Self-Regulatory Organizations; Thomson Financial Technology Services, Inc.; Order Approving Application for Exemption From Registration as a Clearing Agency

[Federal Register Volume 64, Number 92 (Thursday, May 13, 1999)]
[Notices]
[Pages 25948-25950]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-12138]


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SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41377; File No. 600-31]


Self-Regulatory Organizations; Thomson Financial Technology 
Services, Inc.; Order Approving Application for Exemption From 
Registration as a Clearing Agency

May 7, 1999.

I. Introduction

    On January 11, 1999, Thomson Financial Technology Services, Inc. 
(TFTS) \1\ filed with the Securities and Exchange Commission 
(Commission) an application on Form CA-1 \2\ for exemption from 
registration as a clearing agency pursuant to Section 17A of the 
Securities Exchange Act of 1934 (Exchange Act) \3\ and Rule 17Ab2-1 
thereunder.\4\ Notice of TFTS's application was published in the 
Federal Register on February 4, 1999.\5\ The Commission received one 
comment letter in response to the notice of TFTS's exemption 
request.\6\ This order grants TFTS an exemption from registration as a 
clearing agency to offer an electronic trade confirmation (ETC) service 
and a central matching service subject to the conditions and 
limitations described below.
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    \1\ TFTS is a wholly owned subsidiary of Thomson Information 
Services, Inc., which is indirectly owned by the Thomson 
Corporation. The Thomson Corporation is a public company 
incorporated under the laws of Ontario, Canada.
    \2\ Copies of TFTS's application are available for inspection 
and copying at the Commission's Public Reference Room in File No. 
600-31. TFTS submitted a document entitled ``Application for 
Exemptive Order'' with its Form CA-1. That document was not 
considered in the evaluation of TFTS's application.
    \3\ 15 U.S.C. 78q-1.
    \4\ 17 CFR 240.17Ab2-1.
    \5\ Securities Exchange Act Release No. 41003 (January 29, 
1999), 64 FR 5691 (notice of filing of application for exemption 
from registration as a clearing agency).
    \6\ Letter from Frank Denaro, Senior Vice President, Salomon 
Smith Barney (March 5, 1999). The letter is available for inspection 
and copying in the Commission's Public Reference Room in File No. 
600-31.
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II. Description of TFTS's Services

    TFTS will be permitted to offer two types of services under this 
order: (1) an ETC service where TFTS will transmit messages among 
broker-dealers, customers, and custodian banks regarding the terms of a 
trade executed for the customer and (2) a central matching service 
where TFTS will act as an intermediary in the confirmation/affirmation 
process by comparing a broker-dealer's trade data with a customer's 
allocation instructions to produce an affirmed confirmation.
    The parties to institutional trades use ETC services to transmit 
electronically the messages (e.g.,  the institution's allocation 
instructions to the broker-dealer and the broker-dealer's submission of 
trade data to the institutional customer) necessary to confirm and 
affirm the trades. TFTS's ETC service is designed to be used by 
institutional customers, broker-dealers, and custodian banks to 
communicate the terms and acknowledgment of their securities trades.\7\
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    \7\ The Commission has approved proposed rule changes by the 
Municipal Securities Rulemaking Board (MSRB), the National 
Association of Securities Dealers (NASD), and the New York Stock 
Exchange (NYSE) under which their broker-dealer members are 
permitted to use ETC services provided by an entity that has 
received an exemption from clearing agency registration to provide 
confirmation and affirmation services. Securities Exchange Act 
Release No. 41378 (May 7, 1999) [File Nos. SR-MSRB-98-06, SR-NASD-
98-20, and SR-NYSE-98-07]. Previously, those rules required broker-
dealers to use ETC services provided by a registered clearing 
agency.
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    Matching services are a recent development in institutional trade 
processing. A matching service produces an affirmed confirmation of the 
trade by independently performing some of the steps in confirming and 
affirming an institutional trade. It thereby reduces the number of 
messages that have to be sent among the parties to the trade. TFTS's 
matching service will compare the broker-dealer's trade data submission 
to the institution's allocation instructions and will produce an 
affirmed confirmation of the trade if the two descriptions match.\8\
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    \8\ The notice of TFTS's application contains a detailed 
description of both the confirmation/affirmation process for 
institutional trades and TFTS's matching service. Securities 
Exchange Act Release No. 41003, supra note 5.

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[[Page 25949]]

III. Comment Letter

    We received one comment letter in response to the notice of filing 
of TFTS's application.\9\ The commenter generally supported TFTS's 
application.
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    \9\ Letter from Salomon Smith Barney, supra note 6.
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    The Commenter expressed concern with the scope of TFTS's 
undertakeing to develop fair and reasonable linkages between its 
matching service and The Depository Trust Company (DTC). Specifically, 
the commenter stated that vendors may require direct linkages for 
matching and confirmation services and that it did not want to incur 
charges to connect with each new vendor. The commenter stated that it 
believes that broker-dealers and banks that have links to DTC should be 
able to use those links to communicate with matching and confirmation 
service providers.
    The commenter also noted TFTS's undertaking that it will give us 20 
business days' advance notice of any material changes to its matching 
service. The commenter stated that TFTS, like DTC, should be required 
to give participants a comment period before making changes to its 
matching system.

IV. Discussion

A. Statutory Standards

    Section 17A(b)(1) of the Exchange Act requires all clearing 
agencies to register with us.\10\ On April 6, 1998, we issued an 
interpretive release in which we conclude that an entity that provides 
matching services as an intermediary between broker-dealers and 
institutional customers is a clearing agency \11\ and is subject to the 
registration requirements of Section 17A(b)(1) (Matching Release).\12\ 
However, Section 17A(b)(1) also states that upon our own motion or upon 
a clearing agency's application we may conditionally or unconditionally 
exempt a clearing agency from any provisions of Section 17A or the 
rules or regulations thereunder if we find that such exemption is 
consistent with the public interest, the protection of investors, and 
the purposes of Section 17A, including the prompt and accurate 
clearance and settlement of securities transactions and the 
safeguarding of securities and funds. For the reasons set forth below, 
we believe that an exemption for TFTS from full clearing agency 
registration is consistent with Section 17A
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    \10\ 15 U.S.C. 78q-1(b)(1).
    \11\ Section 3(a)(23) of the Exchange Act, 15 U.S.C. 78c(a)(23), 
defines the term clearing agency as, among other things:
    [A]ny person who acts as an intermediary in making payments or 
deliveries or both in connection with transactions in securities or 
who provides facilities for comparison data respecting the terms of 
settlement of securities transactions, to reduce the number of 
settlements of securities transactions, or for the allocation 
securities settlement responsibilities.
    \12\ Securities Exchange Act Release No. 39829 (April 6, 1998), 
64 FR 17943. Specifically the Meeting Release concluded that 
matching constitutes ``comparison of data respecting the term of 
settlement of securities transactions.''
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B. Evaluation of TFTS's Application for Exemption

    We have previously granted three conditional exemptions from 
clearing agency registration.\13\ In those cases, we reviewed the 
applicants' risk management procedures, operational capacity and 
safeguards, corporate structure, and ability to comply with the 
requirements of Section 17A in order to assure that the fundamental 
goals of that section (i.e., the safety and soundness of the national 
clearance and settlement system) were furthers.\14\
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    \13\ Securities Exchange Act Release Nos. 36573 (December 12, 
1995), 60 FR 65076 (order approving applications for exemption from 
clearing agency registration for the Clearing Corporation for 
Options and Securities); 38328 (February 24. 1997), 62 JR 9225 
(order approving application for exemption from clearing agency 
registration for Cedel Bank); and 39643 (February 11, 1998) 63 FR 
8232 (order approving application for exemption from clearing agency 
registration by Moran Guaranty Trust Company of New York, Brussels 
Office, as operator of the Euroclear System).
    \14\ Specifically, the applications were considered against 
standards that the Commission's Division of Market Regulation has 
published for the evaluation of applications for clearing agency 
registration. Securities Exchange Act Release No. 16900 (June 17, 
1980), FR 45 49102.
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    In our consideration of TFTS's application, we noted that the 
matching service would be the only clearing agency function that TFTS 
would perform under an exemptive order. In addition, we recognized that 
while TFTS's matching service could have a significant impact on the 
national clearance and settlement system, all of the concerns raised by 
an entity that performs a wider range of clearing agency functions are 
not raised in TFTS's situation.\15\ Also in our review, we took into 
account that TFTS had represented in its Form CA-1 that it would comply 
with certain conditions that we would impose under an exemptive order. 
Therefore, we have decided not to require TFTS to satisfy all of the 
standards normally required of registrants under Section 17A.\16\ As a 
result, in addition to considering the public interest and the 
protection of investors, the primary factor in our consideration of 
TFTS's application was whether TFTS is so organized and has the 
capacity to be able to facilitate prompt and accurate matching 
services.\17\
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    \15\ TFTS specifically represented that it will not perform 
other functions of a clearing agency such as net settlement, 
maintaining a balance of open positions between buyers and sellers, 
or marking securities to the market. In addition, in its Form CA-1 
TFTS (1) represents that it will not handle funds or securities and 
(2) states that it will not impose prohibitions or limit access to 
its service by potential customers but that it might terminate a 
subscription for failure to pay fees.
    \16\ Accordingly, TFTS will not be subject to the requirements 
of Section 17A which require a registered clearing agency to:
    (1) Fairly represent the clearing agency's shareholders in the 
selection of the clearing agency's directors. Section 17A(b)(3)(C), 
15 U.S.C. 78q-1(b)(3)(C).
    (2) Limit the categories of persons that are potentially 
eligible for clearing agency services. Section 17A(b)(3)(B), 15 
U.S.C. 78q-1(b)(3)(B).
    (3) Equitably allocate reasonable dues, fees, and other charges 
among clearing agency participants. Sections 17A(b)(3)(D) and (E), 
15 U.S.C. 78q-1(b)(3)(D) and (E).
    (4) Enforce compliance by its participants with its rules. 
Sections 17A(b)(3)(A), (G) and (H), 15 U.S.C. 78q-1(b)(3)(A), (G) 
and (H). Because we are granting TFTS an exemption from clearing 
agency registration, TFTS will not be a self-regulatory organization 
and therefore will not be required to file rule changes in 
accordance with Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b). 
Furthermore, we are not requiring TFTS to comply with the rule 
change filing requirements of section 19(b) as a condition of its 
exemption.
    \17\ See Section 17A(b)(3)(A) of the Exchange Act, 15 U.S.C. 
78q-1(b)(3)(A).
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C. Terms of TFTS's Exemption

1. Scope of Exemption
    This order grants TFTS an exemption from registration as a clearing 
agency under Section 17A of the Exchange Act to provide a matching 
service where it will act as an intermediary in the confirmation/
affirmation process to compare a broker-dealer's trade data with a 
customer's allocation instructions to produce an affirmed confirmation. 
The exemption is granted subject to conditions that we believe are 
necessary and appropriate in light of the statutory requirements of the 
Section 17A objective of promoting a safe and efficient national 
clearance and settlement system and in light of TFTS's structure and 
operation. This exemptive order and the conditions and limitations 
contained in it are consistent with our statement in the Matching 
Release that an entity that limits its clearing agency functions to 
providing matching services does not have to be subject to the full 
range of clearing agency regulation.
2. Conditioning of Exemption
    We are including specific conditions in our order exempting TFTS 
from clearing agency registration. As noted above, these conditions are 
designed to promote a safe and efficient national clearance and 
settlement system and to

[[Page 25950]]

enable us to monitor the operation of TFTS's matching service.
    1. Before beginning the commercial operation of its central 
matching service, TFTS must provide us with an audit report that 
addresses all the areas discussed in our Automation Review Policies 
(ARPs).\18\ In order to verify that TFTS is organized and has the 
capacity to be able to facilitate prompt and accurate matching 
services, the exemption contained in this order will take effect thirty 
days after our staff has received an acceptable audit report pursuant 
to this condition.
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    \18\ Securities Exchange Act Release Nos. 27445 (November 16, 
1989), 54 FR 48703; and 29185 (May 9, 1991), 56 FR 22490. In 
addition, Form CA-1 requires applicants to attach its most recent 
balance sheet and statement of income and expenses. TFTS did not 
include this information with its Form CA-1 but represented in its 
Form CA-1 that it will provide us with a current balance sheet and 
income statement before beginning operations.
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    2. TFTS must provide the Commission (beginning in the central 
matching service's second year of operation) with annual reports and 
any associated field work prepared by competent, independent audit 
personnel that are generated in accordance with the annual risk 
assessment of the areas set forth in the ARPs.
    3. TFTS must provide the Commission with twenty business days' 
advance notice of any material changes that TFTS makes to its matching 
service. These changes will not require our approval before they are 
implemented.\19\
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    \19\ While the commenter expressed concern with this condition, 
we believe that receiving advance notice of material changes to 
TFTS's matching service is sufficient for the purposes of this 
exemption. TFTS must file with the Commission a request to modify 
this order if it makes any changes in its operations as summarized 
in this order, in its Form CA-1, dated January 11, 1999, or in any 
subsequently filed amended Form CA-1, that would change the 
fundamental nature of its matching service.
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    4. TFTS must provide the Commission with prompt notification of 
systems outages lasting more than thirty minutes.
    5. TFTS must respond to requests from the Commission for additional 
information relating to its matching service and provide access to the 
Commission to conduct on-site inspections of all facilities (including 
automated systems and systems environment), records, and personnel 
related to the matching service. The requests for information shall be 
made and the inspections shall be conducted solely for the purpose of 
reviewing the matching service's operations and compliance with the 
federal securities laws and the terms and conditions of TFTS's 
exemptive order.
    6. TFTS must supply the Commission or its designee with periodic 
reports regarding the affirmation rates for depository-eligible 
transactions that settle in the United States effected by institutions 
that utilize TFTS's matching service.\20\
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    \20\ For purposes of this condition, we designate DTC as agent 
for receipt of the periodic reports.
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    7. TFTS must preserve a copy or record of all trade details, 
allocation instructions, central trade matching results, reports and 
notices sent to customers, reports regarding affirmation rates that are 
sent to the Commission or its designee, and any compliant received from 
a customer, all of which pertain to the operation of TFTS's matching 
service.\21\ TFTS must retain these records for a period of not less 
than five years, the first two years in an easily accessible place.
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    \21\ All electronic messages that are sent through TFTS's 
systems will originate at the sender's (i.e., the broker-dealer's or 
the customer's) computer terminal and will be routed through TFTS's 
data center. TFTS's data center will copy and store the data that 
passes through it.
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    8. TFTS must develop fair and reasonable linkages between the 
matching service and DTC and other central matching services that are 
regulated by the Commission or that receive an exemption from clearing 
agency registration from the Commission. At this time, we are not 
specifying the type of linkages that TFTS must develop. Our staff will 
consult with TFTS and industry participants to ensure that appropriate 
linkages are developed in a timely fashion. However, we believe that at 
a minimum the linkages should allow parties to trades that are 
processed through one or more matching services to communicate through 
one or more appropriate and effective interfaces with clearing agencies 
and other matching services. For example, a broker-dealer that has a 
link to DTC should be able to transmit trade data through that link to 
an institutional customer that uses TFTS's services without having to 
establish a separate link with TFTS.
3. Modification of Exemption
    The Commission may modify by order the terms, scope, or conditions 
of TFTS's exemption from registration as a clearing agency if we 
determine that such modification is necessary or appropriate in the 
public interest, for the protection of investors, or otherwise in 
furthernace of the purposes of the Exchange Act. Furthermore, we may 
limit, suspend, or revoke this exemption if we find that TFTS has 
violated or is unable to comply with any of the provisions set forth in 
this order if such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Exchange Act

V. Conclusion

    Pending the receipt of TFTS's initial audit report, we believe that 
TFTS will have sufficient operational and processing capability to 
facilitate prompt and accurate matching services. In particular, we 
note that TFTS's exemption will be subject to conditions that are 
designed to enable us to monitor TFTS's operational and processing 
capability with respect to its matching service. Therefore, the 
Commission finds that TFTS's application for exemption from 
registration as a clearing agency meets the standards and requirements 
deemed appropriate for such an exemption.
    It is therefore ordered, pursuant to Section 19(a)(1) of the 
Exchange Act, that the request for exemption from registration as a 
clearing agency filed by Thomson Financial Technology Services, Inc. 
(File No. 600-31) be, and hereby is, granted subject to the conditions 
contained in this order.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-12138 Filed 5-12-99; 8:45 am]
BILLING CODE 8010-01-M