[Federal Register Volume 67, Number 112 (Tuesday, June 11, 2002)]
[Notices]
[Pages 40035-40036]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-14612]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46028; File No. SR-DTC-2002-06]


Self-Regulatory Organizations; the Depository Trust Company; 
Notice of Filing of Proposed Rule Change Relating to the Use of the 
Federal Reserve Banks' Net Settlement System by Settling Banks

June 4, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 7, 2002, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which items have been prepared 
primarily by DTC. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested parties.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change relates to DTC's End-of-Day Settlement 
Process for settling bank participants of DTC.\2\ Currently settling 
banks can use the Net Settlement Service (``NSS'') of the Federal 
Reserve Banks (the ``FRBs'') as one method to satisfy their net-net 
debit balances at DTC. NSS permits DTC to submit an instruction to a 
FRB to have the account of the settling bank charged for their DTC end-
of-day net-net debit balance. Utilization of NSS serves to eliminate 
the need for a settling bank to initiate a wire to DTC's account at a 
FRB in satisfaction of a net-net debit balance. As a result, the risk 
that a settling bank may incur a late payment fee due to a delay in 
wiring funds to DTC is reduced. Under the proposed rule change, as 
described more fully below, (i) all settling banks will be required to 
use NSS and (ii) any settling bank that only settles for its own 
account using NSS may opt to not acknowledge its net-net balance at the 
end of the day.
---------------------------------------------------------------------------

    \2\ A copy of the text of DTC's proposed rule change and the 
attached exhibits are available at the Commission's Public Reference 
Section or through DTC.
---------------------------------------------------------------------------

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 any 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 these 
statements.\3\
---------------------------------------------------------------------------

    \3\ The Commission has modified the text of the summaries 
prepared by DTC.
---------------------------------------------------------------------------

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to reduce settlement 
risk. In February 2001, DTC adopted NSS as an alternative method for 
settling banks to satisfy their end-of-day net-net debits.\4\ To date, 
31 of the 83 DTC settling banks are using NSS.
---------------------------------------------------------------------------

    \4\ Exchange Act Release No. 44176 (April 11, 2001), 66 FR 19821 
(April 17, 2001) [File No. SR-DTC-2001-02]. See also Important 
Notice to Participants Nos. 0842 (November 20, 2000) and 2728 (May 
2, 2002) and DTC's memorandum (April 14, 2000). DTC's current and 
proposed use of NSS, all of which are attached as part of DTC's 
filing.
---------------------------------------------------------------------------

    NSS eliminates the need for a settling bank to initiate a wire to 
DTC's FRB account in satisfaction of its end-of-the-day net-net balance 
and reduces the risk that the settling bank will be delayed in wiring 
funds to DTC. By reducing the likelihood of late payments, usage of NSS 
should reduce the likelihood that settling banks will be assessed a 
late payment fee and that the completion of DTC settlement will be 
delayed.
    The importance of settling banks being able to wire funds to DTC 
became obvious during the week of September 11, 2001. Completion of 
settlement at DTC is at risk if all settling banks that are in a net-
net debit position cannot initiate a wire to DTC's FRB account. 
Although DTC expects additional settling banks to begin to use NSS over 
the next year, DTC believes it is important that the net-net debits of 
all DTC settling banks are collected using NSS. Therefore DTC proposes 
to require all settling banks to use NSS to pay their DTC end-of-the-
day net-net debit balances by August 31, 2001.
    Prior to using NSS, settling banks are required to sign a Settler 
Agreement with an FRB which incorporates a requirement that settling 
banks agree to the terms of the Fed's Operating Circular No. 12.\5\ The 
signed Settler Agreement must be submitted to a FRB through DTC. The 
Settler Agreement must be on the settling bank's letterhead and must be 
signed by an authorized signer recognized by the FRB.
---------------------------------------------------------------------------

    \5\ The Settler Agreement and Operating Circular No. 12 is 
attached as part of DTC's filing.
---------------------------------------------------------------------------

    DTC proposes that settling banks use of NSS will be governed by 
DTC's procedures, including its End-of-Day Settlement Process section 
of DTC's Settlement Service Guide, as amended by this filing.\6\ Fees 
connected with the End-of-Day Settlement Process remain unchanged.
---------------------------------------------------------------------------

    \6\ An amended version of this section of the Settlement Service 
guide is attached as part of DTC's filing.
---------------------------------------------------------------------------

    Under Section 6.4 of Operating Circular No. 12, the settlement 
agent (in this case, DTC) has certain responsibilities regarding the 
allocation among settling banks using NSS of a claim for indemnity by a 
FRB. In making such an allocation, DTC will attempt to apply the same 
loss allocation procedures found in Section

[[Page 40036]]

4 and 9 of DTC's Rules and Procedures as it would with respect to 
losses included in DTC's settlement system.
    Currently all settling banks are required to acknowledge their net-
net debit balances, and settling banks that also settle for others are 
required to acknowledge their net-net credit balances. As part of its 
End-of-the-Day Settlement Process and use of NSS, DTC does not send a 
settling bank's net-net debit balance to a FRB for collection until the 
settling bank has acknowledged its balance. Some settling banks have 
requested that the acknowledgement step no longer be required. 
Therefore, DTC proposes to permit any settling bank that settles only 
for its own account using NSS to opt to not acknowledge its balance by 
signing the NSS Settling Bank Acknowledgement Option Form.\7\ This 
option does not apply to settling banks that settle for others, as the 
acknowledgement process includes the option to refuse to pay for a 
participant for whom that settling bank provides settlement services.
---------------------------------------------------------------------------

    \7\ The form is attached as to DTC's filing. In addition, DTC 
has made changes to its Settling Bank Failure to Settling Procedures 
to reflect that certain settling banks may opt out of the 
acknowledgement requirements. See Exchange Act Release No. 41879 
(September 15, 1999), 64 FR 51360 (September 22, 1999) [File No. SR-
DTC-99-15].
---------------------------------------------------------------------------

    DTC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act\8\ and the rules and regulations 
thereunder applicable to DTC because it will reduce settlement risk. 
The proposed rule change will be implemented consistently with the 
safeguarding of securities and funds in DTC's custody or control or for 
which it is responsible since the new operation of DTC's settlement 
processes, as modified by the proposed rule change, will enhance the 
current operation of the function.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change would have any 
material adverse impact on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    The proposed rule change has been developed through discussions 
with several participants. However, DTC has received a letter from one 
participant expressing concerns regarding the FRB's NSS, and DTC has 
had subsequent conversations with that participant regarding that 
letter.

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

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the self-regulatory organization consents, 
the Commission will:
    (A) By order approve such proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
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 Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of DTC. All submissions 
should refer to File No. SR-DTC-2002-06 and should be submitted by July 
2, 2002.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-14612 Filed 6-10-02; 8:45 am]
BILLING CODE 8010-01-P