[Federal Register Volume 68, Number 139 (Monday, July 21, 2003)]
[Notices]
[Pages 43244-43245]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-18393]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48176; File No. SR-DTC-2002-19]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving Proposed Rule Change to Establish an Inventory 
Management System

July 14, 2003.

I. Introduction

    On December 19, 2002, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-DTC-2002-19 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 21, 2003.\2\ For the 
reasons discussed below, the Commission is approving the proposed rule 
change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 47826 (May 9, 2003), 68 
FR 27876.
---------------------------------------------------------------------------

II. Description

    The industry's prolonged discussions of the development of a new 
matching model that would promote straight through processing (``STP'') 
for institutional transactions identified a series of deficiencies in 
the current processing systems used in 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 which would 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    Today, participants control the processing of their institutional 
deliveries received from a matching utility (such as Omgeo) through 
DTC's Authorization and Exception system (``ANE''). ANE prevents a 
delivery from being sent to DTC's 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, such as Night Deliver Orders 
(``NDOs''), along with authorized institutional deliveries and CNS 
deliveries are processed by DTC at predefined times. All of these 
transactions may recycle (i.e., pend) 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 caused the industry to build 
redundant systems, has increased the number of reclaims, and is 
contrary to achieving STP.
    Implementation of the IMS allows a participant to choose how it 
wants to authorize its deliveries. The key components of IMS include:
    (1) New authorization capabilities (which replace the ANE system) 
that allow participants to stage transactions for automated settlement;
    (2) A new ``profiling'' system that allows participants greater 
control over the timing and order of their deliveries using predefined 
profiles, based on transaction type and asset class, to eliminate 
today's frequent direct intervention in the settlement process that 
inhibits STP;
    (3) Capabilities permitting the linkage of transactions so 
particular receive

[[Page 43245]]

transactions are associated with particular deliveries; \4\ and
---------------------------------------------------------------------------

    \4\ Such a linkage will 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 the 
receive providing the securities for it has been processed. 
Securities Exchange Act Release No. 48007 (June 10, 2003), 68 FR 
35744 (order approving DTC Transaction Look-Ahead Process).
---------------------------------------------------------------------------

    (4) Controls permitting the retention of failed deliveries for the 
following settlement day that eliminates participants' need to reinput 
failed delivery instructions.
    Using IMS, 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. In the passive mode, 
deliveries will be immediately authorized upon receipt. Authorizations 
and exemptions can be on a trade-for-trade basis or a global basis.
    To provide 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 will be able to choose either the 
active or passive authorization mode as the default for different 
transaction types.\5\ 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.
---------------------------------------------------------------------------

    \5\ 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.
---------------------------------------------------------------------------

    All IMS features will be optional. Participants can continue to 
process their deliveries as they do today if they so wish. Participants 
will be able to migrate to any or all of the IMS features that they 
deem valuable. As a result of IMS, participants will be able to 
centrally manage their own settlements and achieve higher levels of 
straight through processing.
    IMS will be implemented in two phases. Phase I, which includes (1) 
the new authorization capabilities that replace ANE, (2) the 
warehousing facility, \6\ and (3) the reintroduction of dropped 
deliveries,\7\ is scheduled to begin in July 2003. Phase II, which 
includes an optional customized delivery and recycle profile,\8\ is 
scheduled to be implemented in December 2003.
---------------------------------------------------------------------------

    \6\ The IMS warehouse feature will store delivery instructions 
on its database and will direct these deliveries into the processing 
system as NDOs that are due to settle on the appropriate settlement 
day.
    \7\ ``Dropped'' deliveries are deliveries from the previous day 
that were not completed. Under this option, ``drops'' will be 
retained and reintroduced into the system for processing on the 
following day. Participants using this service will have the option 
of having drops automatically resubmitted or of having the system 
require a reauthorization of dropped delivery instructions before 
resubmitting.
    \8\ DTC will file another proposed rule change for Commission 
approval before implementing Phase II.
---------------------------------------------------------------------------

III. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions.\9\ The Commission 
finds that DTC's proposed rule change is consistent with this 
requirement because it provides for an automated, centrally managed 
system whereby DTC's participants will have the ability to better 
manage and control the order and timing of their deliveries. 
Consequently, the proposed rule change should help reduce the number of 
late-in-the-day, manual interventions.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

IV. 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-2002-19) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-18393 Filed 7-18-03; 8:45 am]
BILLING CODE 8010-01-P