Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of a Proposed Rule Change Establishing a Fee Schedule for Certain Inter-Depository Deliveries

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34480; File No. SR-DTC-94-10]

Self-Regulatory Organizations; The Depository Trust Company;

Notice of Filing of a Proposed Rule Change Establishing a Fee Schedule

for Certain Inter-Depository Deliveries

August 2, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ notice is hereby given that on July 7, 1994, The

Depository Trust Company (``DTC'') filed with the Securities and

Exchange Commission (``Commission'') 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 groups.

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\1\15 U.S.C. Sec. 78s(b)(1) (1988).

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I. Self-Regulatory Organization's Statement of the Terms of

Substance of the Proposed Rule Change

DTC is proposing the following changes in its fee schedule:

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Service Present fee Proposed fee

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XVIII.

Inter-Depository

Delivery Fees to

Participants:

Valued $.77*................ No Change.

(third-party).

Free None*................ $.64*.

delivery.

Fourth- None................. $.32* to each

party delivery. depository.

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*In addition to the regular Deliver Order fee charged to a Participant

for each item delivered, received or reclaimed.

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 that 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.

A. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

The purpose of the proposed rule change is to make changes to the

fee schedule for inter-depository deliveries. DTC maintains interfaces

with two other registered securities depositories, the Midwest

Securities Trust Company (``MSTC'') and Philadelphia Depository Trust

Company (``Philadep''). DTC processes four types of inter-depository

deliveries: Regional Interface Operations (``RIO'') deliveries, Valued

(``Third-Party'') deliveries, Free deliveries, and Fourth-Party

deliveries. Currently, DTC charges fees for RIO and Third-Party

deliveries.\2\

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\2\In 1977, DTC filed a proposed rule change under Section

19(b)(2) of the Act seeking Commission approval to impose a

surcharge on participants that deliver or receive securities through

interface accounts (i.e., RIO or Third-Party). Securities Exchange

Act Release No. 14109 (October 27, 1977), 42 FR 58991 [File No. SR-

DTC-77-10] (notice of filing of proposed rule change). Subsequently,

the Commission issued two orders instituting proceedings to

determine whether to approve or disapprove Fine No. SR-DTC-77-10.

Securities Exchange Act Release Nos. 20461 (December 7, 1983), 48 FR

55654 and 23083 (March 31, 1986), 51 FR 12421. Pending Commission

action on File No. SR-DTC-77-10, DTC filed a separate proposed rule

change under Section 19(b)(2) of the Act seeking approval for Third-

Party delivery fees. Securities Exchange Act Release No. 14655

(April 11, 1978), 43 FR 16576 [File No. SR-DTC-78-6] (notice of

filing of proposed rule change). Subsequently, DTC amended File No.

SR-DTC-78-6 to change it from a filing under Section 19(b)(2) of the

Act to a filing under Section 19(b)(3)(A) of the Act. As a result,

the Third-Party delivery fees became effective immediately.

Securities Exchange Act Release No. 14835 (June 9, 19978), 15 SEC

Docket 4 (June 27, 1978).

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RIO deliveries are interregional clearing corporation deliveries

related to continuous net settlement deliveries into or out of the

National Securities Clearing Corporation's (``NSCC'') account at DTC. A

RIO delivery represents the net of all trades in a security settling

that day on DTC's books between two clearing corporations. Valued

(Third-Party) deliveries occur when a DTC participant delivers to or

receives from a counterparty that is a participant only in another

depository. Free deliveries typically relate to a DTC participant's

moving a securities position to or from its DTC account from or to its

account at another depository. Fourth-Party deliveries are deliveries

between MSTC and Philadep participants that are routed through DTC. The

deliveries occur through DTC because the interface between MSTC and

Philadep is through DTC.

DTC incurs both internal and external expenses in operating the

interfaces. The Internal expenses include computer usage and support;

dividend, reorganization, and redemption processing; reconciliation of

positions; and certificate inventory management. The external costs to

DTC are fees imposed by the other depositories as agreed to by DTC and

each depository.

DTC now recovers some interface expenses from the RIO and Third-

Party delivery fees. Each of these fees is designed to recover DTC's

estimated annual internal expense for the service. In DTC's 1994 fee

schedule, the RIO delivery fee is $.70, up from $.42 in 1993; the

Third-Party delivery fee is $.77, up from $.49 in 1993.\3\ DTC has

received no adverse comment on the RIO or Third-Party fees in recent

years.

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\3\Securities Exchange Act Release No. 33985 (May 2, 1994), 59

FR 23905 [File No. SR-DTC-94-03] (notice of Filing and immediate

effectiveness of proposed rule change setting forth DTC's 1994 fee

schedule).

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DTC's proposed rule change will establish new fees for Free

deliveries and Fourth-Party deliveries at a level that will recover

DTC's estimated internal 1994 service cost based on budgeted

transaction volumes. Under the proposed rule change, the Free delivery

fee will be $.64, which is in addition to the regular Deliver Order

fee, and the Fourth-Party delivery fee charged to each depository will

be $.32 plus the regular Deliver Order fee. Establishment of these two

fees at these levels will raise DTC's interface cost recovery from

inter-depository delivery fees from 29% to 59%.\4\ Subject to

Commission approval of the proposed rule change, DTC will seek in a

subsequent proposed rule filing to reduce DTC's Deliver Order fee by

$.03 because $.03 of interface expenses will be recovered from the

actual interface users through the proposed new fees for Free and

Fourth-Party deliveries.\5\ The average Deliver Order fee is now $.30

in the Next-Day Funds Settlement system.

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\4\During each of the two years following Commission approval of

the subject proposed fees, DTC will file with the Commission under

Section 19(b)(2) of the Act proposed changes in those fees that will

have the effect of gradually increasing its interface cost recovery

from interface fees to 100%. During this period, DTC also intends to

continue its practice of including changes in the fees for valued

inter-depository deliveries in the schedules of revised DTC services

that are filed annually under Section 19(b)(3)(A) of the Act.

\5\Telephone Conversation between Richard B. Nesson, General

Counsel, DTC, and Margaret J. Robb, Staff Attorney, Division of

Market Regulation, Commission (July 18, 1994).

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The policy of the Board of Directors of DTC has always been that

DTC's costs arising from use of the interfaces between DTC and other

securities depositories should be translated into DTC fee charges to

those who actually use the interfaces. Because depositories have a more

diverse set of participants, many of whom never use such interfaces and

most who do use the interfaces do so infrequently, interface costs are

not mutualized at depositories as they are at clearing corporations.

For example, an analysis of inter-depository deliveries during the

first four months of 1994 shows that while Free deliveries (largely

self-deliveries) between participants' MSTC or Philadep accounts and

their DTC accounts were made by 62% of DTC participants, 3% of DTC

participants account for 80% of all such deliveries.

Some participants making self-deliveries deposit certificates in

another depository and make self-deliveries of positions back to their

DTC accounts. This leaves DTC to deal with the consequences that the

physical certificates are still on deposit at the other depository.

Those consequences affect all DTC participants by increasing DTC

service fees, delaying reorganization activity, and reducing dividend,

interest, and reorganization investment income refunds to DTC

participants due to later receipt of payments. Other adverse

consequences for all DTC participants occur when DTC's access to

securities underlying the positions moved to DTC by book-entry is

limited.

DTC believes the proposed rule change is consistent with DTC's

obligations under Section 17A(b)(3)(D)\6\ of the Act which authorizes

DTC to provide for the equitable allocation of reasonable fees among

its participants.

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\6\15 U.S.C. Sec. 78q-1(b)(3)(D) (1988).

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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 purposes of the Act. The proposed rule change will

more equitably allocate DTC's costs between DTC participants that use

the interfaces and participants that do not.

Among other things, inter-depository interfaces allow companies in

one or more geographic areas to do business with companies in another

geographic area at a small fraction of the cost they would incur if

they were dealing with physical securities even after paying depository

interface fees. Such is the extraordinary cost savings and competitive

effect derived from securities immobilization and book-entry delivery.

So long as interface fees do not exceed interface costs, such fees are

not only fair but fully justified.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received from Members, Participants, or Others

DTC has not solicited comments on the proposed rule change. DTC

will send a memorandum to its participants concerning this proposal and

the rationale for DTC recovery of its interface costs from cost-based

fees charged to interface users. Any comments received by DTC will be

forwarded to the Commission for inclusion in the Commission's public

file 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. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington DC 20549. 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. Copies of such filing will also be available for

inspection and copying at the principal offices of DTC. All submissions

should refer to File No. SR-DTC-94-10 and should be submitted by August

30, 1994.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\7\

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\7\17 CFR 200.30-3(a) (12) (1991).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-19375 Filed 8-8-94; 8:45 am]

BILLING CODE 8010-01-M