Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of Proposed Rule Change To Address and Update Practices and Policies With Respect to the Credit Risk Rating Matrix and Make Other Changes, 17483-17489 [2017-07181]
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Federal Register / Vol. 82, No. 68 / Tuesday, April 11, 2017 / Notices
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deposit procedures for in-kind
purchases of Creation Units and the
redemption procedures for in-kind
redemptions of Creation Units will be
the same for all purchases and
redemptions and Deposit Instruments
and Redemption Instruments will be
valued in the same manner as those
Portfolio Instruments currently held by
the Funds. Applicants also seek relief
from the prohibitions on affiliated
transactions in section 17(a) to permit a
Fund to sell its shares to and redeem its
shares from a Fund of Funds, and to
engage in the accompanying in-kind
transactions with the Fund of Funds.2
The purchase of Creation Units by a
Fund of Funds directly from a Fund will
be accomplished in accordance with the
policies of the Fund of Funds and will
be based on the NAVs of the Funds.
9. Applicants also request relief to
permit a Feeder Fund to acquire shares
of another registered investment
company managed by the Adviser
having substantially the same
investment objectives as the Feeder
Fund (‘‘Master Fund’’) beyond the
limitations in section 12(d)(1)(A) and
permit the Master Fund, and any
principal underwriter for the Master
Fund, to sell shares of the Master Fund
to the Feeder Fund beyond the
limitations in section 12(d)(1)(B).
10. Section 6(c) of the Act permits the
Commission to exempt any persons or
transactions from any provision of the
Act if such exemption is necessary or
appropriate in the public interest and
consistent with the protection of
investors and the purposes fairly
intended by the policy and provisions of
the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may
exempt any person, security, or
transaction, or any class or classes of
persons, securities, or transactions, from
any provision of section 12(d)(1) if the
exemption is consistent with the public
interest and the protection of investors.
Section 17(b) of the Act authorizes the
Commission to grant an order
permitting a transaction otherwise
prohibited by section 17(a) if it finds
that (a) the terms of the proposed
transaction are fair and reasonable and
do not involve overreaching on the part
of any person concerned; (b) the
proposed transaction is consistent with
2 The requested relief would apply to direct sales
of shares in Creation Units by a Fund to a Fund of
Funds and redemptions of those shares. Applicants,
moreover, are not seeking relief from section 17(a)
for, and the requested relief will not apply to,
transactions where a Fund could be deemed an
Affiliated Person, or a Second-Tier Affiliate, of a
Fund of Funds because an Adviser or an entity
controlling, controlled by or under common control
with an Adviser provides investment advisory
services to that Fund of Funds.
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the policies of each registered
investment company involved; and (c)
the proposed transaction is consistent
with the general purposes of the Act.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–07173 Filed 4–10–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80382; File No. SR–DTC–
2017–002]
Self-Regulatory Organizations; The
Depository Trust Company; Notice of
Filing of Proposed Rule Change To
Address and Update Practices and
Policies With Respect to the Credit
Risk Rating Matrix and Make Other
Changes
April 5, 2017.
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 March 22,
2017, 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 the clearing
agency.3 The Commission is publishing
this notice to solicit comments on the
proposed rule change from interested
persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The proposed rule change consists of
amendments to DTC’s Rules, By-Laws
and Organization Certificate (‘‘Rules’’).4
The proposed rule change would amend
Rules 1 and 2 in order to (i) address and
update DTC’s practices and policies
with respect to the existing matrix
(hereinafter referred to as the ‘‘Credit
Risk Rating Matrix’’ or ‘‘CRRM’’), which
was, as described in an earlier DTC rule
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 On March 22, 2017, DTC filed this proposed
rule change as an advance notice (SR–DTC–2017–
801) with the Commission pursuant to Section
806(e)(1) of Title VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act entitled the
Payment, Clearing, and Settlement Supervision Act
of 2010, 12 U.S.C. 5465(e)(1), and Rule 19b–
4(n)(1)(i) of the Act, 17 CFR 240.19b–4(n)(1)(i). A
copy of the advance notice is available at https://
www.dtcc.com/legal/sec-rule-filings.aspx.
4 Capitalized terms not defined herein are defined
in the Rules, available at www.dtcc.com/∼/media/
Files/Downloads/legal/rules/dtc_rules.pdf.
2 17
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17483
filing,5 developed by DTC to assign a
credit rating to certain Participants
(‘‘CRRM-Rated Participants’’) by
evaluating the risks posed by CRRMRated Participants to DTC and its
Participants from providing services to
these CRRM-Rated Participants and (ii)
make other amendments to the Rules to
provide more transparency and clarity
regarding DTC’s current ongoing
membership monitoring process.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, the
clearing agency 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. The
clearing agency has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
1. Purpose
The proposed rule change would
amend Rules 1 and 2 in order to (i)
address and update DTC’s practices and
policies with respect to the CRRM and
(ii) provide more transparency and
clarity regarding DTC’s current
membership monitoring process. In this
regard, the proposed rule change would
(i) add proposed definitions for the
terms ‘‘Credit Risk Rating Matrix’’ and
‘‘Watch List’’ to Rule 1 (Definitions), as
discussed below and (ii) amend Rule 2
(Participants and Pledgees) to (A) clarify
a provision in Section 1 relating to the
types of information a Participant must
provide to DTC upon DTC’s request for
the Participant to demonstrate its
satisfactory financial condition and
operational capability, including its risk
management practices with respect to
services of DTC utilized by the
Participant for another Person and (B)
add a new Section 10 to include
provisions relating to the monitoring,
surveillance and review of Participants,
including, but not limited to, the
application of the CRRM and proposed
5 See Securities Exchange Act Release No. 53655
(April 14, 2006), 71 FR 20428 (April 20, 2006) (SR–
DTC–2006–03) (order of the Commission)
approving a proposed rule change (‘‘2006 Rule
Change’’) of DTC to amend the criteria used by DTC
to place Participants on surveillance status,
including, but not limited to DTC’s application of
the CRRM and the placement of lower rated CRRMRated Participants on an internal list in order to be
monitored more closely (‘‘Watch List’’).
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enhancements to the CRRM, as further
discussed below.
(i) Background
DTC occupies an important role in the
securities settlement system by, among
other things, providing services for the
settlement of book-entry transfer and
pledge of interests in eligible deposited
securities and net funds settlement, in
connection with which Participants may
incur net funds settlement obligations to
DTC. DTC uses the CRRM, the Watch
List and the enhanced surveillance to
manage and monitor default risks of
Participants on an ongoing basis, as
discussed below. The level and
frequency of such monitoring for a
Participant is determined by the
Participant’s risk of default as assessed
by DTC. Participants that are deemed by
DTC to pose a heightened risk to DTC
and its Participants are subject to closer
and more frequent monitoring.
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Existing Credit Risk Rating Matrix
Pursuant to the 2006 Rule Change, all
Participants that are either U.S. brokerdealers or U.S. banks are assigned a
rating generated solely based on
quantitative factors by entering financial
data of those Participants into an
internally generated credit rating matrix,
i.e., the CRRM.6 All other types of
Participants are monitored by credit risk
staff using financial criteria deemed
relevant by DTC but would not be
assigned a rating by the CRRM.7
The 2006 Rule Change explained that
credit risk staff could downgrade a
particular Participant’s credit rating
based on various qualitative factors. An
6 See 2006 Rule Change, SR–DTC–2006–03, 71 FR
20428, which explained that the ratings assigned by
the CRRM were generated using financial data
extracted from standard regulatory reports of U.S.
broker-dealers and banks. A small number of U.S.
banks which submitted standard regulatory reports
were not assigned a rating because they did not take
deposits or make loans, and therefore the regulatory
reports of these banks did not contain information
on asset quality and/or liquidity, which was a data
component used in the CRRM. Id. However, the
2006 Rule Change provided DTC with discretion to
continue to ‘‘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.’’ Id. DTC has
continued to evaluate the CRRM and has
determined that the CRRM is the most effective
method available to it to evaluate the default risk
presented by any U.S. bank that submits regulatory
reports, including a bank whose reports exclude
certain data components as mentioned above.
Accordingly, DTC applies the CRRM to assign
ratings to any U.S. bank that submits regulatory
reports, including those that were not covered by
the CRRM in 2006, as reflected in the proposed rule
change.
7 In the 2006 Rule Change, DTC noted that these
Participants would be monitored by credit risk staff
by reviewing similar criteria as those reviewed for
Participants included on the matrix but such review
would occur outside of the matrix process. Id.
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example of such qualitative factors
might be that the Participant in question
received a qualified audit opinion on its
annual audit. DTC noted in the 2006
Rule Change that in order to protect
DTC and its other Participants, it was
important that credit risk staff maintain
the discretion to downgrade a
Participant’s credit rating on the CRRM
and thus subject the Participant to
closer monitoring.
The current CRRM is comprised of
two credit rating models—one for the
U.S. broker-dealers and one for the U.S.
banks—and generates credit ratings for
the relevant Participants based on a 7point rating system, with ‘‘1’’ being the
strongest credit rating and ‘‘7’’ being the
weakest credit rating.
Over time, the current CRRM has not
kept pace with DTC’s evolving
Participant membership base and
heightened expectations from regulators
and stakeholders for robustness of
financial models. Specifically, the
current CRRM only generates credit
ratings for those Participants that are
U.S. banks or U.S. broker-dealers that
file standard reports with their
regulators, which currently comprise
80% of Participants; foreign banks and
trust companies currently account for
5% of Participants.8 The number of
Participants that are foreign banks or
trust companies increased from 12 in
2012 to 13 in 2017, and is expected to
continue to grow over the coming years.
Foreign banks and trust companies are
typically large global financial
institutions that have complex
businesses and conduct a high volume
of activities. Although foreign banks and
trust companies are not currently rated
by the CRRM, they are monitored by
DTC’s credit risk staff using financial
criteria deemed relevant by DTC and
can be placed on the Watch List if they
experience a financial change that
presents risk to DTC. Given the increase
in the number of foreign bank
Participants in recent years, there is a
need to formalize DTC’s credit risk
evaluation process of the foreign bank or
trust company Participants by assigning
credit ratings to them in order to better
facilitate the comparability of credit
risks among Participants.9
8 As of March 16, 2017, there are 251 Participants,
of which 50 (or 20%) are U.S. banks, 151 (or 60%)
are U.S. broker-dealers and 13 (or 5%) are foreign
banks or trust companies.
9 DTC noted in the 2006 Rule Change that the
CRRM is applied across DTC and its affiliated
clearing agencies, NSCC and FICC. Specifically, in
order to run the CRRM, credit risk staff uses the
financial data of the applicable DTC Participants in
addition to data of applicable members of NSCC
and FICC. In this way, each applicable DTC
Participant is rated against other applicable
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As mentioned above, a Participant’s
credit rating is currently based solely
upon quantitative factors. It is only after
the CRRM has generated a credit rating
with respect to a Participant that such
Participant’s credit rating may be
downgraded manually by credit risk
staff, after taking into consideration
relevant qualitative factors. The
inability of the current CRRM to take
into account qualitative factors requires
frequent and manual overrides by credit
risk staff, which may result in
inconsistent and/or incomplete credit
ratings for Participants.
Furthermore, the current CRRM uses
a relative scoring approach and relies on
peer grouping of Participants to
calculate the credit rating of a
Participant. This approach is not ideal
because a Participant’s credit rating can
be affected by changes in its peer group
even if the Participant’s financial
condition is unchanged.
Proposed Credit Risk Rating Matrix
Enhancements
To improve the coverage and the
effectiveness of the current CRRM, DTC
is proposing three enhancements to the
CRRM. The first proposed enhancement
would expand the scope of CRRM
coverage by enabling the CRRM to
generate credit ratings for Participants
that are foreign banks or trust
companies and that have audited
financial data that is publicly available.
The second proposed enhancement
would incorporate qualitative factors
into the CRRM and therefore is expected
to reduce the need and the frequency of
manual overrides of Participant credit
ratings. The third enhancement would
replace the relative scoring approach
currently used by CRRM with a
statistical approach to estimate the
absolute probability of default of each
Participant.
A. Enable the CRRM to Generate Credit
Ratings for Foreign Bank or Trust
Company Participants
The current CRRM is comprised of
two credit rating models—one for the
U.S. broker-dealers and one for the U.S.
banks. DTC is proposing to enhance the
CRRM by adding an additional credit
rating model for the foreign banks and
trust companies. The additional model
would expand the scope of Participants
to which the CRRM would apply to
include foreign banks and trust
companies that have audited financial
data that is publicly available. The
CRRM credit rating of a foreign bank or
trust company that is a Participant
members of NSCC and FICC. See 2006 Rule Change,
SR–DTC–2006–03, 71 FR 20428.
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would be based on quantitative factors,
including size, capital, leverage,
liquidity, profitability and growth, and
qualitative factors, including market
position and sustainability, information
reporting and compliance, management
quality, capital management and
business/product diversity. By enabling
the CRRM to generate credit ratings for
these Participants, the enhanced CRRM
would provide more comprehensive
credit risk coverage of DTC’s
membership base.
With the proposed enhancement to
the CRRM as described above,
applicable foreign bank or trust
company Participants would be
included in the CRRM process and be
evaluated more effectively and
efficiently because financial data with
respect to these foreign bank or trust
company Participants could be
extracted from data sources in an
automated form.10
After the proposed enhancement,
CRRM would be able to generate credit
ratings on an ongoing basis for all
Participants that are U.S. banks, U.S.
brokers-dealers and foreign banks and
trust companies, which together
represent approximately 85% of
Participants.11
B. Incorporate Qualitative Factors Into
the CRRM
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In addition, as proposed, the
enhanced CRRM would blend both
qualitative factors and quantitative
factors to produce a credit rating for
each applicable Participant in relation
to the Participant’s credit risk. For U.S.
and foreign banks and trust companies,
the enhanced CRRM would use a 70/30
weighted split between quantitative and
qualitative factors to generate credit
ratings. For U.S. broker-dealers, the
weight split between quantitative and
qualitative factors would be 60/40.
These weight splits have been chosen by
DTC based on the industry best practice
as well as research and sensitivity
analysis conducted by DTC. DTC would
review and adjust the weight splits as
well as the quantitative and qualitative
factors, as needed, based on
recalibration of the CRRM to be
10 In the 2006 Rule Change, DTC noted that these
Participants would be monitored by credit risk staff
by reviewing similar criteria as those reviewed for
Participants included on the CRRM, but such
review would occur outside of the CRRM process.
Id.
11 As of March 16, 2017, there are 37 Participants
that would not be rated by the enhanced CRRM, as
proposed, because they are central securities
depositories, securities exchanges, government
sponsored entities, central counterparties, central
banks and U.S. trust companies that do not file Call
Reports (as defined below).
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conducted by DTC approximately every
three to five years.
Although there are advantages to
measuring credit risk quantitatively,
quantitative evaluation models alone are
incapable of fully capturing all credit
risks. Certain qualitative factors may
indicate that a Participant is or will
soon be undergoing financial distress,
which may in turn signal a higher
default exposure to DTC and its other
Participants. As such, a key
enhancement being proposed to the
CRRM is the incorporation of relevant
qualitative factors into each of the three
credit rating models mentioned above.
By including qualitative factors in the
three credit rating models, the enhanced
CRRM would capture risks that would
otherwise not be accounted for with
quantitative factors alone.12 Adding
qualitative factors to the CRRM would
not only enable it to generate more
consistent and comprehensive credit
ratings for applicable Participants, but it
would also help reduce the need and
frequency of manual credit rating
overrides by the credit risk staff because
overrides would likely only be required
under more limited circumstances.13
C. Shifting From Relative Scoring to
Absolute Scoring
As proposed, the enhanced CRRM
would use an absolute scoring approach
and rank each Participant based on its
individual probability of default rather
than the relative scoring approach that
is currently in use. This proposed
change is designed to have a
Participant’s CRRM-generated credit
rating reflect an absolute measure of the
Participant’s default risk and eliminate
any potential distortion of a
Participant’s credit rating from the
Participant’s peer group that may occur
under the relative scoring approach
used in the existing CRRM.
12 The initial set of qualitative factors that would
be incorporated into the CRRM includes (a) for U.S.
broker dealers, market position and sustainability,
management quality, capital management, liquidity
management, geographic diversification, business/
product diversity and access to funding, (b) for U.S.
banks, environment, compliance/litigation,
management quality, liquidity management and
parental demands and (c) for foreign banks and
trust companies, market position and sustainability,
information reporting and compliance, management
quality, capital management and business/product
diversity.
13 Once a Participant is assigned a credit rating,
if circumstances warrant, credit risk staff would
still have the ability to override the CRRM-issued
credit rating by manually downgrading such rating
as they do today. To ensure a conservative
approach, the CRRM-issued credit ratings cannot be
manually upgraded.
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D. Watch List and Enhanced
Surveillance
In addition to the Watch List, DTC
also maintains an enhanced surveillance
list (referenced herein and in the
proposed rule text as ‘‘enhanced
surveillance’’) for membership
monitoring. The enhanced surveillance
list is generally used when Participants
are undergoing drastic and unexpected
changes in their financial conditions or
operation capabilities and thus are
deemed by DTC to be of the highest risk
level and/or warrant additional scrutiny
due to DTC’s ongoing concerns about
these Participants. Accordingly,
Participants that are subject to enhanced
surveillance are reported to DTC’s
management committees and are also
regularly reviewed by a cross-functional
team comprised of senior management
of DTC. More often than not,
Participants that are subject to enhanced
surveillance are also on the Watch List.
The group of Participants that is subject
to enhanced surveillance is generally
much smaller than the group on the
Watch List. The enhanced surveillance
list is an internal tool for DTC that
triggers increased monitoring of a
Participant above the monitoring that
occurs when a Participant is on the
Watch List.
A Participant could be placed on the
Watch List either based on its credit
rating of 5, 6 or 7, which can either be
generated by the CRRM or from a
manual downgrade, or when DTC
deems such placement as necessary to
protect DTC and its Participants. In
contrast, a Participant would be subject
to enhanced surveillance only when
close monitoring of the Participant is
deemed necessary to protect DTC and
its Participants.
(ii) Detailed Description of the Proposed
Rule Changes
The 2006 Rule Change, while setting
forth the procedures DTC follows with
regard to the CRRM and the Watch List,
did not incorporate these procedures
into the text of the Rules. Pursuant to
the proposed rule change, DTC would
amend the Rules to incorporate the
CRRM with the enhancements proposed
above, including (1) the use of both
quantitative and qualitative factors in
generating credit ratings for CRRMRated Participants, (2) the expansion of
the scope of CRRM coverage to enable
the CRRM to generate credit ratings for
Participants that are (a) U.S. banks that
file the Consolidated Report of
Condition and Income (‘‘Call Report’’),
(b) U.S. broker-dealers that file the
Financial and Operational Combined
Uniform Single Report (‘‘FOCUS
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Report’’) or the equivalent with their
regulators, or (c) foreign banks or trust
companies that have audited financial
data that is publicly available and (3)
that the CRRM would use an absolute
scoring approach and rank each
Participant based on its individual
probability of default (rather than the
relative scoring approach that is
currently in use). Also, the proposed
rule change would define the CRRM and
the Watch List and add rule text to
provide more transparency and clarity
regarding DTC’s current ongoing
membership monitoring process.
In this regard, the proposed rule
change would (i) add proposed
definitions for CRRM and Watch List to
Rule 1 (Definitions) and (ii) amend Rule
2 (Participants and Pledgees) (A)
Section 1 to clarify a provision relating
to the types of information a Participant
must provide to DTC upon DTC’s
request for the Participant to
demonstrate its satisfactory financial
condition and operational capability,
including its risk management practices
with respect to services of DTC utilized
by the Participant for another Person or
Persons and (B) to add a new Section 10
to include provisions relating to the
monitoring, surveillance and review of
Participants, including, but not limited
to, the application of the CRRM and
proposed enhancements to the CRRM,
as further discussed below.
A. Proposed Changes to Rule 1
(Definitions)
The proposed rule change would
amend Rule 1 to add definitions for the
CRRM and the Watch List.
The proposed definition of the CRRM
would provide that the term ‘‘Credit
Risk Rating Matrix’’ means a matrix of
credit ratings of Participants as specified
in the proposed new Section 10(a) of
Rule 2. As proposed, the definition
would state that the CRRM is developed
by DTC to evaluate the credit risk such
Participants pose to DTC and its
Participants and is based on factors
determined to be relevant by DTC from
time to time, which factors are designed
to collectively reflect the financial and
operational condition of a Participant.
The proposed definition would also
state that these factors include (i)
quantitative factors, such as capital,
assets, earnings and liquidity and (ii)
qualitative factors, such as management
quality, market position/environment
and capital and liquidity risk
management.
The proposed definition of the Watch
List would provide that the term
‘‘Watch List’’ means, at any time and
from time to time, the list of Participants
whose credit ratings derived from the
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CRRM are 5, 6 or 7, as well as
Participants that, based on DTC’s
consideration of relevant factors,
including those that would be set forth
in the proposed new Section 10 of Rule
2 (described below), are deemed by DTC
to pose a heightened risk to DTC and its
Participants.
B. Proposed Changes to Section 1 of
Rule 2 (Participants and Pledgees)
Section 1 of Rule 2 provides, among
other things, that upon the request of
DTC, a Participant shall furnish to DTC
information sufficient to demonstrate its
satisfactory financial condition and
operational capability. The proposed
rule change would, by way of example,
clarify that the types of information that
DTC may require in this regard include,
but are not limited to, such information
as DTC may request regarding the
businesses and operations of the
Participant and its risk management
practices with respect to services of DTC
utilized by the Participant for another
Person.
C. Proposed New Section 10 of Rule 2
The proposed rule change would add
a new Section 10 of Rule 2 to include
provisions relating to the monitoring,
surveillance and review of Participants,
including, but not limited to, the
application of, and the proposed
enhancements to, the CRRM. In this
regard, the proposed new Section 10 of
Rule 2 would provide that:
(1) All Participants would be
monitored and reviewed by DTC on an
ongoing and periodic basis, which may
include monitoring of news and market
developments and review of financial
reports and other public information.
(2)(i) A Participant that is (A)
qualified to be a Participant pursuant to
(x) Rule 3, Section 1(d) and files the Call
Report (i.e., a U.S. Bank) or (y) Rule 3,
Section 1(h)(ii) and files the FOCUS
Report or the equivalent with its
regulator (i.e., a U.S. broker-dealer) or
(B) a foreign bank or trust company
qualified to be a Participant pursuant to
Section 2 of the Policy Statement on the
Admission of Participants and that has
audited financial data that is publicly
available, would be assigned a credit
rating by DTC in accordance with the
CRRM. The proposed rule change would
also provide that a Participant’s credit
rating will be reassessed each time the
Participant provides DTC with
requested information pursuant to
Section 1 of Rule 2, or as may be
otherwise required under the Rules and
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Procedures 14 (including proposed new
Section 10 of Rule 2).
(ii) Because the factors used as part of
the CRRM may not identify all risks that
a CRRM-Rated Participant may present
to DTC, DTC may, in its discretion,
override the CRRM-Rated Participant’s
credit rating derived from the CRRM to
downgrade that Participant. In this
regard, the proposed rule change would
provide that (A) such a downgrading
may result in the Participant being
placed on the Watch List, and/or it may
subject the Participant to enhanced
surveillance based on relevant factors,
including those described in paragraph
(4) below and (B) DTC may also take
such additional actions with regard to
the Participant as are permitted by the
Rules and Procedures.
(3) Participants other than CRRMRated Participants would not be
assigned a credit rating by the CRRM
but may be placed on the Watch List
and/or may be subject to enhanced
surveillance based on relevant factors,
including those described in paragraph
(4) below, as DTC deems necessary to
protect it and its Participants.
(4) The factors to be considered by
DTC as proposed in paragraphs (2)(ii)
and (3) above would include, but would
not be not limited to, (i) news reports
and/or regulatory observations that raise
reasonable concerns relating to the
Participant, (ii) reasonable concerns
around the Participant’s liquidity
arrangements, (iii) material changes to
the Participant’s organizational
structure, (iv) reasonable concerns of
DTC about the Participant’s financial
stability due to particular facts and
circumstances, such as material
litigation or other legal and/or
regulatory risks, (v) failure of the
Participant to demonstrate satisfactory
financial condition or operational
capability or if DTC has a reasonable
concern regarding the Participant’s
ability to maintain applicable
participation standards and (vi) failure
of the Participant to provide information
required by DTC to assess risk exposure
posed by the Participant’s activity
(including information requested by
DTC pursuant to Section 1 of Rule 2).
(5) A Participant being subject to
enhanced surveillance or being placed
on the Watch List would result in more
thorough monitoring of the Participant’s
financial condition and/or operational
capability, which could include, for
example, on-site visits or additional due
diligence information requests from
14 Pursuant to Section 1 of Rule 1, the term
‘‘Procedures’’ means the Procedures, service guides,
and regulations of DTC adopted pursuant to Rule
27, as amended from time to time. Rules, supra note
4.
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DTC. In this regard, the proposed rule
change would provide that DTC may
require a Participant placed on the
Watch List and/or subject to enhanced
surveillance to make more frequent
financial disclosures, including, without
limitation, interim and/or pro forma
reports. The proposed rule change
would also provide that Participants
that are subject to enhanced
surveillance would also be reported to
DTC’s management committees and
regularly reviewed by a cross-functional
team comprised of senior management
of DTC. The proposed rule change
would further provide that DTC may
also take such additional actions with
regard to any Participant (including a
Participant placed on the Watch List
and/or subject to enhanced surveillance)
as are permitted by the Rules and
Procedures.
srobinson on DSK5SPTVN1PROD with NOTICES
Implementation Timeframe
Pending Commission approval, DTC
expects to implement this proposal
promptly. Participants would be
advised of the implementation date of
this proposal through issuance of a DTC
Important Notice.
2. Statutory Basis
Section 17A(b)(3)(F) of the Act
requires that the Rules be designed to
promote the prompt and accurate
clearance and settlement of securities
transactions and to assure the
safeguarding of securities and funds
which are in the custody or control of
DTC or for which it is responsible.15
By enhancing the CRRM to enable it
to assign credit ratings to Participants
that are foreign banks or trust
companies and that have audited
financial data that is publicly available,
DTC believes that the proposed rule
change is consistent with Section
17A(b)(3)(F) of the Act. This is because
the proposed rule change expands the
CRRM’s applicability to a wider group
of Participants, which further improves
DTC’s membership monitoring process
and better enables DTC to safeguard the
securities and funds which are in its
custody or control or for which it is
responsible in furtherance of the Act.
Similarly, by enhancing the CRRM to
enable it to incorporate qualitative
factors when assigning a Participant’s
credit rating, DTC believes that this
proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act. This is
because the proposed rule change
would enable DTC to take into account
relevant qualitative factors in an
automated and more effective manner
when monitoring the credit risks
15 15
16 17 CFR 240.17Ad–22(e)(3)(i). The Commission
adopted amendments to Rule 17Ad–22, including
U.S.C. 78q–1(b)(3)(F).
VerDate Sep<11>2014
20:18 Apr 10, 2017
presented by Participants, thus
improving DTC’s membership
monitoring process overall, which
would in turn better enable DTC to
safeguard the securities and funds
which are in its custody or control or for
which it is responsible in furtherance of
the Act.
Likewise, by enhancing the CRRM to
shift from a relative scoring approach to
an absolute scoring approach when
assigning a Participant’s credit rating,
DTC believes that this proposed rule
change is consistent with Section
17A(b)(3)(F) of the Act. This is because
the proposed rule change would enable
DTC to generate credit ratings for
Participants that are more reflective of
the Participants’ default risk, thus
improving DTC’s membership
monitoring process overall, which
would in turn better enable DTC to
safeguard the securities and funds
which are in its custody or control or for
which it is responsible in furtherance of
the Act.
By providing specificity, clarity and
additional transparency to the Rules
related to DTC’s current ongoing
membership monitoring process, DTC
believes that the proposed rule changes
to (1) Rule 1 to add the definitions of
CRRM and Watch List, (2) Section 1 of
Rule 2 to clarify a provision relating to
the types of information a Participant
must provide to DTC upon DTC’s
request for the Participant to
demonstrate its satisfactory financial
condition and operational capability
and (3) add Section 10 of Rule 2 to
include provisions relating to the
monitoring, surveillance and review of
Participants, including, but not limited
to, the application of the CRRM and
proposed enhancements thereto, are
consistent with Section 17A(b)(3)(F) of
the Act because the proposed rule
changes would help ensure that the
Rules remain accurate and clear.
Collectively, the proposed changes
would help ensure that the Rules are
more transparent, accurate and clear,
which would help enable all
stakeholders to readily understand their
respective rights and obligations with
DTC’s clearance and settlement of
securities transactions. Therefore, DTC
believes that the proposed rule changes
would promote the prompt and accurate
clearance and settlement of securities
transactions, consistent with Section
17A(b)(3)(F) of the Act.
The proposed enhancements to the
CRRM are consistent with Rule 17Ad–
22(e)(3)(i) under the Act, which was
recently adopted by the Commission.16
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17487
Rule 17Ad–22(e)(3)(i) will require DTC
to establish, implement, maintain and
enforce written policies and procedures
reasonably designed to maintain a
sound risk management framework for
comprehensively managing risks that
arise in or are born by DTC, which
includes . . . systems designed to
identify, measure, monitor and manage
the range of risks that arise in or are
borne by DTC.17 The proposed
enhancements to the CRRM have been
designed to assist DTC in identifying,
measuring, monitoring and managing
the credit risks to DTC posed by its
Participants. The proposed
enhancements to the CRRM accomplish
this by (i) expanding the CRRM’s
applicability to a wider group of
Participants to include Participants that
are foreign banks or trust companies, (ii)
enabling the CRRM to take into account
relevant qualitative factors in an
automated and more effective manner
when monitoring the credit risks
presented by Participants and (iii)
enabling the CRRM to generate credit
ratings for Participants that are more
reflective of the Participants’ default
risk by shifting to an absolute scoring
approach, all of which would improve
DTC’s membership monitoring process
overall. Therefore, DTC believes the
proposed enhancements to the CRRM
would assist DTC in identifying,
measuring, monitoring and managing
risks that arise in or are born by DTC,
consistent with the requirements of Rule
17Ad–22(e)(3)(i).
The proposed rule change to Section
1 of Rule 2 with respect to the scope of
information that may be requested by
DTC from its Participants has been
designed to be consistent with Rule
17Ad–22(e)(19) under the Act, which
was recently adopted by the
Commission.18 Rule 17Ad–22(e)(19)
will require DTC to establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to identify,
monitor, and manage the material risk to
DTC arising from arrangements in
which firms that are indirect
participants in DTC rely on the services
provided by Participants to access
DTC’s payment, clearing, or settlement
facilities.19 By expressly reflecting in
the addition of new subsection 17Ad–22(e), on
September 28, 2016. See Securities Exchange Act
Release No. 78961 (September 28, 2016), 81 FR
70786 (October 13, 2016) (S7–03–14). DTC is a
‘‘covered clearing agency’’ as defined by the new
Rule 17Ad–22(a)(5) and must comply with new
subsection (e) of Rule 17Ad–22 by April 11, 2017.
Id.
17 Id.
18 17 CFR 240.17Ad–22(e)(19). Id.
19 Id.
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srobinson on DSK5SPTVN1PROD with NOTICES
the Rules what is already DTC’s current
practice associated with its request for
information sufficient to demonstrate a
Participant’s satisfactory financial
condition and operational capability to
state that such request may include
information regarding the businesses
and operations of the Participant, as
well as its risk management practices
with respect to services of DTC utilized
by the Participant for another Person,
this proposed rule change would help
enable DTC to have rule provisions that
are reasonably designed to identify,
monitor and manage the material risks
to DTC arising from tiered participation
arrangements consistent with Rule
17Ad–22(e)(19).
(B) Clearing Agency’s Statement on
Burden on Competition
DTC does not believe that the
proposed rule change to (i) enable the
CRRM to generate credit ratings for
Participants that are foreign banks or
trust companies, (ii) incorporate
qualitative factors into the CRRM and
(iii) shift to an absolute scoring
approach would impose any burden on
competition that is not necessary or
appropriate in furtherance of the Act.20
These proposed enhancements to the
CRRM would improve DTC’s Participant
credit risk evaluation process by (1)
expanding the CRRM’s credit rating
capability and thereby providing more
comprehensive credit risk coverage of
Participants, (2) enabling the CRRM to
generate more consistent and
comprehensive credit ratings for
Participants and thereby reducing the
need and frequency for manual
downgrades and (3) enabling the CRRM
to generate credit ratings for Participants
that are more reflective of the
Participants’ default risk. However, DTC
recognizes that any change to its
Participant credit risk evaluation
process, such as the proposed rule
change, may impose a burden on
competition in terms of potential impact
on Participants’ credit ratings.
Nevertheless, DTC believes that any
burden on competition derived from the
proposed rule change would be
necessary and appropriate in
furtherance of the Act because the
proposed enhancements to the CRRM
would help improve DTC’s membership
monitoring process and thus better
enable DTC to safeguard the securities
and funds which are in its custody or
control or for which it is responsible.
Furthermore, the proposed
enhancements to the CRRM would also
assist DTC in identifying, measuring,
monitoring and managing risks that
20 15
U.S.C. 78q–1(b)(3)(I).
VerDate Sep<11>2014
20:18 Apr 10, 2017
Jkt 241001
arise in or are born by DTC. As such,
DTC does not believe the proposed
enhancements to the CRRM would
impose any burden on competition that
is not necessary or appropriate in
furtherance of the Act.
DTC does not believe that the
proposed rule changes to (i) add
proposed definitions for CRRM and
Watch List to Rule 1 and (ii) amend
Rule 2 to (A) clarify a provision relating
to the types of information a Participant
must provide to DTC upon DTC’s
request for the Participant to
demonstrate its satisfactory financial
condition and operational capability
and (B) add provisions relating to the
monitoring, surveillance and review of
Participants that may operate separately
or in conjunction with DTC’s
application of the CRRM, would have
any impact on competition because each
of such proposed rule changes is
designed to provide additional
specificity, clarity and transparency in
the Rules regarding DTC’s current
ongoing membership monitoring
process by expressly providing in the
Rules DTC’s current practices with
respect to such process. As such, these
proposed rule changes would not
impact Participants or impose any
burden on competition.
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants, or Others
Written comments relating to this
proposed rule change have not been
solicited or received. DTC will notify
the Commission of any written
comments received by DTC.
III. Date of Effectiveness of the
Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate 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:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
The proposal shall not take effect
until all regulatory actions required
with respect to the proposal are
completed.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
PO 00000
Frm 00082
Fmt 4703
Sfmt 4703
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 email to rule-comments@
sec.gov. Please include File Number SR–
DTC–2017–002 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549.
All submissions should refer to File
Number SR–DTC–2017–002. This file
number should be included on the
subject line if email 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 Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of DTC and on DTCC’s Web site
(https://dtcc.com/legal/sec-rulefilings.aspx). 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–
2017–002 and should be submitted on
or before May 2, 2017.
21 17
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CFR 200.30–3(a)(12).
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Federal Register / Vol. 82, No. 68 / Tuesday, April 11, 2017 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.21
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–07181 Filed 4–10–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Submission for OMB Review:
Comment Request
Upon Written Request, Copies Available
From: U.S. Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736
Revision:
Joint Standards for Assessing the Diversity
Policies and Practices of Entities
Regulated by the Agencies, SEC File No.
270–664, OMB Control No. 3235–0740.
ACTION:
Notice.
The Securities and Exchange
Commission (the SEC) has submitted a
revision to a currently approved
information collection to the Office of
Management and Budget (OMB) for
review and approval in accordance with
the Paperwork Reduction Act of 1995
(PRA). The SEC previously received
OMB approval for a collection of
information associated with the Final
Interagency Policy Statement
Establishing Joint Standards for
Assessing the Diversity Policies and
Practices of Entities Regulated by the
Agencies (Joint Standards). The revision
adds a form entitled ‘‘Diversity
Assessment Report Assessment Report
for Entities Regulated by the SEC’’
(Diversity Assessment Report) to
facilitate the collection of information
contemplated under the Joint Standards.
DATES: Comments must be submitted on
or before May 11, 2017.
ADDRESSES: The public may review the
background documentation for this
information collection at the following
Web site: www.reginfo.gov. Comments
should be directed to: (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 by sending an
email to: Shagufta_Ahmed@
omb.eop.gov; and (ii) Pamela C. Dyson,
Chief Information Officer, Securities
and Exchange Commission, c/o Remi
Pavlik-Simon, 100 F Street NE.,
Washington, DC 20549 or send an email
to: PRA_Mailbox@sec.gov, and include
‘‘SEC File No. 270–664—OMWI
srobinson on DSK5SPTVN1PROD with NOTICES
SUMMARY:
VerDate Sep<11>2014
20:18 Apr 10, 2017
Jkt 241001
Diversity Assessment Report’’ in the
subject line of the message.
FOR FURTHER INFORMATION CONTACT:
Pamela A. Gibbs, Director, Office of
Minority and Women Inclusion, (202)
551–6046, or Audrey B. Little, Senior
Counsel, Office of Minority and Women
Inclusion, (202) 551–6086, Securities
and Exchange Commission, 100 F
Street, NE., Washington, DC 20549.
SUPPLEMENTARY INFORMATION: Under the
PRA (44 U.S.C. 3501–3520), certain
Federal agencies must obtain approval
from OMB for each collection of
information that they conduct or
sponsor. ‘‘Collection of information’’ is
defined in 44 U.S.C. 3502(3) (and 5 CFR
1320.3(c) of the PRA implementing
regulations) to include agency requests
or requirements that members of the
public submit reports, keep records, or
provide information to a third party.
The PRA (44 U.S.C. 3506(c)(2)(A))
directs these Federal agencies to publish
a 30-day notice in the Federal Register
concerning each proposed collection of
information before submitting the
collection to OMB for approval. To
comply with this requirement, the SEC
is publishing this notice to invite public
comment on the proposed revision to
the currently approved information
collection discussed below.
Title of Collection: Joint Standards for
Assessing Diversity Policies and
Practices of Entities Regulated by the
Agencies.
OMB Control Number: 3235–0740.
Description: The SEC previously
received OMB approval for a voluntary
information collection associated with
the Joint Standards, pursuant to which
entities regulated by the SEC may
conduct voluntarily self-assessments of
their diversity policies and practices
and provide information to pertaining to
the self-assessments to the SEC.1 This
proposed revision to the currently
approved collection adds a form entitled
‘‘Diversity Assessment Report for
Entities Regulated by the SEC’’
(Diversity Assessment Report) to assist
with collection of information regarding
regulated entities’ policies and practices
relating to diversity and inclusion. The
Diversity Assessment Report (1) asks for
general information about a respondent;
(2) includes questions relating to the
standards set forth in the Joint
Standards; (3) seeks data related to
workforce diversity and supplier
diversity; and (4) provides an
opportunity for comments. A draft of
this Diversity Assessment Report can be
viewed at https://www.sec.gov/omwi/
sec-entity-diversity-assessment-report1 80
PO 00000
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Frm 00083
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17489
draft.pdf. The SEC estimates that use of
the Diversity Assessment Report would
reduce the average response time for
this collection per respondent from 12
hours to 10 hours.
The SEC may use the information
submitted by the entities it regulates to
monitor progress and trends in the
financial services industry with regard
to diversity and inclusion in
employment and contracting activities
and to identify and highlight those
policies and practices that have been
successful. The SEC will continue to
reach out to the regulated entities and
other interested parties to discuss
diversity and inclusion in the financial
services industry and share leading
practices. The SEC may also publish
information disclosed by the entity,
such as any identified leading practices,
in any form that does not identify a
particular institution or disclose
confidential business information. The
SEC will not publish diversity and
inclusion information that identifies any
particular regulated entity unless the
regulated entity consents in writing to
such use.
Type of Review: Revision.
Frequency of Response: Annually.
Burden Estimates:
Revised Number of Respondents:
1,300.2
Revised Average Response Time Per
Respondent: 10 hours.
Revised Total Annual Burden Hours:
13,000.
Obligation to Respond: Voluntary.
Comments: On January 24, 2017, the
SEC published a notice of its proposed
revision to the currently approved
information collection associated with
the Joint Standards, and allowed the
public 60 days to submit comments.3
See 82 FR 8248. The comment period
closed March 27, 2017, and the SEC
received no comments that addressed
the proposed revision to the information
collection.
Written comments continue to be
invited on: (a) whether the collection of
information is necessary for the proper
performance of the functions of the SEC,
including whether the information has
practical utility; (b) the accuracy of the
SEC’s estimate of the information
collection burden, including the validity
of the methods and the assumptions
used; (c) ways to enhance the quality,
utility, and clarity of the information
proposed to be collected; (d) ways to
minimize the burden of the collection
2 This number has been modified to account for
the ever changing number of entities regulated by
the SEC. It still, however, represents about 5% of
regulated entities, as set forth in the original PRA
notice for the Joint Standards.
3 82 FR 8248.
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]]>Agencies
[Federal Register Volume 82, Number 68 (Tuesday, April 11, 2017)]
[Notices]
[Pages 17483-17489]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-07181]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80382; File No. SR-DTC-2017-002]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Proposed Rule Change To Address and Update
Practices and Policies With Respect to the Credit Risk Rating Matrix
and Make Other Changes
April 5, 2017.
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 March 22, 2017, 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 the clearing agency.\3\ The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On March 22, 2017, DTC filed this proposed rule change as an
advance notice (SR-DTC-2017-801) with the Commission pursuant to
Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act entitled the Payment, Clearing, and
Settlement Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and Rule
19b-4(n)(1)(i) of the Act, 17 CFR 240.19b-4(n)(1)(i). A copy of the
advance notice is available at https://www.dtcc.com/legal/sec-rule-filings.aspx.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of amendments to DTC's Rules, By-
Laws and Organization Certificate (``Rules'').\4\ The proposed rule
change would amend Rules 1 and 2 in order to (i) address and update
DTC's practices and policies with respect to the existing matrix
(hereinafter referred to as the ``Credit Risk Rating Matrix'' or
``CRRM''), which was, as described in an earlier DTC rule filing,\5\
developed by DTC to assign a credit rating to certain Participants
(``CRRM-Rated Participants'') by evaluating the risks posed by CRRM-
Rated Participants to DTC and its Participants from providing services
to these CRRM-Rated Participants and (ii) make other amendments to the
Rules to provide more transparency and clarity regarding DTC's current
ongoing membership monitoring process.
---------------------------------------------------------------------------
\4\ Capitalized terms not defined herein are defined in the
Rules, available at www.dtcc.com/~/media/Files/Downloads/legal/
rules/dtc_rules.pdf.
\5\ See Securities Exchange Act Release No. 53655 (April 14,
2006), 71 FR 20428 (April 20, 2006) (SR-DTC-2006-03) (order of the
Commission) approving a proposed rule change (``2006 Rule Change'')
of DTC to amend the criteria used by DTC to place Participants on
surveillance status, including, but not limited to DTC's application
of the CRRM and the placement of lower rated CRRM-Rated Participants
on an internal list in order to be monitored more closely (``Watch
List'').
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency 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. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The proposed rule change would amend Rules 1 and 2 in order to (i)
address and update DTC's practices and policies with respect to the
CRRM and (ii) provide more transparency and clarity regarding DTC's
current membership monitoring process. In this regard, the proposed
rule change would (i) add proposed definitions for the terms ``Credit
Risk Rating Matrix'' and ``Watch List'' to Rule 1 (Definitions), as
discussed below and (ii) amend Rule 2 (Participants and Pledgees) to
(A) clarify a provision in Section 1 relating to the types of
information a Participant must provide to DTC upon DTC's request for
the Participant to demonstrate its satisfactory financial condition and
operational capability, including its risk management practices with
respect to services of DTC utilized by the Participant for another
Person and (B) add a new Section 10 to include provisions relating to
the monitoring, surveillance and review of Participants, including, but
not limited to, the application of the CRRM and proposed
[[Page 17484]]
enhancements to the CRRM, as further discussed below.
(i) Background
DTC occupies an important role in the securities settlement system
by, among other things, providing services for the settlement of book-
entry transfer and pledge of interests in eligible deposited securities
and net funds settlement, in connection with which Participants may
incur net funds settlement obligations to DTC. DTC uses the CRRM, the
Watch List and the enhanced surveillance to manage and monitor default
risks of Participants on an ongoing basis, as discussed below. The
level and frequency of such monitoring for a Participant is determined
by the Participant's risk of default as assessed by DTC. Participants
that are deemed by DTC to pose a heightened risk to DTC and its
Participants are subject to closer and more frequent monitoring.
Existing Credit Risk Rating Matrix
Pursuant to the 2006 Rule Change, all Participants that are either
U.S. broker-dealers or U.S. banks are assigned a rating generated
solely based on quantitative factors by entering financial data of
those Participants into an internally generated credit rating matrix,
i.e., the CRRM.\6\ All other types of Participants are monitored by
credit risk staff using financial criteria deemed relevant by DTC but
would not be assigned a rating by the CRRM.\7\
---------------------------------------------------------------------------
\6\ See 2006 Rule Change, SR-DTC-2006-03, 71 FR 20428, which
explained that the ratings assigned by the CRRM were generated using
financial data extracted from standard regulatory reports of U.S.
broker-dealers and banks. A small number of U.S. banks which
submitted standard regulatory reports were not assigned a rating
because they did not take deposits or make loans, and therefore the
regulatory reports of these banks did not contain information on
asset quality and/or liquidity, which was a data component used in
the CRRM. Id. However, the 2006 Rule Change provided DTC with
discretion to continue to ``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.'' Id. DTC has continued to evaluate the CRRM and has
determined that the CRRM is the most effective method available to
it to evaluate the default risk presented by any U.S. bank that
submits regulatory reports, including a bank whose reports exclude
certain data components as mentioned above. Accordingly, DTC applies
the CRRM to assign ratings to any U.S. bank that submits regulatory
reports, including those that were not covered by the CRRM in 2006,
as reflected in the proposed rule change.
\7\ In the 2006 Rule Change, DTC noted that these Participants
would be monitored by credit risk staff by reviewing similar
criteria as those reviewed for Participants included on the matrix
but such review would occur outside of the matrix process. Id.
---------------------------------------------------------------------------
The 2006 Rule Change explained that credit risk staff could
downgrade a particular Participant's credit rating based on various
qualitative factors. An example of such qualitative factors might be
that the Participant in question received a qualified audit opinion on
its annual audit. DTC noted in the 2006 Rule Change that in order to
protect DTC and its other Participants, it was important that credit
risk staff maintain the discretion to downgrade a Participant's credit
rating on the CRRM and thus subject the Participant to closer
monitoring.
The current CRRM is comprised of two credit rating models--one for
the U.S. broker-dealers and one for the U.S. banks--and generates
credit ratings for the relevant Participants based on a 7-point rating
system, with ``1'' being the strongest credit rating and ``7'' being
the weakest credit rating.
Over time, the current CRRM has not kept pace with DTC's evolving
Participant membership base and heightened expectations from regulators
and stakeholders for robustness of financial models. Specifically, the
current CRRM only generates credit ratings for those Participants that
are U.S. banks or U.S. broker-dealers that file standard reports with
their regulators, which currently comprise 80% of Participants; foreign
banks and trust companies currently account for 5% of Participants.\8\
The number of Participants that are foreign banks or trust companies
increased from 12 in 2012 to 13 in 2017, and is expected to continue to
grow over the coming years. Foreign banks and trust companies are
typically large global financial institutions that have complex
businesses and conduct a high volume of activities. Although foreign
banks and trust companies are not currently rated by the CRRM, they are
monitored by DTC's credit risk staff using financial criteria deemed
relevant by DTC and can be placed on the Watch List if they experience
a financial change that presents risk to DTC. Given the increase in the
number of foreign bank Participants in recent years, there is a need to
formalize DTC's credit risk evaluation process of the foreign bank or
trust company Participants by assigning credit ratings to them in order
to better facilitate the comparability of credit risks among
Participants.\9\
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\8\ As of March 16, 2017, there are 251 Participants, of which
50 (or 20%) are U.S. banks, 151 (or 60%) are U.S. broker-dealers and
13 (or 5%) are foreign banks or trust companies.
\9\ DTC noted in the 2006 Rule Change that the CRRM is applied
across DTC and its affiliated clearing agencies, NSCC and FICC.
Specifically, in order to run the CRRM, credit risk staff uses the
financial data of the applicable DTC Participants in addition to
data of applicable members of NSCC and FICC. In this way, each
applicable DTC Participant is rated against other applicable members
of NSCC and FICC. See 2006 Rule Change, SR-DTC-2006-03, 71 FR 20428.
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As mentioned above, a Participant's credit rating is currently
based solely upon quantitative factors. It is only after the CRRM has
generated a credit rating with respect to a Participant that such
Participant's credit rating may be downgraded manually by credit risk
staff, after taking into consideration relevant qualitative factors.
The inability of the current CRRM to take into account qualitative
factors requires frequent and manual overrides by credit risk staff,
which may result in inconsistent and/or incomplete credit ratings for
Participants.
Furthermore, the current CRRM uses a relative scoring approach and
relies on peer grouping of Participants to calculate the credit rating
of a Participant. This approach is not ideal because a Participant's
credit rating can be affected by changes in its peer group even if the
Participant's financial condition is unchanged.
Proposed Credit Risk Rating Matrix Enhancements
To improve the coverage and the effectiveness of the current CRRM,
DTC is proposing three enhancements to the CRRM. The first proposed
enhancement would expand the scope of CRRM coverage by enabling the
CRRM to generate credit ratings for Participants that are foreign banks
or trust companies and that have audited financial data that is
publicly available. The second proposed enhancement would incorporate
qualitative factors into the CRRM and therefore is expected to reduce
the need and the frequency of manual overrides of Participant credit
ratings. The third enhancement would replace the relative scoring
approach currently used by CRRM with a statistical approach to estimate
the absolute probability of default of each Participant.
A. Enable the CRRM to Generate Credit Ratings for Foreign Bank or Trust
Company Participants
The current CRRM is comprised of two credit rating models--one for
the U.S. broker-dealers and one for the U.S. banks. DTC is proposing to
enhance the CRRM by adding an additional credit rating model for the
foreign banks and trust companies. The additional model would expand
the scope of Participants to which the CRRM would apply to include
foreign banks and trust companies that have audited financial data that
is publicly available. The CRRM credit rating of a foreign bank or
trust company that is a Participant
[[Page 17485]]
would be based on quantitative factors, including size, capital,
leverage, liquidity, profitability and growth, and qualitative factors,
including market position and sustainability, information reporting and
compliance, management quality, capital management and business/product
diversity. By enabling the CRRM to generate credit ratings for these
Participants, the enhanced CRRM would provide more comprehensive credit
risk coverage of DTC's membership base.
With the proposed enhancement to the CRRM as described above,
applicable foreign bank or trust company Participants would be included
in the CRRM process and be evaluated more effectively and efficiently
because financial data with respect to these foreign bank or trust
company Participants could be extracted from data sources in an
automated form.\10\
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\10\ In the 2006 Rule Change, DTC noted that these Participants
would be monitored by credit risk staff by reviewing similar
criteria as those reviewed for Participants included on the CRRM,
but such review would occur outside of the CRRM process. Id.
---------------------------------------------------------------------------
After the proposed enhancement, CRRM would be able to generate
credit ratings on an ongoing basis for all Participants that are U.S.
banks, U.S. brokers-dealers and foreign banks and trust companies,
which together represent approximately 85% of Participants.\11\
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\11\ As of March 16, 2017, there are 37 Participants that would
not be rated by the enhanced CRRM, as proposed, because they are
central securities depositories, securities exchanges, government
sponsored entities, central counterparties, central banks and U.S.
trust companies that do not file Call Reports (as defined below).
---------------------------------------------------------------------------
B. Incorporate Qualitative Factors Into the CRRM
In addition, as proposed, the enhanced CRRM would blend both
qualitative factors and quantitative factors to produce a credit rating
for each applicable Participant in relation to the Participant's credit
risk. For U.S. and foreign banks and trust companies, the enhanced CRRM
would use a 70/30 weighted split between quantitative and qualitative
factors to generate credit ratings. For U.S. broker-dealers, the weight
split between quantitative and qualitative factors would be 60/40.
These weight splits have been chosen by DTC based on the industry best
practice as well as research and sensitivity analysis conducted by DTC.
DTC would review and adjust the weight splits as well as the
quantitative and qualitative factors, as needed, based on recalibration
of the CRRM to be conducted by DTC approximately every three to five
years.
Although there are advantages to measuring credit risk
quantitatively, quantitative evaluation models alone are incapable of
fully capturing all credit risks. Certain qualitative factors may
indicate that a Participant is or will soon be undergoing financial
distress, which may in turn signal a higher default exposure to DTC and
its other Participants. As such, a key enhancement being proposed to
the CRRM is the incorporation of relevant qualitative factors into each
of the three credit rating models mentioned above. By including
qualitative factors in the three credit rating models, the enhanced
CRRM would capture risks that would otherwise not be accounted for with
quantitative factors alone.\12\ Adding qualitative factors to the CRRM
would not only enable it to generate more consistent and comprehensive
credit ratings for applicable Participants, but it would also help
reduce the need and frequency of manual credit rating overrides by the
credit risk staff because overrides would likely only be required under
more limited circumstances.\13\
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\12\ The initial set of qualitative factors that would be
incorporated into the CRRM includes (a) for U.S. broker dealers,
market position and sustainability, management quality, capital
management, liquidity management, geographic diversification,
business/product diversity and access to funding, (b) for U.S.
banks, environment, compliance/litigation, management quality,
liquidity management and parental demands and (c) for foreign banks
and trust companies, market position and sustainability, information
reporting and compliance, management quality, capital management and
business/product diversity.
\13\ Once a Participant is assigned a credit rating, if
circumstances warrant, credit risk staff would still have the
ability to override the CRRM-issued credit rating by manually
downgrading such rating as they do today. To ensure a conservative
approach, the CRRM-issued credit ratings cannot be manually
upgraded.
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C. Shifting From Relative Scoring to Absolute Scoring
As proposed, the enhanced CRRM would use an absolute scoring
approach and rank each Participant based on its individual probability
of default rather than the relative scoring approach that is currently
in use. This proposed change is designed to have a Participant's CRRM-
generated credit rating reflect an absolute measure of the
Participant's default risk and eliminate any potential distortion of a
Participant's credit rating from the Participant's peer group that may
occur under the relative scoring approach used in the existing CRRM.
D. Watch List and Enhanced Surveillance
In addition to the Watch List, DTC also maintains an enhanced
surveillance list (referenced herein and in the proposed rule text as
``enhanced surveillance'') for membership monitoring. The enhanced
surveillance list is generally used when Participants are undergoing
drastic and unexpected changes in their financial conditions or
operation capabilities and thus are deemed by DTC to be of the highest
risk level and/or warrant additional scrutiny due to DTC's ongoing
concerns about these Participants. Accordingly, Participants that are
subject to enhanced surveillance are reported to DTC's management
committees and are also regularly reviewed by a cross-functional team
comprised of senior management of DTC. More often than not,
Participants that are subject to enhanced surveillance are also on the
Watch List. The group of Participants that is subject to enhanced
surveillance is generally much smaller than the group on the Watch
List. The enhanced surveillance list is an internal tool for DTC that
triggers increased monitoring of a Participant above the monitoring
that occurs when a Participant is on the Watch List.
A Participant could be placed on the Watch List either based on its
credit rating of 5, 6 or 7, which can either be generated by the CRRM
or from a manual downgrade, or when DTC deems such placement as
necessary to protect DTC and its Participants. In contrast, a
Participant would be subject to enhanced surveillance only when close
monitoring of the Participant is deemed necessary to protect DTC and
its Participants.
(ii) Detailed Description of the Proposed Rule Changes
The 2006 Rule Change, while setting forth the procedures DTC
follows with regard to the CRRM and the Watch List, did not incorporate
these procedures into the text of the Rules. Pursuant to the proposed
rule change, DTC would amend the Rules to incorporate the CRRM with the
enhancements proposed above, including (1) the use of both quantitative
and qualitative factors in generating credit ratings for CRRM-Rated
Participants, (2) the expansion of the scope of CRRM coverage to enable
the CRRM to generate credit ratings for Participants that are (a) U.S.
banks that file the Consolidated Report of Condition and Income (``Call
Report''), (b) U.S. broker-dealers that file the Financial and
Operational Combined Uniform Single Report (``FOCUS
[[Page 17486]]
Report'') or the equivalent with their regulators, or (c) foreign banks
or trust companies that have audited financial data that is publicly
available and (3) that the CRRM would use an absolute scoring approach
and rank each Participant based on its individual probability of
default (rather than the relative scoring approach that is currently in
use). Also, the proposed rule change would define the CRRM and the
Watch List and add rule text to provide more transparency and clarity
regarding DTC's current ongoing membership monitoring process.
In this regard, the proposed rule change would (i) add proposed
definitions for CRRM and Watch List to Rule 1 (Definitions) and (ii)
amend Rule 2 (Participants and Pledgees) (A) Section 1 to clarify a
provision relating to the types of information a Participant must
provide to DTC upon DTC's request for the Participant to demonstrate
its satisfactory financial condition and operational capability,
including its risk management practices with respect to services of DTC
utilized by the Participant for another Person or Persons and (B) to
add a new Section 10 to include provisions relating to the monitoring,
surveillance and review of Participants, including, but not limited to,
the application of the CRRM and proposed enhancements to the CRRM, as
further discussed below.
A. Proposed Changes to Rule 1 (Definitions)
The proposed rule change would amend Rule 1 to add definitions for
the CRRM and the Watch List.
The proposed definition of the CRRM would provide that the term
``Credit Risk Rating Matrix'' means a matrix of credit ratings of
Participants as specified in the proposed new Section 10(a) of Rule 2.
As proposed, the definition would state that the CRRM is developed by
DTC to evaluate the credit risk such Participants pose to DTC and its
Participants and is based on factors determined to be relevant by DTC
from time to time, which factors are designed to collectively reflect
the financial and operational condition of a Participant. The proposed
definition would also state that these factors include (i) quantitative
factors, such as capital, assets, earnings and liquidity and (ii)
qualitative factors, such as management quality, market position/
environment and capital and liquidity risk management.
The proposed definition of the Watch List would provide that the
term ``Watch List'' means, at any time and from time to time, the list
of Participants whose credit ratings derived from the CRRM are 5, 6 or
7, as well as Participants that, based on DTC's consideration of
relevant factors, including those that would be set forth in the
proposed new Section 10 of Rule 2 (described below), are deemed by DTC
to pose a heightened risk to DTC and its Participants.
B. Proposed Changes to Section 1 of Rule 2 (Participants and Pledgees)
Section 1 of Rule 2 provides, among other things, that upon the
request of DTC, a Participant shall furnish to DTC information
sufficient to demonstrate its satisfactory financial condition and
operational capability. The proposed rule change would, by way of
example, clarify that the types of information that DTC may require in
this regard include, but are not limited to, such information as DTC
may request regarding the businesses and operations of the Participant
and its risk management practices with respect to services of DTC
utilized by the Participant for another Person.
C. Proposed New Section 10 of Rule 2
The proposed rule change would add a new Section 10 of Rule 2 to
include provisions relating to the monitoring, surveillance and review
of Participants, including, but not limited to, the application of, and
the proposed enhancements to, the CRRM. In this regard, the proposed
new Section 10 of Rule 2 would provide that:
(1) All Participants would be monitored and reviewed by DTC on an
ongoing and periodic basis, which may include monitoring of news and
market developments and review of financial reports and other public
information.
(2)(i) A Participant that is (A) qualified to be a Participant
pursuant to (x) Rule 3, Section 1(d) and files the Call Report (i.e., a
U.S. Bank) or (y) Rule 3, Section 1(h)(ii) and files the FOCUS Report
or the equivalent with its regulator (i.e., a U.S. broker-dealer) or
(B) a foreign bank or trust company qualified to be a Participant
pursuant to Section 2 of the Policy Statement on the Admission of
Participants and that has audited financial data that is publicly
available, would be assigned a credit rating by DTC in accordance with
the CRRM. The proposed rule change would also provide that a
Participant's credit rating will be reassessed each time the
Participant provides DTC with requested information pursuant to Section
1 of Rule 2, or as may be otherwise required under the Rules and
Procedures \14\ (including proposed new Section 10 of Rule 2).
---------------------------------------------------------------------------
\14\ Pursuant to Section 1 of Rule 1, the term ``Procedures''
means the Procedures, service guides, and regulations of DTC adopted
pursuant to Rule 27, as amended from time to time. Rules, supra note
4.
---------------------------------------------------------------------------
(ii) Because the factors used as part of the CRRM may not identify
all risks that a CRRM-Rated Participant may present to DTC, DTC may, in
its discretion, override the CRRM-Rated Participant's credit rating
derived from the CRRM to downgrade that Participant. In this regard,
the proposed rule change would provide that (A) such a downgrading may
result in the Participant being placed on the Watch List, and/or it may
subject the Participant to enhanced surveillance based on relevant
factors, including those described in paragraph (4) below and (B) DTC
may also take such additional actions with regard to the Participant as
are permitted by the Rules and Procedures.
(3) Participants other than CRRM-Rated Participants would not be
assigned a credit rating by the CRRM but may be placed on the Watch
List and/or may be subject to enhanced surveillance based on relevant
factors, including those described in paragraph (4) below, as DTC deems
necessary to protect it and its Participants.
(4) The factors to be considered by DTC as proposed in paragraphs
(2)(ii) and (3) above would include, but would not be not limited to,
(i) news reports and/or regulatory observations that raise reasonable
concerns relating to the Participant, (ii) reasonable concerns around
the Participant's liquidity arrangements, (iii) material changes to the
Participant's organizational structure, (iv) reasonable concerns of DTC
about the Participant's financial stability due to particular facts and
circumstances, such as material litigation or other legal and/or
regulatory risks, (v) failure of the Participant to demonstrate
satisfactory financial condition or operational capability or if DTC
has a reasonable concern regarding the Participant's ability to
maintain applicable participation standards and (vi) failure of the
Participant to provide information required by DTC to assess risk
exposure posed by the Participant's activity (including information
requested by DTC pursuant to Section 1 of Rule 2).
(5) A Participant being subject to enhanced surveillance or being
placed on the Watch List would result in more thorough monitoring of
the Participant's financial condition and/or operational capability,
which could include, for example, on-site visits or additional due
diligence information requests from
[[Page 17487]]
DTC. In this regard, the proposed rule change would provide that DTC
may require a Participant placed on the Watch List and/or subject to
enhanced surveillance to make more frequent financial disclosures,
including, without limitation, interim and/or pro forma reports. The
proposed rule change would also provide that Participants that are
subject to enhanced surveillance would also be reported to DTC's
management committees and regularly reviewed by a cross-functional team
comprised of senior management of DTC. The proposed rule change would
further provide that DTC may also take such additional actions with
regard to any Participant (including a Participant placed on the Watch
List and/or subject to enhanced surveillance) as are permitted by the
Rules and Procedures.
Implementation Timeframe
Pending Commission approval, DTC expects to implement this proposal
promptly. Participants would be advised of the implementation date of
this proposal through issuance of a DTC Important Notice.
2. Statutory Basis
Section 17A(b)(3)(F) of the Act requires that the Rules be designed
to promote the prompt and accurate clearance and settlement of
securities transactions and to assure the safeguarding of securities
and funds which are in the custody or control of DTC or for which it is
responsible.\15\
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
By enhancing the CRRM to enable it to assign credit ratings to
Participants that are foreign banks or trust companies and that have
audited financial data that is publicly available, DTC believes that
the proposed rule change is consistent with Section 17A(b)(3)(F) of the
Act. This is because the proposed rule change expands the CRRM's
applicability to a wider group of Participants, which further improves
DTC's membership monitoring process and better enables DTC to safeguard
the securities and funds which are in its custody or control or for
which it is responsible in furtherance of the Act.
Similarly, by enhancing the CRRM to enable it to incorporate
qualitative factors when assigning a Participant's credit rating, DTC
believes that this proposed rule change is consistent with Section
17A(b)(3)(F) of the Act. This is because the proposed rule change would
enable DTC to take into account relevant qualitative factors in an
automated and more effective manner when monitoring the credit risks
presented by Participants, thus improving DTC's membership monitoring
process overall, which would in turn better enable DTC to safeguard the
securities and funds which are in its custody or control or for which
it is responsible in furtherance of the Act.
Likewise, by enhancing the CRRM to shift from a relative scoring
approach to an absolute scoring approach when assigning a Participant's
credit rating, DTC believes that this proposed rule change is
consistent with Section 17A(b)(3)(F) of the Act. This is because the
proposed rule change would enable DTC to generate credit ratings for
Participants that are more reflective of the Participants' default
risk, thus improving DTC's membership monitoring process overall, which
would in turn better enable DTC to safeguard the securities and funds
which are in its custody or control or for which it is responsible in
furtherance of the Act.
By providing specificity, clarity and additional transparency to
the Rules related to DTC's current ongoing membership monitoring
process, DTC believes that the proposed rule changes to (1) Rule 1 to
add the definitions of CRRM and Watch List, (2) Section 1 of Rule 2 to
clarify a provision relating to the types of information a Participant
must provide to DTC upon DTC's request for the Participant to
demonstrate its satisfactory financial condition and operational
capability and (3) add Section 10 of Rule 2 to include provisions
relating to the monitoring, surveillance and review of Participants,
including, but not limited to, the application of the CRRM and proposed
enhancements thereto, are consistent with Section 17A(b)(3)(F) of the
Act because the proposed rule changes would help ensure that the Rules
remain accurate and clear. Collectively, the proposed changes would
help ensure that the Rules are more transparent, accurate and clear,
which would help enable all stakeholders to readily understand their
respective rights and obligations with DTC's clearance and settlement
of securities transactions. Therefore, DTC believes that the proposed
rule changes would promote the prompt and accurate clearance and
settlement of securities transactions, consistent with Section
17A(b)(3)(F) of the Act.
The proposed enhancements to the CRRM are consistent with Rule
17Ad-22(e)(3)(i) under the Act, which was recently adopted by the
Commission.\16\ Rule 17Ad-22(e)(3)(i) will require DTC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to maintain a sound risk management framework for
comprehensively managing risks that arise in or are born by DTC, which
includes . . . systems designed to identify, measure, monitor and
manage the range of risks that arise in or are borne by DTC.\17\ The
proposed enhancements to the CRRM have been designed to assist DTC in
identifying, measuring, monitoring and managing the credit risks to DTC
posed by its Participants. The proposed enhancements to the CRRM
accomplish this by (i) expanding the CRRM's applicability to a wider
group of Participants to include Participants that are foreign banks or
trust companies, (ii) enabling the CRRM to take into account relevant
qualitative factors in an automated and more effective manner when
monitoring the credit risks presented by Participants and (iii)
enabling the CRRM to generate credit ratings for Participants that are
more reflective of the Participants' default risk by shifting to an
absolute scoring approach, all of which would improve DTC's membership
monitoring process overall. Therefore, DTC believes the proposed
enhancements to the CRRM would assist DTC in identifying, measuring,
monitoring and managing risks that arise in or are born by DTC,
consistent with the requirements of Rule 17Ad-22(e)(3)(i).
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\16\ 17 CFR 240.17Ad-22(e)(3)(i). The Commission adopted
amendments to Rule 17Ad-22, including the addition of new subsection
17Ad-22(e), on September 28, 2016. See Securities Exchange Act
Release No. 78961 (September 28, 2016), 81 FR 70786 (October 13,
2016) (S7-03-14). DTC is a ``covered clearing agency'' as defined by
the new Rule 17Ad-22(a)(5) and must comply with new subsection (e)
of Rule 17Ad-22 by April 11, 2017. Id.
\17\ Id.
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The proposed rule change to Section 1 of Rule 2 with respect to the
scope of information that may be requested by DTC from its Participants
has been designed to be consistent with Rule 17Ad-22(e)(19) under the
Act, which was recently adopted by the Commission.\18\ Rule 17Ad-
22(e)(19) will require DTC to establish, implement, maintain and
enforce written policies and procedures reasonably designed to
identify, monitor, and manage the material risk to DTC arising from
arrangements in which firms that are indirect participants in DTC rely
on the services provided by Participants to access DTC's payment,
clearing, or settlement facilities.\19\ By expressly reflecting in
[[Page 17488]]
the Rules what is already DTC's current practice associated with its
request for information sufficient to demonstrate a Participant's
satisfactory financial condition and operational capability to state
that such request may include information regarding the businesses and
operations of the Participant, as well as its risk management practices
with respect to services of DTC utilized by the Participant for another
Person, this proposed rule change would help enable DTC to have rule
provisions that are reasonably designed to identify, monitor and manage
the material risks to DTC arising from tiered participation
arrangements consistent with Rule 17Ad-22(e)(19).
---------------------------------------------------------------------------
\18\ 17 CFR 240.17Ad-22(e)(19). Id.
\19\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
DTC does not believe that the proposed rule change to (i) enable
the CRRM to generate credit ratings for Participants that are foreign
banks or trust companies, (ii) incorporate qualitative factors into the
CRRM and (iii) shift to an absolute scoring approach would impose any
burden on competition that is not necessary or appropriate in
furtherance of the Act.\20\ These proposed enhancements to the CRRM
would improve DTC's Participant credit risk evaluation process by (1)
expanding the CRRM's credit rating capability and thereby providing
more comprehensive credit risk coverage of Participants, (2) enabling
the CRRM to generate more consistent and comprehensive credit ratings
for Participants and thereby reducing the need and frequency for manual
downgrades and (3) enabling the CRRM to generate credit ratings for
Participants that are more reflective of the Participants' default
risk. However, DTC recognizes that any change to its Participant credit
risk evaluation process, such as the proposed rule change, may impose a
burden on competition in terms of potential impact on Participants'
credit ratings. Nevertheless, DTC believes that any burden on
competition derived from the proposed rule change would be necessary
and appropriate in furtherance of the Act because the proposed
enhancements to the CRRM would help improve DTC's membership monitoring
process and thus better enable DTC to safeguard the securities and
funds which are in its custody or control or for which it is
responsible. Furthermore, the proposed enhancements to the CRRM would
also assist DTC in identifying, measuring, monitoring and managing
risks that arise in or are born by DTC. As such, DTC does not believe
the proposed enhancements to the CRRM would impose any burden on
competition that is not necessary or appropriate in furtherance of the
Act.
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\20\ 15 U.S.C. 78q-1(b)(3)(I).
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DTC does not believe that the proposed rule changes to (i) add
proposed definitions for CRRM and Watch List to Rule 1 and (ii) amend
Rule 2 to (A) clarify a provision relating to the types of information
a Participant must provide to DTC upon DTC's request for the
Participant to demonstrate its satisfactory financial condition and
operational capability and (B) add provisions relating to the
monitoring, surveillance and review of Participants that may operate
separately or in conjunction with DTC's application of the CRRM, would
have any impact on competition because each of such proposed rule
changes is designed to provide additional specificity, clarity and
transparency in the Rules regarding DTC's current ongoing membership
monitoring process by expressly providing in the Rules DTC's current
practices with respect to such process. As such, these proposed rule
changes would not impact Participants or impose any burden on
competition.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
Written comments relating to this proposed rule change have not
been solicited or received. DTC will notify the Commission of any
written comments received by DTC.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate 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:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
IV. 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 email to rule-comments@sec.gov. Please include
File Number SR-DTC-2017-002 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549.
All submissions should refer to File Number SR-DTC-2017-002. This file
number should be included on the subject line if email 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 Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of DTC and on DTCC's
Web site (https://dtcc.com/legal/sec-rule-filings.aspx). 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-2017-002 and should be
submitted on or before May 2, 2017.
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\21\ 17 CFR 200.30-3(a)(12).
[[Page 17489]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-07181 Filed 4-10-17; 8:45 am]
BILLING CODE 8011-01-P
