade presettlement process is called for, even without factoring in a 
move to T+1.\12\ The existing process is showing signs of strain as 
trade volume grows. As firms have increased their investments to add 
capacity and improve internal processing, confirm and affirm rates have 
not improved, leading to greater risk for the industry.\13\
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    \12\ In July 2000, the SIA released its T+1 Business Case Model 
which the Commission is in the process of reviewing.
    \13\ The average daily U.S. institutional trade volume increased 
to 432,000 trades in 1999 from 182,000 trades in 1995. However, in 
1999, an average of 70,000 institutional trade confirmations with an 
average value of $15 billion a day, were not submitted by broker-
dealer into DTC's TradeSuite system on trade date. This doubled the 
1995 average of 36,000 valued at $7 billion. DTCC has experienced 
trade date confirmation input rates as low as 76% on certain peak 
days during the first quarter of 2000 as compared with the fairly 
steady average rate of 85% over the past several years. In addition, 
only 12% of trades are currently affirmed on trade date and only 88% 
of trades are affirmed by noon of T+2, the deadline for automatic 
submission of the affirmed trade into DTC's settlement system. The 
remaining 12% are not automatically entered into DTC's settlement 
system and require further action on the part of the parties to 
settle. As trade volumes continue to rise or in a T+1 environment, 
these levels will be unacceptable.
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B. GJVMS's Proposed Service

    GJVMS plans on offering an ETC service and a matching service. The 
ETC service would transmit messages (i.e., confirmation and affirmation 
messages) among broker-dealers, institutional customers, and custodian 
banks and would ultimately result in the production of an affirmed 
electronic trade confirmation in accordance with the requirements of 
various self-regulatory organizations rules.\14\ The matching service 
would compare, or match trade information submitted by a broker-dealer 
(i.e., confirmation information) with the trade information submitted 
by an institutional customer (i.e., allocation instructions) to produce 
an affirmed confirmation.\15\
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    \14\ These rules are National Association of Securities Dealers 
Rule 11860(a)(5), New York Stock Exchange 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 Rule 274(b).
    \15\ The matching service will be used to match trade 
information where either the broker-dealer or the institutional 
customer or both is a U.S. entity and where the security is 
registered in the United States.
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    GJVMS represents in its Form CA-1 that as a condition of obtaining 
an exemption from clearing agency registration, it shall.\16\
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    \16\ Exhibit S of GJVMS's Form CA-1. GJVMS also represents 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.
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    (1) Provide the Commission with an audit report that addresses all 
the areas discussed in the Commission's Automation Review Policies 
(ARPs); \17\
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    \17\ 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) Provide the Commission (beginning in its first 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) Provide the Commission with twenty business days advance notice 
of any material changes that it makes to its matching service and ETC 
service. These changes will not require the Commission's approval 
before they are implemented;
    (4) Provide the Commission with prompt notification of significant 
systems outages lasting more than thirty minutes;
    (5) Respond and its service providers (including DTCC and Global 
Joint Venture) shall respond to requests from the Commission for 
additional information relating to its matching service and ETC 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 and ETC service. 
The requests for information shall be made and the inspections shall be 
conducted solely for the purpose of reviewing the matching service's 
and the ETC service's operations and compliance with the federal 
securities laws and the terms and conditions of GJVMS's exemptive 
order;
    (6) Supply the Commission or its designee with periodic \18\ 
reports regarding the affirmation rates for institutional transactions 
effected by institutional investors that utilize its matching service 
and ETC Service;
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    \18\ DTC submits monthly affirmation/confirmation reports to the 
appropriate self-regulatory organizations. The Commission 
anticipates a similar schedule.
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    (7) 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 its matching service and ETC 
service. It shall retain these records for a period of not less than 
five years, the first two years in an easily accessible place;
    (8) Develop fair and reasonable linkages between its matching 
service and other central matching services that are regulated by the 
Commission or that receive an exemption from clearing agency 
registration from the Commission; and
    (9) Not perform any clearing agency function (such as net 
settlement, maintaining a balance of open positions between buyers and 
sellers, or marking securities to the market) other than as permitted 
under the contemplated exemption.

C. Statutory Standards

    Section 17A(b)(1) of the Exchange Act requires all clearing 
agencies to register with the Commission before performing any of the 
functions of a clearing agency.\19\ 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. The GJVMS 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 will 
strike the appropriate balance between the necessity of safety and 
soundness on the one hand and the need to foster efficiency, 
competition, and capital formation on the other hand.
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    \19\ 15 U.S.C. 78q-1(b)(1).
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    The Commission has exercised its authority to conditionally exempt 
an applicant from clearing agency registration on four prior 
occasions.\20\ 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

[[Page 69585]]

the national clearance and settlement system).
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    \20\ 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, now Clearstream); 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); and 
41377 (May 7, 1999), 64 FR 25948 (order approving application for 
exemption from clearing agency registration for Thomson Financial 
Technology Services, Inc.).
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    In the Matching Release, the Commission 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, the Commission stated that an entity seeking 
an exemption from clearing agency registration for matching would be 
required to: (1) Provide the Commission 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 the Commission to inspect its facilities and records; and (4) 
make periodic disclosures to the Commission regarding its operations.
    GJVMS's matching service would be the only clearing agency function 
that it would perform under an exemptive order. While the Commission 
believes that GJVMS's matching services could have a significant impact 
on the national clearance and settlement system, the Commission does 
not believe that GJVMS's matching services raise all of the concerns 
raised by an entity that performs a wider range of clearing agency 
functions. GJVMS 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, the Commission believes 
that it may not be necessary to require GJVMS to satisfy all of the 
standards required of registrants under Section 17A.
    The Commission anticipates that in addition to considering the 
public interest and the protection of investors, the primary factor in 
evaluating GJVMS's application will be whether GJVMS 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.\21\ In particular, GJVMS has represented that, among other 
things, it will provide the Commission 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.
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    \21\ See Section 17A(b)(3)(A) of the Exchange Act, 15 U.S.C. 
78q-1(b)(3)(A).
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    The Commission expects that any exemption from clearing agency 
registration for GJVMS would contain all of the conditions that GJVMS 
has proposed in its Form CA-1. The Commission requests comment on 
whether these conditions are sufficient to promote the purposes of 
Section 17A and to allow the Commission to adequately monitor the 
effects of GJVMS's proposed activities on the national system for the 
clearance and settlement of securities transactions. In addition, the 
Commission invites commenters to address whether granting GJVMS an 
exemption from clearing agency registration would impose any burden on 
competition that is not necessary or appropriate in furtherance of 
Section 17A of the Exchange Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing application by December 18, 2000. 
Such written data, views, and arguments will be considered by the 
Commission in deciding whether to grant GJVMS's request for exemption 
from registration. Persons desiring to make written submissions should 
file six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.
    Reference should be made to File No. [600-32]. 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, NW., Washington, DC 20549. Comments also may be submitted 
electronically at the following E-mail address: [email protected]. 
Electronically submitted comment letters will be posted on the 
Commission's Internet web site (http://www.sec.gov).

    For the Commission by the Division of Market Regulations, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(16).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-29447 Filed 11-16-00; 8:45 am]
BILLING CODE 8010-01-M