Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change To Amend the Dividends Service Guide, 5843-5845 [2011-2225]
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Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Notices
Such statement must be typewritten,
double-spaced, and may not exceed
twenty-five (25) pages.
Upon receipt of the required notice,
OPIC will prepare an agenda, which
will be available at the hearing, that
identifies speakers, the subject on which
each participant will speak, and the
time allotted for each presentation.
A written summary of the hearing will
be compiled, and such summary will be
made available, upon written request to
OPIC’s Corporate Secretary, at the cost
of reproduction.
Written summaries of the projects to
be presented at the September 23, 2010
Board meeting will be posted on OPIC’s
Web site on or about Thursday, August
19, 2010.
CONTACT PERSON FOR INFORMATION:
Information on the hearing may be
obtained from Connie M. Downs at (202)
336–8438, via facsimile at (202) 218–
0136, or via e-mail at
connie.downs@opic.gov.
Dated: January 28, 2011.
Connie M. Downs,
OPIC Corporate Secretary.
[FR Doc. 2011–2312 Filed 1–28–11; 4:15 pm]
BILLING CODE 3210–01–P
SECURITIES AND EXCHANGE
COMMISSION
srobinson on DSKHWCL6B1PROD with NOTICES
Submission for OMB Review;
Comment Request
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of Investor
Education and Advocacy,
Washington, DC 20549–0213.
Extension:
Rule 701; OMB Control No. 3235–
0522; SEC File No. 270–306.
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission
(‘‘Commission’’) has submitted to the
Office of Management and Budget the
request for extension of the previously
approved collection of information
discussed below.
Rule 701 (17 CFR 230.701) under the
Securities Act of 1933 (‘‘Securities Act’’)
(15 U.S.C. 77a et seq.) provides an
exemption for certain issuers from the
registration requirements of the
Securities Act for limited offerings and
sales of securities issued under
compensatory benefit plans or contracts.
The purpose of Rule 701 is to ensure
that a basic level of information is
available to employees and others when
substantial amounts of securities are
issued in compensatory arrangements.
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Information provided under Rule 701 is
mandatory. Approximately 300
companies annually rely on the Rule
701 exemption and it takes 2 hours per
response. We estimate that 25% of the
2 hours per response (0.5 hours) is
prepared by the company for a total
annual reporting burden of 150 hours
(0.5 hours per response × 300
responses).
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a currently valid
control number.
Background documentation for this
information collection may be viewed at
the following link, https://
www.reginfo.gov. Written comments
should be directed to the following
persons: (i) Desk Officer for the
Securities and Exchange Commission,
Office of Information and Regulatory
Affairs, Office of Management and
Budget, Room 10102, New Executive
Office Building, Washington, DC 20503
or send an e-mail to:
Shagufta_Ahmed@omb.eop.gov;
Thomas Bayer, Chief Information
Officer, Securities and Exchange
Commission, C/O Remi Pavlik-Simon,
6432 General Green Way, Alexandria,
VA 22312; or send an e-mail to:
PRA_Mailbox@sec.gov. Comments must
be submitted to OMB within 30 days of
this notice.
Dated: January 27, 2011.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011–2229 Filed 2–1–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–63775; File No. SR–DTC–
2011–01]
Self-Regulatory Organizations; The
Depository Trust Company; Notice of
Filing and Order Granting Accelerated
Approval of Proposed Rule Change To
Amend the Dividends Service Guide
January 26, 2011.
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 January
13, 2011, The Depository Trust
Company (‘‘DTC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
1 15
2 17
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00066
Fmt 4703
5843
primarily by DTC.3 The Commission is
publishing this Notice and Order to
solicit comments on the proposed rule
change from interested persons and to
approve the proposed rule change on an
accelerated basis.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
DTC proposes to amend its Dividends
Service Guide (‘‘Guide’’) to: (1) clarify
DTC’s policy of payment allocations; (2)
begin allocation of funds from agents
received with corresponding CUSIPlevel identification information at 8:20
a.m.; and (3) make other conforming
changes.
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 III below. DTC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.4
(A) Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
One of core asset services provided by
the DTC is the daily collection and
allocation of cash entitlements due on
DTC-eligible securities. These
entitlements, known as Principal and
Income (‘‘P&I’’) payments, include
dividend, interest, periodic principal,
redemption, and maturity payments
arising from the 3.5 million securities
eligible at DTC.
Many paying agents service more than
one issue and typically wire to DTC a
single ‘‘bulk’’ payment to be allocated to
numerous issues or different types of
payments for a single issue. Paying
agents are required to provide with bulk
payments an automated file that
provides corresponding Committee on
Uniform Security Identification
Procedures (‘‘CUSIP’’) level
identification information about the
wire payment.5 CUSIP-level detail
3 The text of the proposed rule change is attached
as Exhibit 5 to DTC’s filing, which is available at
https://www.dtcc.com/downloads/legal/rule_filings/
2011/dtc/2011-01.pdf.
4 The Commission has modified the text of the
summaries prepared by DTC.
5 All paying agents are required to sign DTC’s
Operational Arrangements (‘‘OA’’) letter agreeing to
Continued
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Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Notices
srobinson on DSKHWCL6B1PROD with NOTICES
includes the security’s CUSIP, the
payment amount for the CUSIP, the
payable date, and the payment type (i.e.,
dividend, interest, principal, etc.). The
automated CUSIP-level detail allows
systemic receipt and allocation of the
bulk payment.
Funds from paying agents received
with CUSIP-level identification
information are allocated upon receipt
beginning at 9 a.m. ET and continuing
until 3 p.m. ET. Payments received
without CUSIP-level detail cannot be
systematically received and allocated
because lack of identifying information
included with the payments. In these
instances, DTC has to work with the
paying agent to obtain CUSIP-level
details so that it can manually allocate
funds to the appropriate CUSIPs.
Currently, funds without corresponding
CUSIP-level detail that are received by
3 p.m. ET by DTC are allocated at 3:15
p.m. ET using an algorithmic formula
that allocates each agent’s unidentified
funds.
The majority of payments are sent to
DTC over the Fedwire.6 The ‘‘cut-off’’
time for these allocations is generally at
about 3 p.m. ET to permit completion of
the settlement process at about 4:30
p.m. ET each day. Since the Fedwire
remains open until 6 p.m. ET,
significant volumes of expected
payments are received between DTC’s
allocation cut-off at 3 p.m. ET and the
Fedwire close at 6 p.m. ET. On peak
payment days, the volume of funds
received after the allocation cut-off can
represent upwards of several billion
dollars (on average, about 2–4% of
funds due come in after the allocation
cut-off time).
Aside from those allocations where
DTC has reason to believe that the
related payment from the agent or issuer
will not be received on the payable date,
historically, DTC has allocated nearly
all entitlements on their scheduled
payable date, including those paid to
DTC after established intraday cut-off
times or received without the CUSIP
level detail. Where DTC had
information that payment would not be
made on the payable date, DTC are
allocated the payments upon receipt
and identification.
comply with the provisions of the OA, which set
forth the requirements necessary for an issue to
become and remain eligible for DTC Services. The
OA is available on DTCC’s Web site for agents,
issuers, and any other interested parties at https://
www.dtcc.com/downloads/legal/rules_proc/
eligibility/operational.arrangements.memo.pdf. See
also DTC Important Notice B# 1805–07 (June 29,
2007).
6 Some payments are sent as Automated Clearing
House (ACH) transfers.
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16:00 Feb 01, 2011
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Proposed Change to the Existing
Practice
As a result of an extensive review of
current policies and procedures and in
consultation with its regulators, DTC
has determined that the allocation of
entitlements prior to funding or without
CUSIP-level detail subjects DTC to
potential credit and liquidity risks. For
example, one such risk is that of a
‘‘double default’’ where after an
allocation is made, the agent/issuer
expected to make the payment does not
do so, and the participant that received
the allocation defaults before DTC can
recover it. While this ‘‘allocate all’’
practice provides increased allocations
to DTC participants, it does so at the
expense of the risks described above.
In order to address these risks, DTC
has been working extensively with
paying agents to improve their payment
timeliness and accuracy in a variety of
ways. Paying agents are not provided
with reports identifying various defects
(for example, late, incomplete, or late
and incomplete payment detail) that
should allow them to perform root cause
analysis and improve their processing
and performance. Additionally, DTC has
worked with several larger paying
agents in their conversion to an
automated means of providing CUSIPlevel detail. As a result of these
improvements, DTC has over the last
few years greatly reduced the proportion
of funds received late or without
appropriate CUSIP level detail
(compared to 2009, 2010 allocations
relating to late or unidentified payments
have decreased 60%—an estimated $50
billion in 2010 compared to $128 billion
in 2009).
With risk mitigation at the forefront of
market participants and regulators’
concerns and given the extensive
progress that DTC and paying agents
have made in improving agents’
payment practices, DTC proposes to
discontinue the current ‘‘allocate all’’
practice and to move to a methodology
that results in the allocation only of
those entitlements paid before the cutoff and identified at a CUSIP-level. As
a result of this proposed change in
practice, DTC also proposes to
discontinue its use of the algorithmic
formula to allocate unidentified funds
since this calculation will no longer be
necessary.
In order to accommodate the
anticipated increase in funds not
allocated on the payable date due to late
or unidentified payments, DTC also
proposes to begin allocation of funds
received with corresponding CUSIPlevel identification information upon
receipt, beginning at 8:20 a.m. ET and
PO 00000
Frm 00067
Fmt 4703
Sfmt 4703
continuing every 20 minutes until
shortly after the 3 p.m. ET cut-off time.
This change in time will allow for more
customers to receive timely and
properly identified payments on the
payable date.
DTC believes that the implementation
of this policy eliminates the credit risk
associated with DTC allocating cash
entitlements to participants before such
payments are received from the paying
agent or issuer.
Implementation Timeframe
DTC proposes to implement the
changes set forth in this filing on
February 7, 2011. DTC participants,
paying agents, and other financial
intermediaries were first notified of this
intended change through DTCC’s
publication of a White Paper to the
Industry in November 2009.7 In order to
ensure widespread awareness and
minimize the service impact to
customers, DTC undertook in 2010 a
number of initiatives aimed at paying
agents in order to prepare them for the
implementation of these changes. First,
an Industry Task Force was established
to ensure collaboration and a voice for
key stakeholders and industry
constituencies as the policy moved
forward.8 DTC also sponsored
educational tools to update paying
agents and participants alike about the
upcoming changes to the allocation
policy.9 Finally, DTC gave numerous
7 The White Paper can be found at https://
www.dtcc.com/downloads/leadership/whitepapers/
Payment_Refinement.pdf.
8 The Industry Task Force consisted of the
following entities: Association of Global
Custodians, American Bankers Association, Asset
Managers Forum, Bank of America LaSalle, Bank of
America Merrill Lynch, Bank of NY Mellon, Bank
Depository User Group, Brown Bros. Harriman,
Citibank, Computershare, Deutsche Bank, Edward
Jones, Government Finance Officers Association,
Goldman Sachs, JP Morgan Chase, M&I Bank,
Morgan Stanley, NFS (Fidelity Institutional),
SIFMA, The Clearing House, U.S. Bank, and Wells
Fargo. This Task Force held meetings in February,
April, May, June, July, September, November, and
December 2010.
9 Pursuant to the release of the White Paper, DTC
customers requested a tool that would help measure
the impact of the proposed change at a participant
level and identify current allocations occurring in
a manner that was not consistent with the proposed
methodology. In response to this request and
effective January 22, 2010, DTC developed and
delivered two weekly reports—‘‘CSH DIV—
Imprecise Allocations’’ (e.g., dividends, interest,
pro-rata principal) and ‘‘CSH RED—Imprecise
Allocations’’ (i.e., calls, maturities, redemptions)
that included all ‘‘imprecise’’ or noncompliant
allocations for the given week. The reports were
grouped by allocation day and sorted by CUSIP
allowing participants to measure the impact of
imprecise allocations as well as build a history of
noncompliant CUSIPs to assist in driving allocation
decisions. DTC then developed and put into place
P&I Agent Payment Performance reports which
provided agent-specific payment performance data
and defects (e.g., late payments, missing detail) to
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02FEN1
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Notices
platform presentations and updates to
the following groups: Operations
Advisory Committee, ISITC, ABA
Corporate Trust Committee, SIFMA DTC
Education Conference, SIFMA
Operations & Regulatory Committee,
SIFMA Asset Managers Forum, and
DTC’s Asset Services, Settlement and
Securities Processing Advisory Boards.
The industry has been advised of the
Industry Task Force’s and DTC’s
progress in improving DTC’s P&I
payment process and the
implementation date of the proposed
rule changes through the issuance of
Important Notices that were published
on the DTCC Web site.10
(B) Self-Regulatory Organization’s
Statement on Burden on Competition
DTC does not believe that the
proposed rule change would 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 relating to the
proposed rule change have not been
solicited or received. DTC will notify
the Commission of any written
comments received by DTC.
III. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change 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–DTC–2011–01 on the
subject line.
srobinson on DSKHWCL6B1PROD with NOTICES
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
agents. DTC identified target agents (i.e., those with
late or unidentified payments) and tracked
performance. Approximately 4,000 agents were
provided targeted feedback on specific process
deficiencies (late or unidentified payments) in
2010. DTC also created and maintained a dedicated
electronic mailbox for communicating en masse
with paying agents. DTC contacted the vast majority
of the approximately 7,000 different issuers and
agents making entitlement payments to DTC to aid
in the awareness of the P&I allocation refinement.
10 See DTCC Important Notice 6132–10 (January
15, 2010); DTC Important Notice #7045–10 (August
2, 2010); DTC Important Notice #7659–10
(November 22, 2010).
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16:00 Feb 01, 2011
Jkt 223001
100 F Street, NE., Washington, DC
20549–1090.
All submission should refer to File
Number SR–DTC–2011–01. 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 (https://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 Web site viewing and
printing in the Commission’s Public
Reference Section, 100 F Street, NE.,
Washington, DC 20549–1090, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of such filings
will also be available for inspection and
copying at the principal office of DTC
and on DTC’s Web site at https://
www.dtcc.com/downloads/legal/
rule_filings/2011/dtc/2011-01.pdf. 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–2011–01 and should
be submitted on or before February 23,
2011.
IV. Commission’s Findings and Order
Granting Accelerated Approval of
Proposed Rule Change
For the reasons stated below, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
DTC.11 Specifically, the Commission
finds that the proposed rule change is
consistent with Section 17A(b)(3)(F) of
the Act which requires, among other
things, that the rules of a clearing
agency be designed to promote the
prompt and accurate clearance and
settlement of securities transactions, to
assure the safeguarding of securities and
funds of DTC’s participants which are in
the custody and control of the clearing
agency, and to remove impediments to
11 In approving this proposal, the Commission has
considered its impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
PO 00000
Frm 00068
Fmt 4703
Sfmt 9990
5845
and perfect the mechanism of a national
system for prompt and accurate
clearance and settlement of securities
transactions.12
As described in this filing, DTC’s
‘‘allocate all’’ methodology subjects DTC,
its participants, and beneficial owners
to inherent problems. An in-depth study
conducted internally by DTC at the
request and recommendation of
regulators has resulted in its decision to
eliminate the ‘‘allocate all’’ policy.
Accordingly, the Commission finds that
the rule change is consistent with
Section 17A(b)(3)(F) of the Act because
it should allow DTC to reduce risks
associated with its current P&I payment
process, which in turn, should enable
DTC to better safeguard the funds and
securities which are in DTC’s custody
and control.
DTC has requested that the
Commission find good cause for
approving the proposed rule change
prior to the thirtieth day after
publication of notice of filing thereof in
the Federal Register. As discussed
above, approval of the proposal will
allow DTC to immediately cease its
current ‘‘allocate all’’ P&I payment
policy and implement a policy that
reduces risk for DTC, its participants,
paying agents, and other financial
intermediaries associated with P&I
allocations. Furthermore, in anticipation
of implementation of these changes,
DTC’s participants and paying agents
have already taken the necessary steps
to code their systems for the February 7,
2011, implementation date. Change in
this implementation date could cause
significant system disruptions at these
participants and paying agents. As such,
the Commission finds good cause for
approving the proposed rule change
prior to the thirtieth day after the date
of publication of notice filing in the
Federal Register.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (SR–DTC–2011–
01) is approved on an accelerated basis.
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.13
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011–2225 Filed 2–1–11; 8:45 am]
BILLING CODE 8011–01–P
12 15
13 17
E:\FR\FM\02FEN1.SGM
U.S.C. 78q–1(b)(3)(F).
CFR 200.30–3(a)(12).
02FEN1
Agencies
[Federal Register Volume 76, Number 22 (Wednesday, February 2, 2011)]
[Notices]
[Pages 5843-5845]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-2225]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63775; File No. SR-DTC-2011-01]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing and Order Granting Accelerated Approval of Proposed
Rule Change To Amend the Dividends Service Guide
January 26, 2011.
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 January 13, 2011, The Depository Trust Company (``DTC'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I and II below, which Items have been
prepared primarily by DTC.\3\ The Commission is publishing this Notice
and Order to solicit comments on the proposed rule change from
interested persons and to approve the proposed rule change on an
accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The text of the proposed rule change is attached as Exhibit
5 to DTC's filing, which is available at https://www.dtcc.com/downloads/legal/rule_filings/2011/dtc/2011-01.pdf.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
DTC proposes to amend its Dividends Service Guide (``Guide'') to:
(1) clarify DTC's policy of payment allocations; (2) begin allocation
of funds from agents received with corresponding CUSIP-level
identification information at 8:20 a.m.; and (3) make other conforming
changes.
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 III below. DTC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.\4\
---------------------------------------------------------------------------
\4\ The Commission has modified the text of the summaries
prepared by DTC.
---------------------------------------------------------------------------
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
One of core asset services provided by the DTC is the daily
collection and allocation of cash entitlements due on DTC-eligible
securities. These entitlements, known as Principal and Income (``P&I'')
payments, include dividend, interest, periodic principal, redemption,
and maturity payments arising from the 3.5 million securities eligible
at DTC.
Many paying agents service more than one issue and typically wire
to DTC a single ``bulk'' payment to be allocated to numerous issues or
different types of payments for a single issue. Paying agents are
required to provide with bulk payments an automated file that provides
corresponding Committee on Uniform Security Identification Procedures
(``CUSIP'') level identification information about the wire payment.\5\
CUSIP-level detail
[[Page 5844]]
includes the security's CUSIP, the payment amount for the CUSIP, the
payable date, and the payment type (i.e., dividend, interest,
principal, etc.). The automated CUSIP-level detail allows systemic
receipt and allocation of the bulk payment.
---------------------------------------------------------------------------
\5\ All paying agents are required to sign DTC's Operational
Arrangements (``OA'') letter agreeing to comply with the provisions
of the OA, which set forth the requirements necessary for an issue
to become and remain eligible for DTC Services. The OA is available
on DTCC's Web site for agents, issuers, and any other interested
parties at https://www.dtcc.com/downloads/legal/rules_proc/eligibility/operational.arrangements.memo.pdf. See also DTC
Important Notice B 1805-07 (June 29, 2007).
---------------------------------------------------------------------------
Funds from paying agents received with CUSIP-level identification
information are allocated upon receipt beginning at 9 a.m. ET and
continuing until 3 p.m. ET. Payments received without CUSIP-level
detail cannot be systematically received and allocated because lack of
identifying information included with the payments. In these instances,
DTC has to work with the paying agent to obtain CUSIP-level details so
that it can manually allocate funds to the appropriate CUSIPs.
Currently, funds without corresponding CUSIP-level detail that are
received by 3 p.m. ET by DTC are allocated at 3:15 p.m. ET using an
algorithmic formula that allocates each agent's unidentified funds.
The majority of payments are sent to DTC over the Fedwire.\6\ The
``cut-off'' time for these allocations is generally at about 3 p.m. ET
to permit completion of the settlement process at about 4:30 p.m. ET
each day. Since the Fedwire remains open until 6 p.m. ET, significant
volumes of expected payments are received between DTC's allocation cut-
off at 3 p.m. ET and the Fedwire close at 6 p.m. ET. On peak payment
days, the volume of funds received after the allocation cut-off can
represent upwards of several billion dollars (on average, about 2-4% of
funds due come in after the allocation cut-off time).
---------------------------------------------------------------------------
\6\ Some payments are sent as Automated Clearing House (ACH)
transfers.
---------------------------------------------------------------------------
Aside from those allocations where DTC has reason to believe that
the related payment from the agent or issuer will not be received on
the payable date, historically, DTC has allocated nearly all
entitlements on their scheduled payable date, including those paid to
DTC after established intraday cut-off times or received without the
CUSIP level detail. Where DTC had information that payment would not be
made on the payable date, DTC are allocated the payments upon receipt
and identification.
Proposed Change to the Existing Practice
As a result of an extensive review of current policies and
procedures and in consultation with its regulators, DTC has determined
that the allocation of entitlements prior to funding or without CUSIP-
level detail subjects DTC to potential credit and liquidity risks. For
example, one such risk is that of a ``double default'' where after an
allocation is made, the agent/issuer expected to make the payment does
not do so, and the participant that received the allocation defaults
before DTC can recover it. While this ``allocate all'' practice
provides increased allocations to DTC participants, it does so at the
expense of the risks described above.
In order to address these risks, DTC has been working extensively
with paying agents to improve their payment timeliness and accuracy in
a variety of ways. Paying agents are not provided with reports
identifying various defects (for example, late, incomplete, or late and
incomplete payment detail) that should allow them to perform root cause
analysis and improve their processing and performance. Additionally,
DTC has worked with several larger paying agents in their conversion to
an automated means of providing CUSIP-level detail. As a result of
these improvements, DTC has over the last few years greatly reduced the
proportion of funds received late or without appropriate CUSIP level
detail (compared to 2009, 2010 allocations relating to late or
unidentified payments have decreased 60%--an estimated $50 billion in
2010 compared to $128 billion in 2009).
With risk mitigation at the forefront of market participants and
regulators' concerns and given the extensive progress that DTC and
paying agents have made in improving agents' payment practices, DTC
proposes to discontinue the current ``allocate all'' practice and to
move to a methodology that results in the allocation only of those
entitlements paid before the cut-off and identified at a CUSIP-level.
As a result of this proposed change in practice, DTC also proposes to
discontinue its use of the algorithmic formula to allocate unidentified
funds since this calculation will no longer be necessary.
In order to accommodate the anticipated increase in funds not
allocated on the payable date due to late or unidentified payments, DTC
also proposes to begin allocation of funds received with corresponding
CUSIP-level identification information upon receipt, beginning at 8:20
a.m. ET and continuing every 20 minutes until shortly after the 3 p.m.
ET cut-off time. This change in time will allow for more customers to
receive timely and properly identified payments on the payable date.
DTC believes that the implementation of this policy eliminates the
credit risk associated with DTC allocating cash entitlements to
participants before such payments are received from the paying agent or
issuer.
Implementation Timeframe
DTC proposes to implement the changes set forth in this filing on
February 7, 2011. DTC participants, paying agents, and other financial
intermediaries were first notified of this intended change through
DTCC's publication of a White Paper to the Industry in November
2009.\7\ In order to ensure widespread awareness and minimize the
service impact to customers, DTC undertook in 2010 a number of
initiatives aimed at paying agents in order to prepare them for the
implementation of these changes. First, an Industry Task Force was
established to ensure collaboration and a voice for key stakeholders
and industry constituencies as the policy moved forward.\8\ DTC also
sponsored educational tools to update paying agents and participants
alike about the upcoming changes to the allocation policy.\9\ Finally,
DTC gave numerous
[[Page 5845]]
platform presentations and updates to the following groups: Operations
Advisory Committee, ISITC, ABA Corporate Trust Committee, SIFMA DTC
Education Conference, SIFMA Operations & Regulatory Committee, SIFMA
Asset Managers Forum, and DTC's Asset Services, Settlement and
Securities Processing Advisory Boards.
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\7\ The White Paper can be found at https://www.dtcc.com/downloads/leadership/whitepapers/Payment_Refinement.pdf.
\8\ The Industry Task Force consisted of the following entities:
Association of Global Custodians, American Bankers Association,
Asset Managers Forum, Bank of America LaSalle, Bank of America
Merrill Lynch, Bank of NY Mellon, Bank Depository User Group, Brown
Bros. Harriman, Citibank, Computershare, Deutsche Bank, Edward
Jones, Government Finance Officers Association, Goldman Sachs, JP
Morgan Chase, M&I Bank, Morgan Stanley, NFS (Fidelity
Institutional), SIFMA, The Clearing House, U.S. Bank, and Wells
Fargo. This Task Force held meetings in February, April, May, June,
July, September, November, and December 2010.
\9\ Pursuant to the release of the White Paper, DTC customers
requested a tool that would help measure the impact of the proposed
change at a participant level and identify current allocations
occurring in a manner that was not consistent with the proposed
methodology. In response to this request and effective January 22,
2010, DTC developed and delivered two weekly reports--``CSH DIV--
Imprecise Allocations'' (e.g., dividends, interest, pro-rata
principal) and ``CSH RED--Imprecise Allocations'' (i.e., calls,
maturities, redemptions) that included all ``imprecise'' or
noncompliant allocations for the given week. The reports were
grouped by allocation day and sorted by CUSIP allowing participants
to measure the impact of imprecise allocations as well as build a
history of noncompliant CUSIPs to assist in driving allocation
decisions. DTC then developed and put into place P&I Agent Payment
Performance reports which provided agent-specific payment
performance data and defects (e.g., late payments, missing detail)
to agents. DTC identified target agents (i.e., those with late or
unidentified payments) and tracked performance. Approximately 4,000
agents were provided targeted feedback on specific process
deficiencies (late or unidentified payments) in 2010. DTC also
created and maintained a dedicated electronic mailbox for
communicating en masse with paying agents. DTC contacted the vast
majority of the approximately 7,000 different issuers and agents
making entitlement payments to DTC to aid in the awareness of the
P&I allocation refinement.
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The industry has been advised of the Industry Task Force's and
DTC's progress in improving DTC's P&I payment process and the
implementation date of the proposed rule changes through the issuance
of Important Notices that were published on the DTCC Web site.\10\
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\10\ See DTCC Important Notice 6132-10 (January 15, 2010); DTC
Important Notice 7045-10 (August 2, 2010); DTC Important
Notice 7659-10 (November 22, 2010).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
DTC does not believe that the proposed rule change would 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 relating to the proposed rule change have not been
solicited or received. DTC will notify the Commission of any written
comments received by DTC.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change 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 rule-comments@sec.gov. Please include
File Number SR-DTC-2011-01 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submission should refer to File Number SR-DTC-2011-01. 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 (https://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 Web site viewing and
printing in the Commission's Public Reference Section, 100 F Street,
NE., Washington, DC 20549-1090, on official business days between the
hours of 10 a.m. and 3 p.m. Copies of such filings will also be
available for inspection and copying at the principal office of DTC and
on DTC's Web site at https://www.dtcc.com/downloads/legal/rule_filings/2011/dtc/2011-01.pdf. 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-2011-01 and should be submitted on or before February 23, 2011.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
For the reasons stated below, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to DTC.\11\
Specifically, the Commission finds that the proposed rule change is
consistent with Section 17A(b)(3)(F) of the Act which requires, among
other things, that the rules of a clearing agency be designed to
promote the prompt and accurate clearance and settlement of securities
transactions, to assure the safeguarding of securities and funds of
DTC's participants which are in the custody and control of the clearing
agency, and to remove impediments to and perfect the mechanism of a
national system for prompt and accurate clearance and settlement of
securities transactions.\12\
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\11\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
\12\ 15 U.S.C. 78q-1(b)(3)(F).
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As described in this filing, DTC's ``allocate all'' methodology
subjects DTC, its participants, and beneficial owners to inherent
problems. An in-depth study conducted internally by DTC at the request
and recommendation of regulators has resulted in its decision to
eliminate the ``allocate all'' policy. Accordingly, the Commission
finds that the rule change is consistent with Section 17A(b)(3)(F) of
the Act because it should allow DTC to reduce risks associated with its
current P&I payment process, which in turn, should enable DTC to better
safeguard the funds and securities which are in DTC's custody and
control.
DTC has requested that the Commission find good cause for approving
the proposed rule change prior to the thirtieth day after publication
of notice of filing thereof in the Federal Register. As discussed
above, approval of the proposal will allow DTC to immediately cease its
current ``allocate all'' P&I payment policy and implement a policy that
reduces risk for DTC, its participants, paying agents, and other
financial intermediaries associated with P&I allocations. Furthermore,
in anticipation of implementation of these changes, DTC's participants
and paying agents have already taken the necessary steps to code their
systems for the February 7, 2011, implementation date. Change in this
implementation date could cause significant system disruptions at these
participants and paying agents. As such, the Commission finds good
cause for approving the proposed rule change prior to the thirtieth day
after the date of publication of notice filing in the Federal Register.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-DTC-2011-01) is approved on an
accelerated basis.
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-2225 Filed 2-1-11; 8:45 am]
BILLING CODE 8011-01-P