[Federal Register Volume 66, Number 169 (Thursday, August 30, 2001)]
[Notices]
[Pages 45883-45884]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21919]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44745; File No. SR-DTC-2001-03]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Approval of a Proposed Rule Change Relating to Making 
Foreign Securities Eligible for Depository Services

August 24, 2001.
    On February 23, 2001, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change (File No. SR-DTC-2001-03) pursuant to section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ Notice of 
the proposal was published in the Federal Register on May 10, 2001.\2\ 
No comment letters were received. For the reasons discussed below, the 
Commission is granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 44260 (May 4, 2001), 66 
FR 23956.
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I. Description

    The purpose of the filing is provide DTC and NSCC participants who 
are presently using NSCC's clearing services with respect to foreign 
securities the use, if applicable, of depository services at DTC for 
these securities. These securities are generally foreign ordinary 
equities that have been assigned security numbers (CINS) and NASD 
symbols to automate comparison process. Most trades in foreign ordinary 
shares that are executed between two U.S. broker-dealers are forwarded 
to NASD's automated confirmation transaction (ACT) system and are 
submitted as locked-in trades to NSCC.
    Today, through the NSCC's Foreign Securities Comparison and Netting 
(FSCN) system, foreign securities are compared and netted on a 
bilateral basis in a standardized and automated fashion processed 
through NSCC's over-the-counter system. Receive and deliver 
instructions are automatically generated by NSCC and are distributed to 
participants on the morning after comparison, which expedites the 
settlement process for non-U.S. equity transaction. Trades are netted 
on a participant-to-participant basis reducing the number of deliveries 
for settlement in the local market. NSCC does not currently and will 
not under the proposed rule change, guarantee the ultimate settlement 
of these transactions or the clearance cash adjustment.
    Given the increase in activity over the last few years, U.S. 
broker-dealers have become concerned about the number of potential risk 
and operational issues the current process creates, such as the lack of 
straight through processing (``STP'') from the point of trade to 
settlement. It is DTC's plan to enhance the settlement part of the 
process and to deliver an automated approach to complete the STP 
process from trade to settlement. In doing so, many operational issues 
will be minimized or eliminated.
    Today, there is a separation between the physical movement of these 
securities and the money settlement of the trades (i.e., there is no 
delivery versus payment (``DVP'') as is true for U.S. trades). The 
delivery of the securities occurs in the foreign location and then some 
time later the payment is made in the U.S.
    Currently, trades in these foreign securities executed in the U.S. 
must settle in the local market without the benefit of any DTC's 
infrasture. Therefore, U.S. based broker-dealer who trade in foreign 
securities in the U.S. must set up correspondent relationships in the 
local market. Additionally, each broker-dealers must deal separately 
with the inherent inefficiencies, such as large time-zone differences, 
in this structure. Also, the need to set up such correspondent 
relationships puts smaller broker-dealers at disadvantage because many 
smaller broker-dealers do not have the resources or trading volumes to 
justify such relationships and therefore must enlist a large broker-
dealer to perform such services for its

[[Page 45884]]

clients. As a result, trading costs for the underlying investors are 
increased.
    DTC's plan is to open a custodial account in a local market with an 
agent bank or central securities depository (``CSD'') (collectively 
``custodian'') that will hold shares on DTC's behalf.\3\ DTC's 
participants will be able to communicate with DTC with respect to 
foreign securities as they do today with respect to currently eligible 
U.S. securities. Due to differences in local market practice from that 
in the U.S., the eligibility procedures for foreign securities will 
likely differ from those currently used by DTC. However, participants 
will be made aware of this fact and of the eligibility criteria and 
procedures. These securities will be ``tagged'' in DTC's system in 
order for DTC participants to readily identify them.
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    \3\ DTC's first custodial account will be with Citibank N.A., 
Hong Kong Branch. DTC will submit a proposed rule change under 
Section 19(b)(2) before establishing any new link with any foreign 
custodian.
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    DTC's first such link will be with Citibank N.A., Hong Kong Branch, 
acting as DTC's custodian. Through the custodian, a participant would 
move overseas inventory from its current custodian into DTC's account 
at DTC's foreign custodian. Upon notification from its custodian that 
the foreign securities are being held in its account, DTC would update 
the participant's securities position at DTC. Once the position is on 
DTC's books and records, the participant will be able to move the 
position by book-entry DVP if desired. In addition, other activity, 
such as automated customer account transfer services and stock loan, 
that are currently available for U.S. securities would also be 
available for foreign securities once they are made DTC eligible.
    The DTC Risk Management Committee is responsible for the review and 
monitoring of this service. The committee will use the same due 
diligence template for the establishment of custodial arrangements that 
it uses on all ``outward bound'' links with foreign CSDs.
    The principal benefits that will attend DTC's making these foreign 
securities eligible for certain depository services are: (1) Connecting 
the delivery to the settlement on a DVP basis; (2) accelerated speed of 
settlement of cross-border transactions in these foreign securities; 
(3) eliminating most physical movements of these foreign securities; 
(4) reducing costs and risks to DTC participants; and (5) making these 
services available to a large number of U.S. entities (i.e., DTC 
participants and their clients and customers).

II. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in DTC's custody or control or for which it is 
responsible. The rule change allows DTC and NSCC participants currently 
using NSCC's FSCN system the use of depository services at DTC for 
foreign securities. Making foreign securities eligible for depository 
services enables broker-dealers to move these positions by book-entry 
movement and thereby eliminates the inefficiencies and risks associated 
with the physical movement of security positions. DTC's proposal also 
allows its participants to settle these trades on a DVP basis instead 
of the more risky method currently in place where the movement of 
securities and the payment of money is not necessarily closely related 
in time. Therefore, the Commission finds that the rule change in making 
available risk reductions and efficiencies to DTC's participants is 
done so in a manner consistent with DTC's safeguarding obligations and 
therefore is consistent with section 17(b)(3)(F) of the Act.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular section 17A of the Act and the rules and regulations 
thereunder.
    It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-2001-03) be and hereby 
is approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-21919 Filed 8-29-01; 8:45 am]
BILLING CODE 8010-01-M