Depository Trust Company Rulemaking:
Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change Regarding Year 2000 Validation Testing
SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-40696; File No. SR-DTC-98-18)
November 20, 1998
Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change Regarding Year 2000 Validation Testing
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 ("Act")
1, notice is hereby given that on September 1, 1998,
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 require that its participants successfully complete a Year 2000 validation test.
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 III 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
On January 1, 2000, certain computer programs may misinterpret the Year 2000 as the Year 1900. Because DTC depends on computer technology to allow its participants to input and retrieve settlement transaction reports and to complete the daily settlement of securities transactions, such a misinterpretation could have serious consequences for DTC and its participants. Accordingly, DTC is assessing its own Year 2000 readiness as well as the Year 2000 readiness of all its participants.
Under the proposed rule change, DTC is setting forth a policy statement with respect to DTC’s Rule 2. That rule provides the standards and obligations that entities must meet to become DTC participants and to retain their status as participants. Pursuant to Rule 2, a participant must furnish to DTC upon DTC’s request information that demonstrates the participant has satisfactory operational capability.
In accordance with Rule 2, DTC will require participants that provide input to DTC through a computer to computer link to conduct a Year 2000 validation test directly with DTC at some point during the first nine months of 1999. Because DTC recognizes the importance in obtaining assurances that participants are individually prepared to receive settlement transaction reports from DTC, input settlement transactions to DTC, and complete settlement, DTC’s validation testing process will focus on a limited number of scripted transactions in certain settlement-related areas. The validation test will require participants to process a series of scripted transactions and to balance with DTC’s position and settlement statements. DTC will require that each participant provide DTC with a standard testing acknowledgment, signed by a senior internal auditor, that the participant has balanced to the position
and settlement statements and has done so in a Year 2000 compliant environment.
In DTC’s view, a participant's failure to successfully complete the Year 2000 validation test will constitute a failure to demonstrate the sufficient operational capability required by Rule 2.
DTC believes that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder because the proposed validation testing will reduce the risk of participant failures caused by computer programs that misinterpret the Year 2000 as the Year 1900. The Year 2000 validation test will help ensure that DTC participants have sufficient operational capability to properly interface with DTC before, on, and after the Year 2000.
(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.
The Year 2000 validation test requirement has been received positively by the Securities Industry Association ("SIA") Year 2000 Steering Committee. A draft testing acknowledgment has been reviewed without comment by SIA's Legal and Compliance subcommittee as well as the New York Clearing House Year 2000 Committee.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission
Section 17A(b)(3)(F) of the Act
4 requires that the rules of a clearing agency be
designed to promote the prompt and accurate clearance and settlement of securities transactions. The Commission believes that the proposed rule change is consistent with this obligation because the Year 2000 validation test should allow DTC to address any potential problems associated with its participants’ Year 2000 readiness. As a result, DTC should be able to continue to provide for the prompt and accurate clearance and settlement of securities transactions before, on, and after Year 2000 without interruption.
The Commission finds good cause for approving the proposed rule change prior to the thirtieth day after the publication of notice of the filing. Approving prior to the thirtieth day after publication of notice should allow DTC and its participants to immediately begin to prepare for DTC’s Year 2000 validation testing.
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. 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-98-18 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, that the proposed rule change (File No. SR-DTC-98-18) be and hereby is approved
For the Commission by the Division of Market Regulation, pursuant to delegated authority.
Jonathan G. Katz
SEC News Digest
Self Regulatory Organizations
Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change
The Depository Trust Company ("DTC") filed a proposed rule change (File No. SR-DTC-98-18) under Section 19(b)(1) of the Exchange Act. Under the proposed rule change, DTC will require that its participants successfully complete a Year 2000 validation test. The Commission has approved the proposed rule change on an accelerated basis.
Publication of the proposal is expected to be made in the Federal Register during the week of November 23, 1998.
(Release No. 34-40696)
15 U.S.C. 78(b)(1).
The Commission has modified the text of the summaries prepared by DTC.
If a participant does not have an internal auditor, the testing acknowledgment may be executed by a senior compliance officer or other equivalent officer.
15 U.S.C. 78q-1(b)(3)(F).