[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