Self-Regulatory Organizations; The Depository Trust Company; Order Approving Proposed Rule Change As Amended To Increase Liquidity Resources, 80481-80482 [E8-31048]
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Federal Register / Vol. 73, No. 251 / Wednesday, December 31, 2008 / Notices
processor, subject to the conditions
specified in this order.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.172
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–31094 Filed 12–30–08; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–59148; File No. SR–DTC–
2008–12]
Self-Regulatory Organizations; The
Depository Trust Company; Order
Approving Proposed Rule Change As
Amended To Increase Liquidity
Resources
December 23, 2008.
I. Introduction
On August 26, 2008, The Depository
Trust Company (‘‘DTC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) and on September 9,
2008, and on September 30, 2008,
amended proposed rule change SR–
DTC–2008–12 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 October 21, 2008.2 The Commission
received no comment letters. For the
reasons discussed below, the
Commission is approving the proposed
rule change, as amended.
II. Description
The proposed rule change seeks to
increase the liquidity resources of DTC
to ensure it has sufficient liquidity to
cover the failure of a financial family of
affiliated DTC Participants (‘‘Affiliated
Family’’).3 An Affiliated Family means
a Participant that controls another
Participant or other Participants and
each Participant that is under the
control of the controlling Participant.
For purposes of this definition,
‘‘control’’ means the direct or indirect
ownership of more than 50% of the
voting securities or other voting
interests of an entity.4
172 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 Securities Exchange Act Release No. 58757A
(October 14, 2008), 73 FR 62578.
3 DTC currently has 332 Participants, most of
which are broker-dealers or banks with one
Participant account. Large integrated organizations,
however, typically have several ‘‘legal entities’’
with each being DTC Participants (e.g., a bank
custodian entity and a separate securities firm
entity).
4 Under this definition, DTC currently has 47
Affiliated Families.
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80481
To ensure that DTC is able to
complete its settlement obligations each
day in the event of a Participant’s
inability to settle with DTC, DTC
currently maintains liquidity resources
of $2.5 billion composed of a $600
million all-cash Participants Fund and a
committed line of credit in the amount
of $1.9 billion with a consortium of
banks. DTC’s committed line of credit
was recently increased from $1.4
billion. Given that financial firms have
become increasingly interdependent,
DTC recognizes that there is a
possibility of ‘‘contagion’’ among
several related Participants. Financial
problems at one Participant may impact
the stability of another related
Participant, potentially causing both to
fail simultaneously. Because of concerns
about this potential, DTC and its
regulators have agreed that DTC should
increase its available liquidity resources
so that DTC would be able to withstand
the failure of a financial family of
affiliated DTC Participants.5 To do so,
DTC will (i) increase by $700 million
the total cash deposits to DTC’s all-cash
Participants Fund so that the aggregate
amount of the required cash deposits to
DTC’s Participant Fund plus the
required preferred stock investments of
Participants will be increased to $1.3
billion from $600 million and (ii) limit
the aggregate maximum net debit cap 6
for any Affiliated Family to $3 billion.
The following variables are currently
used in the determination of each
Participant’s required Participant’s
Fund deposit:
(1) The six largest intraday net debit
peaks for a Participant over a rolling 60business day period.
(2) Minimum Fund Deposit: $10,000.
(3) Fund Size: $600 Million.
DTC will continue to employ these
variables to calculate the first $600
million of the required $1.3 billion
Fund. The remaining $700 million will
be allocated proportionately among the
Affiliated Families whose aggregate net
debit caps per family exceed $2.3
billion.7 An Affiliated Family whose net
debit cap exceeds $2.3 billion would be
required to contribute a portion of the
remaining $700 million calculated by
dividing the amount by which the
Affiliated Family’s net debit cap
exceeds $2.3 billion by the sum of the
amounts by which each Affiliated
Family’s net debit cap exceeds $2.3
billion.8 Once an Affiliated Family’s
additional Participant’s Fund
requirement has been established, DTC
will allocate this sum among the
Participants comprising the Affiliated
Family in proportion to each
Participant’s adjusted net debit cap.9
This algorithm will be systematically
used to calculate the allocations for the
Participants of each Affiliated Family,
unless each of the Participants that
comprise an Affiliated Family provides
DTC with written instructions to
allocate the aggregate net debit cap
differently. While the Participants of an
Affiliated Family may give instructions
to reapportion their net debit caps
among themselves, they cannot
reallocate to any one Participant a debit
cap that is greater than the DTC system
calculated net debit cap for that
Participant.
5 The Commission is the primary federal regulator
of DTC as a clearing agency. DTC is also a limited
purpose trust company established under New York
Banking Law and a state member bank of the
Federal Reserve System. As such, the The Federal
Reserve Bank of New York (FRBNY) and the New
York State Department of Banking also have
regulatory authority over DTC.
6 In order to ensure that timely settlement can be
completed in the event of a failure to settle by the
Participant with the largest settlement obligation,
DTC by sets debit limits (called net debit caps) for
each Participant. A Participant’s net debit is limited
throughout the processing day to a net debit cap
that is the lesser of four amounts: (1) An amount
based on the average of the three largest net debits
that the Participant incurred over a rolling 70
business day period, (2) an amount, if any,
determined by the Participant’s settling bank, (3) an
amount, if any, determined by DTC, or (4) $1.8
billion.
7 This amount is based on DTC’s practice of
maintaining a liquidity cushion of $200 million
between its largest net debit cap and its liquidity
resources (i.e., DTC’s current liquidity of $2.5
billion minus the $200 liquidity cushion it
maintains).
8 DTC will adjust the net debit caps of the
Participants that comprise an Affiliated Family so
that the aggregate affiliated net debit cap does not
exceed $3 billion. Currently 18 Affiliate Families
consisting of 57 DTC Participants will be subject to
these Affiliated Family provisions. Thirteen
Affiliated Families will be required to reduce their
overall Net debit caps.
9 The proposed DTC Affiliated Family Algorithm
can be viewed on the Commission’s Web site at
https://www.sec.gov/rules/sro/dtc/2008/3458757.pdf and at DTC’s Web site at https://
www.dtcc.com/downloads/legal/rule_filings/2008/
dtc/2008-12.pdf.
10 15 U.S.C. 78q–1(b)(3)(F).
PO 00000
Frm 00121
Fmt 4703
Sfmt 4703
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 assure
the safeguarding of securities and funds
in DTC’s custody or control or for which
it is responsible.10 The Commission
believes that DTC’s rule change is
consistent with this Section because it
should help assure the safeguarding of
securities and funds in DTC’s custody or
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31DEN1
80482
Federal Register / Vol. 73, No. 251 / Wednesday, December 31, 2008 / Notices
control or for which it is responsible by
increasing DTC’s liquidity resources to
enable it to complete settlement in the
event of a failure of a financial family
of affiliated Participants.
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposed
rule change, as amended, is consistent
with the requirements of the Act and in
particular Section 17A of the Act and
the rules and regulations thereunder. In
approving the proposed rule change, the
Commission considered the proposal’s
impact on efficiency, competition, and
capital formation.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (File No. SR–
DTC–2008–12), as amended, be and
hereby is approved.
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.11
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–31048 Filed 12–30–08; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–59138; File No. SR–FINRA–
2008–064]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Proposed
Rule Change To Amend NASD
Interpretive Material (IM) 2110–2
(Trading Ahead of Customer Limit
Order)
pwalker on PROD1PC71 with NOTICES
December 22, 2008.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
17, 2008, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) (f/k/a
National Association of Securities
Dealers, Inc. (‘‘NASD’’)) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which Items have been
prepared by FINRA. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA 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. FINRA 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
SECURITIES AND EXCHANGE
COMMISSION
11 17
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to amend NASD
Interpretive Material (IM) 2110–2
(Trading Ahead of Customer Limit
Order) to provide that, for the purpose
of determining the minimum price
improvement obligation where there is
no published current inside spread,
members may calculate a current inside
spread by contacting and obtaining
priced quotations from at least two
unaffiliated dealers.
The text of the proposed rule change
is attached as Exhibit 5.3
1. Purpose
NASD IM–2110–2 (commonly
referred to as the ‘‘Manning Rule’’)
generally prohibits a member from
trading for its own account at prices that
would satisfy a customer’s limit order
unless the member immediately
thereafter executes the customer limit
order at the price at which it traded for
its own account or at a better price. The
legal underpinnings for IM–2110–2 are
a firm’s basic fiduciary obligations
under agency law and the requirement
that it must, in the conduct of its
business, ‘‘observe high standards of
commercial honor and just and
equitable principles of trade.’’
On September 12, 2008, the SEC
approved amendments to the minimum
price-improvement standards in IM–
2110–2 to provide tiered standards that
vary according to the price of the
customer limit order.4 The amendments
3 The Commission notes that Exhibit 5 is attached
to the rule filing filed with the Commission but not
to this release. The text of the proposed rule change
is available at FINRA, on its Web site (https://
www.finra.org), and at the Commission’s Public
Reference Room.
4 See Securities Exchange Act Release No. 58532
(September 12, 2008), 73 FR 54649 (September 22,
2008) (order approving SR–NASD–2007–041).
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Frm 00122
Fmt 4703
Sfmt 4703
became effective on November 11,
2008.5 Revised NASD IM–2110–2
prescribes detailed minimum levels of
price improvement that a member must
provide in order to trade ahead of an
unexecuted customer limit order
without triggering the protections
provided by the rule. In other words, the
price-improvement standards in IM–
2110–2 set forth the minimum amount
by which a member must trade, in
addition to the price of the customer
buy limit order (or less than the price of
a customer sell order), to avoid
triggering the protections provided by
IM–2110–2.
The minimum price improvement
tiers are as follows:
(1) For customer limit orders priced
greater than or equal to $1.00, the
minimum amount of price improvement
required is $0.01 for NMS stocks and
the lesser of $0.01 or one-half (1⁄2) of the
current inside spread for OTC equity
securities;
(2) For customer limit orders priced
greater than or equal to $.01 and less
than $1.00, the minimum amount of
price improvement required is the lesser
of $0.01 or one-half (1⁄2) of the current
inside spread;
(3) For customer limit orders priced
less than $.01 but greater than or equal
to $0.001, the minimum amount of price
improvement required is the lesser of
$0.001 or one-half (1⁄2) of the current
inside spread;
(4) For customer limit orders priced
less than $.001 but greater than or equal
to $0.0001, the minimum amount of
price improvement required is the lesser
of $0.0001 or one-half (1⁄2) of the current
inside spread;
(5) For customer limit orders priced
less than $.0001 but greater than or
equal to $0.00001, the minimum
amount of price improvement required
is the lesser of $0.00001 or one-half (1⁄2)
of the current inside spread;
(6) For customer limit orders priced
less than $.00001, the minimum amount
of price improvement required is the
lesser of $0.000001 or one-half (1⁄2) of
the current inside spread; and
(7) For customer limit orders priced
outside the best inside market, the
minimum amount of price improvement
required must either meet the
requirements set forth above or the
member must trade at a price at or
inside the best inside market for the
security.
Therefore, if a firm is holding a
customer limit order to buy priced at
$.75 and the applicable minimum price
improvement standard is $.01, the firm
would be permitted to buy at $.76 or
5 See
E:\FR\FM\31DEN1.SGM
Regulatory Notice 08–49 (September 2008).
31DEN1
]]>Agencies
[Federal Register Volume 73, Number 251 (Wednesday, December 31, 2008)]
[Notices]
[Pages 80481-80482]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-31048]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-59148; File No. SR-DTC-2008-12]
Self-Regulatory Organizations; The Depository Trust Company;
Order Approving Proposed Rule Change As Amended To Increase Liquidity
Resources
December 23, 2008.
I. Introduction
On August 26, 2008, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') and on
September 9, 2008, and on September 30, 2008, amended proposed rule
change SR-DTC-2008-12 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 October 21, 2008.\2\ The Commission received
no comment letters. For the reasons discussed below, the Commission is
approving the proposed rule change, as amended.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 58757A (October 14,
2008), 73 FR 62578.
---------------------------------------------------------------------------
II. Description
The proposed rule change seeks to increase the liquidity resources
of DTC to ensure it has sufficient liquidity to cover the failure of a
financial family of affiliated DTC Participants (``Affiliated
Family'').\3\ An Affiliated Family means a Participant that controls
another Participant or other Participants and each Participant that is
under the control of the controlling Participant. For purposes of this
definition, ``control'' means the direct or indirect ownership of more
than 50% of the voting securities or other voting interests of an
entity.\4\
---------------------------------------------------------------------------
\3\ DTC currently has 332 Participants, most of which are
broker-dealers or banks with one Participant account. Large
integrated organizations, however, typically have several ``legal
entities'' with each being DTC Participants (e.g., a bank custodian
entity and a separate securities firm entity).
\4\ Under this definition, DTC currently has 47 Affiliated
Families.
---------------------------------------------------------------------------
To ensure that DTC is able to complete its settlement obligations
each day in the event of a Participant's inability to settle with DTC,
DTC currently maintains liquidity resources of $2.5 billion composed of
a $600 million all-cash Participants Fund and a committed line of
credit in the amount of $1.9 billion with a consortium of banks. DTC's
committed line of credit was recently increased from $1.4 billion.
Given that financial firms have become increasingly interdependent, DTC
recognizes that there is a possibility of ``contagion'' among several
related Participants. Financial problems at one Participant may impact
the stability of another related Participant, potentially causing both
to fail simultaneously. Because of concerns about this potential, DTC
and its regulators have agreed that DTC should increase its available
liquidity resources so that DTC would be able to withstand the failure
of a financial family of affiliated DTC Participants.\5\ To do so, DTC
will (i) increase by $700 million the total cash deposits to DTC's all-
cash Participants Fund so that the aggregate amount of the required
cash deposits to DTC's Participant Fund plus the required preferred
stock investments of Participants will be increased to $1.3 billion
from $600 million and (ii) limit the aggregate maximum net debit cap
\6\ for any Affiliated Family to $3 billion.
---------------------------------------------------------------------------
\5\ The Commission is the primary federal regulator of DTC as a
clearing agency. DTC is also a limited purpose trust company
established under New York Banking Law and a state member bank of
the Federal Reserve System. As such, the The Federal Reserve Bank of
New York (FRBNY) and the New York State Department of Banking also
have regulatory authority over DTC.
\6\ In order to ensure that timely settlement can be completed
in the event of a failure to settle by the Participant with the
largest settlement obligation, DTC by sets debit limits (called net
debit caps) for each Participant. A Participant's net debit is
limited throughout the processing day to a net debit cap that is the
lesser of four amounts: (1) An amount based on the average of the
three largest net debits that the Participant incurred over a
rolling 70 business day period, (2) an amount, if any, determined by
the Participant's settling bank, (3) an amount, if any, determined
by DTC, or (4) $1.8 billion.
---------------------------------------------------------------------------
The following variables are currently used in the determination of
each Participant's required Participant's Fund deposit:
(1) The six largest intraday net debit peaks for a Participant over
a rolling 60-business day period.
(2) Minimum Fund Deposit: $10,000.
(3) Fund Size: $600 Million.
DTC will continue to employ these variables to calculate the first
$600 million of the required $1.3 billion Fund. The remaining $700
million will be allocated proportionately among the Affiliated Families
whose aggregate net debit caps per family exceed $2.3 billion.\7\ An
Affiliated Family whose net debit cap exceeds $2.3 billion would be
required to contribute a portion of the remaining $700 million
calculated by dividing the amount by which the Affiliated Family's net
debit cap exceeds $2.3 billion by the sum of the amounts by which each
Affiliated Family's net debit cap exceeds $2.3 billion.\8\ Once an
Affiliated Family's additional Participant's Fund requirement has been
established, DTC will allocate this sum among the Participants
comprising the Affiliated Family in proportion to each Participant's
adjusted net debit cap.\9\ This algorithm will be systematically used
to calculate the allocations for the Participants of each Affiliated
Family, unless each of the Participants that comprise an Affiliated
Family provides DTC with written instructions to allocate the aggregate
net debit cap differently. While the Participants of an Affiliated
Family may give instructions to reapportion their net debit caps among
themselves, they cannot reallocate to any one Participant a debit cap
that is greater than the DTC system calculated net debit cap for that
Participant.
---------------------------------------------------------------------------
\7\ This amount is based on DTC's practice of maintaining a
liquidity cushion of $200 million between its largest net debit cap
and its liquidity resources (i.e., DTC's current liquidity of $2.5
billion minus the $200 liquidity cushion it maintains).
\8\ DTC will adjust the net debit caps of the Participants that
comprise an Affiliated Family so that the aggregate affiliated net
debit cap does not exceed $3 billion. Currently 18 Affiliate
Families consisting of 57 DTC Participants will be subject to these
Affiliated Family provisions. Thirteen Affiliated Families will be
required to reduce their overall Net debit caps.
\9\ The proposed DTC Affiliated Family Algorithm can be viewed
on the Commission's Web site at https://www.sec.gov/rules/sro/dtc/
2008/34-58757.pdf and at DTC's Web site at https://www.dtcc.com/
downloads/legal/rule_filings/2008/dtc/2008-12.pdf.
---------------------------------------------------------------------------
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 assure the safeguarding of
securities and funds in DTC's custody or control or for which it is
responsible.\10\ The Commission believes that DTC's rule change is
consistent with this Section because it should help assure the
safeguarding of securities and funds in DTC's custody or
[[Page 80482]]
control or for which it is responsible by increasing DTC's liquidity
resources to enable it to complete settlement in the event of a failure
of a financial family of affiliated Participants.
---------------------------------------------------------------------------
\10\ 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, as amended, is consistent with the requirements
of the Act and in particular Section 17A of the Act and the rules and
regulations thereunder. In approving the proposed rule change, the
Commission considered the proposal's impact on efficiency, competition,
and capital formation.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-DTC-2008-12), as amended, be
and hereby is approved.
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\11\
---------------------------------------------------------------------------
\11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-31048 Filed 12-30-08; 8:45 am]
BILLING CODE 8011-01-P
