Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of a Proposed Rule Change To Adopt a Recovery & Wind-Down Plan and Related Rules, 884-897 [2018-00080]
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Federal Register / Vol. 83, No. 5 / Monday, January 8, 2018 / Notices
Majeure Rule would have any impact, or
impose any burden, on competition.
With respect to the Wind-down Plan
and the proposed Wind-down Rule,
which facilitate the execution of the
Wind-down Plan, the proposal would
operate to effect the transfer of all
eligible Members and Limited Members
of both Divisions to the Transferee, and
would not prohibit any market
participant from either bidding to
become the Transferee or from applying
for membership with the Transferee.
The proposal also would not prohibit
any Member or Limited Member from
withdrawing from FICC prior to the
Transfer Time, as is permitted under the
Rules today, or from applying for
membership with the Transferee.
Therefore, as the proposal would treat
each similarly situated Member
identically under the Wind-down Plan
and this Proposed Rule, FICC does not
believe the Wind-down Plan or the
proposed Wind-down Rule would have
any impact, or impose any burden, on
competition.
FICC does not believe that the other
proposed changes to the Rules and the
EPN Rules would have any impact on
competition because these proposed
changes to incorporate the Proposed
Rules into the Rules and the EPN Rules
are technical clarifications, which
would not, on their own, change FICC’s
current practices or the rights or
obligations of the Members or EPN
Users.
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(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants, or Others
While FICC has not solicited or
received any written comments relating
to this proposal, FICC has conducted
outreach to its Members in order to
provide them with notice of the
proposal. FICC will notify the
Commission of any written comments
received by FICC.
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 clearing agency 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.
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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–
FICC–2017–021 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–FICC–2017–021. 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 website (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 website 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 FICC and on DTCC’s website
(https://dtcc.com/legal/sec-rulefilings.aspx). All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FICC–
2017–021 and should be submitted on
or before January 29, 2018.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.67
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–00079 Filed 1–5–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82432; File No. SR–DTC–
2017–021]
Self-Regulatory Organizations; The
Depository Trust Company; Notice of
Filing of a Proposed Rule Change To
Adopt a Recovery & Wind-Down Plan
and Related Rules
January 2, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
18, 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 of DTC
would (1) adopt the Recovery & Winddown Plan of DTC (‘‘R&W Plan’’ or
‘‘Plan’’); and (2) amend the Rules, ByLaws and Organization Certificate of
DTC (‘‘Rules’’) 4 in order to adopt Rule
32(A) (Wind-down of the Corporation)
and Rule 38 (Market Disruption and
Force Majeure) (each proposed Rule
32(A) and proposed Rule 38, a
‘‘Proposed Rule’’ and, collectively, the
‘‘Proposed Rules’’).
The R&W Plan would be maintained
by DTC in compliance with Rule 17Ad–
22(e)(3)(ii) under the Act by providing
67 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 On December 18, 2017, DTC filed this proposed
rule change as an advance notice (SR–DTC–2017–
803) 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.
4 Capitalized terms used herein and not otherwise
defined herein are defined in the Rules, available
at www.dtcc.com/∼/media/Files/Downloads/legal/
rules/DTC_rules.pdf.
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plans for the recovery and orderly winddown of DTC necessitated by credit
losses, liquidity shortfalls, losses from
general business risk, or any other
losses, as described below.5 The
Proposed Rules are designed to (1)
facilitate the implementation of the
R&W Plan when necessary and, in
particular, allow DTC to effectuate its
strategy for winding down and
transferring its business; (2) provide
Participants with transparency around
critical provisions of the R&W Plan that
relate to their rights, responsibilities and
obligations; and (3) provide DTC with
the legal basis to implement those
provisions of the R&W Plan when
necessary, as described below.
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
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1. Purpose
DTC is proposing to adopt the R&W
Plan to be used by the Board and
management in the event DTC
encounters scenarios that could
potentially prevent it from being able to
provide its critical services as a going
concern. The R&W Plan would identify
(i) the recovery tools available to DTC to
address the risks of (a) uncovered losses
or liquidity shortfalls resulting from the
default of one or more of its
Participants, and (b) losses arising from
non-default events, such as damage to
its physical assets, a cyber-attack, or
custody and investment losses, and (ii)
the strategy for implementation of such
tools. The R&W Plan would also
establish the strategy and framework for
the orderly wind-down of DTC and the
transfer of its business in the remote
event the implementation of the
available recovery tools does not
successfully return DTC to financial
viability.
As discussed in greater detail below,
the R&W Plan would provide, among
other matters, (i) an overview of the
5 17
CFR 240.17Ad–22(e)(3)(ii).
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business of DTC and its parent, The
Depository Trust & Clearing Corporation
(‘‘DTCC’’); (ii) an analysis of DTC’s
intercompany arrangements and critical
links to other financial market
infrastructures (‘‘FMIs’’); (iii) a
description of DTC’s services, and the
criteria used to determine which
services are considered critical; (iv) a
description of the DTC and DTCC
governance structure; (v) a description
of the governance around the overall
recovery and wind-down program; (vi) a
discussion of tools available to DTC to
mitigate credit/market and liquidity
risks, including recovery indicators and
triggers, and the governance around
management of a stress event along a
‘‘Crisis Continuum’’ timeline; (vii) a
discussion of potential non-default
losses and the resources available to
DTC to address such losses, including
recovery triggers and tools to mitigate
such losses; (viii) an analysis of the
recovery tools’ characteristics, including
how they are comprehensive, effective,
and transparent, how the tools provide
appropriate incentives to Participants
to, among other things, control and
monitor the risks they may present to
DTC, and how DTC seeks to minimize
the negative consequences of executing
its recovery tools; and (ix) the
framework and approach for the orderly
wind-down and transfer of DTC’s
business, including an estimate of the
time and costs to effect a recovery or
orderly wind-down of DTC.
The R&W Plan would be structured as
a roadmap, and would identify and
describe the tools that DTC may use to
effect a recovery from the events and
scenarios described therein. Certain
recovery tools that would be identified
in the R&W Plan are based in the Rules
(including the Proposed Rules) and, as
such, descriptions of those tools would
include descriptions of, and reference
to, the applicable Rules and any related
internal policies and procedures. Other
recovery tools that would be identified
in the R&W Plan are based in
contractual arrangements to which DTC
is a party, including, for example,
existing committed or pre-arranged
liquidity arrangements. Further, the
R&W Plan would state that DTC may
develop further supporting internal
guidelines and materials that may
provide operationally for matters
described in the Plan, and that such
documents would be supplemental and
subordinate to the Plan.
Key factors considered in developing
the R&W Plan and the types of tools
available to DTC were its governance
structure and the nature of the markets
within which DTC operates. As a result
of these considerations, many of the
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tools available to DTC that would be
described in the R&W Plan are DTC’s
existing, business-as-usual risk
management and default management
tools, which would continue to be
applied in scenarios of increasing stress.
In addition to these existing, businessas-usual tools, the R&W Plan would
describe DTC’s other principal recovery
tools, which include, for example, (i)
identifying, monitoring and managing
general business risk and holding
sufficient liquid net assets funded by
equity (‘‘LNA’’) to cover potential
general business losses pursuant to the
Clearing Agency Policy on Capital
Requirements (‘‘Capital Policy’’),6 (ii)
maintaining the Clearing Agency Capital
Replenishment Plan (‘‘Replenishment
Plan’’) as a viable plan for the
replenishment of capital should DTC’s
equity fall close to or below the amount
being held pursuant to the Capital
Policy,7 and (iii) the process for the
allocation of losses among Participants
as provided in Rule 4.8 The R&W Plan
would provide governance around the
selection and implementation of the
recovery tool or tools most relevant to
mitigate a stress scenario and any
applicable loss or liquidity shortfall.
The development of the R&W Plan is
facilitated by the Office of Recovery &
Resolution Planning (‘‘R&R Team’’) of
DTCC.9 The R&R Team reports to the
DTCC Management Committee
(‘‘Management Committee’’) and is
responsible for maintaining the R&W
Plan and for the development and
ongoing maintenance of the overall
recovery and wind-down planning
process. The Board, or such committees
as may be delegated authority by the
Board from time to time pursuant to its
charter, would review and approve the
R&W Plan biennially, and would also
review and approve any changes that
6 See Securities Exchange Act Release No. 81105
(July 7, 2017), 82 FR 32399 (July 13, 2017) (SR–
DTC–2017–003, SR–FICC–2017–007, SR–NSCC–
2017–004).
7 See id.
8 See Rule 4 (Participants Fund and Participants
Investment), supra note 4. DTC is proposing
changes to Rule 4 regarding allocation of losses in
a separate filing submitted simultaneously with this
filing (File Nos. SR–DTC–2017–022 and SR–DTC–
2017–804, referred to collectively herein as the
‘‘Loss Allocation Filing’’). DTC expects the
Commission to review both proposals together, and,
as such, the proposal described in this filing
anticipates the approval and implementation of
those proposed changes to the Rules.
9 DTCC operates on a shared services model with
respect to DTC and its other subsidiaries. Most
corporate functions are established and managed on
an enterprise-wide basis pursuant to intercompany
agreements under which it is generally DTCC that
provides a relevant service to a subsidiary,
including DTC.
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are proposed to the R&W Plan outside
of the biennial review.
As discussed in greater detail below,
the Proposed Rules would define the
procedures that may be employed in the
event of a DTC wind-down, and would
provide for DTC’s authority to take
certain actions on the occurrence of a
‘‘Market Disruption Event,’’ as defined
therein. Significantly, the Proposed
Rules would provide Participants with
transparency and certainty with respect
to these matters. The Proposed Rules
would facilitate the implementation of
the R&W Plan, particularly DTC’s
strategy for winding down and
transferring its business, and would
provide DTC with the legal basis to
implement those aspects of the R&W
Plan.
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DTC R&W Plan
The R&W Plan is intended to be used
by the Board and DTC’s management in
the event DTC encounters scenarios that
could potentially prevent it from being
able to provide its critical services as a
going concern. The R&W Plan would be
structured to provide a roadmap, define
the strategy, and identify the tools
available to DTC to either (i) recover, in
the event it experiences losses that
exceed its prefunded resources (such
strategies and tools referred to herein as
the ‘‘Recovery Plan’’) or (ii) wind-down
its business in a manner designed to
permit the continuation of its critical
services in the event that such recovery
efforts are not successful (such strategies
and tools referred to herein as the
‘‘Wind-down Plan’’). The description of
the R&W Plan below is intended to
highlight the purpose and expected
effects of the material aspects of the
R&W Plan, and to provide Participants
with appropriate transparency into
these features.
Business Overview, Critical Services,
and Governance
The introduction to the R&W Plan
would identify the document’s purpose
and its regulatory background, and
would outline a summary of the Plan.
The stated purpose of the R&W Plan is
that it is to be used by the Board and
DTC management in the event DTC
encounters scenarios that could
potentially prevent it from being able to
provide its critical services as a going
concern. The R&W Plan would be
maintained by DTC in compliance with
Rule 17Ad–22(e)(3)(ii) under the Act 10
by providing plans for the recovery and
orderly wind-down of DTC.
The R&W Plan would describe
DTCC’s business profile, provide a
10 17
CFR 240.17Ad–22(e)(3)(ii).
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summary of DTC’s services, and identify
the intercompany arrangements and
critical links between DTC and other
FMIs. This overview section would
provide a context for the R&W Plan by
describing DTC’s business,
organizational structure and critical
links to other entities. By providing this
context, this section would facilitate the
analysis of the potential impact of
utilizing the recovery tools set forth in
later sections of the Recovery Plan, and
the analysis of the factors that would be
addressed in implementing the Winddown Plan.
DTCC is a user-owned and usergoverned holding company and is the
parent company of DTC and its
affiliates, National Securities Clearing
Corporation (‘‘NSCC’’) and Fixed
Income Clearing Corporation (‘‘FICC,’’
and, together with NSCC and DTC, the
‘‘Clearing Agencies’’). The Plan would
describe how corporate support services
are provided to DTC from DTCC and
DTCC’s other subsidiaries through
intercompany agreements under a
shared services model.
The Plan would provide a description
of established links between DTC and
other FMIs, both domestic and foreign,
including central securities depositories
(‘‘CSDs’’) and central counterparties
(‘‘CCPs’’), as well as the twelve U.S.
Federal Reserve Banks. In general, these
links are either ‘‘inbound’’ or ‘‘issuer’’
links, in which the other FMI is a
Participant and/or a Pledgee and
maintains one or more accounts at DTC,
or ‘‘outbound’’ or ‘‘investor’’ links in
which DTC maintains one or more
accounts at another FMI. Key FMIs with
which DTC maintains critical links
include CDS Clearing and Depository
Services Inc. (‘‘CDS’’), the Canadian
CSD, with participant links in both
directions; Euroclear Bank SA/NV
(‘‘EB’’) for cross-border collateral
management services; and The Options
Clearing Corporation (‘‘OCC’’) and the
Federal Reserve Bank of New York
(‘‘FRBNY’’), each of which is both a
Participant and a Pledgee. The critical
link for the U.S. marketplace is the
relationship between DTC and NSCC,
through which continuous net
settlement (‘‘CNS’’) transactions are
completed by settlement at DTC, and
DTC acts as settlement agent for NSCC
for end-of-day funds settlement.11 This
section of the Plan, identifying and
briefly describing DTC’s established
links, would provide a mapping of
critical connections and dependencies
that may need to be relied on or
11 DTC has other links in addition to those
mentioned above. The current list of linked CSDs
is available on the DTCC website.
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otherwise addressed in connection with
the implementation of either the
Recovery Plan or the Wind-down Plan.
The Plan would define the criteria for
classifying certain of DTC’s services as
‘‘critical,’’ and would identify those
critical services and the rationale for
their classification. This section would
provide an analysis of the potential
systemic impact from a service
disruption, and is important for
evaluating how the recovery tools and
the wind-down strategy would facilitate
and provide for the continuation of
DTC’s critical services to the markets it
serves. The criteria that would be used
to identify a DTC service or function as
critical would include consideration as
to (1) whether there is a lack of
alternative providers or products; (2)
whether failure of the service could
impact DTC’s ability to perform its
book-entry and settlement services; (3)
whether failure of the service could
impact DTC’s ability to perform its
payment system functions; and (4)
whether the service is interconnected
with other participants and processes
within the U.S. financial system, for
example, with other FMIs, settlement
banks and broker-dealers. The Plan
would then list each of those services,
functions or activities that DTC has
identified as ‘‘critical’’ based on the
applicability of these four criteria. Such
critical services would include, for
example, MMIs and Commercial Paper
Processing,12 Mandatory and Voluntary
Corporate Actions,13 Cash and Stock
Distributions,14 and End of Day Net
Money Settlement.15 The R&W Plan
would also include a non-exhaustive list
of DTC services that are not deemed
critical.
The evaluation of which services
provided by DTC are deemed critical is
important for purposes of determining
how the R&W Plan would facilitate the
continuity of those services. As
discussed further below, while DTC’s
Wind-down Plan would provide for the
transfer of all critical services to a
transferee in the event DTC’s winddown is implemented, it would
anticipate that any non-critical services
that are ancillary and beneficial to a
critical service, or that otherwise have
12 See Rule 9(C) (Transactions in MMI Securities),
supra note 4.
13 See DTC Reorganizations Service Guide,
available at www.dtcc.com/∼/media/Files/
Downloads/legal/service-guides/
Reorganizations.pdf.
14 See DTC Distributions Service Guide, available
at https://www.dtcc.com/∼/media/Files/Downloads/
legal/service-guides/Service%20Guide%20
Distributions.pdf.
15 See DTC Settlement Service Guide, available at
www.dtcc.com/∼/media/Files/Downloads/legal/
service-guides/Settlement.pdf.
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substantial user demand from the
continuing membership, would also be
transferred.
The Plan would describe the
governance structure of both DTCC and
DTC. This section of the Plan would
identify the ownership and governance
model of these entities at both the Board
of Directors and management levels.
The Plan would state that the stages of
escalation required to manage recovery
under the Recovery Plan or to invoke
DTC’s wind-down under the Winddown Plan would range from relevant
business line managers up to the Board
through DTC’s governance structure.
The Plan would then identify the parties
responsible for certain activities under
both the Recovery Plan and the Winddown Plan, and would describe their
respective roles. The Plan would
identify the Risk Committee of the
Board (‘‘Board Risk Committee’’) as
being responsible for oversight of risk
management activities at DTC, which
include focusing on both oversight of
risk management systems and processes
designed to identify and manage various
risks faced by DTC, and, due to DTC’s
critical role in the markets in which it
operates, oversight of DTC’s efforts to
mitigate systemic risks that could
impact those markets and the broader
financial system.16 The Plan would
identify the DTCC Management Risk
Committee (‘‘Management Risk
Committee’’) as primarily responsible
for general, day-to-day risk management
through delegated authority from the
Board Risk Committee. The Plan would
state that the Management Risk
Committee has delegated specific dayto-day risk management, including
management of risks addressed through
margining systems and related
activities, to the DTCC Group Chief Risk
Office (‘‘GCRO’’), which works with
staff within the DTCC Financial Risk
Management group. Finally, the Plan
would describe the role of the
Management Committee, which
provides overall direction for all aspects
of DTC’s business, technology, and
operations and the functional areas that
support these activities.
The Plan would describe the
governance of recovery efforts in
response to both default losses and nondefault losses under the Recovery Plan,
identifying the groups responsible for
those recovery efforts. Specifically, the
Plan would state that the Management
Risk Committee provides oversight of
actions relating to the default of a
16 The charter of the Board Risk Committee is
available at https://www.dtcc.com/∼/media/Files/
Downloads/legal/policy-and-compliance/DTCCBOD-Risk-Committee-Charter.pdf.
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Participant, which would be reported
and escalated to it through the GCRO,
and the Management Committee
provides oversight of actions relating to
non-default events that could result in
a loss, which would be reported and
escalated to it from the DTCC Chief
Financial Officer (‘‘CFO’’) and the DTCC
Treasury group that reports to the CFO,
and from other relevant subject matter
experts based on the nature and
circumstances of the non-default
event.17 More generally, the Plan would
state that the type of loss and the nature
and circumstances of the events that
lead to the loss would dictate the
components of governance to address
that loss, including the escalation path
to authorize those actions. As described
further below, both the Recovery Plan
and the Wind-down Plan would
describe the governance of escalations,
decisions, and actions under each of
those plans.
Finally, the Plan would describe the
role of the R&R Team in managing the
overall recovery and wind-down
program and plans for each of the
Clearing Agencies.
DTC Recovery Plan
The Recovery Plan is intended to be
a roadmap of those actions that DTC
may employ to monitor and, as needed,
stabilize its financial condition. As each
event that could lead to a financial loss
could be unique in its circumstances,
the Recovery Plan would not be
prescriptive and would permit DTC to
maintain flexibility in its use of
identified tools and in the sequence in
which such tools are used, subject to
any conditions in the Rules or the
contractual arrangement on which such
tool is based. DTC’s Recovery Plan
would consist of (1) a description of the
risk management surveillance, tools,
and governance that DTC would employ
across evolving stress scenarios that it
may face as it transitions through a
‘‘Crisis Continuum,’’ described below;
(2) a description of DTC’s risk of losses
that may result from non-default events,
and the financial resources and recovery
tools available to DTC to manage those
risks and any resulting losses; and (3) an
evaluation of the characteristics of the
17 The Plan would state that these groups would
be involved to address how to mitigate the financial
impact of non-default losses, and in recommending
mitigating actions, the Management Committee
would consider information and recommendations
from relevant subject matter experts based on the
nature and circumstances of the non-default event.
Any necessary operational response to these events,
however, would be managed in accordance with
applicable incident response/business continuity
process; for example, processes established by the
DTCC Technology Risk Management group would
be followed in response to a cyber event.
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recovery tools that may be used in
response to either losses arising out of
a Participant Default (as defined below)
or non-default losses, as described in
greater detail below. In all cases, DTC
would act in accordance with the Rules,
within the governance structure
described in the R&W Plan, and in
accordance with applicable regulatory
oversight to address each situation in
order to best protect DTC, its
Participants and the markets in which it
operates.
Managing Participant Default Losses
and Liquidity Needs Through the Crisis
Continuum. The Plan would describe
the risk management surveillance, tools,
and governance that DTC may employ
across an increasing stress environment,
which is referred to as the ‘‘Crisis
Continuum.’’ This description would
identify those tools that can be
employed to mitigate losses, and
mitigate or minimize liquidity needs, as
the market environment becomes
increasingly stressed. The phases of the
Crisis Continuum would include (1) a
stable market phase, (2) a stressed
market phase, (3) a phase commencing
with DTC’s decision to cease to act for
a Participant or Affiliated Family of
Participants,18 and (4) a recovery phase.
This section of the Recovery Plan would
address conditions and circumstances
relating to DTC’s decision to cease to act
for a Participant (referred to in the R&W
Plan as a ‘‘defaulting Participant,’’ and
the event as a ‘‘Participant Default’’)
pursuant to the Rules.19
The Recovery Plan would provide
context to its roadmap through this
Crisis Continuum by describing DTC’s
ongoing management of credit, market
and liquidity risk, and its existing
process for measuring and reporting its
risks as they align with established
thresholds for its tolerance of those
risks. The Recovery Plan would discuss
the management of credit/market risk
and liquidity exposures together,
because the tools that address these
risks can be deployed either separately
or in a coordinated approach in order to
address both exposures. DTC manages
these risk exposures collectively to limit
their overall impact on DTC and its
Participants. DTC has built-in
mechanisms to limit exposures and
18 The Plan an ‘‘Affiliated Family’’ of Participants
as a number of affiliated entities that are all
Participants of DTC.
19 In the Plan, ‘‘cease to act’’ or ‘‘default’’ would
be defined in accordance with the Rules, including
Rule 4 (Participants Fund and Participants
Investment), Rule 9(A) (Transactions in Securities
and Money Payments), Rule 9(B) (Transactions in
Eligible Securities), Rule 9(C) (Transactions in MMI
Securities), Rule 10 (Discretionary Termination),
Rule 11 (Mandatory Termination) and Rule 12
(Insolvency), supra note 4.
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replenish financial resources used in a
stress event, in order to continue to
operate in a safe and sound manner.
DTC is a closed, collateralized system in
which liquidity resources are matched
against risk management controls, so, at
any time, the potential net settlement
obligation of the Participant or
Affiliated Family of Participants with
the largest net settlement obligation
cannot exceed the amount of liquidity
resources.20 While Collateral securities
are subject to market price risk, DTC
manages its liquidity and market risks
through the calculation of the required
deposits to the Participants Fund 21 and
risk management controls, i.e., collateral
haircuts, the Collateral Monitor 22 and
Net Debit Cap.23
The Recovery Plan would outline the
metrics and indicators that DTC has
developed to evaluate a stress situation
against established risk tolerance
thresholds. Each risk mitigation tool
identified in the Recovery Plan would
include a description of the escalation
thresholds that allow for effective and
timely reporting to the appropriate
internal management staff and
committees, or to the Board. The
Recovery Plan would make clear that
these tools and escalation protocols
would be calibrated across each phase
of the Crisis Continuum. The Recovery
Plan would also establish that DTC
would retain the flexibility to deploy
such tools either separately or in a
coordinated approach, and to use other
alternatives to these actions and tools as
necessitated by the circumstances of a
particular Participant Default event, in
accordance with the Rules. Therefore,
the Recovery Plan would both provide
DTC with a roadmap to follow within
each phase of the Crisis Continuum, and
would permit it to adjust its risk
management measures to address the
unique circumstances of each event.
The Recovery Plan would describe the
conditions that mark each phase of the
20 DTC’s liquidity risk management strategy,
including the manner in which DTC would deploy
liquidity tools as well as its intraday use of
liquidity, is described in the Clearing Agency
Liquidity Risk Management Framework. See
Securities Exchange Act Release Nos. 80489 (April
19, 2017), 82 FR 19120 (April 25, 2017) (SR–DTC–
2017–004, SR–NSCC–2017–005, SR–FICC–2017–
008); 81194 (July 24, 2017), 82 FR 35241 (July 28,
2017) (SR–DTC–2017–004, SR–NSCC–2017–005,
SR–FICC–2017–008).
21 See Rule 4 (Participants Fund and Participants
Investment), supra note 4.
22 See Rule 1, Section 1, supra note 4. For DTC,
credit risk and market risk are closely related, as
DTC monitors credit exposures from Participants
through these risk management controls that are
part of its market risk management strategy and are
designed to comply with Rule 17Ad–22(e)(4) under
the Act, where these risks are referred to as ‘‘credit
risks.’’ See also 17 CFR 240.17Ad–22(e)(4).
23 Id.
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Crisis Continuum, and would identify
actions that DTC could take as it
transitions through each phase in order
to both prevent losses from
materializing through active risk
management, and to restore the
financial health of DTC during a period
of stress.
The ‘‘stable market phase’’ of the
Crisis Continuum would describe active
risk management activities in the
normal course of business. These
activities would include performing (1)
backtests to evaluate the adequacy of the
collateral level and the haircut
sufficiency for covering market price
volatility and (2) stress testing to cover
market price moves under real historical
and hypothetical scenarios to assess the
haircut adequacy under extreme but
plausible market conditions. The
backtesting and stress testing results are
escalated, as necessary, to internal and
Board committees.24
The Recovery Plan would describe
some of the indicators of the ‘‘stressed
market phase’’ of the Crisis Continuum,
which would include, for example,
volatility in market prices of certain
assets where there is increased
uncertainty among market participants
about the fundamental value of those
assets. This phase would involve
general market stresses, when no
Participant Default would be imminent.
Within the description of this phase, the
Recovery Plan would provide that DTC
may take targeted, routine risk
management measures as necessary and
as permitted by the Rules.
Within the ‘‘Participant Default
phase’’ of the Crisis Continuum, the
Recovery Plan would provide a
roadmap for the existing procedures that
DTC would follow in the event of a
Participant Default and any decision by
DTC to cease to act for that
Participant.25 The Recovery Plan would
provide that the objectives of DTC’s
actions upon a Participant Default are to
(1) minimize losses and market
exposure, and (2), to the extent
practicable, minimize disturbances to
the affected markets. The Recovery Plan
would describe tools, actions, and
related governance for both market risk
monitoring and liquidity risk
monitoring through this phase. For
example, in connection with managing
24 DTC’s stress testing practices are described in
the Clearing Agency Stress Testing Framework
(Market Risk). See Securities Exchange Act Release
Nos. 80485 (April 19, 2017), 82 FR 19131 (April 25,
2017) (SR–DTC–2017–005, SR–FICC–2017–009,
SR–NSCC–2017–006); 81192 (July 24, 2017), 82 FR
35245 (July 28, 2017) (SR–DTC–2017–005, SR–
FICC–2017–009, SR–NSCC–2017–006).
25 See Rule 10 (Discretionary Termination); Rule
11 (Mandatory Termination); Rule 12 (Insolvency),
supra note 4.
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its market risk during this phase, DTC
would, pursuant to its Rules and
existing procedures, (1) monitor and
assess the adequacy of its Participants
Fund and Net Debit Caps; and (2) follow
its operational procedures relating to the
execution of a liquidation of the
Participant’s Collateral securities
through close collaboration and
coordination across multiple functions.
Management of liquidity risk through
this phase would involve ongoing
monitoring of, among other things, the
adequacy of the Participants Fund and
risk controls, and the Recovery Plan
would identify certain actions DTC may
deploy as it deems necessary to mitigate
a potential liquidity shortfall, which
would include, for example, the
reduction of Net Debit Caps of some or
all Participants, or seeking additional
liquidity resources. The Recovery Plan
would state that, throughout this phase,
relevant information would be escalated
and reported to both internal
management committees and the Board
Risk Committee.
The Recovery Plan would also
identify financial resources available to
DTC, pursuant to the Rules, to address
losses arising out of a Participant
Default. Specifically, Rule 4, as
proposed to be amended by the Loss
Allocation Filing, would provide that
losses be satisfied first by applying a
‘‘Corporate Contribution,’’ and then, if
necessary, by allocating remaining
losses to non-defaulting Participants.26
The ‘‘recovery phase’’ of the Crisis
Continuum would describe actions that
DTC may take to avoid entering into a
wind-down of its business. In order to
provide for an effective and timely
recovery, the Recovery Plan would
describe two stages of this phase: (1) A
recovery corridor, during which DTC
may experience stress events or observe
early warning indicators that allow it to
evaluate its options and prepare for the
recovery phase; and (2) the recovery
phase, which would begin on the date
that DTC issues the first Loss Allocation
Notice of the second loss allocation
round with respect to a given ‘‘Event
Period.’’ 27
26 See supra note 8. The Loss Allocation Filing
proposes to amend Rule 4 to define the amount
DTC would contribute to address a loss resulting
from either a Participant default or a non-default
event as the ‘‘Corporate Contribution.’’ This amount
would be 50 percent (50%) of the ‘‘General
Business Risk Capital Requirement,’’ which is
calculated pursuant to the Capital Policy and is an
amount sufficient to cover potential general
business losses so that DTC can continue operations
and services as a going concern if those losses
materialize, in compliance with Rule 17Ad–
22(e)(15) under the Act. See also supra note 6; 17
CFR 240.17Ad–22(e)(15).
27 The Loss Allocation Filing proposes to amend
Rule 4 to introduce the concept of an ‘‘Event
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DTC expects that significant
deterioration of liquidity resources
would cause it to enter the recovery
corridor stage of this phase, and, as
such, the actions it may take at this
stage would be aimed at replenishing
those resources. Circumstances that
could cause it to enter the recovery
corridor may include, for example, a
rapid and material increase in market
prices or sequential or simultaneous
failures of multiple Participants or
Affiliated Families of Participants over
a compressed time period. Throughout
the recovery corridor, DTC would
monitor the adequacy of its resources
and the expected timing of
replenishment of those resources, and
would do so through the monitoring of
certain metrics referred to as ‘‘Corridor
Indicators.’’
The majority of the Corridor
Indicators, as identified in the Recovery
Plan, relate directly to conditions that
may require DTC to adjust its strategy
for hedging and liquidating Collateral
securities, and any such changes would
include an assessment of the status of
the Corridor Indicators. Corridor
Indicators would include, for example,
effectiveness and speed of DTC’s efforts
to liquidate Collateral securities, and an
impediment to the availability of its
resources to repay any borrowings due
to any Participant Default. For each
Corridor Indicator, the Recovery Plan
would identify (1) measures of the
indicator, (2) evaluations of the status of
the indicator, (3) metrics for
determining the status of the
deterioration or improvement of the
indicator, and (4) ‘‘Corridor Actions,’’
which are steps that may be taken to
improve the status of the indicator,28 as
well as management escalations
required to authorize those steps.
Because DTC has never experienced the
Period’’ as the ten (10) Business Days beginning on
(i) with respect to a Participant Default, the day on
which DTC notifies Participants that it has ceased
to act for a Participant, or (ii) with respect to a nondefault loss, the day that DTC notifies Participants
of the determination by the Board of Directors that
there is a non-default loss event, as described in
greater detail in that filing. The proposed Rule 4
would define a ‘‘round’’ as a series of loss
allocations relating to an Event Period, and would
provide that the first Loss Allocation Notice in a
first, second, or subsequent round shall expressly
state that such notice reflects the beginning of a
first, second, or subsequent round. The maximum
allocable loss amount of a round is equal to the sum
of the ‘‘Loss Allocation Caps’’ (as defined in the
proposed Rule 4) of those Participants included in
the round. See supra note 8.
28 The Corridor Actions that would be identified
in the Plan are indicative, but not prescriptive;
therefore, if DTC needs to consider alternative
actions due to the applicable facts and
circumstances, the escalation of those alternative
actions would follow the same escalation protocol
identified in the Plan for the Corridor Indicator to
which the action relates.
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default of multiple Participants, it has
not, historically, measured the
deterioration or improvements metrics
of the Corridor Indicators. As such,
these metrics were chosen based on the
business judgment of DTC management.
The Recovery Plan would also
describe the reporting and escalation of
the status of the Corridor Indicators
throughout the recovery corridor.
Significant deterioration of a Corridor
Indicator, as measured by the metrics
set out in the Recovery Plan, would be
escalated to the Board. DTC
management would review the Corridor
Indicators and the related metrics at
least annually, and would modify these
metrics as necessary in light of
observations from simulations of
Participant defaults and other analyses.
Any proposed modifications would be
reviewed by the Management Risk
Committee and the Board Risk
Committee. The Recovery Plan would
estimate that DTC may remain in the
recovery corridor stage between one day
and two weeks. This estimate is based
on historical data observed in past
Participant default events, the results of
simulations of Participant defaults, and
periodic liquidity analyses conducted
by DTC. The actual length of a recovery
corridor would vary based on actual
market conditions observed on the date
and time DTC enters the recovery
corridor stage of the Crisis Continuum,
and DTC would expect the recovery
corridor to be shorter in market
conditions of increased stress.
The Recovery Plan would outline
steps by which DTC may allocate its
losses, and would state that the
available tools related to allocation of
losses would only be used in this and
subsequent phases of the Crisis
Continuum.29 The Recovery Plan would
also identify tools that may be used to
address foreseeable shortfalls of DTC’s
liquidity resources following a
Participant Default, and would provide
that these tools may be used throughout
the Crisis Continuum to address
liquidity shortfalls if they arise. The
goal in managing DTC’s liquidity
resources is to maximize resource
availability in an evolving stress
situation, to maintain flexibility in the
order and use of sources of liquidity,
and to repay any third party lenders in
a timely manner. Liquidity tools
include, for example, DTC’s committed
29 As these matters are described in greater detail
in the Loss Allocation Filing and in the proposed
amendments to Rule 4, described therein, reference
is made to that filing and the details are not
repeated here. See supra note 8.
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889
364-day credit facility 30 and Net Credit
Reductions.31 The Recovery Plan would
state that the availability and capacity of
these liquidity tools cannot be
accurately predicted and are dependent
on the circumstances of the applicable
stress period, including market price
volatility, actual or perceived
disruptions in financial markets, the
costs to DTC of utilizing these tools, and
any potential impact on DTC’s credit
rating.
As stated above, the Recovery Plan
would state that DTC will have entered
the recovery phase on the date that it
issues the first Loss Allocation Notice of
the second loss allocation round with
respect to a given Event Period. The
Recovery Plan would provide that,
during the recovery phase, DTC would
continue and, as needed, enhance, the
monitoring and remedial actions already
described in connection with previous
phases of the Crisis Continuum, and
would remain in the recovery phase
until its financial resources are expected
to be or are fully replenished, or until
the Wind-down Plan is triggered, as
described below.
The Recovery Plan would describe
governance for the actions and tools that
may be employed within the Crisis
Continuum, which would be dictated by
the facts and circumstances applicable
to the situation being addressed. Such
facts and circumstances would be
measured by the Corridor Indicators
applicable to that phase of the Crisis
Continuum, and, in most cases, by the
measures and metrics that are assigned
to those Corridor Indicators, as
described above. Each of these
indicators would have a defined review
period and escalation protocol that
would be described in the Recovery
Plan. The Recovery Plan would also
describe the governance procedures
around a decision to cease to act for a
Participant, pursuant to the Rules, and
around the management and oversight
of the subsequent liquidation of
Collateral securities. The Recovery Plan
would state that, overall, DTC would
retain flexibility in accordance with the
Rules, its governance structure, and its
regulatory oversight, to address a
particular situation in order to best
30 See Securities Exchange Act Release No. 80605
(May 5, 2017), 82 FR 21850 (May 10, 2017) (SR–
DTC–2017–802; SR–NSCC–2017–802).
31 DTC may borrow amounts needed to complete
settlement from Participants by net credit
reductions to their settlement accounts, secured by
the Collateral of the defaulting Participant. See
Securities Exchange Act Release Nos. 24689 (July 9,
1987), 52 FR 26613 (July 15, 1987) (SR–DTC–87–
4); 41879 (September 15, 1999), 64 FR 51360
(September 22, 1999) (SR–DTC–99–15); 42281
(December 28, 1999), 65 FR 1420 (January 10, 2000)
(SR–DTC–99–25).
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protect DTC and its Participants, and to
meet the primary objectives, throughout
the Crisis Continuum, of minimizing
losses and, where consistent and
practicable, minimizing disturbance to
affected markets.
Non-Default Losses. The Recovery
Plan would outline how DTC may
address losses that result from events
other than a Participant Default. While
these matters are addressed in greater
detail in other documents, this section
of the Plan would provide a roadmap to
those documents and an outline for
DTC’s approach to monitoring and
managing losses that could result from
a non-default event. The Plan would
first identify some of the risks DTC faces
that could lead to these losses, which
include, for example, the business and
profit/loss risks of unexpected declines
in revenue or growth of expenses; the
operational risks of disruptions to
systems or processes that could lead to
large losses, including those resulting
from, for example, a cyber-attack; and
custody or investment risks that could
lead to financial losses. The Recovery
Plan would describe DTC’s overall
strategy for the management of these
risks, which includes a ‘‘three lines of
defense’’ approach to risk management
that allows for comprehensive
management of risk across the
organization.32 The Recovery Plan
would also describe DTC’s approach to
financial risk and capital management.
The Plan would identify key aspects of
this approach, including, for example,
an annual budget process, business line
performance reviews with management,
and regular review of capital
requirements against LNA. These risk
management strategies are collectively
intended to allow DTC to effectively
identify, monitor, and manage risks of
non-default losses.
The Plan would identify the two
categories of financial resources DTC
maintains to cover losses and expenses
arising from non-default risks or events
as (1) LNA, maintained, monitored, and
managed pursuant to the Capital Policy,
which include (a) amounts held in
32 The Clearing Agency Risk Management
Framework includes a description of this ‘‘three
lines of defense’’ approach to risk management, and
addresses how DTC comprehensively manages
various risks, including operational, general
business, investment, custody, and other risks that
arise in or are borne by it. See Securities Exchange
Act Release No. 81635 (September 15, 2017), 82 FR
44224 (September 21, 2017) (SR–DTC–2017–013,
SR–FICC–2017–016, SR–NSCC–2017–012). The
Clearing Agency Operational Risk Management
Framework describes the manner in which DTC
manages operational risks, as defined therein. See
Securities Exchange Act Release No. 81745
(September 28, 2017), 82 FR 46332 (October 4,
2017) (SR–DTC–2017–014, SR–FICC–2017–017,
SR–NSCC–2017–013).
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satisfaction of the General Business Risk
Capital Requirement,33 (b) the Corporate
Contribution,34 and (c) other amounts
held in excess of DTC’s capital
requirements pursuant to the Capital
Policy; and (2) resources available
pursuant to the loss allocation
provisions of Rule 4.35
The Plan would address the process
by which the CFO and the DTCC
Treasury group would determine which
available LNA resources are most
appropriate to cover a loss that is caused
by a non-default event. This
determination involves an evaluation of
a number of factors, including the
current and expected size of the loss,
the expected time horizon over when
the loss or additional expenses would
materialize, the current and projected
available LNA, and the likelihood LNA
could be successfully replenished
pursuant to the Replenishment Plan, if
triggered.36 Finally the Plan would
discuss how DTC would apply its
resources to address losses resulting
from a non-default event, including the
order of resources it would apply if the
loss or liability exceeds DTC’s excess
LNA amounts, or is large relative
thereto, and the Board has declared the
event a ‘‘Declared Non-Default Loss
Event’’ pursuant to Rule 4.37
The Plan would also describe
proposed Rule 38 (Market Disruption
and Force Majeure), which DTC is
proposing to adopt in its Rules. This
Proposed Rule would provide
transparency around how DTC would
address extraordinary events that may
occur outside its control. Specifically,
the Proposed Rule would define a
‘‘Market Disruption Event’’ and the
governance around a determination that
such an event has occurred. The
Proposed Rule would also describe
DTC’s authority to take actions during
the pendency of a Market Disruption
Event that it deems appropriate to
address such an event and facilitate the
continuation of its services, if
practicable, as described in greater
detail below.
The Plan would describe the
interaction between the Proposed Rule
and DTC’s existing processes and
procedures addressing business
continuity management and disaster
recovery (generally, the ‘‘BCM/DR
procedures’’), making clear that the
Proposed Rule is designed to support
those BCM/DR procedures and to
address circumstances that may be
33 See
supra note 26.
supra note 26.
35 See supra note 8.
36 See supra note 6.
37 See supra note 8.
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DTC Wind-Down Plan
The Wind-down Plan would provide
the framework and strategy for the
orderly wind-down of DTC if the use of
the recovery tools described in the
Recovery Plan do not successfully
return DTC to financial viability. While
DTC believes that, given the
comprehensive nature of the recovery
tools, such event is extremely unlikely,
as described in greater detail below,
DTC is proposing a wind-down strategy
that provides for (1) the transfer of
DTC’s business, assets, securities
inventory, and membership to another
legal entity, (2) such transfer being
effected in connection with proceedings
under Chapter 11 of the U.S. Federal
Bankruptcy Code,39 and (3) after
effectuating this transfer, DTC
liquidating any remaining assets in an
orderly manner in bankruptcy
proceedings. DTC believes that the
proposed transfer approach to a winddown would meet its objectives of (1)
assuring that DTC’s critical services will
be available to the market as long as
there are Participants in good standing,
38 Standards for Covered Clearing Agencies,
Securities Exchange Act Release No. 78961
(September 28, 2016), 81 FR 70786 (October 13,
2016) (S7–03–14).
39 11 U.S.C. 1101 et seq.
34 See
PO 00000
exogenous to DTC and not necessarily
addressed by the BCM/DR procedures.
Finally, the Plan would describe that,
because the operation of the Proposed
Rule is specific to each applicable
Market Disruption Event, the Proposed
Rule does not define a time limit on its
application. However, the Plan would
note that actions authorized by the
Proposed Rule would be limited to the
pendency of the applicable Market
Disruption Event, as made clear in the
Proposed Rule. Overall, the Proposed
Rule is designed to mitigate risks caused
by Market Disruption Events and,
thereby, minimize the risk of financial
loss that may result from such events.
Recovery Tool Characteristics. The
Recovery Plan would describe DTC’s
evaluation of the tools identified within
the Recovery Plan, and its rationale for
concluding that such tools are
comprehensive, effective, and
transparent, and that such tools provide
appropriate incentives to Participants
and minimize negative impact on
Participants and the financial system, in
compliance with guidance published by
the Commission in connection with the
adoption of Rule 17Ad–22(e)(3)(ii)
under the Act.38 DTC’s analysis and the
conclusions set forth in this section of
the Recovery Plan are described in
greater detail in Item 3(b) of this filing,
below.
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and (2) minimizing disruption to the
operations of Participants and financial
markets generally that might be caused
by DTC’s failure.
In describing the transfer approach to
DTC’s Wind-down Plan, the Plan would
identify the factors that DTC considered
in developing this approach, including
the fact that DTC does not own material
assets that are unrelated to its clearance
and settlement activities. As such, a
business reorganization or ‘‘bail-in’’ of
debt approach would be unlikely to
mitigate significant losses. Additionally,
DTC’s approach was developed in
consideration of its critical and unique
position in the U.S. markets, which
precludes any approach that would
cause DTC’s critical services to no
longer be available.
First, the Wind-down Plan would
describe the potential scenarios that
could lead to the wind-down of DTC,
and the likelihood of such scenarios.
The Wind-down Plan would identify
the time period leading up to a decision
to wind-down DTC as the ‘‘Runway
Period.’’ This period would follow the
implementation of any recovery tools, as
it may take a period of time, depending
on the severity of the market stress at
that time, for these tools to be effective
or for DTC to realize a loss sufficient to
cause it to be unable to borrow to
complete settlement and to repay such
borrowings.40 The Plan would identify
some of the indicators that DTC has
entered this Runway Period, which
would include, for example,
simultaneous successive Participant
Defaults, significant Participant
retirements, and DTC’s inability to
replenish financial resources following
the liquidation of Collateral securities.
The trigger for implementing the
Wind-down Plan would be a
determination by the Board that
recovery efforts have not been, or are
unlikely to be, successful in returning
DTC to viability as a going concern. As
described in the Plan, DTC believes this
is an appropriate trigger because it is
both broad and flexible enough to cover
a variety of scenarios, and would align
incentives of DTC and Participants to
avoid actions that might undermine
DTC’s recovery efforts. Additionally,
this approach takes into account the
characteristics of DTC’s recovery tools
and enables the Board to consider (1)
the presence of indicators of a
successful or unsuccessful recovery, and
(2) potential for knock-on effects of
continued iterative application of DTC’s
recovery tools.
The Wind-down Plan would describe
the general objectives of the transfer
strategy, and would address
assumptions regarding the transfer of
DTC’s critical services, business, assets,
securities inventory, and membership 41
to another legal entity that is legally,
financially, and operationally able to
provide DTC’s critical services to
entities that wish to continue their
membership following the transfer
(‘‘Transferee’’). The Wind-down Plan
would provide that the Transferee
would be either (1) a third party legal
entity, which may be an existing or
newly established legal entity or a
bridge entity formed to operate the
business on an interim basis to enable
the business to be transferred
subsequently (‘‘Third Party
Transferee’’); or (2) an existing, debt-free
failover legal entity established ex-ante
by DTCC (‘‘Failover Transferee’’) to be
used as an alternative Transferee in the
event that no viable or preferable Third
Party Transferee timely commits to
acquire DTC’s business. DTC would
seek to identify the proposed
Transferee, and negotiate and enter into
transfer arrangements during the
Runway Period and prior to making any
filings under Chapter 11 of the U.S.
Federal Bankruptcy Code.42 As stated
above, the Wind-down Plan would
anticipate that the transfer to the
Transferee, including the transfer and
establishment of the Participant and
Pledgee securities accounts on the books
of the Transferee, be effected in
connection with proceedings under
Chapter 11 of the U.S. Federal
Bankruptcy Code, and pursuant to a
bankruptcy court order under Section
363 of the Bankruptcy Code, such that
the transfer would be free and clear of
claims against, and interests in, DTC,
except to the extent expressly provided
in the court’s order.43
In order to effect a timely transfer of
its services and minimize the market
and operational disruption of such
transfer, DTC would expect to transfer
all of its critical services and any noncritical services that are ancillary and
beneficial to a critical service, or that
otherwise have substantial user demand
from the continuing membership. Given
40 The Wind-down Plan would state that, given
DTC’s position as a user-governed financial market
utility, it is possible that its Participants might
voluntarily elect to provide additional support
during the recovery phase leading up to a potential
trigger of the Wind-down Plan, but would also
make clear that DTC cannot predict the willingness
of Participants to do so.
41 Arrangements with FAST Agents and DRS
Agents (each as defined in proposed Rule 32(A))
and with Settling Banks would also be assigned to
the Transferee, so that the approach would be
transparent to issuers and their transfer agents, as
well as to Settling Banks.
42 11 U.S.C. 1101 et seq.
43 See id. at 363.
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the transfer of the securities inventory
and the establishment on the books of
the Transferee Participant and Pledgee
securities accounts, DTC anticipates
that, following the transfer, it would not
itself continue to provide any services,
critical or not. Following the transfer,
the Wind-down Plan would anticipate
that the Transferee and its continuing
membership would determine whether
to continue to provide any transferred
non-critical service on an ongoing basis,
or terminate the non-critical service
following some transition period. DTC’s
Wind-down Plan would anticipate that
the Transferee would enter into a
transition services agreement with
DTCC so that DTCC would continue to
provide the shared services it currently
provides to DTC, including staffing,
infrastructure and operational support.
The Wind-down Plan would also
anticipate the assignment of DTC’s
‘‘inbound’’ link arrangements to the
Transferee. The Wind-down Plan would
provide that in the case of ‘‘outbound’’
links, DTC would seek to have the
linked FMIs agree, at a minimum, to
accept the Transferee as a link party for
a transition period.44
The Wind-down Plan would provide
that, following the effectiveness of the
transfer to the Transferee, the winddown of DTC would involve addressing
any residual claims against DTC through
the bankruptcy process and liquidating
the legal entity. As such, and as stated
above, the Wind-down Plan does not
contemplate DTC continuing to provide
services in any capacity following the
transfer time, and any services not
transferred would be terminated. The
Wind-down Plan would also identify
the key dependencies for the
effectiveness of the transfer, which
include regulatory approvals that would
permit the Transferee to be legally
qualified to provide the transferred
services from and after the transfer, and
approval by the applicable bankruptcy
court of, among other things, the
proposed sale, assignments, and
transfers to the Transferee.
The Wind-down Plan would address
governance matters related to the
execution of the transfer of DTC’s
business and its wind-down. The Wind44 The proposed transfer arrangements outlined in
the Wind-down Plan do not contemplate the
transfer of any credit or funding agreements, which
are generally not assignable by DTC. However, to
the extent the Transferee adopts rules substantially
identical to those DTC has in effect prior to the
transfer, it would have the benefit of any rulesbased liquidity funding. The Wind-down Plan
contemplates that no Participants Fund would be
transferred to the Transferee, as it is not held in a
bankruptcy remote manner and it is the primary
prefunded liquidity resource to be accessed in the
recovery phase.
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down Plan would address the duties of
the Board to execute the wind-down of
DTC in conformity with (1) the Rules,
(2) the Board’s fiduciary duties, which
mandate that it exercise reasonable
business judgment in performing these
duties, and (3) DTC’s regulatory
obligations under the Act as a registered
clearing agency. The Wind-down Plan
would also identify certain factors the
Board may consider in making these
decisions, which would include, for
example, whether DTC could safely
stabilize the business and protect its
value without seeking bankruptcy
protection, and DTC’s ability to
continue to meet its regulatory
requirements.
The Wind-down Plan would describe
(1) actions DTC or DTCC may take to
prepare for wind-down in the period
before DTC experiences any financial
distress, (2) actions DTC would take
both during the recovery phase and the
Runway Period to prepare for the
execution of the Wind-down Plan, and
(3) actions DTC would take upon
commencement of bankruptcy
proceedings to effectuate the Winddown Plan.
Finally, the Wind-down Plan would
include an analysis of the estimated
time and costs to effectuate the plan,
and would provide that this estimate be
reviewed and approved by the Board
annually. In order to estimate the length
of time it might take to achieve a
recovery or orderly wind-down of DTC’s
critical operations, as contemplated by
the R&W Plan, the Wind-down Plan
would include an analysis of the
possible sequencing and length of time
it might take to complete an orderly
wind-down and transfer of critical
operations, as described in earlier
sections of the R&W Plan. The Winddown Plan would also include in this
analysis consideration of other factors,
including the time it might take to
complete any further attempts at
recovery under the Recovery Plan. The
Wind-down Plan would then multiply
this estimated length of time by DTC’s
average monthly operating expenses,
including adjustments to account for
changes to DTC’s profit and expense
profile during these circumstances, over
the previous twelve months to
determine the amount of LNA that it
should hold to achieve a recovery or
orderly wind-down of DTC’s critical
operations. The estimated wind-down
costs would constitute the ‘‘Recovery/
Wind-down Capital Requirement’’
under the Capital Policy.45 Under that
policy, the General Business Risk
Capital Requirement is calculated as the
45 See
supra note 6.
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greatest of three estimated amounts, one
of which is this Recovery/Wind-down
Capital Requirement.46
The R&W Plan is designed as a
roadmap, and the types of actions that
may be taken both leading up to and in
connection with implementation of the
Wind-down Plan would be primarily
addressed in other supporting
documentation referred to therein.
The Wind-down Plan would address
proposed Rule 32(A) (Wind-down of the
Corporation) and proposed Rule 38
(Force Majeure and Market Disruption)),
which would be adopted to facilitate the
implementation of the Wind-down Plan,
as discussed below.
Proposed Rules
In connection with the adoption of
the R&W Plan, DTC is proposing to
adopt the Proposed Rules, each
described below. The Proposed Rules
would facilitate the execution of the
R&W Plan and would provide
Participants with transparency as to
critical aspects of the Plan, particularly
as they relate to the rights and
responsibilities of both DTC and its
Participants. The Proposed Rules also
provide a legal basis to these aspects of
the Plan.
Rule 32(A) (Wind-Down of the
Corporation)
The proposed Rule 32(A) (‘‘Winddown Rule’’) would be adopted to
facilitate the execution of the Winddown Plan. The Wind-down Rule would
include a proposed set of defined terms
that would be applicable only to the
provisions of this Proposed Rule. The
Wind-down Rule would make clear that
a wind-down of DTC’s business would
occur (1) after a decision is made by the
Board, and (2) in connection with the
transfer of DTC’s services to a
Transferee, as described therein.
Generally, the proposed Wind-down
Rule is designed to create clear
mechanisms for the transfer of Eligible
Participants and Pledgees, Settling
Banks, DRS Agents, and FAST Agents
(as these terms would be defined in the
Wind-down Rule), and DTC’s inventory
of financial assets in order to provide for
continued access to critical services and
to minimize disruption to the markets in
the event the Wind-down Plan is
initiated.
Wind-down Trigger. First, the
Proposed Rule would make clear that
the Board is responsible for initiating
the Wind-down Plan, and would
identify the criteria the Board would
consider when making this
determination. As provided for in the
46 See
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Wind-down Plan and in the proposed
Wind-down Rule, the Board would
initiate the Plan if, in the exercise of its
business judgment and subject to its
fiduciary duties, it has determined that
the execution of the Recovery Plan has
not or is not likely to restore DTC to
viability as a going concern, and the
implementation of the Wind-down Plan,
including the transfer of DTC’s business,
is in the best interests of DTC, its
Participants and Pledgees, its
shareholders and creditors, and the U.S.
financial markets.
Identification of Critical Services;
Designation of Dates and Times for
Specific Actions. The Proposed Rule
would provide that, upon making a
determination to initiate the Winddown Plan, the Board would identify
the critical and non-critical services that
would be transferred to the Transferee at
the Transfer Time (as defined below and
in the Proposed Rule), as well as any
non-critical services that would not be
transferred to the Transferee. The
proposed Wind-down Rule would
establish that any services transferred to
the Transferee will only be provided by
the Transferee as of the Transfer Time,
and that any non-critical services that
are not transferred to the Transferee
would be terminated at the Transfer
Time. The Proposed Rule would also
provide that the Board would establish
(1) an effective time for the transfer of
DTC’s business to a Transferee
(‘‘Transfer Time’’), and (2) the last day
that instructions in respect of securities
and other financial products may be
effectuated through the facilities of DTC
(the ‘‘Last Activity Date’’). The Proposed
Rule would make clear that DTC would
not accept any transactions for
settlement after the Last Activity Date.
Any transactions to be settled after the
Transfer Time would be required to be
submitted to the Transferee, and would
not be DTC’s responsibility.
Notice Provisions. The proposed
Wind-down Rule would provide that,
upon a decision to implement the Winddown Plan, DTC would provide its
Participants, Pledgees, DRS Agents,
FAST Agents, Settling Banks and
regulators with a notice that includes
material information relating to the
Wind-down Plan and the anticipated
transfer of DTC’s Participants and
business, including, for example, (1) a
brief statement of the reasons for the
decision to implement the Wind-down
Plan; (2) identification of the Transferee
and information regarding the
transaction by which the transfer of
DTC’s business would be effected; (3)
the Transfer Time and Last Activity
Date; and (4) identification of
Participants and the critical and non-
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critical services that would be
transferred to the Transferee at the
Transfer Time, as well as those NonEligible Participants (as defined below
and in the Proposed Rule) and any noncritical services that would not be
included in the transfer. DTC would
also make available the rules and
procedures and membership agreements
of the Transferee.
Transfer of Membership. The
proposed Wind-down Rule would
address the expected transfer of DTC’s
membership to the Transferee, which
DTC would seek to effectuate by
entering into an arrangement with a
Failover Transferee, or by using
commercially reasonable efforts to enter
into such an arrangement with a Third
Party Transferee. Thus, under the
proposal, in connection with the
implementation of the Wind-down Plan
and with no further action required by
any party:
(1) Each Eligible Participant would
become (i) a Participant of the
Transferee and (ii) a party to a
Participants agreement with the
Transferee;
(2) each Participant that is delinquent
in the performance of any obligation to
DTC or that has provided notice of its
election to withdraw as a Participant (a
‘‘Non-Eligible Participant’’) as of the
Transfer Time would become (i) the
holder of a transition period securities
account maintained by the Transferee
on its books (‘‘Transition Period
Securities Account’’) and (ii) a party to
a Transition Period Securities Account
agreement of the Transferee;
(3) each Pledgee would become (i) a
Pledgee of the Transferee and (ii) a party
to a Pledgee agreement with the
Transferee;
(4) each DRS Agent would become (i)
a DRS Agent of the Transferee and (ii)
a party to a DRS Agent agreement with
the Transferee;
(5) each FAST Agent would become
(i) a FAST Agent of the Transferee and
(ii) a party to a FAST Agent agreement
with the Transferee; and
(6) each Settling Bank for Participants
and Pledgees would become (i) a
Settling Bank for Participants and
Pledgees of the Transferee and (ii) a
party to a Settling Bank Agreement with
the Transferee.
Further, the Proposed Rule would
make clear that it would not prohibit (1)
Non-Eligible Participants from applying
for membership with the Transferee, (2)
Non-Eligible Participants that have
become holders of Transition Period
Securities Accounts (‘‘Transition Period
Securities Account Holders’’) of the
Transferee from withdrawing as a
Transition Period Securities Account
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Holder from the Transferee, subject to
the rules and procedures of the
Transferee, and (3) Participants,
Pledgees, DRS Agents, FAST Agents,
and Settling Banks that would be
transferred to the Transferee from
withdrawing from membership with the
Transferee, subject to the rules and
procedures of the Transferee. Under the
Proposed Rule, Non-Eligible
Participants that have become
Transition Period Securities Account
Holders of the Transferee shall have the
rights and be subject to the obligations
of Transition Period Securities Account
Holders set forth in special provisions of
the rules and procedures of the
Transferee applicable to such Transition
Period Securities Account Holder.
Specifically, Non-Eligible Participants
that become Transition Period
Securities Account Holders must,
within the Transition Period (as defined
in the Proposed Rule), instruct the
Transferee to transfer the financial
assets credited to its Transition Period
Securities Account (i) to a Participant of
the Transferee through the facilities of
the Transferee or (ii) to a recipient
outside the facilities of the Transferee,
and no additional financial assets may
be delivered versus payment to a
Transition Period Securities Account
during the Transition Period.
Transfer of Inventory of Financial
Assets. The proposed Wind-down Rule
would provide that DTC would enter
into arrangements with a Failover
Transferee, or would use commercially
reasonable efforts to enter into
arrangements with a Third Party
Transferee, providing that, in either
case, at Transfer Time:
(1) DTC would transfer to the
Transferee (i) its rights with respect to
its nominee Cede & Co. (‘‘Cede’’) (and
thereby its rights with respect to the
financial assets owned of record by
Cede), (ii) the financial assets held by it
at the FRBNY, (iii) the financial assets
held by it at other CSDs, (iv) the
financial assets held in custody for it
with FAST Agents, (v) the financial
assets held in custody for it with other
custodians and (vi) the financial assets
it holds in physical custody.
(2) The Transferee would establish
security entitlements on its books for
Eligible Participants of DTC that become
Participants of the Transferee that
replicate the security entitlements that
DTC maintained on its books
immediately prior to the Transfer Time
for such Eligible Participants, and DTC
would simultaneously eliminate such
security entitlements from its books.
(3) The Transferee would establish
security entitlements on its books for
Non-Eligible Participants of DTC that
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893
become Transition Period Securities
Account Holders of the Transferee that
replicate the security entitlements that
DTC maintained on its books
immediately prior to the Transfer Time
for such Non-Eligible Participants, and
DTC would simultaneously eliminate
such security entitlements from its
books.
(4) The Transferee would establish
pledges on its books in favor of Pledgees
that become Pledgees of the Transferee
that replicate the pledges that DTC
maintained on its books immediately
prior to the Transfer Time in favor of
such Pledgees, and DTC shall
simultaneously eliminate such pledges
from its books.
Comparability Period. The proposed
automatic mechanism for the transfer of
DTC’s membership is intended to
provide DTC’s membership with
continuous access to critical services in
the event of DTC’s wind-down, and to
facilitate the continued prompt and
accurate clearance and settlement of
securities transactions. Further to this
goal, the proposed Wind-down Rule
would provide that DTC would enter
into arrangements with a Failover
Transferee, or would use commercially
reasonable efforts to enter into
arrangements with a Third Party
Transferee, providing that, in either
case, with respect to the critical services
and any non-critical services that are
transferred from DTC to the Transferee,
for at least a period of time to be agreed
upon (‘‘Comparability Period’’), the
business transferred from DTC to the
Transferee would be operated in a
manner that is comparable to the
manner in which the business was
previously operated by DTC.
Specifically, the proposed Wind-down
Rule would provide that: (1) The rules
of the Transferee and terms of
Participant, Pledgee, DRS Agent, FAST
Agent and Settling Bank agreements
would be comparable in substance and
effect to the analogous Rules and
agreements of DTC, (2) the rights and
obligations of any Participants,
Pledgees, DRS Agents, FAST Agents,
and Settling Banks that are transferred
to the Transferee would be comparable
in substance and effect to their rights
and obligations as to DTC, and (3) the
Transferee would operate the
transferred business and provide any
services that are transferred in a
comparable manner to which such
services were provided by DTC.
The purpose of these provisions and
the intended effect of the proposed
Wind-down Rule is to facilitate a
smooth transition of DTC’s business to
a Transferee and to provide that, for at
least the Comparability Period, the
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Transferee (1) would operate the
transferred business in a manner that is
comparable in substance and effect to
the manner in which the business was
operated by DTC, and (2) would not
require sudden and disruptive changes
in the systems, operations and business
practices of the new Participants,
Pledgees, DRS Agents, FAST Agents,
and Settling Banks of the Transferee.
Subordination of Claims Provisions
and Miscellaneous Matters. The
proposed Wind-down Rule would also
include a provision addressing the
subordination of unsecured claims
against DTC of its Participants who fail
to participate in DTC’s recovery efforts
(i.e., such firms are delinquent in their
obligations to DTC or elect to retire from
DTC in order to minimize their
obligations with respect to the
allocation of losses, pursuant to the
Rules). This provision is designed to
incentivize Participants to participate in
DTC’s recovery efforts.47
The proposed Wind-down Rule
would address other ex-ante matters,
including provisions providing that its
Participants, Pledgees, DRS Agents,
FAST Agents and Settling Banks (1) will
assist and cooperate with DTC to
effectuate the transfer of DTC’s business
to a Transferee, (2) consent to the
provisions of the rule, and (3) grant DTC
power of attorney to execute and deliver
on their behalf documents and
instruments that may be requested by
the Transferee. Finally, the Proposed
Rule would include a limitation of
liability for any actions taken or omitted
to be taken by DTC pursuant to the
Proposed Rule.
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Rule 38 (Market Disruption and Force
Majeure)
The proposed Rule 38 (‘‘Force
Majeure Rule’’) would address DTC’s
authority to take certain actions upon
the occurrence, and during the
pendency, of a ‘‘Market Disruption
Event,’’ as defined therein. The
Proposed Rule is designed to clarify
DTC’s ability to take actions to address
extraordinary events outside of the
control of DTC and of its membership,
and to mitigate the effect of such events
by facilitating the continuity of services
(or, if deemed necessary, the temporary
suspension of services). To that end,
under the proposed Force Majeure Rule,
47 Nothing in the proposed Wind-down Rule
would seek to prevent a Participant that retired its
membership at DTC from applying for membership
with the Transferee. Once its DTC membership is
terminated, however, such firm would not be able
to benefit from the membership assignment that
would be effected by this proposed Wind-down
Rule, and it would have to apply for membership
directly with the Transferee, subject to its
membership application and review process.
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DTC would be entitled, during the
pendency of a Market Disruption Event,
to (1) suspend the provision of any or
all services, and (2) take, or refrain from
taking, or require its Participants and
Pledgees to take, or refrain from taking,
any actions it considers appropriate to
address, alleviate, or mitigate the event
and facilitate the continuation of DTC’s
services as may be practicable.
The proposed Force Majeure Rule
would identify the events or
circumstances that would be considered
a ‘‘Market Disruption Event,’’ including,
for example, events that lead to the
suspension or limitation of trading or
banking in the markets in which DTC
operates, or the unavailability or failure
of any material payment, bank transfer,
wire or securities settlement systems.
The proposed Force Majeure Rule
would define the governance
procedures for how DTC would
determine whether, and how, to
implement the provisions of the rule. A
determination that a Market Disruption
Event has occurred would generally be
made by the Board, but the Proposed
Rule would provide for limited, interim
delegation of authority to a specified
officer or management committee if the
Board would not be able to take timely
action. In the event such delegated
authority is exercised, the proposed
Force Majeure Rule would require that
the Board be convened as promptly as
practicable, no later than five Business
Days after such determination has been
made, to ratify, modify, or rescind the
action. The proposed Force Majeure
Rule would also provide for prompt
notification to the Commission, and
advance consultation with Commission
staff, when practicable. The Proposed
Rule would require Participants and
Pledgees to notify DTC immediately
upon becoming aware of a Market
Disruption Event, and, likewise, would
require DTC to notify its Participants
and Pledgees if it has triggered the
Proposed Rule.
Finally, the Proposed Rule would
address other related matters, including
a limitation of liability for any failure or
delay in performance, in whole or in
part, arising out of the Market
Disruption Event.
2. Statutory Basis
DTC believes that the proposal is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a registered
clearing agency. In particular, DTC
believes that the R&W Plan and each of
the Proposed Rules are consistent with
Section 17A(b)(3)(F) of the Act,48 the
R&W Plan and each of the Proposed
Rules are consistent with Rule 17Ad–
22(e)(3)(ii) under the Act,49 and the
R&W Plan is consistent with Rule
17Ad–22(e)(15)(ii) under the Act,50 for
the reasons described below.
Section 17A(b)(3)(F) of the Act
requires, in part, that the rules of DTC
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.51
The Recovery Plan and the proposed
Force Majeure Rule would promote the
prompt and accurate clearance and
settlement of securities transactions by
providing DTC with a roadmap for
actions it may employ to mitigate losses,
and monitor and, as needed, stabilize,
its financial condition, which would
allow it to continue its critical clearance
and settlement services in stress
situations. Further, as described above,
the Recovery Plan is designed to
identify the actions and tools DTC may
use to address and minimize losses to
both DTC and its Participants. The
Recovery Plan and the proposed Force
Majeure Rule would provide DTC’s
management and the Board with
guidance in this regard by identifying
the indicators and governance around
the use and application of such tools to
enable them to address stress situations
in a manner most appropriate for the
circumstances. Therefore, the Recovery
Plan and the proposed Force Majeure
Rule would also contribute to the
safeguarding of securities and funds
which are in the custody or control of
DTC or for which it is responsible by
enabling actions that would address and
minimize losses.
The Wind-down Plan and the
proposed Wind-down Rule, which
would facilitate the implementation of
the Wind-down Plan, would also
promote the prompt and accurate
clearance and settlement of securities
transactions and assure the safeguarding
of securities and funds which are in the
custody or control of DTC or for which
it is responsible. The Wind-down Plan
and the proposed Wind-down Rule
would collectively establish a
framework for the transfer and orderly
wind-down of DTC’s business. These
proposals would establish clear
mechanisms for the transfer of DTC’s
critical services and membership as well
as clear provision for the transfer of the
securities inventory it holds in fungible
bulk for Participants. By doing so, the
49 17
CFR 240.17Ad–22(e)(3)(ii).
at 240.17Ad–22(e)(15)(ii).
51 15 U.S.C. 78q–1(b)(3)(F).
50 Id.
48 15
PO 00000
U.S.C. 78q–1(b)(3)(F).
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Wind-down Plan and these Proposed
Rules are designed to facilitate the
continuity of DTC’s critical services and
enable its Participants and Pledgees to
maintain access to DTC’s services
through the transfer of its membership
in the event DTC defaults or the Winddown Plan is triggered by the Board.
Therefore, by facilitating the continuity
of DTC’s critical clearance and
settlement services, DTC believes the
proposals would promote the prompt
and accurate clearance and settlement of
securities transactions. Further, by
creating a framework for the transfer
and orderly wind-down of DTC’s
business, DTC believes the proposals
would enhance the safeguarding of
securities and funds which are in the
custody or control of DTC or for which
it is responsible.
Therefore, DTC believes the R&W
Plan and each of the Proposed Rules are
consistent with the requirements of
Section 17A(b)(3)(F) of the Act.52
Rule 17Ad–22(e)(3)(ii) under the Act
requires DTC to establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
maintain a sound risk management
framework for comprehensively
managing legal, credit, liquidity,
operational, general business,
investment, custody, and other risks
that arise in or are borne by the covered
clearing agency, which includes plans
for the recovery and orderly wind-down
of the covered clearing agency
necessitated by credit losses, liquidity
shortfalls, losses from general business
risk, or any other losses.53 The R&W
Plan and each of the Proposed Rules are
designed to meet the requirements of
Rule 17Ad–22(e)(3)(ii).54
The R&W Plan would be maintained
by DTC in compliance with Rule 17Ad–
22(e)(3)(ii) in that it provides plans for
the recovery and orderly wind-down of
DTC necessitated by credit losses,
liquidity shortfalls, losses from general
business risk, or any other losses, as
described above.55 Specifically, the
Recovery Plan would define the risk
management activities, stress conditions
and indicators, and tools that DTC may
use to address stress scenarios that
could eventually prevent it from being
able to provide its critical services as a
going concern. Through the framework
of the Crisis Continuum, the Recovery
Plan would address measures that DTC
may take to address risks of credit losses
and liquidity shortfalls, and other losses
that could arise from a Participant
52 Id.
53 17
Default. The Recovery Plan would also
address the management of general
business risks and other non-default
risks that could lead to losses.
The Wind-down Plan would be
triggered by a determination by the
Board that recovery efforts have not
been, or are unlikely to be, successful in
returning DTC to viability as a going
concern. Once triggered, the Winddown Plan would set forth clear
mechanisms for the transfer of DTC’s
membership and business, and would
be designed to facilitate continued
access to DTC’s critical services and to
minimize market impact of the transfer.
By establishing the framework and
strategy for the execution of the transfer
and wind-down of DTC in order to
facilitate continuous access to DTC’s
critical services, the Wind-down Plan
establishes a plan for the orderly winddown of DTC. Therefore, DTC believes
the R&W Plan would provide plans for
the recovery and orderly wind-down of
the covered clearing agency necessitated
by credit losses, liquidity shortfalls,
losses from general business risk, or any
other losses, and, as such, meets the
requirements of Rule 17Ad–
22(e)(3)(ii).56
As described in greater detail above,
the Proposed Rules are designed to
facilitate the execution of the R&W Plan,
provide Participants with transparency
regarding the material provisions of the
Plan, and provide DTC with a legal basis
for implementation of those provisions.
As such, DTC also believes the Proposed
Rules meet the requirements of Rule
17Ad–22(e)(3)(ii).57
DTC has evaluated the recovery tools
that would be identified in the Recovery
Plan and has determined that these tools
are comprehensive, effective, and
transparent, and that such tools provide
appropriate incentives to DTC’s
Participants to manage the risks they
present. The recovery tools, as outlined
in the Recovery Plan and in the
proposed Force Majeure Rule, provide
DTC with a comprehensive set of
options to address its material risks and
support the resiliency of its critical
services under a range of stress
scenarios. DTC also believes the
recovery tools are effective, as DTC has
both legal basis and operational
capability to execute these tools in a
timely and reliable manner. Many of the
recovery tools are provided for in the
Rules; Participants are bound by the
Rules through their Participants
Agreements with DTC, and the Rules are
adopted pursuant to a framework
established by Rule 19b–4 under the
CFR 240.17Ad–22(e)(3)(ii).
55 Id.
at 240.19b–4.
note 38.
60 17 CFR 240.17Ad–22(e)(3)(ii).
56 Id.
57 Id.
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Act,58 providing a legal basis for the
recovery tools found therein. Other
recovery tools have legal basis in
contractual arrangements to which DTC
is a party, as described above. Further,
as many of the tools are embedded in
DTC’s ongoing risk management
practices or are embedded into its
predefined default-management
procedures, DTC is able to execute these
tools, in most cases, when needed and
without material operational or
organizational delay.
The majority of the recovery tools are
also transparent, as they are or are
proposed to be included in the Rules,
which are publicly available. DTC
believes the recovery tools also provide
appropriate incentives to its owners and
Participants, as they are designed to
control the amount of risk they present
to DTC’s clearance and settlement
system. Finally, DTC’s Recovery Plan
provides for a continuous evaluation of
the systemic consequences of executing
its recovery tools, with the goal of
minimizing their negative impact. The
Recovery Plan would outline various
indicators over a timeline of increasing
stress, the Crisis Continuum, with
escalation triggers to DTC management
or the Board, as appropriate. This
approach would allow for timely
evaluation of the situation and the
possible impacts of the use of a recovery
tool in order to minimize the negative
effects of the stress scenario. Therefore,
DTC believes that the recovery tools that
would be identified and described in its
Recovery Plan, including the authority
provided to it in the proposed Force
Majeure Rule, would meet the criteria
identified within guidance published by
the Commission in connection with the
adoption of Rule 17Ad–22(e)(3)(ii).59
Therefore, DTC believes the R&W
Plan and each of the Proposed Rules are
consistent with Rule 17Ad–
22(e)(3)(ii).60
Rule 17Ad–22(e)(15)(ii) under the Act
requires DTC to establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
identify, monitor, and manage its
general business risk and hold sufficient
LNA to cover potential general business
losses so that DTC can continue
operations and services as a going
concern if those losses materialize,
including by holding LNA equal to the
greater of either (x) six months of the
covered clearing agency’s current
operating expenses, or (y) the amount
determined by the board of directors to
be sufficient to ensure a recovery or
58 Id.
54 Id.
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Federal Register / Vol. 83, No. 5 / Monday, January 8, 2018 / Notices
orderly wind-down of critical
operations and services of the covered
clearing agency.61 While the Capital
Policy addresses how DTC holds LNA
in compliance with these requirements,
the Wind-down Plan would include an
analysis that would estimate the amount
of time and the costs to achieve a
recovery or orderly wind-down of DTC’s
critical operations and services, and
would provide that the Board review
and approve this analysis and
estimation annually. The Wind-down
Plan would also provide that the
estimate would be the ‘‘Recovery/Winddown Capital Requirement’’ under the
Capital Policy. Under that policy, the
General Business Risk Capital
Requirement, which is the sufficient
amount of LNA that DTC should hold to
cover potential general business losses
so that it can continue operations and
services as a going concern if those
losses materialize, is calculated as the
greatest of three estimated amounts, one
of which is this Recovery/Wind-down
Capital Requirement. Therefore, DTC
believes the R&W Plan, as it interrelates
with the Capital Policy, is consistent
with Rule 17Ad–22(e)(15)(ii).62
sradovich on DSK3GMQ082PROD with NOTICES
(B) Clearing Agency’s Statement on
Burden on Competition
DTC does not believe the proposal
would have any impact, or impose any
burden, on competition not necessary or
appropriate in furtherance of the
purpose of the Act.63 The proposal
would apply uniformly to all
Participants and Pledgees. DTC does not
anticipate that the proposal would affect
its day-to-day operations under normal
circumstances, or in the management of
a typical Participant default scenario or
non-default event. DTC is not proposing
to alter the standards or requirements
for becoming or remaining a Participant
or Pledgee, or otherwise using its
services. DTC also does not propose to
change its methodology for calculation
of Participants Fund contributions. The
proposal is intended to (1) address the
risk of loss events and identify the tools
and resources available to it to
withstand and recover from such events,
so that it can restore normal operations,
and (2) provide a framework for its
orderly wind-down and the transfer of
its business in the event those recovery
tools do not restore DTC to financial
viability, as described herein.
The R&W Plan and each of the
Proposed Rules have been developed
and documented in order to satisfy
61 Id.
at 240.17Ad–22(e)(15)(ii).
62 Id.
63 15
U.S.C. 78q–1(b)(3)(I).
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applicable regulatory requirements, as
discussed above.
With respect to the Recovery Plan, the
proposal generally reflects DTC’s
existing tools and existing internal
procedures. Existing tools that would
have a direct impact on the rights,
responsibilities or obligations of
Participants are reflected in the existing
Rules or are proposed to be included in
the Rules. Accordingly, the Recovery
Plan and the proposed Force Majeure
Rule are intended to provide a roadmap,
define the strategy and identify the tools
available to DTC in connection with its
recovery efforts. By proposing to
enhance DTC’s existing internal
management and its regulatory
compliance related to its recovery
efforts, DTC does not believe the
Recovery Plan or the proposed Force
Majeure Rule would have any impact, or
impose any burden, on competition.
With respect to the Wind-down Plan
and the proposed Wind-down Rule,
which facilitate the execution of the
Wind-down Plan, the proposal would
operate to effect the transfer of all
eligible Participants and Pledgees to the
Transferee, and would not prohibit any
market participant from either bidding
to become the Transferee or from
applying for membership with the
Transferee. The proposal also would not
prohibit any Participant or Pledgee from
withdrawing from DTC prior to the
Transfer Time, as is permitted under the
Rules today, or from applying for
membership with the Transferee.
Therefore, as the proposal would treat
each similarly situated Participant and
Pledgee identically under the Winddown Plan and under the Proposed
Wind-down Rule, DTC does not believe
the Wind-down Plan or the proposed
Wind-down Rule would have any
impact, or impose any burden, on
competition.
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants, or Others
While DTC has not solicited or
received any written comments relating
to this proposal, DTC has conducted
outreach to its Members in order to
provide them with notice of the
proposal. 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
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Fmt 4703
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designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the clearing agency 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–2017–021 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–DTC–2017–021. 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 website (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 website 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 website
(https://dtcc.com/legal/sec-rule-
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Federal Register / Vol. 83, No. 5 / Monday, January 8, 2018 / Notices
filings.aspx). All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–DTC–
2017–021 and should be submitted on
or before January 29, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.64
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–00080 Filed 1–5–18; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–82428; File No. SR–NSCC–
2017–018]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of a
Proposed Rule Change To Amend the
Loss Allocation Rules and Make Other
Changes
January 2, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
18, 2017, National Securities Clearing
Corporation (‘‘NSCC’’) 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
modifications to NSCC’s Rules and
Procedures (‘‘Rules’’) in order to amend
provisions in the Rules regarding loss
allocation as well as make other
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 On December 18, 2017, NSCC filed this
proposed rule change as an advance notice (SR–
NSCC–2017–806) 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.
sradovich on DSK3GMQ082PROD with NOTICES
1 15
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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
SECURITIES AND EXCHANGE
COMMISSION
64 17
changes, as described in greater detail
below.4
1. Purpose
The primary purpose of this proposed
rule change is to amend NSCC’s loss
allocation rules in order to enhance the
resiliency of NSCC’s loss allocation
process so that NSCC can take timely
action to address multiple loss events
that occur in succession during a short
period of time (defined and explained in
detail below). In connection therewith,
the proposed rule change would (i) align
the loss allocation rules of the three
clearing agencies of The Depository
Trust & Clearing Corporation (‘‘DTCC’’),
namely The Depository Trust Company
(‘‘DTC’’), Fixed Income Clearing
Corporation (‘‘FICC’’) (including the
Government Securities Division (‘‘FICC/
GSD’’) and the Mortgage-Backed
Securities Division (‘‘FICC/MBSD’’)),
and NSCC (collectively, the ‘‘DTCC
Clearing Agencies’’), so as to provide
consistent treatment, to the extent
practicable and appropriate, especially
for firms that are participants of two or
more DTCC Clearing Agencies, (ii)
increase transparency and accessibility
of the loss allocation rules by enhancing
their readability and clarity, (iii) reduce
the time within which NSCC is required
to return a former Member’s Clearing
Fund deposit, and (iv) make conforming
and technical changes.
(i) Background
Central counterparties (‘‘CCPs’’) play
a key role in financial markets by
mitigating counterparty credit risk on
transactions between market
participants. CCPs achieve this by
providing guaranties to participants
and, as a consequence, are typically
exposed to credit risks that could lead
4 Capitalized terms not defined herein are defined
in the Rules, available at https://www.dtcc.com/∼/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
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897
to default losses. In addition, in
performing its critical functions, a CCP
could be exposed to non-default losses
that are otherwise incident to the CCP’s
clearance and settlement business.
A CCP’s rulebook should provide a
complete description of how losses
would be allocated to participants if the
size of the losses exceeded the CCP’s
pre-funded resources. Doing so provides
for an orderly allocation of losses, and
potentially allows the CCP to continue
providing critical services to the market
and thereby results in significant
financial stability benefits. In addition,
a clear description of the loss allocation
process offers transparency and
accessibility to the CCP’s participants.
Current NSCC Loss Allocation Process
As a CCP, NSCC’s loss allocation
process is a key component of its risk
management process. Risk management
is the foundation of NSCC’s ability to
guarantee settlement, as well as the
means by which NSCC protects itself
and its Members from the risks inherent
in the clearance and settlement process.
NSCC’s risk management process must
account for the fact that, in certain
extreme circumstances, the collateral
and other financial resources that secure
NSCC’s risk exposures may not be
sufficient to fully cover losses resulting
from the liquidation of the portfolio of
a Member for whom NSCC has ceased
to act.5
The Rules currently provide for a loss
allocation process through which both
NSCC (by applying no less than 25% of
its retained earnings in accordance with
Addendum E) and its Members would
share in the allocation of a loss resulting
from the default of a Member for whom
NSCC has ceased to act pursuant to the
Rules. The Rules also recognize that
NSCC may incur losses outside the
context of a defaulting Member that are
otherwise incident to NSCC’s clearance
and settlement business.
NSCC’s loss allocation rules currently
provide that in the event NSCC ceases
to act for a Member, the amounts on
deposit to the Clearing Fund from the
defaulting Member, along with any
other resources of, or attributable to, the
defaulting Member that NSCC may
access under the Rules (e.g., payments
from Clearing Agency Cross-Guaranty
Agreements), are the first source of
funds NSCC would use to cover any
losses that may result from the closeout
of the defaulting Member’s guaranteed
5 When NSCC restricts a Member’s access to
services generally, NSCC is said to have ‘‘ceased to
act’’ for the Member. Rule 46 (Restrictions on
Access to Services) sets out the circumstances
under which NSCC may cease to act for a Member
and the types of actions it may take. Supra note 4.
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]]>Agencies
[Federal Register Volume 83, Number 5 (Monday, January 8, 2018)]
[Notices]
[Pages 884-897]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-00080]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82432; File No. SR-DTC-2017-021]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of a Proposed Rule Change To Adopt a Recovery & Wind-
Down Plan and Related Rules
January 2, 2018.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 18, 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 December 18, 2017, DTC filed this proposed rule change as
an advance notice (SR-DTC-2017-803) 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.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change of DTC would (1) adopt the Recovery &
Wind-down Plan of DTC (``R&W Plan'' or ``Plan''); and (2) amend the
Rules, By-Laws and Organization Certificate of DTC (``Rules'') \4\ in
order to adopt Rule 32(A) (Wind-down of the Corporation) and Rule 38
(Market Disruption and Force Majeure) (each proposed Rule 32(A) and
proposed Rule 38, a ``Proposed Rule'' and, collectively, the ``Proposed
Rules'').
---------------------------------------------------------------------------
\4\ Capitalized terms used herein and not otherwise defined
herein are defined in the Rules, available at www.dtcc.com/~/media/
Files/Downloads/legal/rules/DTC_rules.pdf.
---------------------------------------------------------------------------
The R&W Plan would be maintained by DTC in compliance with Rule
17Ad-22(e)(3)(ii) under the Act by providing
[[Page 885]]
plans for the recovery and orderly wind-down of DTC necessitated by
credit losses, liquidity shortfalls, losses from general business risk,
or any other losses, as described below.\5\ The Proposed Rules are
designed to (1) facilitate the implementation of the R&W Plan when
necessary and, in particular, allow DTC to effectuate its strategy for
winding down and transferring its business; (2) provide Participants
with transparency around critical provisions of the R&W Plan that
relate to their rights, responsibilities and obligations; and (3)
provide DTC with the legal basis to implement those provisions of the
R&W Plan when necessary, as described below.
---------------------------------------------------------------------------
\5\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------
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
DTC is proposing to adopt the R&W Plan to be used by the Board and
management in the event DTC encounters scenarios that could potentially
prevent it from being able to provide its critical services as a going
concern. The R&W Plan would identify (i) the recovery tools available
to DTC to address the risks of (a) uncovered losses or liquidity
shortfalls resulting from the default of one or more of its
Participants, and (b) losses arising from non-default events, such as
damage to its physical assets, a cyber-attack, or custody and
investment losses, and (ii) the strategy for implementation of such
tools. The R&W Plan would also establish the strategy and framework for
the orderly wind-down of DTC and the transfer of its business in the
remote event the implementation of the available recovery tools does
not successfully return DTC to financial viability.
As discussed in greater detail below, the R&W Plan would provide,
among other matters, (i) an overview of the business of DTC and its
parent, The Depository Trust & Clearing Corporation (``DTCC''); (ii) an
analysis of DTC's intercompany arrangements and critical links to other
financial market infrastructures (``FMIs''); (iii) a description of
DTC's services, and the criteria used to determine which services are
considered critical; (iv) a description of the DTC and DTCC governance
structure; (v) a description of the governance around the overall
recovery and wind-down program; (vi) a discussion of tools available to
DTC to mitigate credit/market and liquidity risks, including recovery
indicators and triggers, and the governance around management of a
stress event along a ``Crisis Continuum'' timeline; (vii) a discussion
of potential non-default losses and the resources available to DTC to
address such losses, including recovery triggers and tools to mitigate
such losses; (viii) an analysis of the recovery tools' characteristics,
including how they are comprehensive, effective, and transparent, how
the tools provide appropriate incentives to Participants to, among
other things, control and monitor the risks they may present to DTC,
and how DTC seeks to minimize the negative consequences of executing
its recovery tools; and (ix) the framework and approach for the orderly
wind-down and transfer of DTC's business, including an estimate of the
time and costs to effect a recovery or orderly wind-down of DTC.
The R&W Plan would be structured as a roadmap, and would identify
and describe the tools that DTC may use to effect a recovery from the
events and scenarios described therein. Certain recovery tools that
would be identified in the R&W Plan are based in the Rules (including
the Proposed Rules) and, as such, descriptions of those tools would
include descriptions of, and reference to, the applicable Rules and any
related internal policies and procedures. Other recovery tools that
would be identified in the R&W Plan are based in contractual
arrangements to which DTC is a party, including, for example, existing
committed or pre-arranged liquidity arrangements. Further, the R&W Plan
would state that DTC may develop further supporting internal guidelines
and materials that may provide operationally for matters described in
the Plan, and that such documents would be supplemental and subordinate
to the Plan.
Key factors considered in developing the R&W Plan and the types of
tools available to DTC were its governance structure and the nature of
the markets within which DTC operates. As a result of these
considerations, many of the tools available to DTC that would be
described in the R&W Plan are DTC's existing, business-as-usual risk
management and default management tools, which would continue to be
applied in scenarios of increasing stress. In addition to these
existing, business-as-usual tools, the R&W Plan would describe DTC's
other principal recovery tools, which include, for example, (i)
identifying, monitoring and managing general business risk and holding
sufficient liquid net assets funded by equity (``LNA'') to cover
potential general business losses pursuant to the Clearing Agency
Policy on Capital Requirements (``Capital Policy''),\6\ (ii)
maintaining the Clearing Agency Capital Replenishment Plan
(``Replenishment Plan'') as a viable plan for the replenishment of
capital should DTC's equity fall close to or below the amount being
held pursuant to the Capital Policy,\7\ and (iii) the process for the
allocation of losses among Participants as provided in Rule 4.\8\ The
R&W Plan would provide governance around the selection and
implementation of the recovery tool or tools most relevant to mitigate
a stress scenario and any applicable loss or liquidity shortfall.
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 81105 (July 7,
2017), 82 FR 32399 (July 13, 2017) (SR-DTC-2017-003, SR-FICC-2017-
007, SR-NSCC-2017-004).
\7\ See id.
\8\ See Rule 4 (Participants Fund and Participants Investment),
supra note 4. DTC is proposing changes to Rule 4 regarding
allocation of losses in a separate filing submitted simultaneously
with this filing (File Nos. SR-DTC-2017-022 and SR-DTC-2017-804,
referred to collectively herein as the ``Loss Allocation Filing'').
DTC expects the Commission to review both proposals together, and,
as such, the proposal described in this filing anticipates the
approval and implementation of those proposed changes to the Rules.
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The development of the R&W Plan is facilitated by the Office of
Recovery & Resolution Planning (``R&R Team'') of DTCC.\9\ The R&R Team
reports to the DTCC Management Committee (``Management Committee'') and
is responsible for maintaining the R&W Plan and for the development and
ongoing maintenance of the overall recovery and wind-down planning
process. The Board, or such committees as may be delegated authority by
the Board from time to time pursuant to its charter, would review and
approve the R&W Plan biennially, and would also review and approve any
changes that
[[Page 886]]
are proposed to the R&W Plan outside of the biennial review.
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\9\ DTCC operates on a shared services model with respect to DTC
and its other subsidiaries. Most corporate functions are established
and managed on an enterprise-wide basis pursuant to intercompany
agreements under which it is generally DTCC that provides a relevant
service to a subsidiary, including DTC.
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As discussed in greater detail below, the Proposed Rules would
define the procedures that may be employed in the event of a DTC wind-
down, and would provide for DTC's authority to take certain actions on
the occurrence of a ``Market Disruption Event,'' as defined therein.
Significantly, the Proposed Rules would provide Participants with
transparency and certainty with respect to these matters. The Proposed
Rules would facilitate the implementation of the R&W Plan, particularly
DTC's strategy for winding down and transferring its business, and
would provide DTC with the legal basis to implement those aspects of
the R&W Plan.
DTC R&W Plan
The R&W Plan is intended to be used by the Board and DTC's
management in the event DTC encounters scenarios that could potentially
prevent it from being able to provide its critical services as a going
concern. The R&W Plan would be structured to provide a roadmap, define
the strategy, and identify the tools available to DTC to either (i)
recover, in the event it experiences losses that exceed its prefunded
resources (such strategies and tools referred to herein as the
``Recovery Plan'') or (ii) wind-down its business in a manner designed
to permit the continuation of its critical services in the event that
such recovery efforts are not successful (such strategies and tools
referred to herein as the ``Wind-down Plan''). The description of the
R&W Plan below is intended to highlight the purpose and expected
effects of the material aspects of the R&W Plan, and to provide
Participants with appropriate transparency into these features.
Business Overview, Critical Services, and Governance
The introduction to the R&W Plan would identify the document's
purpose and its regulatory background, and would outline a summary of
the Plan. The stated purpose of the R&W Plan is that it is to be used
by the Board and DTC management in the event DTC encounters scenarios
that could potentially prevent it from being able to provide its
critical services as a going concern. The R&W Plan would be maintained
by DTC in compliance with Rule 17Ad-22(e)(3)(ii) under the Act \10\ by
providing plans for the recovery and orderly wind-down of DTC.
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\10\ 17 CFR 240.17Ad-22(e)(3)(ii).
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The R&W Plan would describe DTCC's business profile, provide a
summary of DTC's services, and identify the intercompany arrangements
and critical links between DTC and other FMIs. This overview section
would provide a context for the R&W Plan by describing DTC's business,
organizational structure and critical links to other entities. By
providing this context, this section would facilitate the analysis of
the potential impact of utilizing the recovery tools set forth in later
sections of the Recovery Plan, and the analysis of the factors that
would be addressed in implementing the Wind-down Plan.
DTCC is a user-owned and user-governed holding company and is the
parent company of DTC and its affiliates, National Securities Clearing
Corporation (``NSCC'') and Fixed Income Clearing Corporation (``FICC,''
and, together with NSCC and DTC, the ``Clearing Agencies''). The Plan
would describe how corporate support services are provided to DTC from
DTCC and DTCC's other subsidiaries through intercompany agreements
under a shared services model.
The Plan would provide a description of established links between
DTC and other FMIs, both domestic and foreign, including central
securities depositories (``CSDs'') and central counterparties
(``CCPs''), as well as the twelve U.S. Federal Reserve Banks. In
general, these links are either ``inbound'' or ``issuer'' links, in
which the other FMI is a Participant and/or a Pledgee and maintains one
or more accounts at DTC, or ``outbound'' or ``investor'' links in which
DTC maintains one or more accounts at another FMI. Key FMIs with which
DTC maintains critical links include CDS Clearing and Depository
Services Inc. (``CDS''), the Canadian CSD, with participant links in
both directions; Euroclear Bank SA/NV (``EB'') for cross-border
collateral management services; and The Options Clearing Corporation
(``OCC'') and the Federal Reserve Bank of New York (``FRBNY''), each of
which is both a Participant and a Pledgee. The critical link for the
U.S. marketplace is the relationship between DTC and NSCC, through
which continuous net settlement (``CNS'') transactions are completed by
settlement at DTC, and DTC acts as settlement agent for NSCC for end-
of-day funds settlement.\11\ This section of the Plan, identifying and
briefly describing DTC's established links, would provide a mapping of
critical connections and dependencies that may need to be relied on or
otherwise addressed in connection with the implementation of either the
Recovery Plan or the Wind-down Plan.
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\11\ DTC has other links in addition to those mentioned above.
The current list of linked CSDs is available on the DTCC website.
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The Plan would define the criteria for classifying certain of DTC's
services as ``critical,'' and would identify those critical services
and the rationale for their classification. This section would provide
an analysis of the potential systemic impact from a service disruption,
and is important for evaluating how the recovery tools and the wind-
down strategy would facilitate and provide for the continuation of
DTC's critical services to the markets it serves. The criteria that
would be used to identify a DTC service or function as critical would
include consideration as to (1) whether there is a lack of alternative
providers or products; (2) whether failure of the service could impact
DTC's ability to perform its book-entry and settlement services; (3)
whether failure of the service could impact DTC's ability to perform
its payment system functions; and (4) whether the service is
interconnected with other participants and processes within the U.S.
financial system, for example, with other FMIs, settlement banks and
broker-dealers. The Plan would then list each of those services,
functions or activities that DTC has identified as ``critical'' based
on the applicability of these four criteria. Such critical services
would include, for example, MMIs and Commercial Paper Processing,\12\
Mandatory and Voluntary Corporate Actions,\13\ Cash and Stock
Distributions,\14\ and End of Day Net Money Settlement.\15\ The R&W
Plan would also include a non-exhaustive list of DTC services that are
not deemed critical.
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\12\ See Rule 9(C) (Transactions in MMI Securities), supra note
4.
\13\ See DTC Reorganizations Service Guide, available at
www.dtcc.com/~/media/Files/Downloads/legal/service-guides/
Reorganizations.pdf.
\14\ See DTC Distributions Service Guide, available at https://
www.dtcc.com/~/media/Files/Downloads/legal/service-guides/
Service%20Guide%20Distributions.pdf.
\15\ See DTC Settlement Service Guide, available at
www.dtcc.com/~/media/Files/Downloads/legal/service-guides/
Settlement.pdf.
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The evaluation of which services provided by DTC are deemed
critical is important for purposes of determining how the R&W Plan
would facilitate the continuity of those services. As discussed further
below, while DTC's Wind-down Plan would provide for the transfer of all
critical services to a transferee in the event DTC's wind-down is
implemented, it would anticipate that any non-critical services that
are ancillary and beneficial to a critical service, or that otherwise
have
[[Page 887]]
substantial user demand from the continuing membership, would also be
transferred.
The Plan would describe the governance structure of both DTCC and
DTC. This section of the Plan would identify the ownership and
governance model of these entities at both the Board of Directors and
management levels. The Plan would state that the stages of escalation
required to manage recovery under the Recovery Plan or to invoke DTC's
wind-down under the Wind-down Plan would range from relevant business
line managers up to the Board through DTC's governance structure. The
Plan would then identify the parties responsible for certain activities
under both the Recovery Plan and the Wind-down Plan, and would describe
their respective roles. The Plan would identify the Risk Committee of
the Board (``Board Risk Committee'') as being responsible for oversight
of risk management activities at DTC, which include focusing on both
oversight of risk management systems and processes designed to identify
and manage various risks faced by DTC, and, due to DTC's critical role
in the markets in which it operates, oversight of DTC's efforts to
mitigate systemic risks that could impact those markets and the broader
financial system.\16\ The Plan would identify the DTCC Management Risk
Committee (``Management Risk Committee'') as primarily responsible for
general, day-to-day risk management through delegated authority from
the Board Risk Committee. The Plan would state that the Management Risk
Committee has delegated specific day-to-day risk management, including
management of risks addressed through margining systems and related
activities, to the DTCC Group Chief Risk Office (``GCRO''), which works
with staff within the DTCC Financial Risk Management group. Finally,
the Plan would describe the role of the Management Committee, which
provides overall direction for all aspects of DTC's business,
technology, and operations and the functional areas that support these
activities.
---------------------------------------------------------------------------
\16\ The charter of the Board Risk Committee is available at
https://www.dtcc.com/~/media/Files/Downloads/legal/policy-and-
compliance/DTCC-BOD-Risk-Committee-Charter.pdf.
---------------------------------------------------------------------------
The Plan would describe the governance of recovery efforts in
response to both default losses and non-default losses under the
Recovery Plan, identifying the groups responsible for those recovery
efforts. Specifically, the Plan would state that the Management Risk
Committee provides oversight of actions relating to the default of a
Participant, which would be reported and escalated to it through the
GCRO, and the Management Committee provides oversight of actions
relating to non-default events that could result in a loss, which would
be reported and escalated to it from the DTCC Chief Financial Officer
(``CFO'') and the DTCC Treasury group that reports to the CFO, and from
other relevant subject matter experts based on the nature and
circumstances of the non-default event.\17\ More generally, the Plan
would state that the type of loss and the nature and circumstances of
the events that lead to the loss would dictate the components of
governance to address that loss, including the escalation path to
authorize those actions. As described further below, both the Recovery
Plan and the Wind-down Plan would describe the governance of
escalations, decisions, and actions under each of those plans.
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\17\ The Plan would state that these groups would be involved to
address how to mitigate the financial impact of non-default losses,
and in recommending mitigating actions, the Management Committee
would consider information and recommendations from relevant subject
matter experts based on the nature and circumstances of the non-
default event. Any necessary operational response to these events,
however, would be managed in accordance with applicable incident
response/business continuity process; for example, processes
established by the DTCC Technology Risk Management group would be
followed in response to a cyber event.
---------------------------------------------------------------------------
Finally, the Plan would describe the role of the R&R Team in
managing the overall recovery and wind-down program and plans for each
of the Clearing Agencies.
DTC Recovery Plan
The Recovery Plan is intended to be a roadmap of those actions that
DTC may employ to monitor and, as needed, stabilize its financial
condition. As each event that could lead to a financial loss could be
unique in its circumstances, the Recovery Plan would not be
prescriptive and would permit DTC to maintain flexibility in its use of
identified tools and in the sequence in which such tools are used,
subject to any conditions in the Rules or the contractual arrangement
on which such tool is based. DTC's Recovery Plan would consist of (1) a
description of the risk management surveillance, tools, and governance
that DTC would employ across evolving stress scenarios that it may face
as it transitions through a ``Crisis Continuum,'' described below; (2)
a description of DTC's risk of losses that may result from non-default
events, and the financial resources and recovery tools available to DTC
to manage those risks and any resulting losses; and (3) an evaluation
of the characteristics of the recovery tools that may be used in
response to either losses arising out of a Participant Default (as
defined below) or non-default losses, as described in greater detail
below. In all cases, DTC would act in accordance with the Rules, within
the governance structure described in the R&W Plan, and in accordance
with applicable regulatory oversight to address each situation in order
to best protect DTC, its Participants and the markets in which it
operates.
Managing Participant Default Losses and Liquidity Needs Through the
Crisis Continuum. The Plan would describe the risk management
surveillance, tools, and governance that DTC may employ across an
increasing stress environment, which is referred to as the ``Crisis
Continuum.'' This description would identify those tools that can be
employed to mitigate losses, and mitigate or minimize liquidity needs,
as the market environment becomes increasingly stressed. The phases of
the Crisis Continuum would include (1) a stable market phase, (2) a
stressed market phase, (3) a phase commencing with DTC's decision to
cease to act for a Participant or Affiliated Family of
Participants,\18\ and (4) a recovery phase. This section of the
Recovery Plan would address conditions and circumstances relating to
DTC's decision to cease to act for a Participant (referred to in the
R&W Plan as a ``defaulting Participant,'' and the event as a
``Participant Default'') pursuant to the Rules.\19\
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\18\ The Plan an ``Affiliated Family'' of Participants as a
number of affiliated entities that are all Participants of DTC.
\19\ In the Plan, ``cease to act'' or ``default'' would be
defined in accordance with the Rules, including Rule 4 (Participants
Fund and Participants Investment), Rule 9(A) (Transactions in
Securities and Money Payments), Rule 9(B) (Transactions in Eligible
Securities), Rule 9(C) (Transactions in MMI Securities), Rule 10
(Discretionary Termination), Rule 11 (Mandatory Termination) and
Rule 12 (Insolvency), supra note 4.
---------------------------------------------------------------------------
The Recovery Plan would provide context to its roadmap through this
Crisis Continuum by describing DTC's ongoing management of credit,
market and liquidity risk, and its existing process for measuring and
reporting its risks as they align with established thresholds for its
tolerance of those risks. The Recovery Plan would discuss the
management of credit/market risk and liquidity exposures together,
because the tools that address these risks can be deployed either
separately or in a coordinated approach in order to address both
exposures. DTC manages these risk exposures collectively to limit their
overall impact on DTC and its Participants. DTC has built-in mechanisms
to limit exposures and
[[Page 888]]
replenish financial resources used in a stress event, in order to
continue to operate in a safe and sound manner. DTC is a closed,
collateralized system in which liquidity resources are matched against
risk management controls, so, at any time, the potential net settlement
obligation of the Participant or Affiliated Family of Participants with
the largest net settlement obligation cannot exceed the amount of
liquidity resources.\20\ While Collateral securities are subject to
market price risk, DTC manages its liquidity and market risks through
the calculation of the required deposits to the Participants Fund \21\
and risk management controls, i.e., collateral haircuts, the Collateral
Monitor \22\ and Net Debit Cap.\23\
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\20\ DTC's liquidity risk management strategy, including the
manner in which DTC would deploy liquidity tools as well as its
intraday use of liquidity, is described in the Clearing Agency
Liquidity Risk Management Framework. See Securities Exchange Act
Release Nos. 80489 (April 19, 2017), 82 FR 19120 (April 25, 2017)
(SR-DTC-2017-004, SR-NSCC-2017-005, SR-FICC-2017-008); 81194 (July
24, 2017), 82 FR 35241 (July 28, 2017) (SR-DTC-2017-004, SR-NSCC-
2017-005, SR-FICC-2017-008).
\21\ See Rule 4 (Participants Fund and Participants Investment),
supra note 4.
\22\ See Rule 1, Section 1, supra note 4. For DTC, credit risk
and market risk are closely related, as DTC monitors credit
exposures from Participants through these risk management controls
that are part of its market risk management strategy and are
designed to comply with Rule 17Ad-22(e)(4) under the Act, where
these risks are referred to as ``credit risks.'' See also 17 CFR
240.17Ad-22(e)(4).
\23\ Id.
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The Recovery Plan would outline the metrics and indicators that DTC
has developed to evaluate a stress situation against established risk
tolerance thresholds. Each risk mitigation tool identified in the
Recovery Plan would include a description of the escalation thresholds
that allow for effective and timely reporting to the appropriate
internal management staff and committees, or to the Board. The Recovery
Plan would make clear that these tools and escalation protocols would
be calibrated across each phase of the Crisis Continuum. The Recovery
Plan would also establish that DTC would retain the flexibility to
deploy such tools either separately or in a coordinated approach, and
to use other alternatives to these actions and tools as necessitated by
the circumstances of a particular Participant Default event, in
accordance with the Rules. Therefore, the Recovery Plan would both
provide DTC with a roadmap to follow within each phase of the Crisis
Continuum, and would permit it to adjust its risk management measures
to address the unique circumstances of each event.
The Recovery Plan would describe the conditions that mark each
phase of the Crisis Continuum, and would identify actions that DTC
could take as it transitions through each phase in order to both
prevent losses from materializing through active risk management, and
to restore the financial health of DTC during a period of stress.
The ``stable market phase'' of the Crisis Continuum would describe
active risk management activities in the normal course of business.
These activities would include performing (1) backtests to evaluate the
adequacy of the collateral level and the haircut sufficiency for
covering market price volatility and (2) stress testing to cover market
price moves under real historical and hypothetical scenarios to assess
the haircut adequacy under extreme but plausible market conditions. The
backtesting and stress testing results are escalated, as necessary, to
internal and Board committees.\24\
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\24\ DTC's stress testing practices are described in the
Clearing Agency Stress Testing Framework (Market Risk). See
Securities Exchange Act Release Nos. 80485 (April 19, 2017), 82 FR
19131 (April 25, 2017) (SR-DTC-2017-005, SR-FICC-2017-009, SR-NSCC-
2017-006); 81192 (July 24, 2017), 82 FR 35245 (July 28, 2017) (SR-
DTC-2017-005, SR-FICC-2017-009, SR-NSCC-2017-006).
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The Recovery Plan would describe some of the indicators of the
``stressed market phase'' of the Crisis Continuum, which would include,
for example, volatility in market prices of certain assets where there
is increased uncertainty among market participants about the
fundamental value of those assets. This phase would involve general
market stresses, when no Participant Default would be imminent. Within
the description of this phase, the Recovery Plan would provide that DTC
may take targeted, routine risk management measures as necessary and as
permitted by the Rules.
Within the ``Participant Default phase'' of the Crisis Continuum,
the Recovery Plan would provide a roadmap for the existing procedures
that DTC would follow in the event of a Participant Default and any
decision by DTC to cease to act for that Participant.\25\ The Recovery
Plan would provide that the objectives of DTC's actions upon a
Participant Default are to (1) minimize losses and market exposure, and
(2), to the extent practicable, minimize disturbances to the affected
markets. The Recovery Plan would describe tools, actions, and related
governance for both market risk monitoring and liquidity risk
monitoring through this phase. For example, in connection with managing
its market risk during this phase, DTC would, pursuant to its Rules and
existing procedures, (1) monitor and assess the adequacy of its
Participants Fund and Net Debit Caps; and (2) follow its operational
procedures relating to the execution of a liquidation of the
Participant's Collateral securities through close collaboration and
coordination across multiple functions. Management of liquidity risk
through this phase would involve ongoing monitoring of, among other
things, the adequacy of the Participants Fund and risk controls, and
the Recovery Plan would identify certain actions DTC may deploy as it
deems necessary to mitigate a potential liquidity shortfall, which
would include, for example, the reduction of Net Debit Caps of some or
all Participants, or seeking additional liquidity resources. The
Recovery Plan would state that, throughout this phase, relevant
information would be escalated and reported to both internal management
committees and the Board Risk Committee.
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\25\ See Rule 10 (Discretionary Termination); Rule 11 (Mandatory
Termination); Rule 12 (Insolvency), supra note 4.
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The Recovery Plan would also identify financial resources available
to DTC, pursuant to the Rules, to address losses arising out of a
Participant Default. Specifically, Rule 4, as proposed to be amended by
the Loss Allocation Filing, would provide that losses be satisfied
first by applying a ``Corporate Contribution,'' and then, if necessary,
by allocating remaining losses to non-defaulting Participants.\26\
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\26\ See supra note 8. The Loss Allocation Filing proposes to
amend Rule 4 to define the amount DTC would contribute to address a
loss resulting from either a Participant default or a non-default
event as the ``Corporate Contribution.'' This amount would be 50
percent (50%) of the ``General Business Risk Capital Requirement,''
which is calculated pursuant to the Capital Policy and is an amount
sufficient to cover potential general business losses so that DTC
can continue operations and services as a going concern if those
losses materialize, in compliance with Rule 17Ad-22(e)(15) under the
Act. See also supra note 6; 17 CFR 240.17Ad-22(e)(15).
---------------------------------------------------------------------------
The ``recovery phase'' of the Crisis Continuum would describe
actions that DTC may take to avoid entering into a wind-down of its
business. In order to provide for an effective and timely recovery, the
Recovery Plan would describe two stages of this phase: (1) A recovery
corridor, during which DTC may experience stress events or observe
early warning indicators that allow it to evaluate its options and
prepare for the recovery phase; and (2) the recovery phase, which would
begin on the date that DTC issues the first Loss Allocation Notice of
the second loss allocation round with respect to a given ``Event
Period.'' \27\
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\27\ The Loss Allocation Filing proposes to amend Rule 4 to
introduce the concept of an ``Event Period'' as the ten (10)
Business Days beginning on (i) with respect to a Participant
Default, the day on which DTC notifies Participants that it has
ceased to act for a Participant, or (ii) with respect to a non-
default loss, the day that DTC notifies Participants of the
determination by the Board of Directors that there is a non-default
loss event, as described in greater detail in that filing. The
proposed Rule 4 would define a ``round'' as a series of loss
allocations relating to an Event Period, and would provide that the
first Loss Allocation Notice in a first, second, or subsequent round
shall expressly state that such notice reflects the beginning of a
first, second, or subsequent round. The maximum allocable loss
amount of a round is equal to the sum of the ``Loss Allocation
Caps'' (as defined in the proposed Rule 4) of those Participants
included in the round. See supra note 8.
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[[Page 889]]
DTC expects that significant deterioration of liquidity resources
would cause it to enter the recovery corridor stage of this phase, and,
as such, the actions it may take at this stage would be aimed at
replenishing those resources. Circumstances that could cause it to
enter the recovery corridor may include, for example, a rapid and
material increase in market prices or sequential or simultaneous
failures of multiple Participants or Affiliated Families of
Participants over a compressed time period. Throughout the recovery
corridor, DTC would monitor the adequacy of its resources and the
expected timing of replenishment of those resources, and would do so
through the monitoring of certain metrics referred to as ``Corridor
Indicators.''
The majority of the Corridor Indicators, as identified in the
Recovery Plan, relate directly to conditions that may require DTC to
adjust its strategy for hedging and liquidating Collateral securities,
and any such changes would include an assessment of the status of the
Corridor Indicators. Corridor Indicators would include, for example,
effectiveness and speed of DTC's efforts to liquidate Collateral
securities, and an impediment to the availability of its resources to
repay any borrowings due to any Participant Default. For each Corridor
Indicator, the Recovery Plan would identify (1) measures of the
indicator, (2) evaluations of the status of the indicator, (3) metrics
for determining the status of the deterioration or improvement of the
indicator, and (4) ``Corridor Actions,'' which are steps that may be
taken to improve the status of the indicator,\28\ as well as management
escalations required to authorize those steps. Because DTC has never
experienced the default of multiple Participants, it has not,
historically, measured the deterioration or improvements metrics of the
Corridor Indicators. As such, these metrics were chosen based on the
business judgment of DTC management.
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\28\ The Corridor Actions that would be identified in the Plan
are indicative, but not prescriptive; therefore, if DTC needs to
consider alternative actions due to the applicable facts and
circumstances, the escalation of those alternative actions would
follow the same escalation protocol identified in the Plan for the
Corridor Indicator to which the action relates.
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The Recovery Plan would also describe the reporting and escalation
of the status of the Corridor Indicators throughout the recovery
corridor. Significant deterioration of a Corridor Indicator, as
measured by the metrics set out in the Recovery Plan, would be
escalated to the Board. DTC management would review the Corridor
Indicators and the related metrics at least annually, and would modify
these metrics as necessary in light of observations from simulations of
Participant defaults and other analyses. Any proposed modifications
would be reviewed by the Management Risk Committee and the Board Risk
Committee. The Recovery Plan would estimate that DTC may remain in the
recovery corridor stage between one day and two weeks. This estimate is
based on historical data observed in past Participant default events,
the results of simulations of Participant defaults, and periodic
liquidity analyses conducted by DTC. The actual length of a recovery
corridor would vary based on actual market conditions observed on the
date and time DTC enters the recovery corridor stage of the Crisis
Continuum, and DTC would expect the recovery corridor to be shorter in
market conditions of increased stress.
The Recovery Plan would outline steps by which DTC may allocate its
losses, and would state that the available tools related to allocation
of losses would only be used in this and subsequent phases of the
Crisis Continuum.\29\ The Recovery Plan would also identify tools that
may be used to address foreseeable shortfalls of DTC's liquidity
resources following a Participant Default, and would provide that these
tools may be used throughout the Crisis Continuum to address liquidity
shortfalls if they arise. The goal in managing DTC's liquidity
resources is to maximize resource availability in an evolving stress
situation, to maintain flexibility in the order and use of sources of
liquidity, and to repay any third party lenders in a timely manner.
Liquidity tools include, for example, DTC's committed 364-day credit
facility \30\ and Net Credit Reductions.\31\ The Recovery Plan would
state that the availability and capacity of these liquidity tools
cannot be accurately predicted and are dependent on the circumstances
of the applicable stress period, including market price volatility,
actual or perceived disruptions in financial markets, the costs to DTC
of utilizing these tools, and any potential impact on DTC's credit
rating.
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\29\ As these matters are described in greater detail in the
Loss Allocation Filing and in the proposed amendments to Rule 4,
described therein, reference is made to that filing and the details
are not repeated here. See supra note 8.
\30\ See Securities Exchange Act Release No. 80605 (May 5,
2017), 82 FR 21850 (May 10, 2017) (SR-DTC-2017-802; SR-NSCC-2017-
802).
\31\ DTC may borrow amounts needed to complete settlement from
Participants by net credit reductions to their settlement accounts,
secured by the Collateral of the defaulting Participant. See
Securities Exchange Act Release Nos. 24689 (July 9, 1987), 52 FR
26613 (July 15, 1987) (SR-DTC-87-4); 41879 (September 15, 1999), 64
FR 51360 (September 22, 1999) (SR-DTC-99-15); 42281 (December 28,
1999), 65 FR 1420 (January 10, 2000) (SR-DTC-99-25).
---------------------------------------------------------------------------
As stated above, the Recovery Plan would state that DTC will have
entered the recovery phase on the date that it issues the first Loss
Allocation Notice of the second loss allocation round with respect to a
given Event Period. The Recovery Plan would provide that, during the
recovery phase, DTC would continue and, as needed, enhance, the
monitoring and remedial actions already described in connection with
previous phases of the Crisis Continuum, and would remain in the
recovery phase until its financial resources are expected to be or are
fully replenished, or until the Wind-down Plan is triggered, as
described below.
The Recovery Plan would describe governance for the actions and
tools that may be employed within the Crisis Continuum, which would be
dictated by the facts and circumstances applicable to the situation
being addressed. Such facts and circumstances would be measured by the
Corridor Indicators applicable to that phase of the Crisis Continuum,
and, in most cases, by the measures and metrics that are assigned to
those Corridor Indicators, as described above. Each of these indicators
would have a defined review period and escalation protocol that would
be described in the Recovery Plan. The Recovery Plan would also
describe the governance procedures around a decision to cease to act
for a Participant, pursuant to the Rules, and around the management and
oversight of the subsequent liquidation of Collateral securities. The
Recovery Plan would state that, overall, DTC would retain flexibility
in accordance with the Rules, its governance structure, and its
regulatory oversight, to address a particular situation in order to
best
[[Page 890]]
protect DTC and its Participants, and to meet the primary objectives,
throughout the Crisis Continuum, of minimizing losses and, where
consistent and practicable, minimizing disturbance to affected markets.
Non-Default Losses. The Recovery Plan would outline how DTC may
address losses that result from events other than a Participant
Default. While these matters are addressed in greater detail in other
documents, this section of the Plan would provide a roadmap to those
documents and an outline for DTC's approach to monitoring and managing
losses that could result from a non-default event. The Plan would first
identify some of the risks DTC faces that could lead to these losses,
which include, for example, the business and profit/loss risks of
unexpected declines in revenue or growth of expenses; the operational
risks of disruptions to systems or processes that could lead to large
losses, including those resulting from, for example, a cyber-attack;
and custody or investment risks that could lead to financial losses.
The Recovery Plan would describe DTC's overall strategy for the
management of these risks, which includes a ``three lines of defense''
approach to risk management that allows for comprehensive management of
risk across the organization.\32\ The Recovery Plan would also describe
DTC's approach to financial risk and capital management. The Plan would
identify key aspects of this approach, including, for example, an
annual budget process, business line performance reviews with
management, and regular review of capital requirements against LNA.
These risk management strategies are collectively intended to allow DTC
to effectively identify, monitor, and manage risks of non-default
losses.
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\32\ The Clearing Agency Risk Management Framework includes a
description of this ``three lines of defense'' approach to risk
management, and addresses how DTC comprehensively manages various
risks, including operational, general business, investment, custody,
and other risks that arise in or are borne by it. See Securities
Exchange Act Release No. 81635 (September 15, 2017), 82 FR 44224
(September 21, 2017) (SR-DTC-2017-013, SR-FICC-2017-016, SR-NSCC-
2017-012). The Clearing Agency Operational Risk Management Framework
describes the manner in which DTC manages operational risks, as
defined therein. See Securities Exchange Act Release No. 81745
(September 28, 2017), 82 FR 46332 (October 4, 2017) (SR-DTC-2017-
014, SR-FICC-2017-017, SR-NSCC-2017-013).
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The Plan would identify the two categories of financial resources
DTC maintains to cover losses and expenses arising from non-default
risks or events as (1) LNA, maintained, monitored, and managed pursuant
to the Capital Policy, which include (a) amounts held in satisfaction
of the General Business Risk Capital Requirement,\33\ (b) the Corporate
Contribution,\34\ and (c) other amounts held in excess of DTC's capital
requirements pursuant to the Capital Policy; and (2) resources
available pursuant to the loss allocation provisions of Rule 4.\35\
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\33\ See supra note 26.
\34\ See supra note 26.
\35\ See supra note 8.
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The Plan would address the process by which the CFO and the DTCC
Treasury group would determine which available LNA resources are most
appropriate to cover a loss that is caused by a non-default event. This
determination involves an evaluation of a number of factors, including
the current and expected size of the loss, the expected time horizon
over when the loss or additional expenses would materialize, the
current and projected available LNA, and the likelihood LNA could be
successfully replenished pursuant to the Replenishment Plan, if
triggered.\36\ Finally the Plan would discuss how DTC would apply its
resources to address losses resulting from a non-default event,
including the order of resources it would apply if the loss or
liability exceeds DTC's excess LNA amounts, or is large relative
thereto, and the Board has declared the event a ``Declared Non-Default
Loss Event'' pursuant to Rule 4.\37\
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\36\ See supra note 6.
\37\ See supra note 8.
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The Plan would also describe proposed Rule 38 (Market Disruption
and Force Majeure), which DTC is proposing to adopt in its Rules. This
Proposed Rule would provide transparency around how DTC would address
extraordinary events that may occur outside its control. Specifically,
the Proposed Rule would define a ``Market Disruption Event'' and the
governance around a determination that such an event has occurred. The
Proposed Rule would also describe DTC's authority to take actions
during the pendency of a Market Disruption Event that it deems
appropriate to address such an event and facilitate the continuation of
its services, if practicable, as described in greater detail below.
The Plan would describe the interaction between the Proposed Rule
and DTC's existing processes and procedures addressing business
continuity management and disaster recovery (generally, the ``BCM/DR
procedures''), making clear that the Proposed Rule is designed to
support those BCM/DR procedures and to address circumstances that may
be exogenous to DTC and not necessarily addressed by the BCM/DR
procedures. Finally, the Plan would describe that, because the
operation of the Proposed Rule is specific to each applicable Market
Disruption Event, the Proposed Rule does not define a time limit on its
application. However, the Plan would note that actions authorized by
the Proposed Rule would be limited to the pendency of the applicable
Market Disruption Event, as made clear in the Proposed Rule. Overall,
the Proposed Rule is designed to mitigate risks caused by Market
Disruption Events and, thereby, minimize the risk of financial loss
that may result from such events.
Recovery Tool Characteristics. The Recovery Plan would describe
DTC's evaluation of the tools identified within the Recovery Plan, and
its rationale for concluding that such tools are comprehensive,
effective, and transparent, and that such tools provide appropriate
incentives to Participants and minimize negative impact on Participants
and the financial system, in compliance with guidance published by the
Commission in connection with the adoption of Rule 17Ad-22(e)(3)(ii)
under the Act.\38\ DTC's analysis and the conclusions set forth in this
section of the Recovery Plan are described in greater detail in Item
3(b) of this filing, below.
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\38\ Standards for Covered Clearing Agencies, Securities
Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786
(October 13, 2016) (S7-03-14).
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DTC Wind-Down Plan
The Wind-down Plan would provide the framework and strategy for the
orderly wind-down of DTC if the use of the recovery tools described in
the Recovery Plan do not successfully return DTC to financial
viability. While DTC believes that, given the comprehensive nature of
the recovery tools, such event is extremely unlikely, as described in
greater detail below, DTC is proposing a wind-down strategy that
provides for (1) the transfer of DTC's business, assets, securities
inventory, and membership to another legal entity, (2) such transfer
being effected in connection with proceedings under Chapter 11 of the
U.S. Federal Bankruptcy Code,\39\ and (3) after effectuating this
transfer, DTC liquidating any remaining assets in an orderly manner in
bankruptcy proceedings. DTC believes that the proposed transfer
approach to a wind-down would meet its objectives of (1) assuring that
DTC's critical services will be available to the market as long as
there are Participants in good standing,
[[Page 891]]
and (2) minimizing disruption to the operations of Participants and
financial markets generally that might be caused by DTC's failure.
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\39\ 11 U.S.C. 1101 et seq.
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In describing the transfer approach to DTC's Wind-down Plan, the
Plan would identify the factors that DTC considered in developing this
approach, including the fact that DTC does not own material assets that
are unrelated to its clearance and settlement activities. As such, a
business reorganization or ``bail-in'' of debt approach would be
unlikely to mitigate significant losses. Additionally, DTC's approach
was developed in consideration of its critical and unique position in
the U.S. markets, which precludes any approach that would cause DTC's
critical services to no longer be available.
First, the Wind-down Plan would describe the potential scenarios
that could lead to the wind-down of DTC, and the likelihood of such
scenarios. The Wind-down Plan would identify the time period leading up
to a decision to wind-down DTC as the ``Runway Period.'' This period
would follow the implementation of any recovery tools, as it may take a
period of time, depending on the severity of the market stress at that
time, for these tools to be effective or for DTC to realize a loss
sufficient to cause it to be unable to borrow to complete settlement
and to repay such borrowings.\40\ The Plan would identify some of the
indicators that DTC has entered this Runway Period, which would
include, for example, simultaneous successive Participant Defaults,
significant Participant retirements, and DTC's inability to replenish
financial resources following the liquidation of Collateral securities.
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\40\ The Wind-down Plan would state that, given DTC's position
as a user-governed financial market utility, it is possible that its
Participants might voluntarily elect to provide additional support
during the recovery phase leading up to a potential trigger of the
Wind-down Plan, but would also make clear that DTC cannot predict
the willingness of Participants to do so.
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The trigger for implementing the Wind-down Plan would be a
determination by the Board that recovery efforts have not been, or are
unlikely to be, successful in returning DTC to viability as a going
concern. As described in the Plan, DTC believes this is an appropriate
trigger because it is both broad and flexible enough to cover a variety
of scenarios, and would align incentives of DTC and Participants to
avoid actions that might undermine DTC's recovery efforts.
Additionally, this approach takes into account the characteristics of
DTC's recovery tools and enables the Board to consider (1) the presence
of indicators of a successful or unsuccessful recovery, and (2)
potential for knock-on effects of continued iterative application of
DTC's recovery tools.
The Wind-down Plan would describe the general objectives of the
transfer strategy, and would address assumptions regarding the transfer
of DTC's critical services, business, assets, securities inventory, and
membership \41\ to another legal entity that is legally, financially,
and operationally able to provide DTC's critical services to entities
that wish to continue their membership following the transfer
(``Transferee''). The Wind-down Plan would provide that the Transferee
would be either (1) a third party legal entity, which may be an
existing or newly established legal entity or a bridge entity formed to
operate the business on an interim basis to enable the business to be
transferred subsequently (``Third Party Transferee''); or (2) an
existing, debt-free failover legal entity established ex-ante by DTCC
(``Failover Transferee'') to be used as an alternative Transferee in
the event that no viable or preferable Third Party Transferee timely
commits to acquire DTC's business. DTC would seek to identify the
proposed Transferee, and negotiate and enter into transfer arrangements
during the Runway Period and prior to making any filings under Chapter
11 of the U.S. Federal Bankruptcy Code.\42\ As stated above, the Wind-
down Plan would anticipate that the transfer to the Transferee,
including the transfer and establishment of the Participant and Pledgee
securities accounts on the books of the Transferee, be effected in
connection with proceedings under Chapter 11 of the U.S. Federal
Bankruptcy Code, and pursuant to a bankruptcy court order under Section
363 of the Bankruptcy Code, such that the transfer would be free and
clear of claims against, and interests in, DTC, except to the extent
expressly provided in the court's order.\43\
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\41\ Arrangements with FAST Agents and DRS Agents (each as
defined in proposed Rule 32(A)) and with Settling Banks would also
be assigned to the Transferee, so that the approach would be
transparent to issuers and their transfer agents, as well as to
Settling Banks.
\42\ 11 U.S.C. 1101 et seq.
\43\ See id. at 363.
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In order to effect a timely transfer of its services and minimize
the market and operational disruption of such transfer, DTC would
expect to transfer all of its critical services and any non-critical
services that are ancillary and beneficial to a critical service, or
that otherwise have substantial user demand from the continuing
membership. Given the transfer of the securities inventory and the
establishment on the books of the Transferee Participant and Pledgee
securities accounts, DTC anticipates that, following the transfer, it
would not itself continue to provide any services, critical or not.
Following the transfer, the Wind-down Plan would anticipate that the
Transferee and its continuing membership would determine whether to
continue to provide any transferred non-critical service on an ongoing
basis, or terminate the non-critical service following some transition
period. DTC's Wind-down Plan would anticipate that the Transferee would
enter into a transition services agreement with DTCC so that DTCC would
continue to provide the shared services it currently provides to DTC,
including staffing, infrastructure and operational support. The Wind-
down Plan would also anticipate the assignment of DTC's ``inbound''
link arrangements to the Transferee. The Wind-down Plan would provide
that in the case of ``outbound'' links, DTC would seek to have the
linked FMIs agree, at a minimum, to accept the Transferee as a link
party for a transition period.\44\
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\44\ The proposed transfer arrangements outlined in the Wind-
down Plan do not contemplate the transfer of any credit or funding
agreements, which are generally not assignable by DTC. However, to
the extent the Transferee adopts rules substantially identical to
those DTC has in effect prior to the transfer, it would have the
benefit of any rules-based liquidity funding. The Wind-down Plan
contemplates that no Participants Fund would be transferred to the
Transferee, as it is not held in a bankruptcy remote manner and it
is the primary prefunded liquidity resource to be accessed in the
recovery phase.
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The Wind-down Plan would provide that, following the effectiveness
of the transfer to the Transferee, the wind-down of DTC would involve
addressing any residual claims against DTC through the bankruptcy
process and liquidating the legal entity. As such, and as stated above,
the Wind-down Plan does not contemplate DTC continuing to provide
services in any capacity following the transfer time, and any services
not transferred would be terminated. The Wind-down Plan would also
identify the key dependencies for the effectiveness of the transfer,
which include regulatory approvals that would permit the Transferee to
be legally qualified to provide the transferred services from and after
the transfer, and approval by the applicable bankruptcy court of, among
other things, the proposed sale, assignments, and transfers to the
Transferee.
The Wind-down Plan would address governance matters related to the
execution of the transfer of DTC's business and its wind-down. The
Wind-
[[Page 892]]
down Plan would address the duties of the Board to execute the wind-
down of DTC in conformity with (1) the Rules, (2) the Board's fiduciary
duties, which mandate that it exercise reasonable business judgment in
performing these duties, and (3) DTC's regulatory obligations under the
Act as a registered clearing agency. The Wind-down Plan would also
identify certain factors the Board may consider in making these
decisions, which would include, for example, whether DTC could safely
stabilize the business and protect its value without seeking bankruptcy
protection, and DTC's ability to continue to meet its regulatory
requirements.
The Wind-down Plan would describe (1) actions DTC or DTCC may take
to prepare for wind-down in the period before DTC experiences any
financial distress, (2) actions DTC would take both during the recovery
phase and the Runway Period to prepare for the execution of the Wind-
down Plan, and (3) actions DTC would take upon commencement of
bankruptcy proceedings to effectuate the Wind-down Plan.
Finally, the Wind-down Plan would include an analysis of the
estimated time and costs to effectuate the plan, and would provide that
this estimate be reviewed and approved by the Board annually. In order
to estimate the length of time it might take to achieve a recovery or
orderly wind-down of DTC's critical operations, as contemplated by the
R&W Plan, the Wind-down Plan would include an analysis of the possible
sequencing and length of time it might take to complete an orderly
wind-down and transfer of critical operations, as described in earlier
sections of the R&W Plan. The Wind-down Plan would also include in this
analysis consideration of other factors, including the time it might
take to complete any further attempts at recovery under the Recovery
Plan. The Wind-down Plan would then multiply this estimated length of
time by DTC's average monthly operating expenses, including adjustments
to account for changes to DTC's profit and expense profile during these
circumstances, over the previous twelve months to determine the amount
of LNA that it should hold to achieve a recovery or orderly wind-down
of DTC's critical operations. The estimated wind-down costs would
constitute the ``Recovery/Wind-down Capital Requirement'' under the
Capital Policy.\45\ Under that policy, the General Business Risk
Capital Requirement is calculated as the greatest of three estimated
amounts, one of which is this Recovery/Wind-down Capital
Requirement.\46\
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\45\ See supra note 6.
\46\ See supra note 6.
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The R&W Plan is designed as a roadmap, and the types of actions
that may be taken both leading up to and in connection with
implementation of the Wind-down Plan would be primarily addressed in
other supporting documentation referred to therein.
The Wind-down Plan would address proposed Rule 32(A) (Wind-down of
the Corporation) and proposed Rule 38 (Force Majeure and Market
Disruption)), which would be adopted to facilitate the implementation
of the Wind-down Plan, as discussed below.
Proposed Rules
In connection with the adoption of the R&W Plan, DTC is proposing
to adopt the Proposed Rules, each described below. The Proposed Rules
would facilitate the execution of the R&W Plan and would provide
Participants with transparency as to critical aspects of the Plan,
particularly as they relate to the rights and responsibilities of both
DTC and its Participants. The Proposed Rules also provide a legal basis
to these aspects of the Plan.
Rule 32(A) (Wind-Down of the Corporation)
The proposed Rule 32(A) (``Wind-down Rule'') would be adopted to
facilitate the execution of the Wind-down Plan. The Wind-down Rule
would include a proposed set of defined terms that would be applicable
only to the provisions of this Proposed Rule. The Wind-down Rule would
make clear that a wind-down of DTC's business would occur (1) after a
decision is made by the Board, and (2) in connection with the transfer
of DTC's services to a Transferee, as described therein. Generally, the
proposed Wind-down Rule is designed to create clear mechanisms for the
transfer of Eligible Participants and Pledgees, Settling Banks, DRS
Agents, and FAST Agents (as these terms would be defined in the Wind-
down Rule), and DTC's inventory of financial assets in order to provide
for continued access to critical services and to minimize disruption to
the markets in the event the Wind-down Plan is initiated.
Wind-down Trigger. First, the Proposed Rule would make clear that
the Board is responsible for initiating the Wind-down Plan, and would
identify the criteria the Board would consider when making this
determination. As provided for in the Wind-down Plan and in the
proposed Wind-down Rule, the Board would initiate the Plan if, in the
exercise of its business judgment and subject to its fiduciary duties,
it has determined that the execution of the Recovery Plan has not or is
not likely to restore DTC to viability as a going concern, and the
implementation of the Wind-down Plan, including the transfer of DTC's
business, is in the best interests of DTC, its Participants and
Pledgees, its shareholders and creditors, and the U.S. financial
markets.
Identification of Critical Services; Designation of Dates and Times
for Specific Actions. The Proposed Rule would provide that, upon making
a determination to initiate the Wind-down Plan, the Board would
identify the critical and non-critical services that would be
transferred to the Transferee at the Transfer Time (as defined below
and in the Proposed Rule), as well as any non-critical services that
would not be transferred to the Transferee. The proposed Wind-down Rule
would establish that any services transferred to the Transferee will
only be provided by the Transferee as of the Transfer Time, and that
any non-critical services that are not transferred to the Transferee
would be terminated at the Transfer Time. The Proposed Rule would also
provide that the Board would establish (1) an effective time for the
transfer of DTC's business to a Transferee (``Transfer Time''), and (2)
the last day that instructions in respect of securities and other
financial products may be effectuated through the facilities of DTC
(the ``Last Activity Date''). The Proposed Rule would make clear that
DTC would not accept any transactions for settlement after the Last
Activity Date. Any transactions to be settled after the Transfer Time
would be required to be submitted to the Transferee, and would not be
DTC's responsibility.
Notice Provisions. The proposed Wind-down Rule would provide that,
upon a decision to implement the Wind-down Plan, DTC would provide its
Participants, Pledgees, DRS Agents, FAST Agents, Settling Banks and
regulators with a notice that includes material information relating to
the Wind-down Plan and the anticipated transfer of DTC's Participants
and business, including, for example, (1) a brief statement of the
reasons for the decision to implement the Wind-down Plan; (2)
identification of the Transferee and information regarding the
transaction by which the transfer of DTC's business would be effected;
(3) the Transfer Time and Last Activity Date; and (4) identification of
Participants and the critical and non-
[[Page 893]]
critical services that would be transferred to the Transferee at the
Transfer Time, as well as those Non-Eligible Participants (as defined
below and in the Proposed Rule) and any non-critical services that
would not be included in the transfer. DTC would also make available
the rules and procedures and membership agreements of the Transferee.
Transfer of Membership. The proposed Wind-down Rule would address
the expected transfer of DTC's membership to the Transferee, which DTC
would seek to effectuate by entering into an arrangement with a
Failover Transferee, or by using commercially reasonable efforts to
enter into such an arrangement with a Third Party Transferee. Thus,
under the proposal, in connection with the implementation of the Wind-
down Plan and with no further action required by any party:
(1) Each Eligible Participant would become (i) a Participant of the
Transferee and (ii) a party to a Participants agreement with the
Transferee;
(2) each Participant that is delinquent in the performance of any
obligation to DTC or that has provided notice of its election to
withdraw as a Participant (a ``Non-Eligible Participant'') as of the
Transfer Time would become (i) the holder of a transition period
securities account maintained by the Transferee on its books
(``Transition Period Securities Account'') and (ii) a party to a
Transition Period Securities Account agreement of the Transferee;
(3) each Pledgee would become (i) a Pledgee of the Transferee and
(ii) a party to a Pledgee agreement with the Transferee;
(4) each DRS Agent would become (i) a DRS Agent of the Transferee
and (ii) a party to a DRS Agent agreement with the Transferee;
(5) each FAST Agent would become (i) a FAST Agent of the Transferee
and (ii) a party to a FAST Agent agreement with the Transferee; and
(6) each Settling Bank for Participants and Pledgees would become
(i) a Settling Bank for Participants and Pledgees of the Transferee and
(ii) a party to a Settling Bank Agreement with the Transferee.
Further, the Proposed Rule would make clear that it would not
prohibit (1) Non-Eligible Participants from applying for membership
with the Transferee, (2) Non-Eligible Participants that have become
holders of Transition Period Securities Accounts (``Transition Period
Securities Account Holders'') of the Transferee from withdrawing as a
Transition Period Securities Account Holder from the Transferee,
subject to the rules and procedures of the Transferee, and (3)
Participants, Pledgees, DRS Agents, FAST Agents, and Settling Banks
that would be transferred to the Transferee from withdrawing from
membership with the Transferee, subject to the rules and procedures of
the Transferee. Under the Proposed Rule, Non-Eligible Participants that
have become Transition Period Securities Account Holders of the
Transferee shall have the rights and be subject to the obligations of
Transition Period Securities Account Holders set forth in special
provisions of the rules and procedures of the Transferee applicable to
such Transition Period Securities Account Holder. Specifically, Non-
Eligible Participants that become Transition Period Securities Account
Holders must, within the Transition Period (as defined in the Proposed
Rule), instruct the Transferee to transfer the financial assets
credited to its Transition Period Securities Account (i) to a
Participant of the Transferee through the facilities of the Transferee
or (ii) to a recipient outside the facilities of the Transferee, and no
additional financial assets may be delivered versus payment to a
Transition Period Securities Account during the Transition Period.
Transfer of Inventory of Financial Assets. The proposed Wind-down
Rule would provide that DTC would enter into arrangements with a
Failover Transferee, or would use commercially reasonable efforts to
enter into arrangements with a Third Party Transferee, providing that,
in either case, at Transfer Time:
(1) DTC would transfer to the Transferee (i) its rights with
respect to its nominee Cede & Co. (``Cede'') (and thereby its rights
with respect to the financial assets owned of record by Cede), (ii) the
financial assets held by it at the FRBNY, (iii) the financial assets
held by it at other CSDs, (iv) the financial assets held in custody for
it with FAST Agents, (v) the financial assets held in custody for it
with other custodians and (vi) the financial assets it holds in
physical custody.
(2) The Transferee would establish security entitlements on its
books for Eligible Participants of DTC that become Participants of the
Transferee that replicate the security entitlements that DTC maintained
on its books immediately prior to the Transfer Time for such Eligible
Participants, and DTC would simultaneously eliminate such security
entitlements from its books.
(3) The Transferee would establish security entitlements on its
books for Non-Eligible Participants of DTC that become Transition
Period Securities Account Holders of the Transferee that replicate the
security entitlements that DTC maintained on its books immediately
prior to the Transfer Time for such Non-Eligible Participants, and DTC
would simultaneously eliminate such security entitlements from its
books.
(4) The Transferee would establish pledges on its books in favor of
Pledgees that become Pledgees of the Transferee that replicate the
pledges that DTC maintained on its books immediately prior to the
Transfer Time in favor of such Pledgees, and DTC shall simultaneously
eliminate such pledges from its books.
Comparability Period. The proposed automatic mechanism for the
transfer of DTC's membership is intended to provide DTC's membership
with continuous access to critical services in the event of DTC's wind-
down, and to facilitate the continued prompt and accurate clearance and
settlement of securities transactions. Further to this goal, the
proposed Wind-down Rule would provide that DTC would enter into
arrangements with a Failover Transferee, or would use commercially
reasonable efforts to enter into arrangements with a Third Party
Transferee, providing that, in either case, with respect to the
critical services and any non-critical services that are transferred
from DTC to the Transferee, for at least a period of time to be agreed
upon (``Comparability Period''), the business transferred from DTC to
the Transferee would be operated in a manner that is comparable to the
manner in which the business was previously operated by DTC.
Specifically, the proposed Wind-down Rule would provide that: (1) The
rules of the Transferee and terms of Participant, Pledgee, DRS Agent,
FAST Agent and Settling Bank agreements would be comparable in
substance and effect to the analogous Rules and agreements of DTC, (2)
the rights and obligations of any Participants, Pledgees, DRS Agents,
FAST Agents, and Settling Banks that are transferred to the Transferee
would be comparable in substance and effect to their rights and
obligations as to DTC, and (3) the Transferee would operate the
transferred business and provide any services that are transferred in a
comparable manner to which such services were provided by DTC.
The purpose of these provisions and the intended effect of the
proposed Wind-down Rule is to facilitate a smooth transition of DTC's
business to a Transferee and to provide that, for at least the
Comparability Period, the
[[Page 894]]
Transferee (1) would operate the transferred business in a manner that
is comparable in substance and effect to the manner in which the
business was operated by DTC, and (2) would not require sudden and
disruptive changes in the systems, operations and business practices of
the new Participants, Pledgees, DRS Agents, FAST Agents, and Settling
Banks of the Transferee.
Subordination of Claims Provisions and Miscellaneous Matters. The
proposed Wind-down Rule would also include a provision addressing the
subordination of unsecured claims against DTC of its Participants who
fail to participate in DTC's recovery efforts (i.e., such firms are
delinquent in their obligations to DTC or elect to retire from DTC in
order to minimize their obligations with respect to the allocation of
losses, pursuant to the Rules). This provision is designed to
incentivize Participants to participate in DTC's recovery efforts.\47\
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\47\ Nothing in the proposed Wind-down Rule would seek to
prevent a Participant that retired its membership at DTC from
applying for membership with the Transferee. Once its DTC membership
is terminated, however, such firm would not be able to benefit from
the membership assignment that would be effected by this proposed
Wind-down Rule, and it would have to apply for membership directly
with the Transferee, subject to its membership application and
review process.
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The proposed Wind-down Rule would address other ex-ante matters,
including provisions providing that its Participants, Pledgees, DRS
Agents, FAST Agents and Settling Banks (1) will assist and cooperate
with DTC to effectuate the transfer of DTC's business to a Transferee,
(2) consent to the provisions of the rule, and (3) grant DTC power of
attorney to execute and deliver on their behalf documents and
instruments that may be requested by the Transferee. Finally, the
Proposed Rule would include a limitation of liability for any actions
taken or omitted to be taken by DTC pursuant to the Proposed Rule.
Rule 38 (Market Disruption and Force Majeure)
The proposed Rule 38 (``Force Majeure Rule'') would address DTC's
authority to take certain actions upon the occurrence, and during the
pendency, of a ``Market Disruption Event,'' as defined therein. The
Proposed Rule is designed to clarify DTC's ability to take actions to
address extraordinary events outside of the control of DTC and of its
membership, and to mitigate the effect of such events by facilitating
the continuity of services (or, if deemed necessary, the temporary
suspension of services). To that end, under the proposed Force Majeure
Rule, DTC would be entitled, during the pendency of a Market Disruption
Event, to (1) suspend the provision of any or all services, and (2)
take, or refrain from taking, or require its Participants and Pledgees
to take, or refrain from taking, any actions it considers appropriate
to address, alleviate, or mitigate the event and facilitate the
continuation of DTC's services as may be practicable.
The proposed Force Majeure Rule would identify the events or
circumstances that would be considered a ``Market Disruption Event,''
including, for example, events that lead to the suspension or
limitation of trading or banking in the markets in which DTC operates,
or the unavailability or failure of any material payment, bank
transfer, wire or securities settlement systems. The proposed Force
Majeure Rule would define the governance procedures for how DTC would
determine whether, and how, to implement the provisions of the rule. A
determination that a Market Disruption Event has occurred would
generally be made by the Board, but the Proposed Rule would provide for
limited, interim delegation of authority to a specified officer or
management committee if the Board would not be able to take timely
action. In the event such delegated authority is exercised, the
proposed Force Majeure Rule would require that the Board be convened as
promptly as practicable, no later than five Business Days after such
determination has been made, to ratify, modify, or rescind the action.
The proposed Force Majeure Rule would also provide for prompt
notification to the Commission, and advance consultation with
Commission staff, when practicable. The Proposed Rule would require
Participants and Pledgees to notify DTC immediately upon becoming aware
of a Market Disruption Event, and, likewise, would require DTC to
notify its Participants and Pledgees if it has triggered the Proposed
Rule.
Finally, the Proposed Rule would address other related matters,
including a limitation of liability for any failure or delay in
performance, in whole or in part, arising out of the Market Disruption
Event.
2. Statutory Basis
DTC believes that the proposal is consistent with the requirements
of the Act and the rules and regulations thereunder applicable to a
registered clearing agency. In particular, DTC believes that the R&W
Plan and each of the Proposed Rules are consistent with Section
17A(b)(3)(F) of the Act,\48\ the R&W Plan and each of the Proposed
Rules are consistent with Rule 17Ad-22(e)(3)(ii) under the Act,\49\ and
the R&W Plan is consistent with Rule 17Ad-22(e)(15)(ii) under the
Act,\50\ for the reasons described below.
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\48\ 15 U.S.C. 78q-1(b)(3)(F).
\49\ 17 CFR 240.17Ad-22(e)(3)(ii).
\50\ Id. at 240.17Ad-22(e)(15)(ii).
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Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of DTC 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.\51\ The Recovery Plan and the proposed
Force Majeure Rule would promote the prompt and accurate clearance and
settlement of securities transactions by providing DTC with a roadmap
for actions it may employ to mitigate losses, and monitor and, as
needed, stabilize, its financial condition, which would allow it to
continue its critical clearance and settlement services in stress
situations. Further, as described above, the Recovery Plan is designed
to identify the actions and tools DTC may use to address and minimize
losses to both DTC and its Participants. The Recovery Plan and the
proposed Force Majeure Rule would provide DTC's management and the
Board with guidance in this regard by identifying the indicators and
governance around the use and application of such tools to enable them
to address stress situations in a manner most appropriate for the
circumstances. Therefore, the Recovery Plan and the proposed Force
Majeure Rule would also contribute to the safeguarding of securities
and funds which are in the custody or control of DTC or for which it is
responsible by enabling actions that would address and minimize losses.
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\51\ 15 U.S.C. 78q-1(b)(3)(F).
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The Wind-down Plan and the proposed Wind-down Rule, which would
facilitate the implementation of the Wind-down Plan, would also promote
the prompt and accurate clearance and settlement of securities
transactions and assure the safeguarding of securities and funds which
are in the custody or control of DTC or for which it is responsible.
The Wind-down Plan and the proposed Wind-down Rule would collectively
establish a framework for the transfer and orderly wind-down of DTC's
business. These proposals would establish clear mechanisms for the
transfer of DTC's critical services and membership as well as clear
provision for the transfer of the securities inventory it holds in
fungible bulk for Participants. By doing so, the
[[Page 895]]
Wind-down Plan and these Proposed Rules are designed to facilitate the
continuity of DTC's critical services and enable its Participants and
Pledgees to maintain access to DTC's services through the transfer of
its membership in the event DTC defaults or the Wind-down Plan is
triggered by the Board. Therefore, by facilitating the continuity of
DTC's critical clearance and settlement services, DTC believes the
proposals would promote the prompt and accurate clearance and
settlement of securities transactions. Further, by creating a framework
for the transfer and orderly wind-down of DTC's business, DTC believes
the proposals would enhance the safeguarding of securities and funds
which are in the custody or control of DTC or for which it is
responsible.
Therefore, DTC believes the R&W Plan and each of the Proposed Rules
are consistent with the requirements of Section 17A(b)(3)(F) of the
Act.\52\
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\52\ Id.
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Rule 17Ad-22(e)(3)(ii) under the Act requires DTC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to maintain a sound risk management framework for
comprehensively managing legal, credit, liquidity, operational, general
business, investment, custody, and other risks that arise in or are
borne by the covered clearing agency, which includes plans for the
recovery and orderly wind-down of the covered clearing agency
necessitated by credit losses, liquidity shortfalls, losses from
general business risk, or any other losses.\53\ The R&W Plan and each
of the Proposed Rules are designed to meet the requirements of Rule
17Ad-22(e)(3)(ii).\54\
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\53\ 17 CFR 240.17Ad-22(e)(3)(ii).
\54\ Id.
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The R&W Plan would be maintained by DTC in compliance with Rule
17Ad-22(e)(3)(ii) in that it provides plans for the recovery and
orderly wind-down of DTC necessitated by credit losses, liquidity
shortfalls, losses from general business risk, or any other losses, as
described above.\55\ Specifically, the Recovery Plan would define the
risk management activities, stress conditions and indicators, and tools
that DTC may use to address stress scenarios that could eventually
prevent it from being able to provide its critical services as a going
concern. Through the framework of the Crisis Continuum, the Recovery
Plan would address measures that DTC may take to address risks of
credit losses and liquidity shortfalls, and other losses that could
arise from a Participant Default. The Recovery Plan would also address
the management of general business risks and other non-default risks
that could lead to losses.
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\55\ Id.
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The Wind-down Plan would be triggered by a determination by the
Board that recovery efforts have not been, or are unlikely to be,
successful in returning DTC to viability as a going concern. Once
triggered, the Wind-down Plan would set forth clear mechanisms for the
transfer of DTC's membership and business, and would be designed to
facilitate continued access to DTC's critical services and to minimize
market impact of the transfer. By establishing the framework and
strategy for the execution of the transfer and wind-down of DTC in
order to facilitate continuous access to DTC's critical services, the
Wind-down Plan establishes a plan for the orderly wind-down of DTC.
Therefore, DTC believes the R&W Plan would provide plans for the
recovery and orderly wind-down of the covered clearing agency
necessitated by credit losses, liquidity shortfalls, losses from
general business risk, or any other losses, and, as such, meets the
requirements of Rule 17Ad-22(e)(3)(ii).\56\
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\56\ Id.
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As described in greater detail above, the Proposed Rules are
designed to facilitate the execution of the R&W Plan, provide
Participants with transparency regarding the material provisions of the
Plan, and provide DTC with a legal basis for implementation of those
provisions. As such, DTC also believes the Proposed Rules meet the
requirements of Rule 17Ad-22(e)(3)(ii).\57\
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\57\ Id.
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DTC has evaluated the recovery tools that would be identified in
the Recovery Plan and has determined that these tools are
comprehensive, effective, and transparent, and that such tools provide
appropriate incentives to DTC's Participants to manage the risks they
present. The recovery tools, as outlined in the Recovery Plan and in
the proposed Force Majeure Rule, provide DTC with a comprehensive set
of options to address its material risks and support the resiliency of
its critical services under a range of stress scenarios. DTC also
believes the recovery tools are effective, as DTC has both legal basis
and operational capability to execute these tools in a timely and
reliable manner. Many of the recovery tools are provided for in the
Rules; Participants are bound by the Rules through their Participants
Agreements with DTC, and the Rules are adopted pursuant to a framework
established by Rule 19b-4 under the Act,\58\ providing a legal basis
for the recovery tools found therein. Other recovery tools have legal
basis in contractual arrangements to which DTC is a party, as described
above. Further, as many of the tools are embedded in DTC's ongoing risk
management practices or are embedded into its predefined default-
management procedures, DTC is able to execute these tools, in most
cases, when needed and without material operational or organizational
delay.
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\58\ Id. at 240.19b-4.
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The majority of the recovery tools are also transparent, as they
are or are proposed to be included in the Rules, which are publicly
available. DTC believes the recovery tools also provide appropriate
incentives to its owners and Participants, as they are designed to
control the amount of risk they present to DTC's clearance and
settlement system. Finally, DTC's Recovery Plan provides for a
continuous evaluation of the systemic consequences of executing its
recovery tools, with the goal of minimizing their negative impact. The
Recovery Plan would outline various indicators over a timeline of
increasing stress, the Crisis Continuum, with escalation triggers to
DTC management or the Board, as appropriate. This approach would allow
for timely evaluation of the situation and the possible impacts of the
use of a recovery tool in order to minimize the negative effects of the
stress scenario. Therefore, DTC believes that the recovery tools that
would be identified and described in its Recovery Plan, including the
authority provided to it in the proposed Force Majeure Rule, would meet
the criteria identified within guidance published by the Commission in
connection with the adoption of Rule 17Ad-22(e)(3)(ii).\59\
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\59\ Supra note 38.
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Therefore, DTC believes the R&W Plan and each of the Proposed Rules
are consistent with Rule 17Ad-22(e)(3)(ii).\60\
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\60\ 17 CFR 240.17Ad-22(e)(3)(ii).
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Rule 17Ad-22(e)(15)(ii) under the Act requires DTC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to identify, monitor, and manage its general
business risk and hold sufficient LNA to cover potential general
business losses so that DTC can continue operations and services as a
going concern if those losses materialize, including by holding LNA
equal to the greater of either (x) six months of the covered clearing
agency's current operating expenses, or (y) the amount determined by
the board of directors to be sufficient to ensure a recovery or
[[Page 896]]
orderly wind-down of critical operations and services of the covered
clearing agency.\61\ While the Capital Policy addresses how DTC holds
LNA in compliance with these requirements, the Wind-down Plan would
include an analysis that would estimate the amount of time and the
costs to achieve a recovery or orderly wind-down of DTC's critical
operations and services, and would provide that the Board review and
approve this analysis and estimation annually. The Wind-down Plan would
also provide that the estimate would be the ``Recovery/Wind-down
Capital Requirement'' under the Capital Policy. Under that policy, the
General Business Risk Capital Requirement, which is the sufficient
amount of LNA that DTC should hold to cover potential general business
losses so that it can continue operations and services as a going
concern if those losses materialize, is calculated as the greatest of
three estimated amounts, one of which is this Recovery/Wind-down
Capital Requirement. Therefore, DTC believes the R&W Plan, as it
interrelates with the Capital Policy, is consistent with Rule 17Ad-
22(e)(15)(ii).\62\
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\61\ Id. at 240.17Ad-22(e)(15)(ii).
\62\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
DTC does not believe the proposal would have any impact, or impose
any burden, on competition not necessary or appropriate in furtherance
of the purpose of the Act.\63\ The proposal would apply uniformly to
all Participants and Pledgees. DTC does not anticipate that the
proposal would affect its day-to-day operations under normal
circumstances, or in the management of a typical Participant default
scenario or non-default event. DTC is not proposing to alter the
standards or requirements for becoming or remaining a Participant or
Pledgee, or otherwise using its services. DTC also does not propose to
change its methodology for calculation of Participants Fund
contributions. The proposal is intended to (1) address the risk of loss
events and identify the tools and resources available to it to
withstand and recover from such events, so that it can restore normal
operations, and (2) provide a framework for its orderly wind-down and
the transfer of its business in the event those recovery tools do not
restore DTC to financial viability, as described herein.
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\63\ 15 U.S.C. 78q-1(b)(3)(I).
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The R&W Plan and each of the Proposed Rules have been developed and
documented in order to satisfy applicable regulatory requirements, as
discussed above.
With respect to the Recovery Plan, the proposal generally reflects
DTC's existing tools and existing internal procedures. Existing tools
that would have a direct impact on the rights, responsibilities or
obligations of Participants are reflected in the existing Rules or are
proposed to be included in the Rules. Accordingly, the Recovery Plan
and the proposed Force Majeure Rule are intended to provide a roadmap,
define the strategy and identify the tools available to DTC in
connection with its recovery efforts. By proposing to enhance DTC's
existing internal management and its regulatory compliance related to
its recovery efforts, DTC does not believe the Recovery Plan or the
proposed Force Majeure Rule would have any impact, or impose any
burden, on competition.
With respect to the Wind-down Plan and the proposed Wind-down Rule,
which facilitate the execution of the Wind-down Plan, the proposal
would operate to effect the transfer of all eligible Participants and
Pledgees to the Transferee, and would not prohibit any market
participant from either bidding to become the Transferee or from
applying for membership with the Transferee. The proposal also would
not prohibit any Participant or Pledgee from withdrawing from DTC prior
to the Transfer Time, as is permitted under the Rules today, or from
applying for membership with the Transferee. Therefore, as the proposal
would treat each similarly situated Participant and Pledgee identically
under the Wind-down Plan and under the Proposed Wind-down Rule, DTC
does not believe the Wind-down Plan or the proposed Wind-down Rule
would have any impact, or impose any burden, on competition.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
While DTC has not solicited or received any written comments
relating to this proposal, DTC has conducted outreach to its Members in
order to provide them with notice of the proposal. 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 clearing agency 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 [email protected]. Please include
File Number SR-DTC-2017-021 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-DTC-2017-021. 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 website (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 website 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 website
(https://dtcc.com/legal/sec-rule-
[[Page 897]]
filings.aspx). All comments received will be posted without change.
Persons submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-DTC-2017-021 and should be
submitted on or before January 29, 2018.
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\64\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\64\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-00080 Filed 1-5-18; 8:45 am]
BILLING CODE 8011-01-P
