Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing and Extension of the Review Period of an Advance Notice To Adopt a Recovery & Wind-Down Plan and Related Rules, 4310-4324 [2018-01688]
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allocation rules of the other DTCC
Clearing Agencies, but also would help
to ensure that DTC’s loss allocation
rules are transparent and clear to
Participants. Aligning the loss allocation
rules of the DTCC Clearing Agencies
would provide consistent treatment, to
the extent practicable and appropriate,
especially for firms that are participants
of two or more DTCC Clearing Agencies.
Having transparent and clear loss
allocation rules would enable
Participants to better understand the key
aspects of DTC’s Rules and Procedures
relating to Participant Default, as well as
non-default events, and provide
Participants with increased
predictability and certainty regarding
their exposures and obligations. As
such, DTC believes that the proposed
rule changes with respect to pro rata
settlement charges, and to align the loss
allocation rules across the DTCC
Clearing Agencies and to improve the
overall transparency and accessibility of
DTC’s loss allocation rules are
consistent with Rule 17Ad–22(e)(23)(i)
under the Act.
III. Date of Effectiveness of the Advance
Notice and Timing for Commission
Action
The proposed change may be
implemented if the Commission does
not object to the proposed change
within 60 days of the later of (i) the date
that the proposed change was filed with
the Commission or (ii) the date that any
additional information requested by the
Commission is received,63 unless
extended as described below. The
clearing agency shall not implement the
proposed change if the Commission has
any objection to the proposed change.64
Pursuant to Section 806(e)(1)(H) of the
Clearing Supervision Act,65 the
Commission may extend the review
period of an advance notice for an
additional 60 days, if the changes
proposed in the advance notice raise
novel or complex issues, subject to the
Commission providing the clearing
agency with prompt written notice of
the extension.
Here, as the Commission has not
requested any additional information,
the date that is 60 days after DTC filed
the Advance Notice with the
Commission is February 16, 2018.
However, the Commission is extending
the review period of the Advance Notice
for an additional 60 days under Section
806(e)(1)(H) of the Clearing Supervision
Act 66 because the Commission finds
63 12
U.S.C. 5465(e)(1)(G).
U.S.C. 5465(e)(1)(F).
65 12 U.S.C. 5465(e)(1)(H).
66 Id.
64 12
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that the Advance Notice raises complex
issues. Specifically, the proposed
changes are substantial, detailed, and
interrelated to corresponding proposals
by NSCC and FICC.67 The proposed
changes would provide a
comprehensive revision to such loss
allocation process when addressing
losses from either a Participant Default
or a non-default event. In doing so, DTC
would clarify certain elements of,
introduce new concepts to, and modify
other aspects of its loss allocation
waterfall as described above.
Furthermore, the proposed changes
would align the loss allocation rules
across all three DTCC Clearing
Agencies, in order to help provide
consistent treatment of the rules, to the
extent practicable and appropriate,
especially for firms that are participants
of two or more DTCC Clearing Agencies.
Accordingly, pursuant to Section
806(e)(1)(H) of the Clearing Supervision
Act,68 the Commission is extending the
review period of the Advance Notice to
April 17, 2018 which is the date by
which the Commission shall notify the
clearing agency of any objection
regarding the Advance Notice, unless
the Commission requests further
information for consideration of the
Advance Notice (SR–DTC–2017–804).69
The clearing agency shall post notice
on its website of proposed changes that
are implemented.
The proposal shall not take effect
until all regulatory actions required
with respect to the proposal are
completed.70
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing.
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–2017–804 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.
67 Supra note 5 (listing the corresponding
proposals by NSCC and FICC).
68 12 U.S.C. 5465(e)(1)(H).
69 This extension extends the time periods under
Sections 806(e)(1)(E) and (G) of the Clearing
Supervision Act. 12 U.S.C. 5465(e)(1)(E) and (G).
70 See supra note 2 (concerning the clearing
agency’s related proposed rule change).
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All submissions should refer to File
Number SR–DTC–2017–804. 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 Advance Notice that
are filed with the Commission, and all
written communications relating to the
Advance Notice 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-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–DTC–2017–804 and
should be submitted on or before
February 14, 2018.
By the Commission.
Eduardo A. Aleman
Assistant Secretary.
[FR Doc. 2018–01691 Filed 1–29–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82579; File No. SR–DTC–
2017–803]
Self-Regulatory Organizations; The
Depository Trust Company; Notice of
Filing and Extension of the Review
Period of an Advance Notice To Adopt
a Recovery & Wind-Down Plan and
Related Rules
January 24, 2018.
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
(‘‘Clearing Supervision Act’’) and Rule
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19b–4(n)(1)(i) under the Securities
Exchange Act of 1934 (‘‘Act’’),1 notice is
hereby given that on December 18, 2017,
The Depository Trust Company (‘‘DTC’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) advance
notice SR–DTC–2017–803 (‘‘Advance
Notice’’) as described in Items I and II
below, which Items have been prepared
by the clearing agency.2 The
Commission is publishing this notice to
solicit comments on the Advance Notice
from interested persons and to extend
the review period of the Advance Notice
for an additional 60 days pursuant to
Section 806(e)(1)(H) of the Clearing
Supervision Act.3
I. Clearing Agency’s Statement of the
Terms of Substance of the Advance
Notice
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The advance notice of DTC would
propose to (1) adopt the Recovery &
Wind-down 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
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.
1 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b–
4(n)(1)(i), respectively.
2 On December 18, 2017, DTC filed the Advance
Notice as a proposed rule change (SR–DTC–2017–
021) with the Commission pursuant to Section
19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule
19b–4 thereunder, 17 CFR 240.19b–4. A copy of the
proposed rule change is available at https://
www.dtcc.com/legal/sec-rule-filings.
3 12 U.S.C. 5465(e)(1)(H).
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.
5 17 CFR 240.17Ad–22(e)(3)(ii).
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II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Advance Notice
In its filing with the Commission, the
clearing agency included statements
concerning the purpose of and basis for
the Advance Notice and discussed any
comments it received on the Advance
Notice. 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 and B below, of the most
significant aspects of such statements.
(A) Clearing Agency’s Statement on
Comments on the Advance Notice
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.
(B) Advance Notice Filed Pursuant to
Section 806(e) of the Clearing
Supervision Act
Description of Proposed Changes
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
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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, businessas-usual tools, the R&W Plan would
describe DTC’s other principal recovery
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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
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
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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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.
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
10 17
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CFR 240.17Ad–22(e)(3)(ii).
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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
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
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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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
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
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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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
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
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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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
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
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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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
risk 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
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
18 The Plan defines 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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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
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
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 No. 80489 (April
19, 2017), 82 FR 19120 (April 25, 2017) (SR–DTC–
2017–004, SR–DTC–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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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
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
24 DTC’s stress testing practices are described in
the Clearing Agency Stress Testing Framework
(Market Risk). See Securities Exchange Act Release
No. 80485 (April 19, 2017), 82 FR 19131 (April 25,
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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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
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
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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
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
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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4315
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
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).
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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
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
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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
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
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).
33 See supra note 26.
34 See supra note 26.
35 See supra note 8.
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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
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,
36 See
37 See
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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.
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,
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
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.
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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
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.
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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
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
42 11
U.S.C. 1101 et seq.
id. at 363.
43 See
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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 Winddown 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
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 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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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
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)),
45 See
46 See
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supra note 6.
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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
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
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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 noncritical 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
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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
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4319
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
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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
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
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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.
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
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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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.
Expected Effect on and Management of
Risk
DTC believes the proposal to adopt
the R&W Plan and the Proposed Rules
would enable it to better manage its
risks. As described above, the Recovery
Plan would identify the recovery tools
and the risk management activities that
DTC may use to address risks of
uncovered losses or shortfalls resulting
from a Participant default and losses
arising from non-default events. By
creating a framework for its
management of risks across an evolving
stress scenario and providing a roadmap
for actions it may employ to monitor
and, as needed, stabilize its financial
condition, the Recovery Plan would
strengthen DTC’s ability to manage risk.
The Wind-down Plan would also enable
DTC to better manage its risks by
establishing the strategy and framework
for its orderly wind-down and the
transfer of DTC’s business, including the
transfer of the securities inventory and
establishment of the Participant and
Pledgee securities accounts on the books
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of the transferee, when the Wind-down
Plan is triggered. By creating clear
mechanisms for the transfer of DTC’s
membership and business, the Winddown Plan would facilitate continued
access to DTC’s critical services and
minimize market impact of the transfer
and enable DTC to better manage risks
related to the wind-down of DTC.
DTC believes the Proposed Rules
would enable it to better manage its
risks by facilitating, and providing a
legal basis for, the implementation of
critical aspects of the R&W Plan. The
Proposed Rules would provide
Participants with transparency around
those provisions of the R&W Plan that
relate to their and DTC’s rights,
responsibilities and obligations.
Therefore, DTC believes the Proposed
Rules would enable it to better manage
its risks by providing this transparency
and creating some certainty, to the
extent practicable, around the
occurrence of a Market Disruption Event
(as such term is defined in the Proposed
Rule), and around the implementation
of the Wind-down Plan.
Consistency With the Clearing
Supervision Act
The stated purpose of the Clearing
Supervision Act is to mitigate systemic
risk in the financial system and promote
financial stability by, among other
things, promoting uniform risk
management standards for systemically
important financial market utilities and
strengthening the liquidity of
systemically important financial market
utilities.48 Section 805(a)(2) of the
Clearing Supervision Act 49 also
authorizes the Commission to prescribe
risk management standards for the
payment, clearing, and settlement
activities of designated clearing entities,
like DTC, for which the Commission is
the supervisory agency. Section 805(b)
of the Clearing Supervision Act 50 states
that the objectives and principles for
risk management standards prescribed
under Section 805(a) shall be to promote
robust risk management, promote safety
and soundness, reduce systemic risks,
and support the stability of the broader
financial system.
DTC believes that the proposed
change is consistent with Section 805(b)
of the Clearing Supervision Act because
it is designed to address each of these
objectives. The Recovery Plan and the
proposed Force Majeure Rule would
promote robust risk management and
would reduce systemic risks by
providing DTC with a roadmap for
48 12
U.S.C. 5461(b).
49 Id. at 5464(a)(2).
50 Id. at 5464(b).
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actions it may employ to monitor and
manage its risks, and, as needed, to
stabilize its financial condition in the
event those risks materialize. Further,
the Recovery Plan would identify the
triggers of recovery tools, but would not
provide that those triggers necessitate
the use of that tool. Instead, the
Recovery Plan would provide that the
triggers of these tools lead to escalation
to an appropriate management body,
which would have authority and
flexibility to respond appropriately to
the situation. Essentially, the Recovery
Plan and the proposed Force Majeure
Rule are designed to minimize losses to
both DTC and its Participants by giving
DTC the ability to determine the most
appropriate way to address each stress
situation. This approach would allow
for proper 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 situation,
and would reduce systemic risks related
to the implementation of the Recovery
Plan and the underlying recovery tools.
The Wind-down Plan and the
proposed Wind-down Rule, which
would facilitate the implementation of
the Wind-down Plan, would promote
safety and soundness and would
support the stability of the broader
financial system because they would
establish a framework for the orderly
wind-down of DTC’s business and
would set forth clear mechanics for the
transfer of its critical services and
membership as well as clear provisions
concerning the transfer of the securities
inventory that DTC holds in fungible
bulk on behalf of its Participants. By
designing the Wind-down Plan and the
proposed Wind-down Rule to provide
for the continued access to DTC’s
critical services and membership, DTC
believes they would promote safety and
soundness and would support stability
in the broader financial system in the
event the Wind-down Plan is
implemented.
By assisting DTC to promote robust
risk management, promote safety and
soundness, reduce systemic risks, and
support the stability of the broader
financial system, as described above,
DTC believes the proposal is consistent
with Section 805(b) of the Clearing
Supervision Act.51
DTC also 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
51 Id.
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Section 17A(b)(3)(F) of the Act,52 the
R&W Plan and each of the Proposed
Rules are consistent with Rule 17Ad–
22(e)(3)(ii) under the Act,53 and the
R&W Plan is consistent with Rule
17Ad–22(e)(15)(ii) under the Act,54 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.55
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
52 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(3)(ii).
54 Id. at 240.17Ad–22(e)(15)(ii).
55 15 U.S.C. 78q–1(b)(3)(F).
53 17
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securities inventory it holds in fungible
bulk for Participants. By doing so, the
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.56
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.57 The R&W
Plan and each of the Proposed Rules are
designed to meet the requirements of
Rule 17Ad–22(e)(3)(ii).
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.58 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.
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).59
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).60
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
56 Id.
57 17
established by Rule 19b–4 under the
Act,61 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).62
Therefore, DTC believes the R&W
Plan and each of the Proposed Rules are
consistent with Rule 17Ad–
22(e)(3)(ii).63
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
61 Id.
CFR 240.17Ad–22(e)(3)(ii).
58 Id.
VerDate Sep<11>2014
at 240.19b–4.
note 38.
63 17 CFR 240.17Ad–22(e)(3)(ii).
59 Id.
62 Supra
60 Id.
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be sufficient to ensure a recovery or
orderly wind-down of critical
operations and services of the covered
clearing agency.64 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).65
III. Date of Effectiveness of the Advance
Notice and Timing for Commission
Action
The proposed change may be
implemented if the Commission does
not object to the proposed change
within 60 days of the later of (i) the date
that the proposed change was filed with
the Commission or (ii) the date that any
additional information requested by the
Commission is received,66 unless
extended as described below. The
clearing agency shall not implement the
proposed change if the Commission has
any objection to the proposed change.67
Pursuant to Section 806(e)(1)(H) of the
Clearing Supervision Act,68 the
Commission may extend the review
period of an advance notice for an
additional 60 days, if the changes
proposed in the advance notice raise
novel or complex issues, subject to the
Commission providing the clearing
agency with prompt written notice of
the extension.
Here, as the Commission has not
requested any additional information,
the date that is 60 days after DTC filed
the Advance Notice with the
Commission is February 16, 2018.
However, the Commission is extending
the review period of the Advance Notice
for an additional 60 days under Section
806(e)(1)(H) of the Clearing Supervision
Act 69 because the Commission finds the
Advance Notice is both novel and
complex, as discussed below.
The Advance Notice is novel because
it concerns a matter of first impression
for the Commission. Specifically, it
concerns a recovery and wind-down
plan that has not been part of the
Commission’s regulatory framework for
registered clearing agencies until the
recent adoption of Rule 17Ad–
22(e)(3)(ii) under the Act.70
Rule 17Ad–22(e)(3)(ii) under the
Act 71 requires DTC to establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to, as applicable,
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 DTC, which
includes 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. The Commission has not
yet considered such a plan pursuant to
Rule 17Ad–22(e)(3)(ii) under the Act.72
The Advance Notice is complex
because the proposed changes are
substantial, detailed, and interrelated
with other risk management practices at
the clearing agency. The Advance
Notice is substantial because it is
designed to comprehensively address
how the clearing agency would
implement a recovery or wind-down
plan. For example, according to the
clearing agency, the R&W Plan would
provide, among other things, (i) an
overview of the business of DTC and its
parent, DTCC; (ii) an analysis of DTC’s
intercompany arrangements and critical
links to other 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 certain 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
69 Id.
64 Id.
at 240.17Ad–22(e)(15)(ii).
70 Securities Exchange Act Release 78961
(September 28, 2016), 81 FR 70786 (October 13,
2017) (S7–03–14).
71 17 CFR 240.17Ad–22(e)(3)(ii).
72 Id.
65 Id.
66 12
U.S.C. 5465(e)(1)(G).
U.S.C. 5465(e)(1)(F).
68 12 U.S.C. 5465(e)(1)(H).
67 12
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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 Advance Notice is detailed
because it articulates the step-by-step
process the clearing agency would
undertake to implement a recovery or
wind-down plan.
The Advance Notice is interrelated
with other risk management practices at
the clearing agency because the R&W
Plan concerns some existing rules that
address risk management as well as
proposed rules that would further
address risk management. For example,
according to the clearing agency, many
of the tools available to the clearing
agency that would be described in the
R&W Plan are the clearing agency’s
existing, business-as-usual risk
management and default management
tools, which would continue to be
applied in scenarios of increasing stress.
The Advance Notice also proposes new
rules, such as the proposed market
disruption and force majeure rule,73 and
contemplates application of the rules
proposed in the Loss Allocation Filing
as an integral part of the operation of the
R&W Plan.74
Accordingly, pursuant to Section
806(e)(1)(H) of the Clearing Supervision
Act,75 the Commission is extending the
review period of the Advance Notice to
April 17, 2018 which is the date by
which the Commission shall notify the
clearing agency of any objection
regarding the Advance Notice, unless
the Commission requests further
information for consideration of the
Advance Notice (SR–DTC–2017–803).76
The clearing agency shall post notice
on its website of proposed changes that
are implemented.
The proposal shall not take effect
until all regulatory actions required
73 Proposed DTC Rule 38 (Market Disruption and
Force Majeure).
74 See supra note 8.
75 12 U.S.C. 5465(e)(1)(H).
76 This extension extends the time periods under
Sections 806(e)(1)(E) and (G) of the Clearing
Supervision Act. 12 U.S.C. 5465(e)(1)(E) and (G).
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By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
with respect to the proposal are
completed.77
IV. Solicitation of Comments
[FR Doc. 2018–01688 Filed 1–29–18; 8:45 am]
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing.
Comments may be submitted by any of
the following methods:
Electronic Comments
Paper Comments
daltland on DSKBBV9HB2PROD with NOTICES
• 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–2017–803. 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 Advance Notice that
are filed with the Commission, and all
written communications relating to the
Advance Notice 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-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–DTC–
2017–803 and should be submitted on
or before February 14, 2018.
77 See supra note 2 (concerning the clearing
agency’s related proposed rule change).
18:18 Jan 29, 2018
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[Release No. 34–82576; File No. SR–OCC–
2018–001]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meetings
• 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–2017–803 on the subject line.
VerDate Sep<11>2014
SECURITIES AND EXCHANGE
COMMISSION
2:00 p.m. on Thursday,
February 1, 2018.
PLACE: Closed Commission Hearing
Room 10800.
STATUS: This meeting will be closed to
the public.
MATTERS TO BE CONSIDERED:
Commissioners, Counsel to the
Commissioners, the Secretary to the
Commission, and recording secretaries
will attend the closed meeting. Certain
staff members who have an interest in
the matters also may be present.
The General Counsel of the
Commission, or his designee, has
certified that, in his opinion, one or
more of the exemptions set forth in 5
U.S.C. 552b(c)(3), (5), (6), (7), (8), 9(B)
and (10) and 17 CFR 200.402(a)(3),
(a)(5), (a)(6), (a)(7), (a)(8), (a)(9)(ii) and
(a)(10), permit consideration of the
scheduled matters at the closed meeting.
Commissioner Jackson, as duty
officer, voted to consider the items
listed for the closed meeting in closed
session, and determined that
Commission business required
consideration earlier than one week
from today. No earlier notice of this
meeting was practicable.
The subject matters of the closed
meeting will be:
Institution and settlement of
injunctive actions;
Institution and settlement of
administrative proceedings;
Litigation matters;
Resolution of litigation claims; and
Other matters relating to enforcement
proceedings.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting items.
CONTACT PERSON FOR MORE INFORMATION:
For further information and to ascertain
what, if any, matters have been added,
deleted or postponed; please contact
Brent J. Fields from the Office of the
Secretary at (202) 551–5400.
TIME AND DATE:
Dated: January 26, 2018.
Brent J. Fields,
Secretary.
PO 00000
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January 24, 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 January
18, 2018, The Options Clearing
Corporation (‘‘OCC’’) 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 OCC. 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 by OCC
would make certain revisions to OCC’s
Fee Policy to reduce the permitted
implementation time for proposed
changes to its Schedule of Fees. Under
the proposed rule change, the Fee Policy
would provide that any change to the
Schedule of Fees resulting from a
review of OCC’s fees by the Board of
Directors (‘‘Board’’) as stipulated under
the Fee Policy would be implemented
no sooner than 30 days from the date of
the filing of the proposed fee change
with the Commission, rather than the
minimum 60-day period provided for
currently in the Fee Policy.
The Fee Policy is included as
confidential Exhibit 5 to the filing.
Material proposed to be added to the
Fee Policy as currently in effect is
marked by underlining and material
proposed to be deleted is marked in
strikethrough text. All terms with initial
capitalization that are not otherwise
defined herein have the same meaning
as set forth in the By-Laws and Rules.3
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for the
Proposed Rule Change
In its filing with the Commission,
OCC included statements concerning
the purpose of and basis for the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b\4.
3 OCC’s By-Laws and Rules can be found on
OCC’s public website: https://optionsclearing.com/
about/publications/bylaws.jsp.
2 17
[FR Doc. 2018–01902 Filed 1–26–18; 4:15 pm]
BILLING CODE 8011–01–P
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing of Proposed Rule Change
Related to The Options Clearing
Corporation’s Fee Policy
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]]>Agencies
[Federal Register Volume 83, Number 20 (Tuesday, January 30, 2018)]
[Notices]
[Pages 4310-4324]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-01688]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82579; File No. SR-DTC-2017-803]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing and Extension of the Review Period of an Advance
Notice To Adopt a Recovery & Wind-Down Plan and Related Rules
January 24, 2018.
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 (``Clearing
Supervision Act'') and Rule
[[Page 4311]]
19b-4(n)(1)(i) under the Securities Exchange Act of 1934 (``Act''),\1\
notice is hereby given that on December 18, 2017, The Depository Trust
Company (``DTC'') filed with the Securities and Exchange Commission
(``Commission'') advance notice SR-DTC-2017-803 (``Advance Notice'') as
described in Items I and II below, which Items have been prepared by
the clearing agency.\2\ The Commission is publishing this notice to
solicit comments on the Advance Notice from interested persons and to
extend the review period of the Advance Notice for an additional 60
days pursuant to Section 806(e)(1)(H) of the Clearing Supervision
Act.\3\
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\1\ 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-4(n)(1)(i),
respectively.
\2\ On December 18, 2017, DTC filed the Advance Notice as a
proposed rule change (SR-DTC-2017-021) with the Commission pursuant
to Section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4
thereunder, 17 CFR 240.19b-4. A copy of the proposed rule change is
available at https://www.dtcc.com/legal/sec-rule-filings.
\3\ 12 U.S.C. 5465(e)(1)(H).
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I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice
The advance notice of DTC would propose to (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'').
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\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 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.
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\5\ 17 CFR 240.17Ad-22(e)(3)(ii).
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Advance Notice
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the Advance Notice
and discussed any comments it received on the Advance Notice. 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 and B below, of the most significant aspects of such
statements.
(A) Clearing Agency's Statement on Comments on the Advance Notice
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.
(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing
Supervision Act
Description of Proposed Changes
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
[[Page 4312]]
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 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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\10\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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
[[Page 4313]]
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 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.
---------------------------------------------------------------------------
\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
[[Page 4314]]
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 defines 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 risk 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 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 No. 80489 (April 19, 2017), 82 FR 19120 (April 25, 2017)
(SR-DTC-2017-004, SR-DTC-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.
---------------------------------------------------------------------------
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 No. 80485 (April 19, 2017), 82 FR
19131 (April 25, 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
[[Page 4315]]
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.
---------------------------------------------------------------------------
\25\ See Rule 10 (Discretionary Termination); Rule 11 (Mandatory
Termination); Rule 12 (Insolvency), supra note 4.
---------------------------------------------------------------------------
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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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
[[Page 4316]]
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).
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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 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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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,
[[Page 4317]]
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, and (2) minimizing disruption
to the operations of Participants and financial markets generally that
might be caused by DTC's failure.
---------------------------------------------------------------------------
\39\ 11 U.S.C. 1101 et seq.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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
[[Page 4318]]
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-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
[[Page 4319]]
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-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
[[Page 4320]]
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 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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
Expected Effect on and Management of Risk
DTC believes the proposal to adopt the R&W Plan and the Proposed
Rules would enable it to better manage its risks. As described above,
the Recovery Plan would identify the recovery tools and the risk
management activities that DTC may use to address risks of uncovered
losses or shortfalls resulting from a Participant default and losses
arising from non-default events. By creating a framework for its
management of risks across an evolving stress scenario and providing a
roadmap for actions it may employ to monitor and, as needed, stabilize
its financial condition, the Recovery Plan would strengthen DTC's
ability to manage risk. The Wind-down Plan would also enable DTC to
better manage its risks by establishing the strategy and framework for
its orderly wind-down and the transfer of DTC's business, including the
transfer of the securities inventory and establishment of the
Participant and Pledgee securities accounts on the books
[[Page 4321]]
of the transferee, when the Wind-down Plan is triggered. By creating
clear mechanisms for the transfer of DTC's membership and business, the
Wind-down Plan would facilitate continued access to DTC's critical
services and minimize market impact of the transfer and enable DTC to
better manage risks related to the wind-down of DTC.
DTC believes the Proposed Rules would enable it to better manage
its risks by facilitating, and providing a legal basis for, the
implementation of critical aspects of the R&W Plan. The Proposed Rules
would provide Participants with transparency around those provisions of
the R&W Plan that relate to their and DTC's rights, responsibilities
and obligations. Therefore, DTC believes the Proposed Rules would
enable it to better manage its risks by providing this transparency and
creating some certainty, to the extent practicable, around the
occurrence of a Market Disruption Event (as such term is defined in the
Proposed Rule), and around the implementation of the Wind-down Plan.
Consistency With the Clearing Supervision Act
The stated purpose of the Clearing Supervision Act is to mitigate
systemic risk in the financial system and promote financial stability
by, among other things, promoting uniform risk management standards for
systemically important financial market utilities and strengthening the
liquidity of systemically important financial market utilities.\48\
Section 805(a)(2) of the Clearing Supervision Act \49\ also authorizes
the Commission to prescribe risk management standards for the payment,
clearing, and settlement activities of designated clearing entities,
like DTC, for which the Commission is the supervisory agency. Section
805(b) of the Clearing Supervision Act \50\ states that the objectives
and principles for risk management standards prescribed under Section
805(a) shall be to promote robust risk management, promote safety and
soundness, reduce systemic risks, and support the stability of the
broader financial system.
---------------------------------------------------------------------------
\48\ 12 U.S.C. 5461(b).
\49\ Id. at 5464(a)(2).
\50\ Id. at 5464(b).
---------------------------------------------------------------------------
DTC believes that the proposed change is consistent with Section
805(b) of the Clearing Supervision Act because it is designed to
address each of these objectives. The Recovery Plan and the proposed
Force Majeure Rule would promote robust risk management and would
reduce systemic risks by providing DTC with a roadmap for actions it
may employ to monitor and manage its risks, and, as needed, to
stabilize its financial condition in the event those risks materialize.
Further, the Recovery Plan would identify the triggers of recovery
tools, but would not provide that those triggers necessitate the use of
that tool. Instead, the Recovery Plan would provide that the triggers
of these tools lead to escalation to an appropriate management body,
which would have authority and flexibility to respond appropriately to
the situation. Essentially, the Recovery Plan and the proposed Force
Majeure Rule are designed to minimize losses to both DTC and its
Participants by giving DTC the ability to determine the most
appropriate way to address each stress situation. This approach would
allow for proper 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 situation, and would reduce systemic risks related to the
implementation of the Recovery Plan and the underlying recovery tools.
The Wind-down Plan and the proposed Wind-down Rule, which would
facilitate the implementation of the Wind-down Plan, would promote
safety and soundness and would support the stability of the broader
financial system because they would establish a framework for the
orderly wind-down of DTC's business and would set forth clear mechanics
for the transfer of its critical services and membership as well as
clear provisions concerning the transfer of the securities inventory
that DTC holds in fungible bulk on behalf of its Participants. By
designing the Wind-down Plan and the proposed Wind-down Rule to provide
for the continued access to DTC's critical services and membership, DTC
believes they would promote safety and soundness and would support
stability in the broader financial system in the event the Wind-down
Plan is implemented.
By assisting DTC to promote robust risk management, promote safety
and soundness, reduce systemic risks, and support the stability of the
broader financial system, as described above, DTC believes the proposal
is consistent with Section 805(b) of the Clearing Supervision Act.\51\
---------------------------------------------------------------------------
\51\ Id.
---------------------------------------------------------------------------
DTC also 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,\52\ the R&W Plan and each of the
Proposed Rules are consistent with Rule 17Ad-22(e)(3)(ii) under the
Act,\53\ and the R&W Plan is consistent with Rule 17Ad-22(e)(15)(ii)
under the Act,\54\ for the reasons described below.
---------------------------------------------------------------------------
\52\ 15 U.S.C. 78q-1(b)(3)(F).
\53\ 17 CFR 240.17Ad-22(e)(3)(ii).
\54\ Id. at 240.17Ad-22(e)(15)(ii).
---------------------------------------------------------------------------
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.\55\ 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.
---------------------------------------------------------------------------
\55\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
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
[[Page 4322]]
securities inventory it holds in fungible bulk for Participants. By
doing so, the 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.\56\
---------------------------------------------------------------------------
\56\ Id.
---------------------------------------------------------------------------
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.\57\ The R&W Plan and each
of the Proposed Rules are designed to meet the requirements of Rule
17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------
\57\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------
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.\58\ 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.
---------------------------------------------------------------------------
\58\ Id.
---------------------------------------------------------------------------
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).\59\
---------------------------------------------------------------------------
\59\ Id.
---------------------------------------------------------------------------
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).\60\
---------------------------------------------------------------------------
\60\ Id.
---------------------------------------------------------------------------
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,\61\ 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.
---------------------------------------------------------------------------
\61\ Id. at 240.19b-4.
---------------------------------------------------------------------------
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).\62\
---------------------------------------------------------------------------
\62\ Supra note 38.
---------------------------------------------------------------------------
Therefore, DTC believes the R&W Plan and each of the Proposed Rules
are consistent with Rule 17Ad-22(e)(3)(ii).\63\
---------------------------------------------------------------------------
\63\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------
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
[[Page 4323]]
be sufficient to ensure a recovery or orderly wind-down of critical
operations and services of the covered clearing agency.\64\ 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).\65\
---------------------------------------------------------------------------
\64\ Id. at 240.17Ad-22(e)(15)(ii).
\65\ Id.
---------------------------------------------------------------------------
III. Date of Effectiveness of the Advance Notice and Timing for
Commission Action
The proposed change may be implemented if the Commission does not
object to the proposed change within 60 days of the later of (i) the
date that the proposed change was filed with the Commission or (ii) the
date that any additional information requested by the Commission is
received,\66\ unless extended as described below. The clearing agency
shall not implement the proposed change if the Commission has any
objection to the proposed change.\67\
---------------------------------------------------------------------------
\66\ 12 U.S.C. 5465(e)(1)(G).
\67\ 12 U.S.C. 5465(e)(1)(F).
---------------------------------------------------------------------------
Pursuant to Section 806(e)(1)(H) of the Clearing Supervision
Act,\68\ the Commission may extend the review period of an advance
notice for an additional 60 days, if the changes proposed in the
advance notice raise novel or complex issues, subject to the Commission
providing the clearing agency with prompt written notice of the
extension.
---------------------------------------------------------------------------
\68\ 12 U.S.C. 5465(e)(1)(H).
---------------------------------------------------------------------------
Here, as the Commission has not requested any additional
information, the date that is 60 days after DTC filed the Advance
Notice with the Commission is February 16, 2018. However, the
Commission is extending the review period of the Advance Notice for an
additional 60 days under Section 806(e)(1)(H) of the Clearing
Supervision Act \69\ because the Commission finds the Advance Notice is
both novel and complex, as discussed below.
---------------------------------------------------------------------------
\69\ Id.
---------------------------------------------------------------------------
The Advance Notice is novel because it concerns a matter of first
impression for the Commission. Specifically, it concerns a recovery and
wind-down plan that has not been part of the Commission's regulatory
framework for registered clearing agencies until the recent adoption of
Rule 17Ad-22(e)(3)(ii) under the Act.\70\
---------------------------------------------------------------------------
\70\ Securities Exchange Act Release 78961 (September 28, 2016),
81 FR 70786 (October 13, 2017) (S7-03-14).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(3)(ii) under the Act \71\ requires DTC to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to, as applicable, 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 DTC, which includes 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. The Commission has not yet considered such a plan
pursuant to Rule 17Ad-22(e)(3)(ii) under the Act.\72\
---------------------------------------------------------------------------
\71\ 17 CFR 240.17Ad-22(e)(3)(ii).
\72\ Id.
---------------------------------------------------------------------------
The Advance Notice is complex because the proposed changes are
substantial, detailed, and interrelated with other risk management
practices at the clearing agency. The Advance Notice is substantial
because it is designed to comprehensively address how the clearing
agency would implement a recovery or wind-down plan. For example,
according to the clearing agency, the R&W Plan would provide, among
other things, (i) an overview of the business of DTC and its parent,
DTCC; (ii) an analysis of DTC's intercompany arrangements and critical
links to other 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
certain 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 Advance Notice is detailed because it articulates the step-by-
step process the clearing agency would undertake to implement a
recovery or wind-down plan.
The Advance Notice is interrelated with other risk management
practices at the clearing agency because the R&W Plan concerns some
existing rules that address risk management as well as proposed rules
that would further address risk management. For example, according to
the clearing agency, many of the tools available to the clearing agency
that would be described in the R&W Plan are the clearing agency's
existing, business-as-usual risk management and default management
tools, which would continue to be applied in scenarios of increasing
stress. The Advance Notice also proposes new rules, such as the
proposed market disruption and force majeure rule,\73\ and contemplates
application of the rules proposed in the Loss Allocation Filing as an
integral part of the operation of the R&W Plan.\74\
---------------------------------------------------------------------------
\73\ Proposed DTC Rule 38 (Market Disruption and Force Majeure).
\74\ See supra note 8.
---------------------------------------------------------------------------
Accordingly, pursuant to Section 806(e)(1)(H) of the Clearing
Supervision Act,\75\ the Commission is extending the review period of
the Advance Notice to April 17, 2018 which is the date by which the
Commission shall notify the clearing agency of any objection regarding
the Advance Notice, unless the Commission requests further information
for consideration of the Advance Notice (SR-DTC-2017-803).\76\
---------------------------------------------------------------------------
\75\ 12 U.S.C. 5465(e)(1)(H).
\76\ This extension extends the time periods under Sections
806(e)(1)(E) and (G) of the Clearing Supervision Act. 12 U.S.C.
5465(e)(1)(E) and (G).
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The clearing agency shall post notice on its website of proposed
changes that are implemented.
The proposal shall not take effect until all regulatory actions
required
[[Page 4324]]
with respect to the proposal are completed.\77\
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\77\ See supra note 2 (concerning the clearing agency's related
proposed rule change).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. 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-2017-803 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-2017-803. 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 Advance Notice that are filed with the
Commission, and all written communications relating to the Advance
Notice 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-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-2017-803 and should be submitted on
or before February 14, 2018.
By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-01688 Filed 1-29-18; 8:45 am]
BILLING CODE 8011-01-P
