Depository Trust Company Rulemaking:
Accelerated Approval of a Proposed Rule Change Implementing a Freeze on New Participant Accounts and a Contingency Plan for Withdrawal by Transfer Transactions
SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-41799; File No. SR-DTC-99-20)
August 27, 1999
Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change Implementing a Freeze on New Participant Accounts and a Contingency Plan for Withdrawal by Transfer Transactions
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (Act), 1 notice is hereby given that on August 19, 1999, The Depository Trust Company (DTC) 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 DTC. The Commission is publishing this notice and order to solicit comments from interested persons and to grant accelerated approval of the proposal.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
Under the proposed rule change, DTC will not activate any new participant accounts after September 15, 1999, and until reasonably practicable in January 2000. 2 In addition, DTC will temporarily implement a contingency plan for the processing of withdrawal by transfer (WT) transactions in the unlikely event that participants' customers seek to withdraw security positions from participants due to concerns regarding systems problems related to the century date change.
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 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. 3
(A) Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
September 15th New Participant Account Freeze
The proposed rule change provides that DTC will not activate any new participant accounts after September 15, 1999 (the end of the participant validation testing period), 4 and until reasonably practicable in January, 2000. DTC announced in its June 3, 1999, Important Notice that "[a]ny organization currently seeking admission as a direct Participant should plan to complete the admission process by [September 15], or defer activation of its account until after the century date change. Similarly, Participants wishing to switch to computer-to-computer input of settlement-related transactions or switch to another mode of computer-to-computer input for these transactions must have completed implementation of the changes (and complete the necessary validation testing) by September 15."
DTC's Rule 2 provides in part that:
the Corporation may decline to accept the application of any applicant upon a determination by the Corporation that the Corporation does not have adequate personnel, space, data processing capacity or other operational capability at that time to perform its services for additional Participants without impairing the ability of the Corporation to provide services for its existing Participants, to assure the prompt, accurate and orderly processing and settlement of Securities transactions, to safeguard the funds and Securities held by or for the Corporation for Participants or Pledgees or otherwise to carry out its functions; provided, however, that applicants whose applications are denied pursuant to this paragraph shall be approved as promptly as the capabilities of the Corporation permit in the order in which their applications were filed with the Corporation.
DTC believes that continuing to activate new participant accounts or allowing participants to change their mode of settlement-related computer input after September 15th could potentially be disruptive to the rest of its Year 2000 efforts. Specifically, DTC will be devoting a great deal of resources to its second internal certification test in October and November of 1999. The internal certification test involves the testing of DTC's mainframe applications and systems in order to confirm their Year 2000 readiness. Additionally, DTC would like to ensure that it has enough time to deal with any unanticipated issues that arise before the end of the calendar year.
Withdrawal by Transfer Contingency Plan
In response to concerns expressed by some participants and in consultation with the Securities Industry Association and the Securities Transfer Association, DTC will temporarily implement a contingency plan to deal with the processing of an increased number of WT transactions (WT contingency plan). The concerns stem from the possibility that customers will seek to withdraw security positions from participants due to fears relating to the century date change in spite of customer education campaigns by participants and industry groups. Should a potential substantial increase in volume materialize, the WT contingency plan will enable DTC to process as many as 30,000 WT transactions daily, over triple the current volume of 9,000 WTs daily. Because WT processing and the related direct mail service 5 are highly labor intensive operations for DTC and transfer agents alike, the WT contingency plan also provides a mechanism for curbing volume in the unlikely event it exceeds 30,000 WT requests on any given day. As described in more detail below, this aspect of the contingency plan will potentially affect only participants whose volumes grow substantially higher than their present day volumes.
The WT contingency plan will be implemented and remain in effect during the fourth quarter of 1999. 6 The WT contingency plan is primarily comprised of (1) an internal task force of employees available to process increased volumes and (2) system changes to DTC's automated WT (AWT) system, which commences the WT processing stream. The AWT system changes described below are designed to prevent daily WT volume from exceeding 30,000 items in a manner that is fair and equitable to all participants and requires no programming changes by participants.
DTC has established a database showing the maximum allowable amount of WTs for each participant. The maximum allowable amount is based on participants' daily average WT volume for the three month period of February through April 1999. The maximum allowable amounts will be triggered only if the aggregate number of WTs submitted by participants exceeds the threshold of 30,000 on any day in the fourth quarter. A participant exceeding its maximum allowable amount will not be limited in its WT volume as long as fewer than 30,000 WTs are requested in total.
During the fourth quarter, the AWT system will initially process WT requests as normal, collecting WT requests transmitted by participants and sending them to the account transaction processor (ATP) to perform account updating. The WTs are processed in the same sequence as transmitted by participants. This process is usually finished each day by 9:30 a.m. Eastern Time (ET).
Under the proposed rule change a new procedure will be introduced in which AWT will count the aggregate number of items successfully processed by ATP to determine whether the overall cap of 30,000 items was exceeded, and the excess amount (total reversal amount). If the cap is exceeded, procedures will begin to automatically identify and reverse the required number of WTs to lower the day's total to 30,000 items. To accomplish this, AWT will identify the participants that surpassed their maximum allowable amounts and will record the excess items that were processed after their maximum allowable amounts were reached. The excess items will be stored on a temporary file, sorted in last in first out order by participant. The system will then select one excess item per participant from the temporary file and will continuously repeat this process until enough excess items have been selected to meet the total reversal amount. WT reversal transactions will then be created and processed to reverse the chosen excess WTs. This WT reversal process will be finished by approximately 9:45 a.m. (ET). Normal processing for WTs not reversed will then resume with DTC preparing certificates and transfer registration instructions for delivery to transfer agents.
Under the proposed rule change DTC will not automatically pend WTs that were reversed by the above procedure. Participants will therefore be required to submit new WT requests the following business day.
DTC believes that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder. In particular, the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act 7 which requires that the rules of a clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions and, in general, to protect investors and the public interest.
(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.
(C) Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others
No comments were solicited or received on the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Section 17A(b)(3)(F) of the Act 8 requires that the rules of a clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions. The Commission finds that the proposed rule change is consistent with this obligation because the proposed modifications to DTC's Year 2000 policies will permit DTC sufficient time before year end to complete its Year 2000 preparations. In addition, the implementation of the proposed WT contingency plan will enable DTC to deal with any substantial increase in the processing of WT transactions. As a result, DTC should be able to continue to provide prompt and accurate clearance and settlement of securities transactions before, on, and after Year 2000 without interruption.
DTC requested that the Commission find good cause for approving the proposed rule change prior to the thirtieth day after the publication of notice of the filing. The Commission finds good cause for approving the proposed rule change prior to the thirtieth day after the publication of notice of the filing because such approval will allow DTC to better prepare for a smooth Year 2000 transition.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. 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 Room, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such filing will also be available for inspection and copying at the principal office of DTC. All submissions should refer to the File No. SR-DTC-99-20 and should be submitted by [insert date 21 days from the date of publication in the Federal Register ].
It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 9 that the proposed rule change (File No. SR-DTC-99-20) be and hereby is approved.
For the Commission by the Division of Market Regulation, pursuant to delegated authority.10
Jonathan G. Katz
115 U.S.C. 78s(b)(1).
2 The proposed rule change is also applicable to DTC's Mortgage Backed Securities Division.
3The Commission has modified the text of the summaries prepared by DTC.
4Securities Exchange Act Release No. 40696 (November 20, 1998), 63 FR 65829 (Commission order approving DTC's validation testing requirement).
5 DTC's direct mail service is comprised of two components, direct mail by the agent (DMA) and direct mail by DTC (DMD). Participants may elect to use either DMA or DMD to have their newly issued WT securities mailed directly to customers by transfer agents or DTC, respectively.
6 In the unlikely event that DTC experiences sustained volumes of 30,000 WTs daily into the first quarter of the Year 2000, DTC will keep the WT contingency plan in effect until such time as volumes return to normal levels.
715 U.S.C. 78q-1(b)(3)(F).
815 U.S.C. 78q-1(b)(3)(F).
915 U.S.C. 78s(b)(2).
1017 CFR 200.30-3(a)(12).