[Federal Register Volume 70, Number 225 (Wednesday, November 23, 2005)]
[Notices]
[Pages 70902-70907]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-6458]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52784; File No. SR-DTC-2005-08]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Approval of a Proposed Rule Change Relating to the New 
Canadian Link Service

November 16, 2005.

I. Introduction

    On July 27, 2005, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') proposed rule 
change SR-DTC-2005-08 pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'').\1\ On August 30, 2005, DTC amended the 
proposed rule change. Notice of the proposal was published in the 
Federal Register on September 26, 2005.\2\ No comment letters were 
received. For the reasons discussed below, the Commission is granting 
approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 52471, (September 19, 
2005), 70 FR 56196.
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II. Description

    The proposed rule change will allow participants of DTC and 
participants of The Canadian Depository for Securities Limited 
(``CDS'') (i) to clear and settle securities transactions in Canadian 
dollars and (ii) to transfer or receive Canadian dollars without any

[[Page 70903]]

corresponding delivery or receipt of securities.

1. Overview of the Canadian-Link Service

    The proposed rule change creates a new DTC service, the Canadian-
Link Service, that will facilitate the clearance and settlement of 
valued securities transactions and the transfer of funds denominated in 
Canadian dollars between DTC's Participants using the Canadian-Link 
Service (``Canadian-Link Participants'') and CDS Participants and 
between Canadian-Link Participants and other Canadian-Link 
Participants. Currently, DTC processes transactions in U.S. dollars 
only. The Canadian-Link Service will:
    (1) Create a new link between DTC and CDS to leverage the existing 
CDS infrastructure for clearing and settling valued securities 
transactions and transferring funds in Canadian dollars so that DTC 
will not have to replicate this infrastructure;
    (2) Apply enhanced DTC risk management controls to the transactions 
processed for Canadian-Link Participants through the Canadian-Link 
Service and will also subject DTC to CDS risk management controls, 
which are similar in most respects to DTC risk management controls; and
    (3) Permit DTC Participants to concentrate their securities 
positions at DTC and not bifurcate inventory between DTC and CDS or a 
Canadian custodian.
    At the present time, CDS maintains a number of links with DTC and 
the National Securities Clearing Corporation (``NSCC''). These links 
include:
    (1) The American and Canadian Connection for Efficient Securities 
Settlement (``ACCESS'') Service which enables CDS Participants to clear 
and settle transactions with DTC Participants through omnibus accounts 
maintained by CDS with DTC and NSCC.\3\ CDS Participants that use the 
ACCESS Service are not participants or members of DTC or NSCC and CDS 
does not maintain or sponsor individual accounts at DTC or NSCC for 
such CDS Participants.
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    \3\ CDS has advised DTC that it has decided to terminate the 
ACCESS Service and to transfer its users to the New York Link 
Service. However, the ACCESS Service will continue to be available 
to DTC Participants for free deliveries of securities to and from 
CDS Participants.
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    (2) The New York Link Service which enables CDS Participants to 
clear and settle transactions with DTC Participants through sponsored 
accounts maintained by CDS with DTC and NSCC. Through such sponsored 
accounts, CDS Participants may clear and settle transactions on a trade 
for trade basis or on a continuous net settlement basis through the 
facilities of DTC and NSCC.
    (3) The DTC Direct Link Service which enables CDS Participants to 
clear and settle transactions with DTC Participants through sponsored 
accounts maintained by CDS with DTC. Through such sponsored accounts, 
CDS Participants may clear and settle their transactions on a trade for 
trade basis through the facilities of DTC.
    At the present time, DTC maintains no comparable links with CDS 
although DTC Participants may use the ACCESS Service of CDS for free 
deliveries of securities to and from CDS Participants. With the 
implementation of the Canadian-Link Service by DTC, Canadian-Link 
Participants will have the same ability to clear and settle valued 
securities transactions with CDS Participants and other Canadian-Link 
Participants in Canadian dollars that CDS Participants now have to 
clear and settle valued securities transactions with DTC Participants 
in U.S. dollars. As noted above, this will be accomplished using the 
existing CDS infrastructure for processing transactions in Canadian 
dollars together with enhanced DTC risk management controls.

2. The DTC Omnibus Account

    DTC, as a participant of CDS, will maintain at CDS a ledger 
consisting of a series of accounts, including a securities account to 
record securities held by CDS for DTC and securities to be delivered by 
DTC to CDS and a funds account to record the net amount of money owing 
from time to time intraday between DTC and CDS. Such ledger and the 
accounts included in the ledger are referred to collectively as the 
``DTC Omnibus Account.''
    The DTC Omnibus Account will be subject to all CDS risk management 
controls, including the full collateralization of securities 
transactions, subject to appropriate haircuts, and limits on allowable 
net debits. DTC will be the account party on the DTC Omnibus Account. 
As a participant of CDS, DTC will be liable to CDS with respect to 
transactions processed for Canadian-Link Participants through the DTC 
Omnibus Account. Such obligations of DTC to CDS will in turn be matched 
by the obligations of Canadian-Link Participants to DTC with respect to 
such transactions. As an operational matter, DTC will act as a conduit 
between Canadian-Link Participants and CDS by transmitting to CDS 
information and instructions received from Canadian-Link Participants 
and by transmitting to Canadian-Link Participants information and 
instructions received from CDS. CDS and Canadian-Link Participants will 
not have a direct relationship with each other.
    The DTC Omnibus Account will have its own (i) collateral 
requirements and controls and net debit requirements and controls, (ii) 
settlement obligations, and (iii) line of credit from a Canadian bank 
that is a CDS Participant to secure the settlement obligations of DTC 
to CDS. In accordance with the Rules and Procedures of CDS, DTC will be 
a member of a credit ring with certain other CDS Participants.\4\ 
Although DTC will take instructions from Canadian-Link Participants 
with respect to their transactions with CDS Participants through the 
Canadian-Link Service, DTC will at all times maintain control over the 
securities and funds credited to the DTC Omnibus Account.
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    \4\ CDS has advised DTC that (i) DTC will be required to be a 
member of the Non-Contributing Receivers Credit Ring for Canadian 
Dollar Settlements, (ii) the only claims that could be made against 
DTC as a member of this credit ring involve very unusual events, and 
(iii) no claim has ever been made by CDS against any member of this 
credit ring.
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    Transactions will be processed in the CDS system on each day that 
CDS is open for business (``CDS Business Day'') whether or not such day 
is a day that DTC is open for business (``DTC Business Day'').

3. Transactions Processed Through the Canadian-Link Service

    Transactions between Canadian-Link Participants and CDS 
Participants will be processed through the DTC Omnibus Account in 
accordance with the Rules and Procedures of CDS. Canadian-Link 
Participants will be able (i) to deliver securities to or receive 
securities from CDS Participants against payment in Canadian dollars 
and (ii) to transfer funds to or receive funds from CDS Participants in 
Canadian dollars without any corresponding delivery or receipt of 
securities.
    Transactions between Canadian-Link Participants and other Canadian-
Link Participants will be processed through accounts at DTC in 
accordance with the Rules and Procedures of DTC. Canadian-Link 
Participants will be able to (i) deliver securities to or receive 
securities from other Canadian-Link Participants against payment in 
Canadian dollars and (ii) transfer funds to or receive funds from other 
Canadian-Link Participants in Canadian dollars without any 
corresponding delivery or receipt of securities.

[[Page 70904]]

    For both transactions between Canadian-Link Participants and CDS 
Participants processed through the DTC Omnibus Account and transactions 
between Canadian-Link Participants and other Canadian-Link Participants 
processed through accounts at DTC, there will be a single end-of-day 
Canadian dollar money settlement between DTC and its Canadian-Link 
Participants (``Canadian-Link Money Settlement''). For the transactions 
between Canadian-Link Participants and CDS Participants processed 
through the DTC Omnibus Account, there will be a separate end-of-day 
Canadian dollar money settlement between CDS and DTC.

4. Eligibility of Participants and Securities

    All DTC Participants will be eligible to be Canadian-Link 
Participants and use the Canadian-Link Service, provided that they 
comply with (i) the Rules and Procedures of DTC, (ii) the Rules and 
Procedures of CDS, and (iii) all agreements between DTC and CDS 
relating to the participation of DTC in CDS. (Such agreements together 
with the Rules and Procedures of CDS will be referred to as the 
``Canadian-Link Documents'').
    DTC will determine what securities will be eligible for the 
Canadian-Link Service (``Canadian-Link Securities''). Some securities 
may be eligible for all purposes of the Canadian-Link Service and some 
securities may be eligible only for limited purposes (e.g., clearance 
and settlement through the facilities of CDS but only custody and asset 
servicing through the facilities of DTC). In no case will a security be 
eligible for the Canadian-Link Service if the issuer is on an OFAC list 
of specially designated nationals and blocked persons or is 
incorporated in a jurisdiction on an OFAC list of sanctioned countries. 
As is the case with securities processed through the facilities of DTC, 
it will be DTC rather than CDS that will monitor such compliance with 
OFAC regulations.

5. Enhanced DTC Risk Management Controls

    Each Canadian-Link Participant will be required to make an 
additional required cash deposit to the DTC Participants Fund 
(``Canadian-Link Required Participants Fund Deposit''). The amount of 
the Canadian-Link Required Participants Fund Deposit will be determined 
by a formula that will be fixed by DTC and will be set forth in DTC's 
procedures. For all purposes of the Rules and Procedures of DTC, the 
Canadian-Link Required Participants Fund Deposit of a Canadian-Link 
Participant will be considered a part of the Required Participants Fund 
Deposit of such Participant and will secure all of the obligations of 
such Participant to DTC, including transactions processed for such 
Participant through the Canadian-Link Service and other transactions 
processed by DTC for such Participant.
    Each Canadian-Link Participant will be assigned a net debit cap on 
the transactions that may be processed for such Participant through the 
Canadian-Link Service (``Canadian-Link Net Debit Cap''). The Canadian-
Link Net Debit Cap of a Canadian-Link Participant will be determined by 
a formula that will be fixed by DTC and will be set forth in DTC's 
procedures. Under existing DTC Rules, which will not be affected by new 
DTC Rule 30, which governs the Canadian-Link Service, each DTC 
Participant is assigned a Net Debit Cap on the transactions that may be 
processed for such Participant through the facilities of DTC (i.e., a 
limit on the negative funds balance that may from time to time be 
incurred with respect to its Canadian-Link funds transactions). The 
Canadian-Link Net Debit Cap of a Canadian-Link Participant and not its 
Net Debit Cap will apply to the transactions of such Participant 
processed through the Canadian-Link Service, including both 
transactions with CDS Participants processed for such Participant 
through the DTC Omnibus Account and transactions with other Canadian-
Link Participants processed for such Participant through accounts at 
DTC. The Net Debit Cap of a Canadian-Link Participant and not its 
Canadian-Link Net Debit Cap will apply to all other transactions 
processed by DTC for such Participant.
    Each Canadian-Link Participant will have a single Collateral 
Monitor with respect to transactions processed for such Participant 
through the Canadian-Link Service and other transactions processed by 
DTC for such Participant. For purposes of the Canadian-Link Service, 
the Collateral Monitor of a Canadian-Link Participant will be adjusted 
as follows:
    (1) Canadian dollar net credits from transactions processed for 
such Participant through the Canadian-Link Service will be converted 
into U.S. dollar equivalents and added to U.S. dollar net credits from 
other transactions processed by DTC for such Participant;
    (2) Canadian dollar net debits from transactions processed for such 
Participant through the Canadian-Link Service will be converted into 
U.S. dollar equivalents and added to U.S. dollar net debits from other 
transactions processed by DTC for such Participant;
    (3) The Collateral Value of Canadian-Link Securities delivered by 
such Participant to CDS Participants through the DTC Omnibus Account 
and the Collateral Value of Canadian-Link Securities delivered by such 
Participant to other Canadian-Link Participants through accounts at DTC 
will be converted into U.S. dollar equivalents and deducted from the 
Collateral Value of the collateral of such Participant; and
    (4) Collateral Value in U.S. dollars will be given for Canadian-
Link Securities received by such Participant from other Canadian-Link 
Participants but no Collateral Value will be given for Canadian-Link 
Securities received by such Participant from CDS Participants unless 
and until such securities are credited to an account of such 
Participant at DTC.

6. Instructions for Transactions Processed Through the Canadian-Link 
Service

    A Canadian-Link Participant may give DTC an instruction to clear 
and settle a securities transaction or to effect a funds transaction 
between such Participant and a CDS Participant as follows:
    (1) An instruction from a Canadian-Link Participant to DTC to clear 
and settle a delivery of Canadian-Link Securities to a CDS Participant 
will constitute an instruction for DTC (i) to report or to confirm as 
appropriate the details of the transaction to CDS for processing in the 
CDS system and (ii) to transfer the securities subject to such 
instruction from an account of such Participant at DTC to the DTC 
Omnibus Account for the purpose of making such delivery on the 
settlement date;
    (2) An instruction from a Canadian-Link Participant to DTC to clear 
and settle a receipt of Canadian-Link Securities from a CDS Participant 
will constitute an instruction for DTC (i) to report or to confirm as 
appropriate the details of the transaction to CDS for processing in the 
CDS system and (ii) to transfer subject to CDS risk management controls 
the securities subject to such instruction from the DTC Omnibus Account 
to an account of such Participant at DTC on the settlement date;
    (3) An instruction from a Canadian-Link Participant to DTC with 
respect to a payment of Canadian dollars to a CDS Participant without 
any corresponding receipt of Canadian-Link Securities will constitute 
an instruction for DTC to report or confirm as appropriate the details 
of the transaction to CDS for processing in the CDS system; and

[[Page 70905]]

    (4) An instruction from a Canadian-Link Participant to DTC with 
respect to a receipt of Canadian dollars from a CDS Participant without 
any corresponding delivery of Canadian-Link Securities will constitute 
an instruction for DTC to report or confirm as appropriate the details 
of the transaction to CDS for processing in the CDS system.
    A Canadian-Link Participant may give DTC an instruction to clear 
and settle a securities transaction or effect a funds transaction with 
another Canadian-Link Participant as follows:
    (1) An instruction from a Canadian-Link Participant to DTC to clear 
and settle a delivery of Canadian-Link Securities to another Canadian-
Link Participant will constitute an instruction for DTC (i) to match 
the details of such transaction and (ii) if such details match, to 
debit the securities from an account of the delivering Participant at 
DTC and to credit the securities to an account of the receiving 
Participant at DTC and (iii) credit the delivering Participant and to 
debit the receiving Participant the contract price of the securities in 
Canadian-Link Money Settlement;
    (2) An instruction from a Canadian-Link Participant to DTC to clear 
and settle a receipt of Canadian-Link Securities from another Canadian-
Link Participant will constitute an instruction for DTC (i) to match 
the details of such transaction and (ii) if such details match, to 
credit the securities to an account of the receiving Participant at DTC 
and to debit the securities from an account of the delivering 
Participant at DTC, and (iii) to debit the receiving Participant and to 
credit the delivering Participant the contract price of the securities 
in Canadian-Link Money Settlement;
    (3) An instruction from a Canadian-Link Participant to DTC with 
respect to the payment of Canadian dollars to another Canadian-Link 
Participant without any corresponding receipt of Canadian-Link 
Securities will constitute an instruction for DTC (i) to match the 
details of such transaction and (ii) if such details match, to debit 
the paying Participant and to credit the receiving Participant the 
appropriate amount of funds in Canadian-Link Money Settlement;
    (4) An instruction from a Canadian-Link Participant to DTC with 
respect to the receipt of Canadian dollars from another Canadian-Link 
Participant without any corresponding delivery of Canadian-Link 
Securities will constitute an instruction for DTC (i) to match the 
details of such transaction and (ii) if such details match, to credit 
the paying Participant and to debit the receiving Participant the 
appropriate amount of funds in Canadian-Link Money Settlement.
    All valued securities transactions processed through the Canadian-
Link Service will be settled trade for trade on a delivery against 
payment basis.

7. The Settlement of Transactions Processed Through the Canadian-Link 
Service

    On each CDS Business Day, CDS will give DTC a recap of all 
transactions processed for DTC through the DTC Omnibus Account on such 
CDS Business Day and the net amount of money that CDS owes DTC or that 
DTC owes CDS with respect to such transactions. In turn, DTC will give 
each Canadian-Link Participant a recap of the transactions processed 
for such Participant through the Canadian-Link Service on such CDS 
Business Day, including transactions with CDS Participants processed 
for such Participant through the DTC Omnibus Account and transactions 
with other Canadian-Link Participants processed for such Participant 
through accounts at DTC, and the net amount of money that DTC owes such 
Participant or that such Participant owes DTC with respect to such 
transactions. Then, in the following order, (i) Canadian-Link 
Participants with net settlement debits will pay DTC the amounts of 
such net settlement debits, (ii) DTC will pay CDS the amount of any net 
settlement debit owing to CDS or CDS will pay DTC the amount of any net 
settlement credit owing to DTC, and (iii) DTC will pay Canadian-Link 
Participants with net settlement credits the amounts of such net 
settlement credits. However, the amount of any net settlement credit 
owing to a Canadian-Link Participant with respect to transactions 
processed for such Participant through the Canadian-Link Service may be 
withheld and applied to any obligation of such Participant to DTC or to 
any obligation of DTC to another registered clearing agency with 
respect to such Participant. DTC will not be required to make any 
payment to Canadian-Link Participants with net settlement credits 
unless and until DTC receives payment from all Canadian-Link 
Participants with net settlement debits and payment of any net amount 
of money that CDS owes DTC.
    If a Canadian-Link Participant fails to pay any Canadian dollar net 
settlement debit with respect to the transactions processed for such 
Participant through the Canadian-Link Service. DTC may apply the DTC 
Participants Fund to cover any shortfall in its settlement obligations 
to CDS. If the day of such default is a DTC Business Day, DTC may 
either:
    (1) Declare such Participant to be a Defaulting Participant, in 
which case DTC will have all of its rights and remedies under the Rules 
and Procedures of DTC, including the right to sell or to pledge (i) all 
securities credited to the DTC Omnibus Account at CDS for delivery to 
the Defaulting Participant, which securities are owned by DTC until 
they are paid for by the Participant, (ii) all securities provisionally 
credited to an account of the Defaulting Participant at DTC against 
payment, which securities are owned by DTC until they are paid for by 
the Participant, and (iii) all securities which are designated as 
additional Collateral by the Defaulting Participant pursuant to the 
Rules and Procedures of DTC; or
    (2) Translate the amount of such Canadian dollar net settlement 
debit into a U.S. dollar amount that will be added to or subtracted 
from, as the case may be, the U.S. dollar net settlement debit or 
credit of such Participant with respect to other transactions processed 
for such Participant through the facilities of DTC on that day and if 
as a result of this process such Participant has a net-net settlement 
debit with respect to all transactions processed for such Participant 
and fails to pay such net-net settlement debit to DTC, DTC may declare 
such Participant to be a Defaulting Participant and will have all of 
its rights and remedies under the Rules and Procedures of DTC, 
including the rights and remedies described above.
    If the day of such default is not a DTC Business Day and as a 
result the amount of such Canadian dollar net settlement debit cannot 
be included in the calculation of the settlement obligations of such 
Participant with respect to other transactions processed by DTC for 
such Participant on that day, DTC will deem such Participant to be a 
Defaulting Participant, and DTC will have all of its rights and 
remedies under the Rules and Procedures of DTC, including the rights 
and remedies described above. Any amounts withdrawn from the DTC 
Participants Fund to cover a shortfall in the settlement obligations of 
DTC to CDS will be restored to the Participants Fund (i) from any 
payments subsequently received by DTC from the Defaulting Participant 
and (ii) from any amounts derived by DTC from the operation of its 
failure to settle procedures and loss allocation rules.

8. Additional Matters

    As a member of CDS, DTC must observe and comply with the Canadian-

[[Page 70906]]

Link Documents. Each Canadian-Link Participant, in order to use the 
Canadian-Link Service, acknowledges that (i) all transactions processed 
for such Participant though the facilities of CDS are subject to the 
Canadian-Link Documents, (ii) the Canadian-Link Documents may include 
grants of security interests in and liens on securities and funds in 
the CDS system in which such Participant has an interest, (iii) there 
are other provisions of the Canadian-Link Documents that could also 
affect the interest of such Participant in such securities and funds, 
and (iv) in the event of any conflict between the Rules and Procedures 
of DTC, which are a contract between DTC and DTC Participants, and the 
Canadian-Link Documents, which are a contract between DTC and CDS, the 
requirements of the Canadian-Link Documents will prevail.

9. Fees

    DTC is proposing to charge its Canadian-Link Participants the 
following fees. The fee schedule is set forth in section 23 of the 
Canadian-Link Service Guide.\5\ All fees will be collected in U.S. 
dollars through the existing U.S. dollar settlement system and will be 
uniquely identified on the DTC U.S. dollar settlement statement bill. 
The proposed fees are as follows:
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    \5\ Section 23 of the Canadian-Link Service Guide is attached as 
Exhibit 2 to DTC's filed proposed rule change.
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(1) Deliver Order Fees
    DTC will charge $2.00 U.S. per submitted Canadian dollar delivery/
receive, recall transaction resulting from the automatic recall 
process, cancel instruction, and modify instruction. DTC will not 
charge for hold instructions of Canadian dollar deliveries/receives, DK 
instructions, confirm instructions, or end-of-day sweep transactions.
(2) Payment Order Fees
    DTC will charge $2.00 U.S. per submitted Canadian dollar payment 
order delivery/receive, cancel instruction, and modify instruction. DTC 
will not charge for hold instructions of Canadian dollar payment order 
deliveries/receives, DK instructions, or confirm instructions.
(3) Asset Servicing/Custody Fees
    DTC will charge for asset servicing and custody services on all 
Canadian and U.S. securities at the existing DTC Asset Servicing/
Custody fees.

III. Discussion

    Section 17A of the Act sets forth the regulatory framework for the 
national system for clearance and settlement of securities transactions 
and provides the requirements a clearing agency must meet in order to 
be registered with the Commission. Although the proposed rule change 
concerns the linkage of DTC and CDS to facilitate the clearance, 
settlement, and custody of Canadian securities and payments of Canadian 
dollars by DTC participants, it is consistent with the general purpose 
of section 17A to promote the perfection of a system for the prompt and 
accurate clearance and settlement of securities transactions. 
Furthermore, the proposed rule change is consistent with DTC's other 
cross border services that link CDS with DTC to facilitate the 
clearance and settlement of transactions executed by CDS participants 
in U.S. dollars.
    Section 17A(a)(1)(D) of the Act provides in general that the 
linking of clearance and settlement facilities and the development of 
uniform standards and procedures for clearance and settlement reduces 
unnecessary costs and increases the protection of investors and persons 
facilitating transactions by and acting on behalf of investors.\6\ The 
Canadian-Link Service will take advantage of existing connectivity 
between DTC and CDS to increase efficiencies and to reduce costs for 
DTC participants and ultimately investors with respect to the clearance 
and settlement of Canadian dollar transactions. Additionally, new DTC 
Rule 30 will establish detailed procedures for the Canadian-Link 
Service that will provide certainty and reliability with respect to 
these transactions and will apply to all Canadian-Link Participants. As 
a result, the proposed rule change is consistent with the directives in 
sections 17A(a)(1)(D) because it should reduce unnecessary costs by 
providing increased efficiencies for DTC participants and because it 
should create uniform standards for the clearance and settlement of 
securities transactions by establishing procedures for Canadian dollar 
transactions processed through DTC.
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    \6\ 15 U.S.C. 78q-1(a)(1)(D).
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    Section 17A(b)(3)(F) of the Act 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. Most DTC participants currently clear and 
settle their Canadian securities transactions in Canadian dollars by 
using a custodian bank in Canada as a settlement agent at CDS. The 
proposed rule change is designed to streamline the clearance and 
settlement process of Canadian dollar transactions for DTC participants 
by centralizing the process at DTC and by establishing rules and 
procedures for Canadian Link Participants. By leveraging the existing 
linkage between DTC and CDS, by using the existing rules and procedures 
of DTC and CDS, and by establishing new rules and procedures for the 
Canadian-Link Service, DTC has put in place sufficient procedures so 
that it should be able to assure the safeguarding of securities and 
funds which are in its custody or control or for which it is 
responsible.
    The Commission also considered whether the fact that under the 
proposal DTC will be required to become a member of a clearing agency 
that is neither registered with nor regulated by the Commission (i.e., 
CDS) would be inconsistent with DTC's statutory obligations under 
section 17A or would present unacceptable risks to DTC or its 
participants. As a member of CDS and as an intermediary for its 
Canadian-Link Participants, DTC will be subject to CDS's rules and 
procedures and will bear the initial financial burden if CDS or a 
Canadian-Link Participant fails to meet its settlement obligations. 
Also, DTC will be required to be a member of CDS's Non-Contributing 
Receivers Credit Ring. Accordingly, the Commission has focused part of 
its review of DTC's proposal on CDS itself and on DTC's risk management 
procedures related to the Canadian-Link Service.
    CDS is the sole central securities depository organized in the 
Canadian market and is regulated in Canada at the Federal and 
provincial level. CDS has been a member of DTC since 1979. As a 
participant of DTC, CDS is required to meet DTC's financial and capital 
requirements and is subject to DTC's risk management evaluation and 
review.\7\ As a result, DTC has previously evaluated and is familiar 
with CDS's financial and organizational soundness. CDS conducts its 
clearance and settlement services pursuant to a published rulebook and 
has risk management procedures in place that are similar to and in some 
cases more conservative than DTC's risk management procedures. For 
example, CDS requires that all positions be fully collateralized with a 
bank line of credit, and it has limited membership

[[Page 70907]]

categories and credit rings so that a participant will not share in a 
financial loss related to a service in which it does not participate. 
Furthermore, DTC provided the Commission with the materials it used to 
analyze the risks associated with the Canadian-Link Service and 
represented that in its risk analysis it found neither any unacceptable 
risk related to DTC becoming a member in CDS nor any other cause for 
concern regarding the proposed rule change. Accordingly, the Commission 
finds that neither DTC nor its participants should be exposed to any 
undue risks or burdens as a result of DTC's membership in CDS or DTC's 
offering the Canadian-Link Service.
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    \7\ CDS has also been a member of NSCC since 1984 and is subject 
to NSCC's risk management evaluation and review.
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    Based on the DTC's history with CDS, the regulatory oversight and 
risk management framework of CDS's operations, and the risk analysis 
DTC performed with respect to the proposed rule change, the Commission 
is satisfied that DTC has taken adequate steps to design the Canadian-
Link Service so that it can be offered by DTC in a manner that enables 
DTC to assure the safeguarding of securities and funds which are in its 
custody or control or for which it is responsible.

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-2005-08) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-6458 Filed 11-22-05; 8:45 am]
BILLING CODE 8010-01-P