[Federal Register Volume 66, Number 78 (Monday, April 23, 2001)]
[Notices]
[Pages 20502-20505]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-9961]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-44189; File No. SR-DTC-00-10]
Self-Regulatory Organizations; The Depository Trust Company;
Order Approving a Proposed Rule Change Relating to the Combination of
The Depository Trust Company's TradeSuite Institutional Trade
Processing Services with Thomson Financial ESG's Institutional Trade
Processing Services
April 17, 2001.
On August 22, 2000, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') and on
January 31, 2001, February 20, 2001, February 23, 2001, and March 16,
2001, amended \1\ a proposed rule change (File No. SR-DTC-00-10)
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'').\2\ Notice of the proposal was published in the Federal
Register on November 17, 2000.\3\ The Commission received thirty-six
comment letters in response to the proposed rule change.\4\ For the
reasons
[[Page 20503]]
discussed below, the Commission is approving the proposed rule change.
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\1\ The amendments clarify the proposed rule change and notice
is not necessary.
\2\ 15 U.S.C. 78s(b)(1).
\3\ Securities Exchange Act Release No. 43541 (November 9,
2000), 65 FR 69591.
\4\ Letters from Jerome J. Clair, Chairman, Securities Industry
Association (``SIA'') Operations Committee (June 9, 2000); Peter
Johnston, Chairman, SIA Institutional Transaction Processing
Committee (June 28, 2000); Daniel M. Rosenthal, President and CEO,
Instinet Clearing Services, Inc. (August 21, 2000); Jeffrey C.
Bernstein, Bear, Stearns Securities Corp. (August 28, 2000); Thomas
J. Perna, Senior Executive Vice President, The Bank of New York
(August 29, 2000); James D. Hintz, Chairman, Great Lakes Investment
Managers Operations Group (September 5, 2000); Diane L. Schueneman,
First Vice President, Merrill Lynch Investment Managers (September
12, 2000); Judith Donahue, Chairperson, and Kenneth Juster,
Director, The Asset Managers Forum (September 12, 2000); Melvin B.
Taub, Salomon Smith Barney (September 14, 2000); Ronald J. Kessler,
Corporate Vice President and Director of Operations, A.G. Edwards &
Sons, Inc. (October 5, 2000); Richard B. Nesson, Managing Director
and General Counsel, The Depository Trust & Clearing Corporation
(``DTCC'') (November 20, 2000); Burkhard Gutzeit, Chairman, and C.
Steven Crosby, Acting Chief Executive Officer, Global Straight
Through Processing AG (``GSTP AG'') (December 18, 2000); Justin
Lowe, Chief Executive Officer, and Robert Raich, Chief Financial
Officer, TLX Trading Network (``TLX'') (December 18, 2000); and John
P. Davidson, Managing Director, Morgan Stanley Dean Witter (December
21, 2000); J. Ann Bonathan, Director, Schroders (December 28, 2000);
Kamezo Nakai, Managing Director, Nomura Securities Co., Ltd.
(December 29, 2000); Burkhard H. Gutzeit, Chairman, and C. Steven
Crosby, Acting Chief Executive Officer, GSTP AG (January 3, 2001);
Gary Bullock, Global Head of Operations, UBS Warburg (January 3,
2001); Carl H. Urist, Managing Director and Deputy General Counsel,
DTCC (January 4, 2001); James M. Brown, Senior Vice President and
Treasurer, The Capital Group Companies, Inc. (January 4, 2001);
James J. Mitchell, President, Northern Trust Corporation (January 4,
2001); Arthur Barton, Chief Administrative Officer, Clay Finley Inc.
(January 4, 2001); Robert K. DiFazio, Salomon Smith Barney (January
4, 2001); R.J.M. van der Horst, Managing Director, ABN AMRO Bank
(January 4, 2001); David J. Brooks, Vice President, Merrill Lynch
(January 5, 2001); Neil Henderson, Senior Vice President, The Chase
Manhattan Bank (January 5, 2001); Michael Wyne, Chairman, and Gary
Koenig, Vice Chairman, The Asset Managers Forum (January 5, 2001);
E. Blake Moore, Jr., General Counsel, Nicholas-Applegate (January 5,
2001); Mitchel Lenson, Managing Director-Global Head of Operations
and Technology, Deutsche Bank Group (January 5, 2001); Albert E.
Petersen, Executive Vice President, State Street (January 5, 2001);
Carl H. Urist, Managing Director and Deputy General Counsel, DTCC
(January 12, 2001); Bradley I. Abelow, Managing Director, Goldman,
Sachs & Co. (January 22, 2001); Burkhard H. Gutzeit, Chairman, and
C. Steven Crosby, Acting Chief Executive Officer, GSTP AG (January
30, 2001); Lawrence A. Gross, Vice President and General Counsel,
Sungard (February 9, 2001); Richard B. Nesson, Managing Director and
General Counsel, DTCC (March 9, 2001); and Richard B. Nesson,
Managing Director and General Counsel, DTCC (March 9, 2001).
Copies of the comment letters and a copy of the Summary of
Comments can be obtained through the Commission's Public Reference
Room (File No. DTC-00-10).
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I. Description of DTC's Proposed Rule Change
The proposed rule change seeks Commission approval of DTC's
proposal to combine its TradeSuite family of institutional trade
processing services (``TradeSuite Business'') with the institutional
trade processing services offered by Thomson Financial ESG (``ESG
Business'') \5\ in a proposed joint venture, Omgeo,\6\ between DTCC,\7\
Thomson Financial Inc.,\8\ and Interavia, A.G. (``Interavia'').\9\ The
proposal is as follows:
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\5\ Thomson Financial ESG is a division of Thomson Financial, a
Thomson Corporation subsidiary. Letter amending Form CA-1 from
Jeffrey T. Waddle, Vice President and Senior Counsel, DTCC (March
16, 2001).
\6\ As originally filed, Omgeo was to be called the Global Joint
Venture. Letter amending DTC-00-10 from Carl H. Urist, Managing
Director and Deputy General Counsel, DTCC (January 31, 2001).
Omgeo will be a manager managed limited liability company which
is managed by its board of managers. The Omgeo board of managers
will consist of nine voting managers and one non-voting manager.
Five of the voting managers will be industry representatives, three
of which will be nominees of DTCC, and two will be nominees of
Thomson. Of the remaining four voting managers, two of the voting
managers will be DTCC representatives, and two will be
representatives of Thomson.
As originally filed, DTC-00-10 set forth that the board of
managers was to be composed of seven voting managers and one non-
voting manager. Three of the voting managers were to be industry
board representatives with two nominated by DTCC and one nominated
by Thomson. Letter amending DTC-00-10 from Carl H. Urist, Managing
Director and Deputy General Counsel, DTCC (January 31, 2001).
\7\ DTCC was created in 1999 as a holding company for DTC and
the National Securities Clearing Corporation (``NSCC'').
\8\ Thomson Information Services Inc. has been renamed Thomson
Financial Inc. Thomson Financial Inc. is a wholly owned indirect
subsidiary of Thomson Corporation. Thomson Corporation is a global
electronic information company. Letter amending Form CA-1 from
Jeffrey T. Waddle, Vice President and Senior Counsel, DTCC (February
23, 2001).
\9\ Interavia is a Swiss corporate affiliate of Thomson
Financial Inc.
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After receipt of all necessary regulatory approvals, DTC
will transfer existing assets of the TradeSuite Business, Thomson
Financial Inc. will transfer existing U.S. assets of the ESG Business,
and Interavia will transfer existing non-U.S. assets of the ESG
Business to Omgeo.
Certain support functions and other services will be
provided to Omgeo by DTCC, DTC, and Thomson Financial Inc. Pursuant to
service contracts.
Omgeo will provide through its wholly owned subsidiary,
Global Joint Venture Matching services-US, LLC (``GJVMS''),\10\ which
has applied for an exemption from registration as a clearing
agency,\11\ post-trade, presettlement related services, including
execution notification, allocation, electronic trade confirmation
(``ETC''), Central Matching Service,\12\ operational and standing
databases (i.e., trade enrichment), and communications between trading
parties and their settlement agents.
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\10\ GJVMS is a member managed limited liability company and as
such it will be managed by its only member, Omgeo.
\11\ The Commission has stated that matching is a clearing
agency function that requires an entity that performs matching to
register as a clearing agency or obtain an exemption from
registration as a clearing agency. However, an entity that only
provides a matching services does not have to be subject to the full
range of clearing agency regulation. Securities Exchange Act Release
No. 39829 (April 6, 1998), 63 FR 17943 [File No. S7-10-98]. In 1999,
the Commission granted Thomson an exemption from clearing agency
registration to provide matching services. Securities Exchange Act
Release No. 41377 (May 7, 1999), 64 FR 25948 [File No. 600-31].
Concurrent with this order, the Commission is issuing an order
granting GJVMS an exemption from registration as a clearing agency
so that it can provide a Central Matching Service. Securities
Exchange Act Release Nos. 44188 (April 17, 2001) [File No. 600-32]
(order granting GJVMS an exemption from registration as a clearing
agency) and 43540 (November 9, 2000), 65 FR 69582 [File No. 600-32]
(notice of filing of application for exemption from clearing agency
registration).
\12\ ``Central Matching Service,'' as such term is used in this
order, means an electronic service to centrally match trade
information between a broker-dealer and its institutional customer
(so long as one or both of such parties is a U.S. person) relating
to transactions in securities issued by a U.S. issuer, regardless of
where the transactions are settled.
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Omgeo's governance arrangements will be designed to assure
that the ``U.S. regulated aspects'' of Omgeo's activities,\13\
including the pricing structure for the fees to be charged to users of
such services, will be subject to the control of users.
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\13\ The term ``U.S. regulated aspects'' of Omgeo's activities
refers to any services that would require registration with the
Commission as a clearing agency, an exemption from such
registration, or designation as a ``qualified vendor'' as defined in
New York Stock Exchange Rule 387(a)(5), in National Association of
Securities Dealers Rule 11860(a)(5), and in similar rules of other
self-regulatory organizations. Such activities, therefore, would
include the Omgeo's proposed ETC and centralized matching services
for institutional transactions (so long as one or both of such
parties is a U.S. person) in securities issued by a U.S. issuer,
regardless of where the transactions are settled.
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Omgeo will be operated on a for-profit basis. Fifty
percent of any profits not retained by Omgeo will be distributed to
DTCC.\14\
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\14\ Profits distributed to DTCC that are not retained by DTCC
will be available, if so determined by DTCC's Board of Directors,
for rebate to the participants of DTCC's wholly-owned subsidiaries,
DTC and NSCC.
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As trading volumes have continued their dramatic upward climb over
the past decade, it has become clear that the current system for post-
trade presettlement processing institutional trades needs major
changes. Operations professionals in both domestic and foreign
securities markets have concluded that the current sequential and
fragmented electronic trade confirmation/affirmation model must be made
more efficient and that connectivity to electronic systems by a much
broader spectrum of industry participants must be encouraged so that
institutional trades can be processed efficiently and settled on time.
According to DTC, the combination of the TradeSuite Business \15\
and ESG Business \16\ and the linking of their customers could produce
immediate benefits. For example, DTC estimates that 12% of
institutional trades processed in TradeSuite are affirmed on trade date
and that only 87% are affirmed by noon of T+2. By using allocations
processed on the ESG Business' OASYS system in the TradeSuite Business'
TradeMatch, a much larger percentage of trades could be affirmed
earlier in the settlement cycle. Earlier affirmation would allow
broker-dealers and their institutional customers to identify and
resolve the exceptions and potential fails much earlier in the
settlement cycle.
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\15\ Generally, the TradeSuite Business consists of the
following products: TradeMessage, TradeMatch, TradeSettle, and
TradeHub.
\16\ Generally, the ESG Business consists of the following
products: ALERT, OASYS, OASYS Global, MarketMatch, and ITM
Benchmarks.
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In addition, the DTC resources to be transferred to Omgeo or
provided to Omgeo pursuant to a services contract are for the most part
resources that are already fully dedicated to the TradeSuite Business.
Therefore, implementation of the subject proposal will not deprive DTC
of resources needed for it to provide its other services in a safe and
sound manner. Furthermore, all existing services of the TradeSuite and
ESG Businesses will continue uninterrupted during and after the
transfer to Omgeo.
II. Comment Letters
The Commission received thirty-six comment letters in response to
the notice of filing of GJVMS's application.\17\ Eleven of the comment
letters praised GJVMS's timing in light of the industry need for
straight-through processing and a shortened settlement cycle to reduce
settlement risks and stressed that there remain no more meaningful
efficiencies to be drawn
[[Page 20504]]
from the current settlement system.\18\ In addition, these letters
applauded GJVMS's intention to interoperate with other competitors and
pledged support in furtherance of GJVMS's progress.
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\17\ Most comment letters were commenting on this proposed rule
change and GJVMS's application for exemption from clearing agency
registration.
\18\ Jerome J. Clair, Chairman, Securities Industry Association
Operations Committee (June 9, 2000); Peter Johnston, Chairman, SIA
Institutional Transaction Processing Committee (June 28, 2000);
Daniel M. Rosenthal, President and CEO, Instinet Clearing Services,
Inc. (August 21, 2000); Jeffrey C. Bernstein, Bear Stearns
Securities Corp. (August 28, 2000); Thomas J. Perna, Senior
Executive Vice President, The Bank of New York (August 29, 2000);
James D. Hintz, Chairman, Great Lakes Investment Managers Operations
Group (September 5, 2000); Diane L. Schueneman, First Vice
President, Merrill Lynch Investment Managers (September 12, 2000);
Judith Donahue, Chairperson, and Kenneth Juster, Director, The Asset
Managers Forum (September 12, 2000); Melvin B. Taub, Salomon Smith
Barney (September 14, 2000); Ronald J. Kessler, Corporate Vice
President and Director of Operations, A.G. Edwards & Sons, Inc.
(October 5, 2000); and John P. Davidson, Managing Director, Morgan
Stanley Dean Witter (December 21, 2000).
\19\ J. Ann Bonathan, Director, Schroders (December 28, 2000);
Kamezo Nakai, Managing Director, Normura Securities Co., Ltd.
(December 29, 2000); Gary Bullock, Global Head of Operations, UBS
Warburg (January 3, 2001); Burkhard H. Gutzeit, Chairman, and C.
Steven Crosby, Acting Chief Executive Officer, GSTP AG (January 3,
2001); R.J.M. van der Horst, Managing Director, ABN AMRO Bank
(January 4, 2001); James M. Brown, Senior Vice President and
Treasurer, The Capital Group Companies, Inc. (January 4, 2001);
James J. Mitchell, President, Northern Trust Corporation (January 4,
2001); Arthur Barton, Chief Administrative Officer, Clay Finley Inc.
(January 4, 2001); Robert K. DiFazio, Salomon Smith Barney (January
4, 2001); E. Blake Moore, Jr., General Counsel, Nicholas-Applegate
(January 5, 2001); Mitchel Lenson, Managing Director-Global Head of
Operations and Technology, Deutsche Bank Group (January 5, 2001);
Albert E. Petersen, Executive Vice President, State Street (January
5, 2001); David J. Brooks, Vice President, Merrill Lynch (January 5,
2001); Neil Henderson, Senior Vice President, The Chase Manhattan
Bank (January 5, 2001); Michael Wyne, Chairman, and Gary Koenig,
Vice Chairman, The Asset Managers Forum (January 5, 2001); Bradley
I. Abelow, Managing Director, Goldman, Sachs & Co. (January 22,
2001); and Burkhard H. Gutzeit, Chairman, and C. Steven Crosby,
Acting Chief Executive Officer, GSTP AG (January 30, 2001).
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Seventeen comment letters urged the Commission to ensure that no
entity improperly gains a monopoly on any aspect of trade
processing.\19\ Those letters requested that before the Commission
grants an exemption to GJVMS, the Commission take steps to safeguard
interoperability and competition among service providers.
GSTP AG expressed its concern that combining elements of DTC, an
industry utility, with a commercial entity, Thomson Financial Inc.,
could limit access to DTC by competitors and could give GJVMS an unfair
advantage through differential pricing, lack of interoperability, and
preferential treatment of GJVMS's clients by DTC.\20\
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\20\ Letter from Burkhard H. Gutzeit, Chairman, and C. Steven
Crosby, Acting Chief Executive Officer, GSTP AG (January 3, 2001).
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In a response to the GSTP AG's comment letters and other comment
letters raising similar issues, DTCC stated that (1) DTC, as a
registered clearing agency, is prohibited from unfairly discriminating
among users, (2) interoperability is a complex issue that must be
solved through participation of the SIA, the Commission, and competing
providers, (3) access to DTC's settlement system and the prices it
charges will not be affected by GJVMS, (4) GJVMS will not use
intellectual property concerns to interfere with access to DTC, (5)
standardized access to DTC will still be available as it has been for
the past twenty-five years, and (6) GJVMS will have its own sales force
separate from DTC.\21\
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\21\ Letter from Carl H. Urist, Managing Director and Deputy
General Counsel, DTCC (January 12, 2001).
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GSTP AG responded to DTCC's letter and stated that DTC must clearly
explain which functions will continue to be performed exclusively by
DTC and which will be performed by GJVMS.\22\ In particular, GSTP AG
stated that DTCC's response left unclear whether DTC will consider
GJVMS to be a vendor at the same level as GSTP AG or any other central
matching service, or whether DTC will accord to GJVMS preferential
treatment. Also, GSTP AG stated that DTCC failed to address how
communications with settlement agents will occur. GSTP AG said that
fair and open access to DTC settlement functions for all matching
services must encompass a requirement that DTC, not GJVMS, continue to
provide this service. Furthermore, GSTP AG expressed its concern that
DTCC did not clarify interoperability and whether DTC's customer
service will show preferential treatment to clients of GJVMS.
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\22\ Letter from Burkhard H. Gutzeit, Chairman, and C. Steven
Crosby, Acting Chief, Executive Officer, GSTP AG (January 30, 2001).
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DTCC responded to GSTP AG's January 3, 2001, letter by stating that
the GSTP AG comment letter reflects confusion by GSTP AG about the
functions to be performed by GJVMS.\23\ In addition, DTCC stated that
DTC would limit its activities to following the settlement instructions
authorized by its participants whether those instructions were
submitted by GJVMS, GSTP AG, or any other Central Matching Service or
vendor. Finally, DTCC stated that it expects that the concerns
expressed by GSTP AG about interoperability and the relationship
between DTC and GJVMS will be fully addressed in the Commission's
approval orders.
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\23\ Letter from Richard B. Nesson, Managing Director and
General Counsel, DTCC (March 9, 2001).
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A comment by TLX Trading Network expressed concern about the post-
merger availability and affordability of TradeMessage, SID, and ALERT
to vendors.\24\ DTCC stated in response that access to TradeMessage,
SID, and ALERT will not be hampered by GJVMS.\25\ DTCC asserted that
the same procedure for settlement instructions will continue after the
formation of GJVMS. Vendors acting on behalf of DTC participants will
be able to transmit settlement instructions directly to DTC without the
involvement of GJVMS. As is done today, DTC will charge fees for such
services to the participants on whose behalf the vendors are acting,
with no additional charges to the vendors. In addition, DTCC stated in
its letter that the same open access by customers' vendors to SID will
continue with respect to the unified database after GJVMS commences
operations.
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\24\ Letter from Justin Lowe, Chief Executive Officer, and
Robert Raich, Chief Financial Officer, TLX Trading Network (``TLX'')
(December 18, 2000).
\25\ Letter from Carl H. Urist, Managing Director and Deputy
General Counsel, DTCC (January 4, 2001).
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Sungard expressed concern that moving TradeSuite and SID to GJVMS
will require competitors either to adhere to GJVMS's protocols and
presumably higher fees for access or to incur the expense of building
redundant databases.\26\ DTCC responded that the Sungard letter appears
to raise the same issues that were previously addressed in DTCC's
January 4 and 12, 2001, letters responding to the TLX and GSTP AG
letters.\27\
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\26\ Letter from Lawrence A. Gross, Vice President and General
Counsel, Sungard (February 9, 2001).
\27\ Letter from Richard B. Nesson, Managing Director and
General Counsel, DTCC (March 9, 2001).
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III. Discussion
In Section 17A, Congress made several findings with respect to the
national system for the clearance and settlement of securities
transactions.\28\ Among these, Congress found that: the prompt and
accurate clearance and settlement of securities transactions is
necessary for the protection of investors and persons facilitating
transactions by an acting on behalf of investors; inefficient
procedures for clearance and settlement impose unnecessary costs on
investors and persons facilitating transactions by and acting on behalf
of investors; and new data processing and communications techniques
create the opportunity for more efficient, effective,
[[Page 20505]]
and safe procedures for clearance and settlement.
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\28\ 15 U.S.C. 78q-1(a)1).
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The Commission finds that the approval of DTC's rule change for the
transfer and combining of its TradeSuite Business with Thomson's ESG
Business is consistent with these findings. As set forth above, the
current processing system for the confirmation/affirmation of
institutional securities transactions is showing signs of inadequacy as
trading volumes continue to increase and needs to undergo major
changes. By combining DTC's TradeSuite Business with Thomson ESG
Business, a major step will be taken with respect to a more efficient
and effective post-trade presettlement procession of institutional
trades. Among other benefits, the combination should provide a means
whereby a larger percentage of trades will be affirmed earlier in the
settlement cycle which should allow broker-dealers and their
institutional customers to identify and resolve exceptions and
potential fails earlier. In addition, the combination of TradeSuite's
and ESG's systems development expertise and other resources should
facilitate the move to straight-through processing, a shorter
settlement cycle, and improved management of rising trading volume.
The Commission also finds that the competition concerns raised by
some commenters about the services of TradeSuite being provided through
GJVMS are adequately addressed in the terms of the Commission's order
granting GJVMS an exemption from clearing agency registration.
Furthermore, DTC has represented that it shall not favor any single
provider of Central Matching Services, including GJVMS, over any other
Central Matching Services in terms of the quality and caliber of the
interface to DTC's clearing agency or settlement functions, quality of
connectivity, receipt of delivery and payment orders, speed or
processing delivery and payment orders, capacity provided, or priority
assigned in processing delivery and payment orders.\29\
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\29\ Letter amending DTC-00-10 from Richard B. Nesson, Managing
Director and General Counsel, DTCC (February 20, 2001).
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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 and the
rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-DTC-00-10) be and hereby is
approved.
For the Commission, by the Division of Market Regulations,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-9961 Filed 4-20-01; 8:45 am]
BILLING CODE 8010-01-M