February 9, 2001
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Re: Release No. 34-43540 (File No. 600-32); and
Release No. 34-43541 (File No. SR-DTC-00-10)
Dear Mr. Katz:
SunGard Data Systems, Inc. ("SunGard") appreciates the opportunity to comment on the above-captioned releases (the "Proposing Releases"). In summary, we believe that the proposed combination of the institutional trade processing services currently offered by Thomson Financial ESG and its affiliates ("Thomson") with similar services currently offered by the Depository Trust & Clearing Corporation ("DTC") will impede competition and stifle innovation in this critical aspect of trade processing. Accordingly, we recommend that the Commission approve the proposed combination only if it is subject to the conditions described below, which are designed to permit other entrants the opportunity to meaningfully and fairly compete.
1. Description of SunGard.
SunGard is an NYSE-listed company that provides integrated IT solutions and eProcessing for the financial services community. It has annual revenues of over one billion dollars and serves more than 10,000 clients in over 50 countries.
To address its customers' needs for straight-through processing ("STP"), SunGard is developing a transaction processing service known as the SunGard Transaction Network. When fully implemented, this service will link asset managers, brokers, exchanges and banks with settlement agents and custodians. The ultimate goal is to be able to initiate transactions from any order management system and from any device and to execute and process the transactions in real-time. The SunGard Transaction Network will offer STP services for the key transaction flows in the life cycle of an institutional trade. It will automate the execution of orders, the generation of allocations and confirmations, and the affirmation and matching of trades.
SunGard currently offers a service known as SunGard Direct. SunGard Direct is an STP service aimed at institutional traders and asset managers. It provides straight-through processing of equities, enabling custodians and settlement agents to focus on receipt and delivery of securities and settlement of cash, rather than verification and affirmation of trade details. As an extension of SunGard Direct, SunGard intends to offer a complete range of allocation, confirmation and settlement services. As such, it intends to provide services that will directly compete with the proposed joint venture between Thomson and DTC.
2. Recent History of Institutional Trade Processing.
It is truly ironic that competitors in the post-trade processing business now find themselves attacking Thomson for engaging in anti-competitive practices. For years, Thomson attacked the virtual monopoly that DTC enjoyed by virtue of stock exchange and NASD rules1 that required confirmations and affirmations to be processed by a registered clearing corporation ("Tie-in Rules").
This issue dates back to 1993 when Thomson urged the Commission to eliminate the Tie-in Rules. Since all registered clearing agencies were owned or controlled by the very exchanges and NASD that had adopted the Tie-in Rules, Thomson argued that the Rules were anti-competitive and precluded new entrants from providing competing services. The Operations Committee of the Securities Industry Association formed a sub-committee to study this issue and work with Thomson and DTC to develop a compromise that would permit new entrants to the field, while assuring the safety and soundness of the clearing process. This compromise finally resulted in the submission of rules by the NYSE, the NASD and the MSRB to permit "Qualified Vendors" to provide post-trade processing to institutional customers. At the time the SEC published these rules for comment, it noted that, "[a]s a practical matter, the [Tie-in Rules] require broker-dealers to use the [DTC] Institutional Delivery ("ID") system because it is the only confirmation/affirmation service offered by a securities depository."2
The proposal and later adoption of the Qualified Vendor rules was somewhat of a Pyrrhic victory for Thomson. At the time the Commission published the Qualified Vendor rules for comment, it also concluded that Thomson's proposed post-trade matching services would require it to register as a clearing agency under the Securities Exchange Act of 1934 (the "34 Act"). As a result, Thomson was again put in a position where it might have to register as a clearing agency in order to participate in the post-trade processing business.
In January 1999, Thomson applied to the Commission for an exemption from clearing agency registration3 and, on May 7, 1999, the Commission granted this exemption4. Having finally achieved regulatory parity, Thomson and DTC are now proposing to form a global joint venture ("GJV") which would combine the post-trade processing functions of the two dominant service providers in an entity that is not subject to direct Commission regulation. We respectfully request the Commission to either reject this proposal outright or impose sufficient conditions to assure that other companies can effectively compete with the GJV.
3. The Proposed GJV Should Not be Approved Because It Will Impede Competition Among Clearing Agencies.
Section 17A of the 34 Act requires the Commission to establish a national system for clearance and settlement of securities "having due regard ... for the maintenance of fair competition among ... clearing agencies." While we recognize the need for straight through processing of post-trade data to achieve the goal of T+1 settlement, we do not believe that formation of GJV is necessary to accomplish this end, especially in light of the anti-competitive impact of this combination on other clearing agencies.
a. Although Thomson And DTC Share A Monopoly Of Current Users Of The Post-Trade Business, SunGard Services A Much Larger Number Of Potential Users Who Must Have STP Capability.
As noted in the Proposing Releases, DTC and Thomson operate "the two principal systems used by broker-dealers and institutional investors for post-trade presettlement processing of trades. The merger of these two services would link the two largest providers of institutional post-trade, presettlement processing services." Thomson has over 500 clients for its OASYS US allocation product, which currently has no competitors other than DTC's TradeSuite product, which has approximately 100 clients. Both Thomson and DTC have concentrated on the top 300 institutional money managers ranked by assets under management. As discussed above, DTC has a 100% monopoly on the collection of confirmations from all broker-dealers that are NYSE, NASD or MSRB members. As a result of this monopoly on the collection of confirmation information, DTC also enjoys 100% connectivity to custodian banks involved in the affirmation of confirmations by NYSE, NASD and MSRB members.
Notwithstanding the virtual total market share enjoyed by Thomson and DTC, they service a very small segment of the market in terms of numbers of potential users. T+1 settlement will require that all portfolio managers and custodians, large and small, have STP capabilities. SunGard already services a large segment of the middle tier of this market. Unless SunGard is permitted to compete on a level playing field with GJV, this large segment of the market will have to find alternative means of accessing STP and complying with T+1.5
b. By Permitting DTC To Transfer Its Tradesuite Business To GJV, The SEC Is Permitting The Conversion Of An Industry-Owned, Non-Profit, SEC Regulated Utility, To A Privately Owned, For Profit Enterprise Not Subject To SEC Regulation.
An effective clearing process such as post-trade processing requires that data from all trades be centralized in a single data depository or, if data is collected by different entities, that data be shared by all of these collection points. Until Thomson achieved Qualified Vendor status, all trade data generated by broker-dealers was required to be submitted to DTC. Because DTC retained control of all trade data, any investment manager or custodian that wished to participate in the institutional delivery system had to submit data to DTC for comparison and affirmation. Thus, DTC maintained a pending trade database that included essential trade data for all trades that were to be affirmed and settled through the ID system. This in turn permitted DTC to maintain the Standing Instruction Database ("SID") which contained the delivery instructions for participating custodians and their institutional clients. Access to this centralized body of trade data and delivery instructions is essential for any firm wishing to provide post-trade processing services.
In the Proposing Releases, DTC states that it will transfer the "existing assets of the TradeSuite Business" to GJV. According to DTC's marketing materials, TradeSuite is comprised of four components, TradeMessage, TradeMatch, TradeSettle and TradeHub. TradeMessage is a translation and communication protocol that permits the communication of electronic notices of execution, allocations, confirmations, and affirmations. TradeMatch is the matching engine that provides automatic matching of confirmations and allocations. TradeSettle enhances trade and allocation information by adding information contained in the SID. TradeHub is the 24 hour message switch which routes information generated by users to the appropriate party. While it is not entirely clear exactly what services currently provided by DTC will be transferred to GJV, we assume for purposes of this letter that DTC intends to transfer the pending trade database and the SID to GJV.
In today's environment, any firm wishing to provide post-trade processing services may interface with DTC by adhering to its published protocols and paying its SEC-approved fees. As discussed above, access to these services is essential to enable firms to compete. If in fact, the pending trade database and SID are transferred to GJV, potential competitors will be required to adhere to the protocols specified by GJV and pay the fees charged by GJV. Although GJV's application for an exemption from clearing agency registration states that GJV will provide access to its services on fair and reasonable terms, there are three critical differences between the situation today and the one proposed by GJV.6
First, DTC is an industry-owned monopoly. While it is still a monopoly, the fact that it is owned by a broad sector of the industry provides some measure of restraint in its actions. For example, DTC would presumably not impose inappropriately high fees since its owners would end up paying them. In fact, DTC has historically rebated excess profits to its users. GJV on the other hand is largely privately owned by Thomson which is in turn a privately owned company. Although it will be half-owned by DTC, its very purpose is to produce higher profits than could be generated by DTC. As such, we can be virtually assured that access fees for competitors will increase.
Second, DTC has always been subject to SEC oversight. Its fees are subject to SEC review, and denial of access is subject to SEC appeal. GJV on the other hand will be outside the Commission's direct regulatory control. Although the Commission could theoretically rescind GVC's clearing agency exemption, this would be like killing a fly with a howitzer.
Finally, firms like SunGard that wish to provide post-trade processing services currently may obtain the information they need from DTC on the same terms as every other competitor. Once GJV is formed, however, SunGard will have to purchase data from GJV that GJV is paid to collect. In other words, GJV will receive a double subsidy: payment from its broker-dealer participants for collecting the data and payment from competitors who need the data. This double subsidy will give GJV fundamental competitive advantages over its competitors in attracting new users. Inevitably, GJV's economic advantage will be used by it to win buy-side order routing business away from competitors like SunGard. Therefore, not only will competition in post-trade processing suffer, but so will competition in buy-side order routing and processing.
Although a requirement of "interoperability" would imply that all competitors will be forced to "come to terms" with each other, it will take a considerable amount of time and expense to implement the necessary standards and technologies to actually achieve interoperability. In the meantime, the dominant market position currently enjoyed by Thomson and DTC will put all potential competitors in an unequal bargaining position with GJV, which would start with a 100% market share and subsidized access to the critical data. No amount of interoperability would be able to level the huge tilt in this playing field.
c. If Competitors Do Not Wish To Access Confirmation Information And Instructions Through GJV, They Will Be Forced To Recreate These Databases In A Redundant And Costly Fashion.
If companies that want to compete with GJV do not wish to be dependent on receiving critical confirmation and settlement information from their competitor, they will be forced to recreate these databases by collecting the same information from money managers, broker-dealers and custodian banks. This will require the creation of redundant connectivity, information flows, and storage capacity that will in turn burden the industry with millions of dollars of unnecessary costs. The recent consolidation of clearing and settlement processing into a single clearing agency and depository (DTC) illustrates that the industry has no interest in supporting competing facilities where an industry-owned monopoly can provide the same service at a lesser cost.
4. In Order To Alleviate These Concerns, The SEC Should Require DTC To Retain Certain Assets As Industry Utilities.
As discussed above, DTC currently maintains two databases that any post-trade processor can access by payment of DTC's published fees. These databases-the pending trade database and the SID-contain essential information necessary for post-trade processing. Because DTC has been an SEC-sanctioned monopoly for many years, the pending trade database is the only complete record of broker-provided trade information available. Although it would be theoretically possible for each post-trade processor to obtain this information directly from broker-dealers, the network and software infrastructure necessary to accomplish this would take years to build and would be unnecessarily costly and redundant. In an industry consumed with getting ready for T+1, the investment in duplicative infrastructure would be wasteful and distracting. In reality, post-trade processors will have to purchase this data, and the only way to maintain fair competition is to provide the data through a directly regulated industry utility-i.e., DTC.
We are recommending that this essential data be centrally warehoused at DTC for access by all post-trade processors, including GJV, on equal terms both as to access and price. To accomplish this under the new Qualified Vendor rules, the SEC should require that any registered clearing agency, exempted clearing agency or Qualified Vendor transmit this information to DTC. The cost of maintaining the databases would be born by the post-trade processors that use the data. This will assure that all competitors are on equal footing and that GJV will not inherit DTC's monopoly advantage.
SunGard sincerely appreciates the opportunity to submit its views on these important subjects and is committed to work together with other industry participants to find a solution that is fair and equitable to all.
Very truly yours,
s/Lawrence A. Gross
Lawrence A. Gross
Vice President and General Counsel
cc: Jerry Carpenter
|1||See NYSE Rule 387, NASD Rule 11860 and MSRB Rule G-15(d)(ii) as they existed in 1998.|
|2||Securities Exchange Act Release No. 39829 (April 6,1998), 63 FR 17943.|
|3||Securities Exchange Act Release No. 41003 (January 29, 1999), 64 FR 5691.|
|4||Securities Exchange Act Release No. 41377 (May 7, 1999), 64 FR 25948.|
|5||Although SunGard provides software and back office services to many of the largest financial services firms in the United States, its post-trade processing services tend to be focussed on the middle tier firms, not the large size firms serviced by DTC and Thomson.|
|6||It is telling that DTC, in its January 4, 2001, comment letter responding the Trading Linx's concern that competitors would not have access to trade confirmations, Carl Urist stated: "vendors acting on behalf of DTC participants will be able to transmit settlement instructions without the involvement of GJV." This of course totally misses the point. Settlement instructions will go to DTC directly, but access to confirmation information will go through GJV.|