Self-Regulatory Organizations; The Depository Trust Company; Order Approving a Proposed Rule Change Relating to Enhancement of the Current Link With Deutsche Borse Clearing AG

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40660; International Series Release No. 1170; File No.

SR-DTC-98-19]

Self-Regulatory Organizations; The Depository Trust Company;

Order Approving a Proposed Rule Change Relating to Enhancement of the

Current Link With Deutsche Borse Clearing AG

November 10, 1998.

On September 15, 1998, The Depository Trust Company (``DTC'') Filed

with the Securities and Exchange Commission (``Commission'') a proposed

rule change (File No. SR-DTC-98-19) pursuant to Section 10(b)(1) of the

Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal

was published in the Federal Register on September 23, 1998.\2\ The

Commission received seven comment letters in response to the filing.\3\

For the reasons discussed below, the Commission is approving the

proposed rule change.

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

\2\ Securities Exchange Act Release No. 40445 (September 16,

1998), 63 FR 50950.

\3\ Infra note 6.

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I. Description

Under the rule change, DTC will open an omnibus account at Deutsche

Borse Clearing AG (``DBC'') in order to create a two-way interface

between DTC and DBC. Presently, DBC has an omnibus account at DTC which

enables DBC and its participants to effect book-entry deliveries at DTC

to DTC participants. The current link between DTC and DBC allows DBC

and its participants to use the custody, book-entry, and delivery

services of DTC for transactions involving securities that are eligible

in both systems. The current link permits a DTC participant to settle a

cross-border transaction with a DBC counterparty by making a book-entry

delivery, on a free of payment basis, from its participant account at

DTC to the DBC omnibus account at DTC and by identifying the DBC

participant account to which the delivered securities should be

credited.\4\ Cash settlement of the transaction will take place outside

of DTC.

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\4\ All deliveries of securities into or out of DBC's omnibus

account at DTC are on a free of payment basis.

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However, under the current link a DBC participant cannot make a

book-entry delivery of securities held in its account at DBC to a DTC

participant's account at DTC. In order for a DBC participant to make a

delivery of securities to a DTC counterparty's account at DTC, the DBC

participant must deliver the physical securities to DTC.

The rule change will permit book-entry movements of securities from

a DBC participant's account at DBC to a DTC counterparty's account at

DTC. Thus, a DBC participant will be able to settle a cross-border

transaction with a DTC counterparty by making a book-entry delivery, on

a free of payment basis, from its participant account at DBC to the DTC

omnibus account at DBC and by identifying the DTC participant account

to which the delivered shares should be credited.\5\ The receiving DTC

participant can then redeliver the securities within DTC through a

book-entry movement on either a free of payment or against payment

basis.

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\5\ All deliveries of securities into or out of DTC's omnibus

account at DBC are on a free of payment basis.

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If required, DBC will provide subcustody services such as income

collection, maturity presentments, and reorganization processing on

securities held in DTC's omnibus account at DBC in accordance with DBC

procedures. Currently, DTC provides such services for securities held

by DTC on behalf of DBC.

II. Comment Letters

The Commission received seven comment letters in response to the

notice of the proposed rule change.\6\ Five commenters, Credit Suisse

First Boston Corporation, Salomon Smith Barney, Skadden Arps, Deutsche

Bank, and BONY, expressed support for the proposed rule change. These

comments stated generally that the proposed rule change would

facilitate the efficient processing of cross-border securities

transactions and would reduce risks and costs to participants of DTC

and DBC.\7\

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\6\ Letters from P. Howard Edelstein, President, Electronic

Settlements Group, Thomson Financial Services (``Thomson'') (October

14, 1998); Joseph D. Fashano, Director, Credit Suisse First Boston

Corporation (October 20, 1998); Thomas L. Montrone, President, The

Securities Transfer Association, Inc. (``STA'') (October 21, 1998);

Simon M. Lorne, Managing Director, Salomon Smith Barney (October 23,

1998); J. Michael Schell, Skadden, Arps, Slate, Meagher & Flom LLP

(``Skadden Arps'') (October 23, 1998); Jurgen Rebouillon, Senior

Vice President, and Thomas Klee, First Vice President, Deutsche Bank

AG (``Deutsche Bank'') (October 23, 1998); Joseph M. Velli, Senior

Executive Vice President, The Bank of New York (``BONY'') (October

23, 1998).

\7\ The comment letters submitted by Skadden Arps, Deutsche

Bank, and BONY addressed the rule change with reference to the

merger of Daimler-Benz Aktiengesellschaft and Chrysler Corporation

into DaimlerChrysler AG. Skadden Arps is counsel to Daimler-Benz,

and BONY and Deutsche Bank will serve as cotransfer agents for

DaimlerChrysler ordinary shares.

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The STA expressed concern that under the proposed rule change some

U.S. investors may receive transfer services from transfer agents that

are not fully subject to U.S. regulation. In response to the STA's

letter, Skadden Arps noted that the transfer agents for DaimlerChrysler

ordinary shares, BONY and Deutsche Bank, are registered under Section

17A of the Act. Skadden Arps also stated that it believed that it is

not necessary to subject all cross-border exchange links to Section 17A

registration.

Thomson expressed concern that the proposed rule change might

result in an expansion of the scope of certain self-regulatory

organization rules governing the confirmation and affirmation of

institutional securities trades. Thomson requested that the Commission

clarify that the proposed rule change would not affect the exemption in

those rules for trades that settle outside the United States.\8\

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\8\ Specifically, Thomson referenced National Association of

Securities Dealers Rule 11860, New York Stock Exchange (``NYSE'')

Rule 387(a)(5), Municipal Securities Rulemaking Board Rule G-

15(d)(ii), American Stock Exchange Rule 423(5), Chicago Stock

Exchange Article XV, Rule 5, Pacific Exchange Rule 9.12(a)(5), and

Philadelphia Stock Exchange Rule 274(b). Those rules require that

for certain securities transactions the facilities of a securities

depository be used for the confirmation, acknowledgment, and book

entry settlement of the transactions. However, those rules also

state that they are not applicable to transactions that are to be

settled outside the United States. See, e.g., NYSE Rule 387(a)(5),

Interpretation .10.

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III. Discussion

Section 17A(b)(3)(F) of the Act \9\ requires, among other things,

that the rules of a clearing agency be designed to promote the prompt

and accurate clearance and settlement of securities transactions and to

assure the safeguarding of securities and funds that are in its custody

or control or for which it is responsible. The Commission believes that

the proposed rule change is consistent with DTC's obligations under

Section 17A(b)(3)(F).

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\9\ 15 U.S.C. 78q-1(b)(3)(F).

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The Commission believes that the rule change should increase

efficiency in the movement of securities positions and in the

settlement of securities transactions among participants of DTC and DBC

by reducing the need for the movement of physical securities. The link

should not

[[Page 64136]]

only reduce the time and expense associated with physical movements of

securities positions but should also reduce the risk of loss and

erroneous processing that always exists with physical movements. The

Commission also believes that the procedures for the link between DTC

and DBC are consistent with DTC's safeguarding obligation in that all

movements into or out of DTC's omnibus account at DBC and into or out

of DBC's omnibus account at DTC will be on a free of payment basis.\10\

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\10\ In addition, DTC has obtained an opinion of counsel

concerning German law and DTC's participation in DBC.

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The Commission has taken account of the comment letters that it

received in response to the proposed rule change. The Commission

believes that the rule change should not affect the obligation of any

entity to register as a transfer agent pursuant to Section 17A of the

Act.\11\ In addition, the Commission believes that the rule change

should not have any effect on the rules of any self-regulatory

organization other than DTC.

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\11\ The Commission notes that the entities that will perform

transfer functions for shares in DaimlerChrysler are registered

transfer agents.

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IV. Conclusion

On the basis of the foregoing, the Commission finds that the

proposal is consistent with the requirements of the Act and in

particular with the requirements of Section 17A of the Act \12\ and the

rules and regulations thereunder.

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\12\ 15 U.S.C. 78q-1.

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

Act,\13\ that the proposed rule change (File No. SR-DTC-98-19) be, and

hereby is, approved.

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\13\ 15 U.S.C. 78s(b)(2).

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\14\

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\14\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98-30826 Filed 11-17-98; 8:45 am]

BILLING CODE 8010-01-M