Self-Regulatory Organizations; Philadelphia Depository Trust Company; Notice of Filing and Order Granting Accelerated Approval on a Temporary Basis of a Proposed Rule Change To Appoint the Canadian Depository for Securities as a Correspondent Depository

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-37918; File No. SR-Philadep-96-17]

Self-Regulatory Organizations; Philadelphia Depository Trust

Company; Notice of Filing and Order Granting Accelerated Approval on a

Temporary Basis of a Proposed Rule Change To Appoint the Canadian

Depository for Securities as a Correspondent Depository

November 1, 1996.

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

(``Act''),\1\ notice is hereby given that on October 17, 1996, the

Philadelphia Depository Trust Company (``Philadep'') 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 Philadep. On October 28, 1996, Philadep filed an

amendment to the proposed rule change to amend its procedures and to

attach as an exhibit to its original filing a copy of the correspondent

depository agreement.\2\ On October 31, 1996, Philadep filed an

amendment to the proposed rule change to make certain technical

changes.\3\ The Commission is publishing this notice and order to

solicit comments from interested persons and to grant accelerated

approval of the proposed rule change through April 30, 1997.

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

\2\ Letter from J. Keith Kessel, Compliance Officer, Philadep,

to Jerry Carpenter, Assistant Director, Division of Market

Regulation (``Division''), Commission (October 28, 1996).

\3\ Letter from J. Keith Kessel, Compliance Officer, Philadep,

to Jerry Carpenter, Assistant Director, Division, Commission

(October 31, 1996).

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

of the Proposed Rule Change

The purpose of the proposed rule change is to allow Philadep to

appoint The Canadian Depository for Securities Limited (``CDS'') as

Philadep's nonexclusive agent and custodian in receiving securities

deposited by CDS-sponsored participants for delivery to Philadep.

Currently, the West Canada Depository Trust Company (``WCDTC'') serves

as Philadep's correspondent depository.\4\ On November 1, 1996, CDS

will assume the operations of WCDTC and the West Canada Clearing

Corporation (``WCCC''), WCDTC's affiliated clearing corporation.

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\4\ Securities Exchange Act Release No. 36782 (January 26,

1996), 61 FR 3956 [File No. SR-Philadep-96-01] (order granting

accelerated approval on a temporary basis of a proposed rule change

to appoint the WCDTC as a correspondent depository); Securities

Exchange Act Release No. 37383 (June 28, 1996), 61 FR 35292 [File

No. SR-Philadep-96-09] (order granting accelerated approval on a

temporary basis through December 31, 1996 of a proposed rule change

seeking permanent approval of the designation of the WCDTC as a

correspondent depository).

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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, Philadep 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. Philadep has prepared summaries, set forth in sections

(A), (B), and (C) below, of the most significant aspects of such

statements.\5\

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\5\ The Commission has modified the text of the summaries

prepared by Philadep.

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[[Page 57939]]

(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 allow Philadep to

authorize CDS to act as a nonexclusive agent and custodian for Philadep

in receiving securities deposited by certain CDS-sponsored participants

for credit to their respective subaccounts in CDS's omnibus account at

Phkladep. The custodial arrangement will be effectuated by contracts

executed between Philadep and CDS, and CDS will become a participant of

Philadep pursuant to Philadep's rules and procedures.

At or before 12:45 p.m. (Eastern Standard Time) on any business day

Philadep is open, CDS will notify Philadep by facsimile transmission or

through Philadep's Automated Deposit System of initiated and pending

instructions to Canadian transfer agents to transfer various Canadian

securities held by CDS into Philadep's nominee name. Philadep will

credit CDS's account(s) for Canadian issues at the time of this

notification. Philadep will credit CDS's account(s) for incoming

deposits of U.S. issues (received by CDS and designated for physical

delivery and deposit to its Philadep account) at the time of their

physical receipt by Philadep. Philadep has the functionality whereby

CDS can enter certificate details into Philadep's Automated Deposit

System in order to reduce the processing time upon receipt of U.S.

issues. As a result Philadep is able to grant CDS credit upon receipt

of the U.S. securities.

With regard to Canadian issues, CDS will instruct Canadian transfer

agents to reregister the issues in Philadep's nominee name and to

deliver them to CDS as agent and custodian of Philadep. With respect to

acting as Philadep's agent for interfacing with Canadian transfer

agents, CDS has more direct knowledge of and familiarity with Canadian

transfer agents. CDS has a Canadian address and is expected to obtain

receipt of certificates faster than Philadep would obtain receipt

through the international postal system. Earlier receipt of

certificates means earlier certainty with respect to the value and

validity of deposited certificates. This is a benefit to Philadep

because the earlier Philadep receives notice of defects in a

certificate, the sooner it can reverse the credit to the CDS account

and the better it can limit the risk that the securities will have been

transferred out of the account before the reversal of the credit can

take place.

For Canadian issues returning to CDS from the Canadian transfer

agent, CDS will safeguard the deposited securities and will hold them

with deposit tickets attached and segregated from other securities held

by CDS until forwarded to Philadep by licensed air courier or by other

carrier agreed upon by the parties. Securities held overnight will be

deposited in CDS's value. If CDS fails to deliver these securities to

Philadep, Philadep will institute certificate replacement procedures.

For fails to deliver resulting from settled CNS transactions, Philadep

will short CDS's CNS account with Stock Clearing Corporation of

Philadelphia (``SCCP''), Philadep's affiliated clearing corporation.

SCCP will mark to market all short positions and collect marks daily.

If the deposited securities are U.S. securities, CDS will forward

the securities directly to Philadep on the day the securities were

reported to Philadep. Securities will be shipped to Philadep by

licensed air courier or by other carrier agreed upon by the parties.

CDS and Philadep have agreed that securities placed within the

custody and control of CDS on behalf of Philadep will not be subject to

any right, charge, security interest, lien, or claim of any kind in

favor of CDS or any person claiming through CDS. CDS and Philadep have

further agreed that CDS will have no legal or equitable right, title,

or interest in or to such securities, including, but not limited to,

any right, title, or interest in or to any principal or interest

coupons, redemption proceeds, payments, or payable mounts relating to

any securities. In addition, CDS will maintain adequate insurance

coverage with respect to any securities which are in custody on behalf

of Philadep. Furthermore, CDS will make a participants fund

contribution of $1 million, which is in excess of the minimum amount

required under the applicable participants fund formula, and CDS will

maintain a letter of credit in the amount of $5 million (Canadian)

issued to Philadep securing CDS's guaranty obligations.

Philadep believes the proposed rule change is consistent with the

requirements of Section 17A of Act and the rules and regulations

thereunder because the rule proposal fosters cooperation and

coordination with persons engaged in the clearance and settlement of

securities transactions and further assures the safeguarding of

securities and funds which are in the custody or control of Philadep or

for which it is responsible.

(B) Self-Regulatory Organization's Statement on Burden on Competition

Philadep does not believe that the proposed rule change will impact

or impose a burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received From Members, Participants or Others

Written comments were neither solicited nor received with respect

to the proposed rule change. Philadep will notify the Commission of any

written comments received by Philadep.

III. Date of Effectiveness of the Proposed Rule Change and Timing

for Commission Action

Section 17A(b)(3)(F) of the Act requires that the rules of a

clearing agency be designed to foster cooperation and coordination with

persons engaged in the clearance and settlement of securities

transactions.\6\ The Commission believes that Philadep's designation of

CDS as Philadep's non-exclusive agent and custodian in receiving

securities deposited by CDS-sponsored participants for delivery to

Philadep is consistent with Philadep's obligations under Section

17A(b)(3)(F) because the proposed rule change should help foster

cooperation and coordination between the U.S. and Canadian clearance

and settlement systems by facilitating a link between Philadep and CDS.

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

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On January 26, 1996, the Commission granted approval to Philadep's

proposal that it be allowed to appoint WCDTC as its nonexclusive agent

and custodian in receiving certain securities deposits.\7\ In

connection with this proposed rule filing to allow Philadep to appoint

CDS as its nonexclusive agent and custodian in order to allow CDS to

continue the correspondent depository activities of WCDTC, Philadep has

requested that the Commission grant Philadep the latitude to modify the

extra financial protections that are currently being applied to the

WCDTC account (i.e., $1 million participants fund deposit and $5

million (Canadian) in a letter of credit). Philadep contends that a

decrease in the financial protections Philadep receives from CDS is

justified given (1) Philadep's belief that the short selling activity

in the account may decrease when CDS assumes the operations of WCDCT

and WCCC; (2) that SCCP filed a proposed rule change with the

Commission to modify the participant's fund formula to account for

short selling activity; (3) Philadep's belief that CDS is

[[Page 57940]]

better capitalized than WCDTC and WCCC; and (4) Philadep's belief that

CDS has comprehensive and formalized risk management controls. However,

Philadep has not provided the Commission with any supporting

documentation regarding its assertion that there will be a reduction in

short selling activity, that CDS is better capitalized than WCDTC and

WCCC, or that CDS has comprehensive and formalized risk management

controls. Additionally, the Commission is currently reviewing SCCP's

proposed rule change to modify its participants fund formula and has

not granted its approval to the proposal.\8\ Therefore, it is the

Commission's position that the extra financial protections that are

currently being applied to the WCDTC account (i.e., $1 million

participants fund deposit and $5 million (Canadian) in a letter of

credit) should remain in place at the same levels.

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\7\ Supra. note 4.

\8\ File No. SR-SCCP-96-08.

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Philadep has requested that the Commission find good cause for

approving the proposed rule change prior to the thirtieth day after the

date of publication of notice of the filing. The Commission finds good

cause for approving the proposed rule change prior to the thirtieth day

after the date of publication of notice of filing because accelerated

approval will allow Philadep to immediately appoint CDS as its

nonexclusive agent and custodian thus allowing CDS to continue the

correspondent depository activities currently being performed by WCDTC.

Effective November 1, 1996, CDS will assume the operations of WCDTC and

WCCC. The staff of the Board of Governors of the Federal Reserve System

have concurred with the Commission's granting of accelerated

approval.\9\

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\9\ Telephone conversation between John Rudolph, Supervisory

Trust Analyst, Board of Governors of the Federal Reserve Board, and

Chris Concannon, Staff Attorney, Division, Commission (October 31,

1996).

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On June 28, 1996, the Commission extended the temporary approval of

Philadep's custodial arrangement with WCDTC until December 31, 1996, so

that Philadep and the Commission could further monitor, review, and

analyze this custodial arrangement.\10\ Accordingly, the Commission is

granting temporary approval of the proposed rule change through April

30, 1997, so that the Commission can continue to monitor and analyze

the development of CDS as Philadep's nonexclusive agent and custodian.

During this period, Philadep will monitor the nonexclusive agent and

custodian arrangement between Philadep and CDS to ensure that proper

risk management procedures are in place. In this regard, the Commission

requests that Philadep continue to file monthly reports analyzing

activity in CDS's omnibus account and subaccounts. Therefore, the

Commission is temporarily approving the proposed rule change through

April 30, 1997.

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\10\ Supra. note 4.

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IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and

arguments concerning the foregoing. Persons making written submission

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

Copies of the submissions, 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, N.W., Washington,

D.C. 20549. Copies of such filings will also be available for

inspection and coping at the principal office of Philadep. All

submissions should refer to file number SR-Philadep-96-17 and should be

submitted by November 29, 1996.

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,

that the proposed rule change (File No. SR-Philadep-96-17) be, and

hereby is, approved through April 30, 1997.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\11\

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\11\ 17 CFR 200.30-3(a)(12) (1996).

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Jonathan G. Katz,

Secretary.

[FR Doc. 96-28696 Filed 11-7-96; 8:45 am]

BILLING CODE 8010-01-M