[Federal Register Volume 71, Number 217 (Thursday, November 9, 2006)]
[Notices]
[Pages 65854-65855]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-18958]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54701; File No. SR-DTC-2006-11]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving Proposed Rule Change To Allow the Inventory Management 
System To Accept Real-Time and Late Affirmed Trades From Omgeo

November 3, 2006.

I. Introduction

    On July 11, 2006, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') and on 
September 20, 2006, amended proposed rule change SR-DTC-2006-11 
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 October 3, 2006.\2\ The Commission received no comment 
letters in response to the proposed rule change. For the reasons 
discussed below, the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 54521 (September 27, 
2006), 71 FR 58457.
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II. Description

    DTC seeks to expand its Inventory Management System (``IMS'') to 
accept in real-time non-Continuous Net Settlement (``non-CNS'') 
institutional trades from Omgeo LLC (``Omgeo'') and to accept late 
affirmed trades into IMS for automated settlement at DTC.

1. Current Process for IMS

    Omgeo's TradeSuite system currently feeds DTC a batch file of 
approximately 320,000 eligible affirmed institutional trades at 
approximately 1 p.m. on T+2. Delivering DTC participants then authorize 
or exempt these trades in IMS for automated settlement to be attempted 
at DTC. Any trades affirmed after 12 p.m. on T+2 are ineligible for 
automated settlement at DTC via the TradeSuite interface. These late 
affirmed trades are typically settled by the broker-dealer or custodian 
by processing a DTC Delivery Order (``DO''). These DOs experience a 
higher reclaim rate than deliveries of eligible affirmed trades.

2. Proposed Changes

    DTC proposed to enhance its interface with Omgeo to accept eligible 
affirmed non-CNS trades from Omgeo's TradeSuite system in real-time. 
Although DTC will receive affirmed

[[Page 65855]]

trades from Omgeo's TradeSuite system in real-time as they are 
affirmed, participants will still have the ability to process 
authorizations and exemptions as they do today.
    Participants will be able to authorize trades as they are received 
into IMS through the existing options (i.e., globally or on a trade-
for-trade basis). Omgeo will continue to produce the Cumulative 
Eligible Trade report/file at approximately 1 p.m. on T+2. This batch 
report/file notifies participants of affirmed Matched Institutional 
Trades (``MITS'') sent to IMS for the following settlement date. 
However, IMS will continue the current practice of applying a 
participant's authorization profile for MITS after the midday cut-off 
on T+2 (at approximately 1 p.m.).
    In addition, some new functionality is also being introduced 
through the enhanced Omgeo and DTC interface. Omgeo will send ``late 
affirmed'' \3\ trades to IMS. Late affirmed trades will be stored and 
identified in IMS as a new transaction type, Late Matched Institutional 
Trades (``LMIT''). These trades are currently ineligible for automated 
settlement at DTC. This new functionality will allow participants to 
eliminate settling these transactions as DOs at DTC, which experience a 
higher reclaim rate than affirmed eligible trades, and will provide for 
the automated settlement of these transactions.
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    \3\ Late affirmed trades are defined as trades affirmed after 
the 12:00 p.m. cutoff on T+2 until 12:00 p.m. on settlement date.
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    For the new LMITs, IMS will default to the ``active'' authorization 
mode (i.e., deliveries would not be processed unless they are 
authorized). Unauthorized ``late affirmed'' trades will remain in IMS 
until settlement date + 21 days (the current IMS trade retention time 
frame). For authorized LMIT items, IMS will apply a participant's 
authorization profile as the items are received from Omgeo. LMITs will 
bypass DTC's Receiver Authorized Delivery (``RAD'') processing as do 
all Omgeo deliveries.
    Omgeo will continue to update IMS and notify DTC participants using 
a status message of any Change of Eligibility (``COE'').\4\ COE (i.e., 
DTC-eligible to DTC-ineligible) messages will be passed to IMS by 
TradeSuite up until midnight of T+1. IMS will process COE-related 
messages on a real-time basis for both authorized and yet to be 
authorized trades. IMS will ``reauthorize'' a previously authorized 
DTC-eligible trade in the event the trade becomes DTC-eligible, again. 
In addition, an appropriate audit trail will be provided by IMS for 
participants. Ineligible MITS transactions in IMS will be cancelled at 
end of day on settlement date.
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    \4\ COE-related messages can be sent for the following reasons:
    (1) When a DTC eligible trade changes to CNS eligible, the trade 
is resent to IMS by Omego with an indicator that it is now 
ineligible (IMS status becomes ineligible). Omego will then send the 
trade to NSCC for settlement in CNS. A trade can become CNS eligible 
after being DTC eligible, if the security, ID agent (a prime 
broker), clearing agent, and clearing broker all are CNS eligible.
    (2) When a DTC eligible trade subsequently becomes ineligible 
for settling at DTC, the trade is resent to IMS by Omego with an 
indicator that it is now Ineligible (IMS status updated to 
ineligible). A trade may become ineligible for DTC settlement 
processing if prior to settlement date, the participant, security, 
or ID agent become ineligible for DTC processing.
    (3) If a previously sent DTC eligible trade changed to 
ineligible becomes eligible for settling at DTC, again, the trade is 
re-sent to IMS by Omego with an indicator that it is now eligible 
(IMS status is updated to eligible from ineligible).
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    DTC will charge the following delivery fees for LMITs:
     $0.17 (current ``night DO'' fee) if authorized by the 
participant before the night cycle.
     $0.45 (current ``day DO'' fee) if authorized by the 
participant after the night cycle.
     $0.006 per delivery (current IMS delivery fee) for every 
trade that is processed through the IMS authorization profile.
    Participants that currently submit machine-readable authorization/
exemption instructions can choose to continue to process their Omgeo 
deliveries as they do today. The proposed change is scheduled to be 
implemented in November 2006.

III. Discussion

    Section 19(b) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization. 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.\5\ The Commission 
finds that DTC's proposed rule change is consistent with this 
requirement because it should promote the prompt and accurate clearance 
and settlement of securities transactions by enhancing the IMS 
interface with Omgeo to accept eligible affirmed trades from Omgeo's 
TradeSuite system in real-time and to accept late affirmed trades into 
IMS for automated settlement at DTC. In addition, the proposed rule 
change should provide for the equitable allocation of reasonable dues, 
fees, and other charges among DTC's members as required by Section 
17A(b)(3)(D).\6\
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
    \6\ 15 U.S.C. 78q-1(b)(3)(D).
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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-2006-11) be and hereby 
is approved. 

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-18958 Filed 11-8-06; 8:45 am]
BILLING CODE 8011-01-P