[Federal Register Volume 73, Number 46 (Friday, March 7, 2008)]
[Notices]
[Pages 12485-12487]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-4401]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57392; File No. SR-DTC-2007-16]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of a Proposed Rule Change Relating to the Admission of
Foreign Entities as Direct Depository Participants
February 27, 2008.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on November 16, 2007, The
Depository Trust Company (``DTC'') filed with the Securities and
Exchange Commission (``Commission'') and on February 5, 2008, amended
the proposed rule change as described in Items I, II, and III below,
which items have been prepared primarily by DTC. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change would amend DTC's policy statement
regarding the admission of participants to permit entities that are
organized in a foreign country and are not subject to U.S. federal or
state regulation (``foreign entities'') to become eligible to become
direct DTC participants (``Foreign Entity Policy Statement'').\2\
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\2\ The National Securities Clearing Corporation (``NSCC'') has
filed a similar proposed rule change that would permit NSCC to adopt
a similar policy statement with respect to the admission of foreign
entities as members. Securities Exchange Act Release No. 57391
(February 27, 2008) (File No. SR-NSCC-2007-15).
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, DTC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. DTC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\3\
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\3\ The Commission has modified parts of these statements.
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A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In 1990, DTC adopted a Policy Statement on the Admission of
Participants (``1990 Policy Statement'') to make clear that in
determining whether to grant access to its services, DTC regards as a
critical factor that an applicant is subject to comprehensive U.S.
federal or state regulation relating to, among other things, capital
adequacy, financial reporting and recordkeeping, operating performance,
and business conduct.\4\ Generally under the 1990 Policy Statement,
unless an applicant is subject to U.S. federal or state regulatory
agency oversight, the applicant would not be eligible to become a DTC
participant.\5\ Since 1990, DTC has admitted a small number of foreign
entities where their obligations to DTC have been guaranteed by
creditworthy DTC participants.
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\4\ Securities Exchange Act Release No. 28754 (January 8, 1991),
56 FR 1548 (January 15, 1991) (File No. SR-DTC-90-01).
\5\ DTC recognized, however, that any person designated by the
Commission pursuant to Section 17A(b)(3)(B)(vi) of the Act, even if
not subject to such regulatory oversight, would be eligible for
admission. The 1990 Policy Statement was approved by the Commission
on January 8, 1991.
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The purpose of the proposed Foreign Entity Policy Statement is to
establish admissions criteria that will permit a well-qualified foreign
entity to become a participant of DTC and to obtain direct access to
DTC's services while assuring that the unique risks associated with the
admission of foreign entities are adequately addressed.\6\
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\6\ DTC's proposed ``Policy Statement on the Admission of Non-
U.S. Entities as Direct Depository Participants'' is attached as
Exhibit 5 to its filing, which can be found at http://www.dtcc.com/downloads/legal/rule_filings/2007/dtc/2007-16.pdf.
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The admission of foreign entities as participants raises a number
of unique risks and issues, including that (1) the entity is not
subject to federal or state regulation, (2) that the operation of the
laws of the entity's home country and time zone differences \7\ may
impede the successful exercise of DTC's rights and remedies
particularly in the event of the entity's failure to settle, and (3)
financial information about the foreign entity made available to DTC
for monitoring purposes may be less adequate than the financial
information about U.S.-based entities.
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\7\ Time zone differences may complicate communications between
a foreign participant and its U.S. Settling Bank with respect to the
timely payment of the participant's net debit to DTC including
intraday demands for payment. These differences may also delay DTC's
receipt of information available in the foreign participant's home
country to others including its other creditors about the foreign
participant's financial condition on the basis of which DTC would
have taken steps to protect the interests of DTC and its
participants.
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The Foreign Participant Policy Statement would require that in
addition to executing the standard DTC Participation Agreement the
foreign entity enter into a series of undertakings and agreements that
are designed to address jurisdictional concerns and to assure that DTC
is provided with audited financial information that is acceptable to
DTC.\8\ The proposed policy statement would also require that the
foreign entity (1) be subject to regulation in its home country and (2)
be in good standing with its home country regulator.
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\8\ In the Foreign Entity Policy Statement, DTC has reserved the
right to waive certain of these criteria where such criteria are
inappropriate to a particular applicant or class of applicants
(e.g., a foreign government or international or national central
securities depositories).
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The Foreign Participant Policy Statement was previously approved by
the Commission on a temporary basis in 1997.\9\ As currently proposed,
the
[[Page 12486]]
Foreign Participant Policy Statement would retain all the requirements
of the previous version with the exception of the ``special financial
conditions'' requirements, as explained below. It would also include
new requirements with respect to non-U.S. GAAP financial statements and
anti-money laundering (``AML'') risk.
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\9\ Securities Exchange Act Release Nos. 38600 (May 9, 1997), 62
FR 27086 (May 16, 1997) (File No. SR-DTC-96-13); 40064 (June 3,
1998), 63 FR 31818 (June 10, 1998) (File No. SR-DTC-98-11); 41466
(May 28, 1999), 64 FR 30077 (June 4, 1999) (File No. SR-DTC-99-12);
42865 (May 30, 2000), 65 FR 36188 (June 7, 2000) (File No. SR-DTC-
00-07); 44470 (June 22, 2001), 66 FR 34972 (July 2, 2001) (File No.
SR-DTC-2001-10). Approval of the Foreign Participant Policy
Statement as previously filed and temporarily approved by the
Commission extended through May 31, 2002.
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The Foreign Entity Policy Statement previously included ``special
financial conditions'' requirements applicable to participants that
were foreign entities. The special financial conditions requirements
mandated that a foreign entity have and maintain minimum net capital of
100% of the minimum net capital for the admission of a U.S. entity. A
foreign entity was also required to have additional ``special
collateral'' in its account equal to fifty percent of its net debit
cap. Any net debit of the foreign entity had to be supported by the
value of other, non-special collateral including securities received by
the participant valued in accordance with DTC's customary haircuts.
Except for U.S. Treasury securities, which received a haircut of 2
percent, securities posted as special collateral received a haircut of
50% of their market value. The foreign entity did not receive credit
for special collateral in DTC's collateral monitor. DTC now believes
that its net debit cap, collateral monitor, and other risk management
controls and procedures applicable to all participants together with
the other requirements of the Foreign Entity Policy Statement would
adequately limit DTC's exposure in the event of the failure to settle
and insolvency of a foreign participant without the need for the
special financial conditions requirement.\10\
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\10\ Additionally, in the Foreign Participant Policy Statement,
DTC has reserved the right to require a foreign entity to deposit
additional amounts to DTC's participants fund and the right to
require a letter of credit as the form of participant fund
collateral where DTC in its sole discretion believes the entity
presents legal risk.
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The Foreign Entity Policy Statement also previously required
foreign entities to provide to DTC for financial monitoring purposes
audited financial statements prepared in accordance with U.S. generally
accepted accounting principles or other generally accepted accounting
principles that are satisfactory to DTC. As it is currently proposed,
the Foreign Entity Policy Statement retains this requirement but to
address the risk presented by accepting financial statements prepared
in non-U.S. GAAP, DTC would increase the existing minimum financial
requirements for any foreign entity submitting its financial statements
in non-U.S. GAAP by a premium. The premiums would be as follows:
(i) 1\1/2\ times the existing requirement for a foreign entity
submitting financial statements prepared in accordance with
International Financial Reporting Standards (``IFRS''), the Companies
Act of 1985 (``UK GAAP''), or Canadian GAAP;
(ii) 5 times the existing requirement for a foreign entity
submitting financial statements prepared in accordance with a European
Union (``EU'') country GAAP other than UK GAAP; and
(iii) 7 times the existing requirement for a foreign entity
submitting financial statements prepared in accordance with any other
type of GAAP.
Finally, DTC is proposing to add a new requirement to the Foreign
Entity Policy Statement that a foreign entity must provide sufficient
information to DTC so that DTC can evaluate AML risk.
The proposed rule change is consistent with the requirements of
Section 17A(b)(3)(F) of the Act. The proposed policy does not unfairly
discriminate against foreign entities seeking admission as participants
because it appropriately takes into account the unique risks to DTC
raised by their admission.
B. Self-Regulatory Organization's Statement on Burden on Competition
DTC perceives no impact on competition by reason of the proposed
rule change.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments from DTC participants or others have not been
solicited or received on the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which the self-regulatory organization consents,
the Commission will:
(a) By order approve the proposed rule change or
(b) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
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. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-DTC-2007-16 on the subject line.
Paper Comments:
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-DTC-2007-16. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Room, 100 F Street, NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of DTC. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-DTC-2007-16 and should be
submitted on or before March 28, 2008.
[[Page 12487]]
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-4401 Filed 3-6-08; 8:45 am]
BILLING CODE 8011-01-P