[Federal Register Volume 63, Number 168 (Monday, August 31, 1998)]
[Pages 46262-46263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23316]

[[Page 46262]]



[Release No. 34-40361; File No. SR-DTC-98-15]

Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Accelerated Approval of a Proposed Rule Change To 
Incorporate the Rules and Procedures of Participants Trust Company To 
Increase the Size of the Board of Directors and To Amend the Rules 
Regarding the Use of the Participants Fund

August 25, 1998.
    On July 13, 1998, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') and on July 30, 
1998, amended a proposed rule change (File No. SR-DTC-98-15) pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ Notice of the proposal was published in the Federal 
Register on August 10, 1998.\2\ On August 11, 1998, DTC filed its 
second amendment to the proposed rule change.\3\ No comment letters 
were received. For the reasons discussed below, the Commission is 
granting accelerated approval of the proposed rule change.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 40300 (August 3, 1998), 
63 FR 42650.
    \3\ The August 11, 1998, amendment represents a technical 
amendment to the proposed rule change and as such does not require 
republication of notice.

I. Description

    The rule change relates to the merger of DTC and Participants Trust 
Company (``PTC'').\4\ DTC and PTC have entered into a merger agreement 
under which PTC will merge with and into DTC. DTC will form a mortgage-
backed securities division (``MSB Division'') to deliver the depository 
services currently provided by PTC to its participants with respect to 
PTC-eligible securities. DTC will adopt PTC's rules and procedures, 
with certain modifications, as the rules and procedures of the MBS 
Division. Under the merger agreement, the MBS Division will remain in 
place until at least September 30, 2000. Current PTC participants will 
be given the opportunity to become participants and limited purpose 
participants in the MBS Division. The cash and securities presently 
constituting the PTC participants fund will be transferred to a new MBS 
Division participants fund.

    \4\ For a more detailed description of the merger, refer to 
Securities Exchange Act Release No. 40121 (June 24, 1998), 63 FR 
35631 [File Nos. SR-DTC-98-12, SR-PTC-98-02] (notice of proposed 
rule change relating to proposed merger between DTC and PTC).

    The merger agreement also provides that as of the effective date of 
the merger one PTC board member nominated by PTC's board shall become a 
member of DTC's Board. This new director position is to remain in place 
at least until September 30, 2000. In order to accommodate the new 
director position, DTC is amending its By-Laws to increase the number 
of directors on its Board from seventeen to eighteen.
    Virtually all of PTC's participants are also DTC participants.\5\ 
DTC participants are entitled to acquire DTC stock based upon their use 
of DTC's services. The amount of each DTC participant's entitlement is 
recalculated each year, and participants that purchase DTC's stock are 
permitted to vote in the election of DTC's Board of Directors. After 
DTC and PTC merge, the calculation of each participant's entitlement to 
acquire DTC stock will take full account of the participant's use of 
services provided through the MBS Division.

    \5\ The only exceptions are Federal Home Loan Mortgage 
Corporation (a limited purpose participant), Federal National 
Mortgage Association, and The Federal Reserve Bank of Cleveland.

    In addition to the amendments regarding the creation of the MBS 
Division, DTC is adding language to its Rule 4 to make clear that if 
DTC were to cease providing some or all of its services, it could use 
the participants fund to cover wind-down costs that are not covered by 
service fee revenues or other available resources.

II. Discussion

    The Commission believes that DTC's proposal to make PTC's rules a 
part of DTC's rules is consistent with DTC's obligations under Section 
17A of the Act.\6\ The Commission has previously approved all of PTC's 
rules as being consistent with PTC's responsibility as a clearing 
agency as set forth in Section 17A(b)(3) of the Act.\7\ The Commission 
believes that by adopting these previously approved rules of PTC as the 
rules for its newly created MBS Division, DTC will be able to fulfill 
its statutory obligations under Section 17A(b)(3) with respect to the 
clearance, settlement, and depository service provided by its MBS 

    \6\ 15 U.S.C. 78q-1.
    \7\ 15 U.S.C. 78q-1(b)(3).

    Section 17A(b)(3)(C) of the Act\8\ requires that the rules of a 
clearing agency assure the fair representation of its shareholders (or 
members) and participants in the selection of its directors and 
administration of its affairs. The Commission believes that the 
proposed rule change is consistent with DTC's obligations under Section 
17A(b)(3)(C) for several reasons. First, almost all of PTC's members 
are also members of DTC and therefore are already represented on DTC's 
Board.\9\ Second, the rule change provides that when the merger become 
effective a PTC board member nominated by PTC's Board will become a 
member of DTC's Board. Third, the rule change provides that the 
calculation of DTC participants' entitlement to purchase stock, and 
therefore vote in the election of DTC's Board, will include the 
participants' use of the services of the MBS Division.

    \8\ 15 U.S.C. 78q-1(b) (3) (C).
    \9\Supra note 5.

    Section 17A(b)(3)(F) of the Act\10\ requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible. The Commission believes that by adding 
language to Rule 4 to make clear and explicit DTC's rights and 
obligations with respect to its participants' fund, DTC's ability to 
assure the safeguarding of securites and funds which are in DTC's 
custody or control or for which it is responsible should be enhanced.

    \10\ 15 U.S.C. 78q-1(b)(3)(F).

    DTC has requested that the Commission approve the proposed rule 
change prior to the thirtieth day after publication of the 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 
because such approval will allow securities transactions that are 
currently processed through PTC to be processed efficiently through the 
MBS Division of DTC and will allow an orderly transfer of PTC's 
operations to DTC.

III. 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\11\ and the 
rules and regulations thereunder.

    \11\ 15 U.S.C. 78q-1.

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-98-15) be and hereby is 
approved on an accelerated basis.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\

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


[[Page 46263]]

Jonathan G. Katz,
[FR Doc. 98-23316 Filed 8-28-98; 8:45 am]