Self-Regulatory Organizations; The Depository Trust Company; Order Approving Proposed Rule Change to Amend the Criteria Used to Place Participants on Surveillance Status, 20428-20429 [E6-5933]

Download as PDF 20428 Federal Register / Vol. 71, No. 76 / Thursday, April 20, 2006 / Notices customers and other broker-dealers, including specialists, other ROTs, away market makers and firms. Consistent with the Exchange’s current rules on priority, parity, and precedence, the electronic hedging and/or liquidating orders of ROTs, as provided in this proposal, would be on parity with the orders of other broker-dealers, specialists, ROTs, and away market makers. The electronic hedging and/or liquidating orders of ROTs will continue to receive market maker treatment because the orders would be executed to reduce the risk of the positions put on by the ROT in connection with his market maker responsibilities in the formerly assigned option class. 2. Statutory Basis The Exchange believes the proposed rule change, as amended, is consistent with section 6(b) of the Act,8 in general, and furthers the objectives of section 6(b)(5) of the Act,9 in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Exchange believes that providing ROTs with this limited ability to send orders in connection with a bona fide hedge or liquidating position in an option class that has been relocated would provide an effective and efficient means for ROTs to reduce position risk, and thereby, promote a free and open national market system. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange believes the proposed rule change, as amended, does not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. hsrobinson on PROD1PC61 with NOTICES C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others No written comments were solicited or received by the Exchange on this proposal, as amended. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 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 8 15 9 15 U.S.C. 78f(b). U.S.C. 78f(b)(5). VerDate Aug<31>2005 14:56 Apr 19, 2006 Jkt 208001 90 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 Exchange consents, the Commission will: A. By order approve the proposed rule change, as amended, 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 (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–Amex–2005–096 on the subject line. should be submitted on or before May 11, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.10 Jill M. Peterson, Assistant Secretary. [FR Doc. E6–5920 Filed 4–19–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–53655; File No. SR–DTC– 2006–03] Self-Regulatory Organizations; The Depository Trust Company; Order Approving Proposed Rule Change to Amend the Criteria Used to Place Participants on Surveillance Status April 14, 2006. I. Introduction On February 3, 2006, The Depository Trust Company (‘‘DTC’’) filed with the Securities and Exchange Commission Paper Comments (‘‘Commission’’) proposed rule change • Send paper comments in triplicate SR–DTC–2006–03 pursuant to section to Nancy M. Morris, Secretary, 19(b)(1) of the Securities Exchange Act Securities and Exchange Commission, of 1934 (‘‘Act’’).1 Notice of the proposal 100 F Street, NE., Washington, DC was published in the Federal Register 20549–1090. on March 14, 2006.2 The Commission All submissions should refer to File received no comment letters in response Number SR–Amex–2005–096. This file to the proposed rule change. For the number should be included on the reasons discussed below, the subject line if e-mail is used. To help the Commission is approving the proposed Commission process and review your rule change. comments more efficiently, please use only one method. The Commission will II. Description post all comments on the Commission’s Overview Internet Web site (https://www.sec.gov/ DTC has developed certain criteria for rules/sro.shtml). Copies of the placing participants on surveillance. submission, all subsequent Specifically, all broker-dealers from amendments, all written statements which DTC requires the submission of with respect to the proposed rule FOCUS or FOGS reports and banks from change that are filed with the which DTC requires the submission of Commission, and all written CALL reports 3 are assigned a rating that communications relating to the is generated by entering financial data of proposed rule change between the Commission and any person, other than the participant into a risk evaluation matrix (‘‘Matrix’’) that was developed by those that may be withheld from the public in accordance with the 10 17 CFR 200.30–3(a)(12). provisions of 5 U.S.C. 552, will be 1 15 U.S.C. 78s(b)(1). available for inspection and copying in 2 Securities Exchange Act Release No. 53435 the Commission’s Public Reference (March 7, 2006), 71 FR 13198. Room. Copies of the filing also will be 3 A small number of DTC member banks which available for inspection and copying at submit CALL reports are not assigned a rating. the principal office of the Exchange. All Because these banks do not make loans and do not take deposits as part of their business activities, comments received will be posted their CALL reports do not contain information on without change; the Commission does asset quality and/or liquidity. Asset quality and not edit personal identifying liquidity are among the financial figures used in the Matrix. Since these figures would be zero in the information from submissions. You Matrix for these banks, their Matrix results would should submit only information that DTC you wish to make available publicly. All not adequately portray their financial status. not has therefore concluded that these banks do submissions should refer to File lend themselves to appropriate analysis using the Matrix. Number SR–Amex–2005–096 and PO 00000 Frm 00047 Fmt 4703 Sfmt 4703 E:\FR\FM\20APN1.SGM 20APN1 Federal Register / Vol. 71, No. 76 / Thursday, April 20, 2006 / Notices 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 hsrobinson on PROD1PC61 with NOTICES 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. Lowrated 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 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 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 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 will 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. VerDate Aug<31>2005 14:56 Apr 19, 2006 Jkt 208001 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 riskbased capital ratio. Credit risk staff also monitors those participants not included in the Matrix process using similar criteria.6 These criteria may 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 continues to reserve the right to place a participant on the watch list for failure to comply with operational standards and requirements.7 III. Discussion Section 19(b) of the Act directs the Commission to approve a proposed rule change of a self-regulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization. Section 17A(b)(3)(F) of the Act requires that the rules of a clearing agency be designed to facilitate the safeguarding of securities and funds which are in its custody or control or for which it is responsible.8 The Commission finds that DTC’s proposed rule change is consistent with this requirement because it improves DTC’s member surveillance process which should better enable DTC to safeguard the securities and funds which are in its custody or control or for which it is responsible. IV. Conclusion On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act and in particular 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–2006–03) be and hereby is approved. 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). 8 15 U.S.C. 78q–1(b)(3)(F). 9 17 CFR 200.30–3(a)(12). PO 00000 Frm 00048 Fmt 4703 Sfmt 4703 20429 For the Commission by the Division of Market Regulation, pursuant to delegated authority.9 Jill M. Peterson, Assistant Secretary. [FR Doc. E6–5933 Filed 4–19–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–53653; File No. SR–NASD– 2006–035] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Granting Accelerated Approval of Proposed Rule Change Relating to Proposed Amendments to IM 2110–2 to Codify NASD’s Existing Position that the Manning Rule Applies to All Members, Whether Acting as a Market Maker or Not April 14, 2006. On March 6, 2006, the National Association of Securities Dealers, Inc. (‘‘NASD’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change relating to proposed amendments to NASD Interpretive Material 2110–2, Trading Ahead of Customer Limit Order (commonly referred to as the Manning Rule) to state that the rule applies to all members, whether acting as a market maker or not. NASD asked the Commission to grant accelerated approval to the proposed rule change. The Commission stated it would consider granting accelerated approval at the close of a 15-day comment period, and published the proposed rule change for notice and comment in the Federal Register on March 28, 2006.3 The Commission received no comments on the proposal. The Commission has reviewed carefully the proposed rule change and finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association 4 and, in particular, the requirements of section 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 53527 (March 21, 2006), 71 FR 15503. 4 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 2 17 E:\FR\FM\20APN1.SGM 20APN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 71, Number 76 (Thursday, April 20, 2006)]
[Notices]
[Pages 20428-20429]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-5933]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53655; File No. SR-DTC-2006-03]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving Proposed Rule Change to Amend the Criteria Used to 
Place Participants on Surveillance Status

April 14, 2006.

I. Introduction

    On February 3, 2006, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-DTC-2006-03 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 March 14, 2006.\2\ The 
Commission received no comment letters in response to the proposed rule 
change. For the reasons discussed below, the Commission is approving 
the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 53435 (March 7, 2006), 
71 FR 13198.
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II. Description

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

[[Page 20429]]

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\
---------------------------------------------------------------------------

    \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 will 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.
---------------------------------------------------------------------------

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 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 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 may 
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 continues to reserve the right to place a participant on the watch 
list for failure to comply with operational standards and 
requirements.\7\
---------------------------------------------------------------------------

    \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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III. Discussion

    Section 19(b) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization. Section 17A(b)(3)(F) of the Act requires that the rules 
of a clearing agency be designed to facilitate the safeguarding of 
securities and funds which are in its custody or control or for which 
it is responsible.\8\ The Commission finds that DTC's proposed rule 
change is consistent with this requirement because it improves DTC's 
member surveillance process which should better enable DTC to safeguard 
the securities and funds which are in its custody or control or for 
which it is responsible.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular 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-2006-03) be and hereby 
is approved.
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    \9\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-5933 Filed 4-19-06; 8:45 am]
BILLING CODE 8010-01-P

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