[Federal Register Volume 68, Number 129 (Monday, July 7, 2003)]
[Notices]
[Pages 40314-40315]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-17003]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48089; File No. SR-DTC-2002-06]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving a Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval of Amendments to a Proposed Rule Change 
Relating to the Use of the Federal Reserve Banks' Net Settlement System 
by Settling Banks

June 25, 2003.

I. Introduction

    On May 7, 2002, The Depository Trust Company filed with the 
Securities and Exchange Commission (``Commission'') a proposed rule 
change File No. SR-DTC-2002-06 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 June 11, 2002.\2\ DTC amended 
the proposal on April 8, 2003,\3\ and June 5, 2003.\4\ Two comment 
letters were received.\5\ For the reasons discussed below, the 
Commission is granting accelerated approval of the proposed rule 
change. \6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 46028, (June 4, 2002), 
67 FR 40035 (June 11, 2002).
    \3\ The April 8, 2003, amendment deleted the words ``attempt 
to'' from the sentence in the filing (the sixth paragraph of section 
3 of the filing) that indicated DTC would apply the same loss 
allocation procedures found in DTC's rules as it would with respect 
to losses incurred in DTC's settlement system.
    \4\ The June 5, 2003, amendment added two provisions to the 
filing. The first provision allowed settling banks to opt out of NSS 
for one business day under certain circumstances. (See note 8.) The 
second provision provided that DTC would send a notification prior 
to DTC's NSS transmission to its account at the FRB.
    \5\ Letters from Neil T. Henderson, Senior Vice President, JP 
MorganChase (July 1, 2002); Daniel L. Goelzer, Counsel for the 
Association, The Association of Global Custodians (July 2, 2002). 
The commenters have indicated that they no longer object to the 
Commission approving DTC's amended filing.
    \6\ A copy of the text of DTC's proposed rule change, the 
amendments, and the attached exhibits are available at the 
Commission's Public Reference Section or through DTC.
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II. Description

    The Federal Reserve Banks' (``FRBs'') Net Settlement Service 
(``NSS'') is an automated mechanism for submitting settlement files to 
the FRBs and is used by entities in private clearing arrangements that 
provide for the exchange and settlement of transactions on a net basis. 
In February 2001, DTC adopted NSS as an alternative method for its 
participants' settling banks to satisfy their end-of-day net-net debits 
at DTC.\7\ Under the NSS process, DTC submits an instruction to a FRB 
on behalf of the settling bank to have the account of the settling bank 
charged for their DTC end-of-day net-net debit balance. Use of the NSS 
eliminates the need for a settling bank to initiate a wire to DTC's FRB 
account in satisfaction of the settling bank's net-net debit balance at 
DTC. As originally adopted, use of NSS was on a voluntary basis. 
Currently 43 of the 79 DTC settling banks are using NSS.
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    \7\ 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), all of which are 
included as part of DTC's filing.
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    Under the rule change, DTC will require all settling banks to use 
NSS.\8\ Settling banks using NSS will be governed by DTC's procedures, 
including the End-of-Day Settlement Process section of DTC's Settlement 
Service Guide.\9\ Fees connected with the End-of-Day Settlement Process 
remain unchanged.
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    \8\ In extenuating circumstances when a settling bank would 
prefer to opt out of NSS for one business day and to send its wire 
directly to DTC's account at the FRB in settlement of its net-net 
debit balance, DTC will exclude that settling bank's debit amount 
from the NSS transmission that would ordinarily be forwarded to the 
FRB.
    \9\ The revised version of the End-of-Day Settlement Process 
section of the Settlement Service Guide is included as part of DTC's 
filing.
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    Prior to using NSS, settling banks will be required to sign a 
Settler Agreement with an FRB which incorporates a requirement that the 
settling bank agrees to the terms of the Fed's Operating Circular No. 
12.\10\ The signed Settler Agreement must be on the settling bank's 
letterhead, must be signed by an authorized signer recognized by the 
FRB, and must be submitted to a FRB through DTC.
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    \10\ The Settler Agreement and Operating Circular No. 12 are 
attached as part of DTC's filing.
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    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 apply the same loss 
allocation procedures found in Section 4 and 9 of DTC's Rules as it 
would with respect to losses included in DTC's settlement system.
    DTC will send a ``pre-advice'' to each settling bank, notifying the 
settling bank that DTC is about to send its NSS transmission to the 
FRB. Each settling bank will be required to acknowledge its net-net 
debit balance at the end of the day; however, any settling bank that 
only settles for its own account may elect to not acknowledge its net 
debit balance at the end of the day.\11\ This option will not be made 
available to settling banks that settle for others because the 
acknowledgement process includes the option to refuse to pay for a 
participant for whom the settling bank provides settlement services. 
Settling banks that settle for others will also be required to 
acknowledge their net-net credit balances. DTC will not send a settling 
bank's net-net debit balance to a FRB for collection until the settling 
bank has acknowledged its balance.
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    \11\ Settling banks electing not to acknowledge their debit 
balance will be required to sign the NSS Settling Bank 
Acknowledgement Option Form. The form is included as part of 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. Exchange Act 
Release No. 41879 (September 15, 1999), 64 FR 51360 (September 22, 
1999) [File No. SR-DTC-99-15].
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III. Comment Letters

    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-2002-06. This file number should be included on the 
subject line if e-mail is used. 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. 
Electronically submitted comment letters also will be posted on the 
Commission's web site (http://www.sec.gov).\12\ Copies of such filing 
also will be available for inspection and copying at the principal 
office of the DTC. All submissions

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should refer to File No. SR-DTC-2002-06 and should be submitted by July 
28, 2003.
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    \12\ We do not edit personal, identifying information such as 
names, or e-mail addresses, from electronic submissions. Submit only 
information you wish to make publicly available.
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IV. Discussion

    Section 17A(b)(3)(F) requires that the rules of a clearing agency 
be designed to assure the safeguarding of securities and funds which 
are in the custody or control of the clearing agency or for which it is 
responsible.\13\ The rule change should allow DTC to reduce settlement 
risk and improve its safeguarding of securities and funds by reducing 
the risk that the completion of settlement will be delayed because a 
settling bank is late or is unable to wire funds to DTC in settlement 
of its obligations.
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    \13\ 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 date of publication of 
notice of filing. Participants and their settling banks have been on 
notice for over a year that DTC intended to require the use of NSS, and 
some have been working with DTC during this time to address procedural 
or operational issues they had with the DTC proposal. Now that those 
issues have been resolved by DTC's amendments to the proposed rule 
change, accelerated approval will allow DTC to implement the 
requirement to use NSS as soon as possible, which in turn will allow 
DTC to improve its risk reduction efforts.

V. 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 with the requirements of section 17A(b)(3)(F) 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-2002-06) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-17003 Filed 7-3-03; 8:45 am]
BILLING CODE 8010-01-P