[Federal Register: August 19, 2008 (Volume 73, Number 161)]
[Notices]
[Page 48411-48413]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19au08-74]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58345; File No. SR-DTC-2007-16]
Self-Regulatory Organizations; The Depository Trust Company;
Order Granting Approval of a Proposed Rule Change Relating to the
Admission of Foreign Entities as Direct Depository Participants
August 12, 2008.
I. Introduction
On November 16, 2007, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') and on
February 5, 2008, amended proposed rule change SR-DTC-2007-13 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 March 7, 2008.\2\ No comment letters were received. For the
reasons discussed below, the Commission is granting approval of the
proposed rule change as modified by Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 57392 (February 27,
2008), 73 FR 12485.
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II. Description
The proposed rule change amends 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'').\3\
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\3\ The National Securities Clearing Corporation (``NSCC'')
filed and the Commission has approved 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. 58344 (August 12, 2008) (File No. SR-NSCC-
2007-15).
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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 well-qualified foreign
entities to become participants 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 U.S. 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 Entity Policy Statement requires 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
[[Page 48412]]
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 Entity Policy Statement was previously approved by the
Commission on a temporary basis in 1997.\9\ As currently proposed, the
Foreign Entity 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 Entity 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
1000% 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 a 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 Entity 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 (``GAAP'') or other generally accepted
accounting principles that were satisfactory to DTC. As proposed, the
Foreign Entity Policy Statement will provide for the submission of
audited financial statements other than U.S. GAAP, 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.
III. Discussion
Section 17A(b)(3)(F) of the Act 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.\11\ When the Commission previously
approved DTC's Foreign Entity Policy Statement it found that the policy
statement was designed to address the jurisdiction differences in
regulatory structure and in business operations of non-U.S. entities
with respect to risk control and management. Additionally, the
Commission found that the policy statement was designed to bind non-
U.S. entities to DTC's rules and procedures in a manner similar to
domestic participants and was designed to lesson or eliminate the
negative effects that jurisdictional issues could have on DTC's
exercise of its rights against non-U.S. entities. The proposed rule
change adopts a Foreign Entity Policy Statement that is substantially
similar to the one previously approved by the Commission. DTC has
eliminated the special financial conditions that were included in the
earlier policy statement and has added a new requirement to increase
the minimum financial requirements if the foreign participant submits
audited financial statements prepared using non-U.S. GAAP. The
multiples used to calculate the premiums DTC will charge for non-U.S.
GAAP are identical to those the Commission previously approved for the
Government Securities Division and MBS Division of the Fixed Income
Clearing Corporation.\12\ Although DTC will collect less collateral
than was required under the earlier policy statement, we are satisfied
with DTC's explanation that its other financial controls, such as in
its discretion requiring a letter of credit, are sufficiently designed
to limit risk of loss to DTC or its participants as a result of a
foreign participant's insolvency. In addition, recent changes in
bankruptcy law have raised questions about whether DTC could enforce
its rights to a participant's collateral in non-U.S. jurisdictions. The
changes with respect to the participants' minimum financial
requirements should help to ensure that all foreign participants have
sufficient financial resources to be participants in and meet their
settlement obligations to DTC. Accordingly, based on this and the
earlier findings, we find that the Foreign Entity Policy Statement is
designed assure the safeguarding of securities and funds which are in
which are in the custody or control of DTC or for which it is
responsible.
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\11\ 15 U.S.C. 78q-1(b)(3)(F).
\12\ Securities Exchange Act Release No. 51385 (March 16, 2005),
70 FR 14736 (March 23, 2005) (File No. SR-FICC-2004-14).
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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.\13\
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\13\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-DTC-2007-16), as modified by
Amendment No. 1, be and hereby is approved.
[[Page 48413]]
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-19133 Filed 8-18-08; 8:45 am]
BILLING CODE 8010-01-P