Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change Implementing a Freeze on New Participant Accounts and a Contingency Plan for Withdrawal by Transfer Transactions

[Federal Register Volume 64, Number 172 (Tuesday, September 7, 1999)]
[Notices]
[Pages 48690-48692]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23107]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41799; File No. SR-DTC-99-20]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Implementing a Freeze on New Participant Accounts and a 
Contingency Plan for Withdrawal by Transfer Transactions

August 27, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(Act),\1\ notice is hereby given that on August 19, 1999, The 
Depository Trust Company (DTC) filed with the Securities and Exchange 
Commission (Commission) the proposed rule change as described in Items 
I and II below, which items have been prepared primarily by DTC. The 
Commission is publishing this notice and order to solicit comments from 
interested persons and to grant accelerated approval of the proposal.
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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 provides that generally, DTC will not 
activate any new participant accounts after September 15, 1999, and 
until reasonably practicable in January 2000.\2\ In addition, DTC will 
temporarily implement a contingency plan for the processing of 
withdrawal by transfer (WT) transactions in the unlikely event that 
participant's customers seek to withdraw security positions from 
participants due to concerns regarding systems problems related to the 
century date change.
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    \2\ The proposed rule change is also applicable to DTC's 
Mortgage Backed Securities Division.
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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 the text of the summaries 
prepared by DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

September 15th New Participant Account Freeze
    The proposed rule change provides that generally DTC will not 
activate any new participant accounts after September 15, 1999 (the end 
of the participant validation testing period),\4\ and until reasonably 
practicable in January, 2000. DTC announced in its June 3, 1999, 
Important Notice that ``[a]ny organization currently seeking admission 
as a direct Participant should plan to complete the admission process 
by [September 15], or defer activation of its account until after the 
century date change. Similarly, Participants wishing to switch to 
computer-to-computer input of settlement-related transactions or switch 
to another mode of computer-to-computer input for transactions must 
have completed implementation of the changes (and complete the 
necessary validation testing) by September 15.''
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    \4\ Securities Exchange Act Release No. 40696 (November 20, 
1998), 63 FR 65829 (Commission order approving DTC's validation 
testing requirement).
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    DTC's Rule 2 provides in part that:

    The Corporation may decline to accept the application of any 
applicant upon a determination by the Corporation that the 
Corporation does not have adequate personnel, space, data processing 
capacity or other operational capability at that time to perform its 
services for additional Participants without impairing the ability 
of the Corporation to provide services for its existing 
Participants, to assure the prompt, accurate and orderly processing 
and settlement of Securities transactions, to safeguard the funds 
and Securities held by or for the Corporation for Participants or 
Pledgees or otherwise to carry out its functions; provided, however, 
that applicants whose applications are denied pursuant to this 
paragraph shall be approved as promptly as the capabilities of the 
Corporation permit in the order in which their applications were 
filed with the Corporation.

    DTC believes that continuing to activate numerous new participant 
accounts or allowing participants to change their mode of settlement-
related computer input after September 15th could potentially be 
disruptive to the rest of its Year 2000 efforts. Specifically, DTC will 
be devoting a great deal of resources to its second internal 
certification test in October and November of 1999. The internal 
certification test involves the testing of DTC's mainframe applications 
and systems in order to confirm their Year 2000 readiness. 
Additionally, DTC would like to ensure that it has enough time to deal 
with any unanticipated issues that arise before the end of the calendar 
year.
Withdrawal By Transfer Contingency Plan
    In response to concerns expressed by some participants and in 
consultation with the Securities Industry Association and the 
Securities Transfer Association, DTC will temporarily implement a 
contingency plan to deal with the processing of an increased number of 
WT transactions (WT contingency plan). The concerns stem from the 
possibilitly that customers will seek to withdraw security positions 
from participants due to fears relating to the century date change in 
spite of customer education campaigns by participants and industry 
groups. Should a potential substantial increase in volume materialize, 
the WT contingency plan will enable DTC to process as many as 30,000 WT 
transactions daily, over triple the current volume of 9,000 WTs daily. 
Because WT processing and the related direct mail service \5\ are 
highly labor intensive operations for DTC and transfer agents alike, 
the WT contingency plan also provides a

[[Page 48691]]

mechanism for curbing volume in the unlikely event it exceeds 30,000 WT 
requests on any given day. As described in more detail below, this 
aspect of the contingency plan will potentially affect only 
participants whose volumes grow substantially higher than their present 
day volumes.
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    \5\ DTC's direct mail service is comprised of two components, 
direct mail by the agent (DMA) and direct mail by DTC (DMD). 
Participants may elect to use either DMA or DMD to have their newly 
issued WT securities mailed directly to customers by transfer agents 
or DTC, respectively.
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    The WT contingency plan will be implemented and remain in effect 
during the fourth quarter of 1999.\6\ The WT contingency plan is 
primarily comprised of (1) an internal task force of employees 
available to process increased volumes and (2) system changes to DTC's 
automated WT (AWT) system, which commences the WT processing stream. 
The AWT system changes described below are designed to prevent daily WT 
volume from exceeding 30,000 items in a manner that is fair and 
equitable to all participants and requires no programming changes by 
participants.
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    \6\ In the unlikely event that DTC experiences sustained volumes 
of 30,000 WTs daily into the first quarter of the Year 2000, DTC 
will keep the WT contingency plan in effect until such time as 
volumes return to normal levels.
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    DTC has established a database showing the maximum allowable amount 
of WTs for each participant. The maximum allowable amount is based on 
participants' daily average WT volume for the three month period of 
February through April 1999. The maximum allowable amounts will be 
triggered only if the aggregate number of WTs submitted by participants 
exceeds the threshold of 30,000 on any day in the fourth quarter. A 
participant exceeding its maximum allowable amount will not be limited 
in its WT volume as long as fewer than 30,000 WTs are requested in 
total.
    During the fourth quarter, the AWT system will initially process WT 
requests as normal, collecting WT requests transmitted by participants 
and sending them to the account transaction processor (ATP) to perform 
account updating. The WTs are processed in the same sequence as 
transmitted by participants. This process is usually finished each day 
by 9:30 a.m. Eastern Time (ET).
    Under the proposed rule change a new procedure will be introduced 
in which AWT will count the aggregate number of items successfully 
processed by ATP to determine whether the overall cap of 30,000 items 
was exceeded, and the excess amount (total reversal amount). If the cap 
is exceeded, procedures will begin to automatically identify and 
reverse the required number of WTs to lower the day's total to 30,000 
items. To accomplish this, AWT will identify the participants that 
surpassed their maximum allowable amounts and will record the excess 
items that were processed after their maximum allowable amounts were 
reached. The excess items will be stored on a temporary file, sorted in 
last in first out order by participant. The system will then select one 
excess item per participant from the temporary file and will 
continuously repeat this process until enough excess items have been 
selected to meet the total reversal amount. WT reversal transactions 
will then be created and processed to reverse the chosen excess WTs. 
This WT reversal process will be finished by approximately 9:45 a.m. 
(ET). Normal processing for WTs not reversed will then resume with DTC 
preparing certificates and transfer registration instructions for 
delivery to transfer agents.
    Under the proposed rule change DTC will not automatically pend WTs 
that were reversed by the above procedure. Participants will therefore 
be required to submit new WT requests the following business day.
    DTC believes that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder. In 
particular, the proposed rule change is consistent with Section 
17A(b)(3)(F) of the Act \7\ which requires that the rules of a clearing 
agency be designed to promote the prompt and accurate clearance and 
settlement of securities transactions and, in general, to protect 
investors and the public interest.
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    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purpose of the Act.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received from Members, Participants, or Others

    No comments were solicited or received on the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Section 17A(b)(3)(F) of the Act \8\ requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions. The Commission 
finds that the proposed rule change is consistent with this obligation 
because the proposed modifications to DTC's Year 2000 policies will 
permit DTC sufficient time before year end to complete its Year 2000 
preparations. In addition, the implementation of the proposed WT 
contingency plan will enable DTC to deal with any substantial increase 
in the processing of WT transactions. As a result, DTC should be able 
to continue to provide prompt and accurate clearance and settlement of 
securities transactions before, on, and after Year 2000 without 
interruption.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    DTC requested that the Commission find good cause for approving the 
proposed rule change prior to the thirtieth day after the publication 
of notice of the filing. The Commission finds good cause for approving 
the proposed rule change prior to the thirtieth day after the 
publication of notice of the filing because such approval will allow 
DTC to better prepare for a smooth Year 2000 transition.

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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. 
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, 450 Fifth Street, NW, Washington, 
DC 20549. Copies of such filing will also be available for inspection 
and copying at the principal office of DTC. All submissions should 
refer to the File No. SR-DTC-99-20 and should be submitted by September 
28, 1999.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (File No. SR-DTC-99-20) be and 
hereby is approved.

    \9\ 15 U.S.C. 78s(b)(2).

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[[Page 48692]]

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-23107 Filed 9-3-99; 8:45 am]
BILLING CODE 8010-01-M