[Federal Register Volume 68, Number 98 (Wednesday, May 21, 2003)]
[Notices]
[Pages 27876-27877]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-12731]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47826; File No. SR-DTC-2002-19]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change to Establish an Inventory 
Management System

May 9, 2003
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 19, 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.
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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

    DTC is seeking to establish an Inventory Management System 
(``IMS'') which will provide new central control capabilities for the 
settlement process including new capabilities for transaction 
authorization and new controls for the management of pending 
deliveries.

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.\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
    The industry's prolonged discussions of the development of a new 
matching model that promotes straight through processing (``STP'') for 
institutional transactions identified a series of deficiencies in the 
processing systems for settling those transactions.\3\ Industry 
members, particularly members of the Securities Industry Association's 
Institutional Trade Processing Committee, pressed DTC to develop a 
series of capabilities to permit participants to centrally manage their 
own settlements as a way of furthering STP in the settlement process 
itself. A working group under the Settlement Advisory Board of The 
Depository Trust & Clearing Corporation (``DTCC'') assisted in crafting 
the framework for IMS.
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    \3\ The present U.S. system has evolved over time in different 
ways for different instruments, participants, and marketplaces. 
While the current system has met the needs of the industry well, the 
result is an intricate web of processing steps that are not 
standardized and are quite complex and inflexible. Many participants 
manage their processing with late-cycle interventions such as (a) 
withholding or ``exempting'' trades from more automatic processes, 
subsequently intervening in the system to reintroduce the 
transaction when they are ready to process it and (b) reversing or 
``reclaiming'' problem transactions before or after settlement has 
occurred. These practices late in the settlement cycle disrupt 
automated processing and contribute to the incidence of fails, which 
creates costs and risks for participants and for the system as a 
whole.
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    Today, participants control the processing of their institutional 
deliveries received from a matching utility (such as Omgeo's TradeSuite 
system) through the Authorization and Exception system (``ANE''). ANE 
will not send a delivery to the processing system without an 
affirmative authorization from the delivering participant. This 
affirmative authorization is given either on an item-by-item basis or 
through a ``global'' authorization. A participant can submit exceptions 
to explicitly withhold a delivery from processing. Conversely, 
deliveries from the National Securities Clearing Corporation's 
(``NSCC's'') Continuous Net Settlement system (``CNS'') are 
automatically processed unless the participant instructs NSCC otherwise 
via an exemption. Other deliveries (e.g., Night Deliver Orders 
[``NDOs'']) along with authorized institutional deliveries and CNS 
deliveries are processed by DTC at predefined times. All of these 
transactions may pend (``recycle'') in the event of a position 
deficiency or a problem with system controls. Recycles are processed 
based on one of two recycle options; a ``First In First Out'' process 
or a DTC preestablished recycle queue.
    Participants generally have sought greater control over the 
processing of their deliveries than these procedures permit. Therefore, 
participants have built internal inventory management systems or 
adopted internal manual procedures that exempt deliveries from 
automatic processing so that the participants can control the sequence 
and timing of their deliveries. This has created an STP shortfall, 
caused the industry to build redundant systems, and has increased the 
number of reclaims.
    DTC is now seeking to allow a participant to choose how it wants to 
authorize its deliveries. The key components of IMS include:
    (1) New authorization capabilities (replacing the ANE system) which 
participants can use to stage transactions for automated settlement;
    (2) A new ``profiling'' system which will allow participants 
greater control over the timing and order of their deliveries by 
transaction type and asset class via predefined profiles to eliminate 
today's frequent direct intervention in the settlement process that 
inhibits STP;
    (3) Capabilities permitting the linkage of transactions so 
particular receive transactions are associated with particular 
deliveries;\4\ and
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    \4\ Such a linkage would permit customers to associate 
securities they expected to receive with specific securities they 
expected to deliver so that they no longer need to exempt a delivery 
until they receive providing the securities for it has been 
processed.
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    (4) Controls permitting the retention of failed deliveries for the 
following settlement day eliminating participants' need to reinput 
these instructions.
    As a result of industry feedback, DTC has designed IMS to permit 
authorization and control of different transaction types (e.g., NDOs, 
etc.) within each asset class (e.g., equities) and to permit increased 
authorization options. The creation of IMS also makes possible a 
warehousing \5\ facility for

[[Page 27877]]

future deliveries through the NDO function and the reintroduction of 
dropped deliveries.\6\ At the participant's option, the system could 
require reauthorization of reintroduced ``drops'' before they are 
resubmitted for processing on the following day.
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    \5\ DTC's current front-end edits do not permit a delivery to 
have a future settlement date. The current NDO function only permits 
deliveries to have a future settlement date of the next business day 
or earlier. The IMS warehouse feature will store deliveries on its 
database and direct these deliveries into the processing system as 
NDOs that are due to settle on the appropriate settlement day.
    \6\ ``Dropped'' deliveries are deliveries from the previous day 
that were incomplete. Under this new option, ``drops'' would be 
automatically retained and reintroduced into the system for 
processing on the following day.
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    If approved by the Commission, IMS will be implemented in two 
phases. Three initiatives, (1) the replacement of ANE, (2) warehousing, 
and (3) the reintroduction of dropped deliveries, will be available in 
Phase I. Phase I is scheduled to begin in July 2003. Phase II, 
scheduled to be implemented in December 2003, will create an optional 
customized delivery and recycle profile.\7\
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    \7\ DTC will file another proposed rule change for Commission 
approval before implementing Phase II.
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    A participant can choose to authorize its deliveries either 
actively or passively. In the active mode, deliveries will not be 
processed unless an authorization is sent. Authorizations and 
exemptions can be on a trade-for-trade basis or a global basis. Global 
authorization or exemption capabilities will also be available via the 
Participant Browser System display screens. The new passive mode 
authorization option will immediately authorize a delivery when it is 
received and process it on its settlement day unless the participant 
exempts it.
    Recognizing the need for flexibility and options, a participant 
will be able to create authorization profiles for the following asset 
classes: equity, municipal debt, corporate debt, and money market 
instruments. Within each asset class, a participant can choose which 
authorization mode it would like applied as its default for the 
different transaction types. \8\ For example, for the asset class 
equities, a participant could choose to use active mode authorization 
for matched institutional deliveries and passive mode authorization for 
CNS deliveries.
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    \8\ In Phase I, authorization modes can be assigned for the 
following transaction types:
    (1) Institutional deliveries from a matching utility;
    (2) CNS;
    (3) NDOs;
    (4) Reintroduced drops; and
    (5) ACATS auto deliveries.
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    Participants would not be required to make systemic changes and can 
continue to process their deliveries as they do today. All IMS features 
will be optional, and participants will be able to migrate to any or 
all features they deem valuable. As a result of this new system, 
participants will be able to centrally manage their own settlements and 
achieve higher levels of straight through processing.
    DTC believes that the proposed rule change is consistent with the 
requirements of section 17A of the Act \9\ and the rules and 
regulations thereunder applicable to DTC because it will permit the 
accurate clearance and settlement of securities by allowing 
participants to centrally manage their own settlements and control the 
order and timing of their deliveries earlier in the settlement cycle.
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    \9\ 15 U.S.C. 78q-1.
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(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, in the public interest, and for 
the protection of investors.

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

    DTC has discussed this rule change proposal in its current form 
with various DTC participants and industry groups, a number of whom 
have worked closely in developing the proposed IMS system.

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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-DTC-2002-19. This file number should be included on the 
subject line if e-mail is used. To help us process and review comments 
more efficiently, comments should be sent in hardcopy or by e-mail but 
not by both methods. 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-2002-19 and should 
be submitted by June 11, 2003.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-12731 Filed 5-20-03; 8:45 am]
BILLING CODE 8010-01-P