

[Federal Register: March 14, 2006 (Volume 71, Number 49)]
[Notices]               
[Page 13198-13200]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14mr06-125]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53435; File No. SR-DTC-2006-03]

 
Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change To Amend the Criteria Used To 
Place Participants on Surveillance Status

March 7, 2006.

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on

[[Page 13199]]

February 3, 2006, The Depository Trust Company (``DTC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which items have 
been prepared by DTC. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested parties.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    DTC is seeking to amend the criteria it uses to place participants 
on surveillance status.

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 these 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

Overview
    DTC has developed certain criteria for placing participants on 
surveillance. Specifically, all broker-dealers from which DTC requires 
the submission of FOCUS or FOGS reports and banks from which DTC 
requires the submission of CALL reports \3\ are assigned a rating that 
is generated by entering financial data of the participant into a risk 
evaluation matrix (``Matrix'') that was developed by credit risk 
staff.\4\ Those participants with a ``weak'' rating (i.e., deemed to 
pose a relatively higher degree of risk to DTC) are placed on an 
internal ``watch list'' and are monitored more closely. All 
participants that do not fall into the categories of banks and broker-
dealers mentioned above are not currently included in the Matrix 
process but are monitored by DTC's credit risk staff using financial 
criteria deemed relevant by DTC.\5\
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    \3\ A small number of DTC member banks which submit CALL reports 
are not assigned a rating. Because these banks do not make loans and 
do not take deposits as part of their business activities, their 
CALL reports do not contain information on asset quality and/or 
liquidity. Asset quality and liquidity are among the financial 
figures used in the Matrix. Since these figures would be zero in the 
Matrix for these banks, their Matrix results would not adequately 
portray their financial status. DTC has therefore concluded that 
these banks do not lend themselves to appropriate analysis using the 
Matrix.
    \4\ The Matrix is used by DTC and its affiliated clearing 
agencies, the Fixed Income Clearing Corporation (``FICC'') and the 
National Securities Clearing Corporation (``NSCC''). In using the 
Matrix, credit risk staff uses the financial data of each applicable 
DTC participant and the financial data of each applicable member of 
FICC and NSCC. In this way, each applicable DTC participant, FICC 
member, and NSCC member are rated against each other.
    \5\ DTC will continually evaluate the matrix methodology and its 
effectiveness and make such changes as it deems prudent and 
practicable within such time frames as it determines to be 
appropriate. DTC will update the Commission staff periodically on 
its evaluations of the Matrix.
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Procedures
    Credit risk staff approaches its analysis of participants in the 
following manner. First, the required information of designated broker-
dealers and banks are entered into the Matrix and a rating for each 
participant is generated. Low-rated participants are placed on the 
watch list. At this point, credit risk staff may downgrade a particular 
participant's rating based on various qualitative factors. For example, 
one qualitative factor might be that the participant in question 
received a qualified audit opinion on its annual audit. In order for 
DTC to protect itself and its other participants, it is important that 
credit risk staff maintain the discretion to downgrade a participant's 
Matrix rating and thus subject the participant to closer monitoring. 
All rated participants, including those on the watch list, are 
monitored monthly or quarterly, depending upon the participant's 
financial filing frequency, against basic minimum financial 
requirements and other parameters.
    All broker-dealer participants included on the watch list are 
monitored more closely than those not on the watch list. This means 
that they are also monitored for various parameter breaks which may 
include but are not limited to such things as a defined decline in 
excess net capital over a one month or three month period, a defined 
period loss, a defined aggregate indebtedness/net capital ratio, a 
defined net capital/aggregate debit items ratio, or a defined net 
capital/regulatory net capital ratio. All bank participants included on 
the watch list are also monitored more closely for watch list parameter 
breaks which may include but are not limited to such things as a 
defined quarter loss, a defined decline in equity, a defined tier one 
leverage ratio, a defined tier one risk-based capital ratio, and a 
defined total risk-based capital ratio.
    Credit risk staff also monitors those participants not included in 
the Matrix process using similar criteria.\6\ These criteria include 
but are not limited to such things as failure to meet minimum financial 
requirements, experiencing a significant decrease in equity, or a 
significant loss. This class of participants may be placed on the watch 
list based on credit risk staff's analysis of this information. DTC 
reserves the right to place a participant on the Watch List for failure 
to comply with operational standards and requirements.\7\
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    \6\ Participants that are not included in the Matrix are: the 
banks discussed in footnote 3, United States (``U.S.'') branches and 
agencies of non-U.S. banks, non-U.S. central securities 
depositories, and U.S. government sponsored enterprises.
    \7\ Participants are required to meet the standards of financial 
condition, operational capability, and character set forth in DTC 
Rule 2 (Participants and Pledgees).
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    DTC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \8\ and the rules and 
regulations thereunder applicable to DTC because it will facilitate the 
safeguarding of securities and funds which are in its custody or 
control or for which it is responsible and in general will protect 
investors and the public interest by improving DTC's member 
surveillance process.
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    \8\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change will have any 
impact or impose any burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received from Members, participants or Others

    Written comments have not been solicited with respect to the 
proposed rule change, and none have been received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the self-regulatory organization consents, 
the Commission will:

[[Page 13200]]

    (A) By order approve such proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-DTC-2006-03 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
All submissions should refer to File Number SR-DTC-2006-03. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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 Section, 100 F Street, 
NE., Washington, DC 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of DTC and on DTC's 
Web site at https://login.dtcc.com/dtcorg/. All comments received will 

be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-DTC-2006-03 and should be submitted on 
or before April 4, 2006.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-3573 Filed 3-13-06; 8:45 am]

BILLING CODE 8010-01-P
