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”). Notice of the proposal was published in the Federal Register on June 11, 2002. DTC amended the proposal on April 8, 2003, and June 5, 2003. Two comment letters were received. For the reasons discussed below, the Commission is granting accelerated approval of the proposed rule change.
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. 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.
Under the rule change, DTC will require all settling banks to use NSS. 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. Fees connected with the End-of-Day Settlement Process remain unchanged.
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. 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.
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. 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.
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: firstname.lastname@example.org. 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). Copies of such filing also will be available for inspection and copying at the principal office of the DTC. All submissions Start Printed Page 40315should refer to File No. SR-DTC-2002-06 and should be submitted by July 28, 2003.
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. 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.
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.
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.Start Signature
For the Commission by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
2. Securities Exchange Act Release No. 46028, (June 4, 2002), 67 FR 40035 (June 11, 2002).Back to Citation
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.Back to Citation
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.Back to Citation
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.Back to Citation
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.Back to Citation
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.Back to Citation
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.Back to Citation
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.Back to Citation
10. The Settler Agreement and Operating Circular No. 12 are attached as part of DTC's filing.Back to Citation
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].Back to Citation
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.Back to Citation
[FR Doc. 03-17003 Filed 7-3-03; 8:45 am]
BILLING CODE 8010-01-P