Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of Amendment No. 1 to an Advance Notice To Adopt a Recovery & Wind-Down Plan and Related Rules, 38344-38357 [2018-16708]

Download as PDF 38344 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–83743; File No. SR–DTC– 2017–803] Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of Amendment No. 1 to an Advance Notice To Adopt a Recovery & Wind-Down Plan and Related Rules July 31, 2018. sradovich on DSK3GMQ082PROD with NOTICES 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’’) 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 19b–4(n)(1)(i) under the Securities Exchange Act of 1934 (‘‘Act’’).1 The notice of filing and extension of the review period of the Advance Notice was published for comment in the Federal Register on January 30, 2018.2 1 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b– 4(n)(1)(i), respectively. 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 and Rule 19b–4 thereunder (‘‘Proposed Rule Change’’). (17 CFR 240.19b–4 and 17 CFR 240.19b–4, respectively.) The Proposed Rule Change was published in the Federal Register on January 8, 2018. See Securities Exchange Act Release No. 82432 (January 2, 2018), 83 FR 884 (January 8, 2018) (SR–DTC–2017–021). On February 8, 2018, the Commission designated a longer period within which to approve, disapprove, or institute proceedings to determine whether to approve or disapprove the Proposed Rule Change. See Securities Exchange Act Release No. 82669 (February 8, 2018), 83 FR 6653 (February 14, 2018) (SR–DTC–2017–021; SR–FICC–2017–021; SR– NSCC–2017–017). On March 20, 2018, the Commission instituted proceedings to determine whether to approve or disapprove the Proposed Rule Change. See Securities Exchange Act Release No. 82912 (March 20, 2018), 83 FR 12999 (March 26, 2018) (SR–DTC–2017–021). On June 25, 2018, the Commission designated a longer period for Commission action on the proceedings to determine whether to approve or disapprove the Proposed Rule Change. Therefore, September 5, 2018 is the date by which the Commission should either approve or disapprove the Proposed Rule Change. See Securities Exchange Act Release No. 83509 (June 25, 2018), 83 FR 30785 (June 29, 2018) (SR– DTC–2017–021; SR–FICC–2017–021; SR–NSCC– 2017–017). On June 28, 2018, DTC filed Amendment No. 1 to the Proposed Rule Change. See Securities Exchange Act Release No. 83628 (July 13, 2018), 83 FR 34263 (July 19, 2018) (SR– DTC–2017–021). As of the date of this release, the Commission has not received any comments on the Proposed Rule Change. 2 Securities Exchange Act Release No. 82579 (January 24, 2018), 83 FR 4310 (January 30, 2018) (SR–DTC–2017–803). Pursuant to Section 806(e)(1)(H) of the Clearing Supervision Act, 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 VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 On April 10, 2018, the Commission required additional information from DTC pursuant to Section 806(e)(1)(D) of the Clearing Supervision Act, which tolled the Commission’s period of review of the Advance Notice.3 On June 28, 2018, DTC filed Amendment No. 1 to the Advance Notice to amend and replace in its entirety the Advance Notice as originally submitted on December 18, 2017.4 On July 6, 2018, the Commission received a response to its request for additional information in consideration of the Advance Notice, which added a further 60-days to the review period pursuant to Section 806(e)(1)(E) and (G) of the Clearing Supervision Act.5 The Advance Notice, as amended by Amendment No. 1, is described in Items I and II below, which Items have been prepared by DTC. The Commission is publishing this notice to solicit comments on the Advance Notice, as amended by Amendment No. 1, from interested persons. I. Clearing Agency’s Statement of the Terms of Substance of the Advance Notice The Advance Notice of DTC proposes 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’’) 6 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’’ or complex issues, subject to the Commission providing the clearing agency with prompt written notice of the extension. 12 U.S.C. 5465(e)(1)(H). The Commission found that the Advance Notice raised novel and complex issues and, accordingly, extended the review period of the Advance Notice for an additional 60 days until April 17, 2018, pursuant to Section 806(e)(1)(H). Id. 3 12 U.S.C. 5465(e)(1)(D); see Memorandum from the Office of Clearance and Settlement Supervision, Division of Trading and Markets, titled ‘‘Commission’s Request for Additional Information,’’ available at https://www.sec.gov/ rules/sro/dtc-an.shtml. 4 To promote the public availability and transparency of its post-notice amendment, DTC submitted a copy of Amendment No. 1 through the Commission’s electronic public comment letter mechanism. Accordingly, Amendment No. 1 has been posted on the Commission’s website at https:// www.sec.gov/rules/sro/dtc-an.shtml and thus been publicly available since June 29, 2018. 5 12 U.S.C. 5465(e)(1)(E) and (G); see Memorandum from the Office of Clearance and Settlement Supervision, Division of Trading and Markets, titled ‘‘Response to the Commission’s Request for Additional Information,’’ available at https://www.sec.gov/rules/sro/dtc-an.shtml. 6 Capitalized terms used herein and not otherwise defined herein are defined in the Rules, available at https://www.dtcc.com/∼/media/Files/Downloads/ legal/rules/DTC_rules.pdf. PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 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.7 The Proposed Rules are designed to (1) facilitate the implementation of the R&W Plan when necessary and, in particular, allow DTC to effectuate its strategy for winding down and transferring its business; (2) provide Participants with transparency around critical provisions of the R&W Plan that relate to their rights, responsibilities and obligations; and (3) provide DTC with the legal basis to implement those provisions of the R&W Plan when necessary, as described below. II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the 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 Amendment No. 1 This filing constitutes Amendment No. 1 (‘‘Amendment’’) to the Advance Notice (also referred to below as the ‘‘Original Filing’’) previously filed by DTC.8 DTC is amending the proposed R&W Plan and the Original Filing in order to clarify certain matters and make minor technical and conforming 7 17 CFR 240.17Ad–22(e)(3)(ii). Securities Exchange Act Release No. 82579 (January 24, 2018), 83 FR 4310 (January 30, 2018) (SR–DTC–2017–803). 8 See E:\FR\FM\06AUN1.SGM 06AUN1 sradovich on DSK3GMQ082PROD with NOTICES Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices changes to the R&W Plan, as described below and as marked on Exhibit 4 hereto. To the extent such changes to the Plan require changes to the Original Filing, the information provided under ‘‘Description of Proposed Changes’’ in the Original Filing has been amended and is restated in its entirety below. Other sections of the Original Filing are unchanged and are restated in their entity for convenience. First, this Amendment would clarify the use in the Plan of the term ‘‘Participant Default Losses.’’ This Amendment would also clarify the actions and tools available in the third phase of the Crisis Continuum, which is referred to as the ‘‘Participant Default phase.’’ This Amendment would also make conforming changes as necessary to reflect the use of these terms. Second, this Amendment would clarify that actions and tools described in the Plan that are available in one phase of the Crisis Continuum may be used in subsequent phases of the Crisis Continuum, when appropriate to address the applicable situation. This Amendment would also clarify that allocation of losses resulting from a Participant Default would be applied when provide for in, and in accordance with, Rule 4. Third, this Amendment would clarify that the Recovery Corridor (as defined therein) is not a ‘‘sub-phase’’ of the recovery phase. Rather, the Recovery Corridor is a period of time that would occur toward the end of the Participant Default phase, when indicators are that DTC may transition into the recovery phase. Thus, the Recovery Corridor precedes the recovery phase. Fourth, this Amendment would make revisions to address the allocation of losses resulting from a Participant Default in order to more closely conform such statements to the changes proposed by the Loss Allocation Filing, as defined below. Fifth, this Amendment would clarify the notifications that DTC would be required to make under the Proposed Rule 38 (Market Disruption and Force Majeure). Finally, this Amendment would make minor, technical and conforming revisions to correct typographical errors and to simplify descriptions. For example, such revisions would use lower case for terms that are not defined therein, and would use upper case for terms that are defined. The Amendment would also simplify certain descriptions by removing extraneous words and statements that are repetitive. These minor, technical revisions would not alter the substance of the proposal. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 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 PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 38345 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 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’’),9 (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,10 and (iii) the process for the allocation of losses among Participants as provided in Rule 4.11 The R&W Plan 9 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). 10 See id. 11 See Rule 4 (Participants Fund and Participants Investment), supra note 6. DTC is proposing changes to Rule 4 regarding allocation of losses in a separate filing submitted simultaneously with the Original Filing. See Securities Exchange Act Release Nos. 82432 (January 2, 2018), 83 FR 884 (January 8, 2018) (SR–DTC–2017–021) and 82579 (January 24, 2018), 83 FR 4310 (January 30, 2018) (SR–DTC–2017–803) (collectively referred to herein E:\FR\FM\06AUN1.SGM Continued 06AUN1 38346 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 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.12 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 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. sradovich on DSK3GMQ082PROD with NOTICES 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 as the ‘‘Loss Allocation Filing’’). DTC has submitted an amendment to the Loss Allocation Filing. A copy of the amendment to the Loss Allocation Filing is available at https://www.dtcc.com/legal/sec-rulefilings.aspx. DTC expects the Commission to review both proposals, as amended, together, and, as such, the proposal described in this filing anticipates the approval and implementation of those proposed changes to the Rules. 12 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. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 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 13 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 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. 13 17 PO 00000 CFR 240.17Ad–22(e)(3)(ii). Frm 00074 Fmt 4703 Sfmt 4703 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.14 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 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 14 DTC has other links in addition to those mentioned above. The current list of linked CSDs is available on the DTCC website. E:\FR\FM\06AUN1.SGM 06AUN1 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES applicability of these four criteria. Such critical services would include, for example, MMIs and Commercial Paper Processing,15 Mandatory and Voluntary Corporate Actions,16 Cash and Stock Distributions,17 and End of Day Net Money Settlement.18 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 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 15 See Rule 9(C) (Transactions in MMI Securities), supra note 6. 16 See DTC Reorganizations Service Guide, available at www.dtcc.com/∼/media/Files/ Downloads/legal/service-guides/ Reorganizations.pdf. 17 See DTC Distributions Service Guide, available at https://www.dtcc.com/∼/media/Files/Downloads/ legal/service-guides/Service%20Guide %20Distributions.pdf. 18 See DTC Settlement Service Guide, available at www.dtcc.com/∼/media/Files/Downloads/legal/ service-guides/Settlement.pdf. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 financial system.19 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 circumstances of the non-default event.20 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, 19 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. 20 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. PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 38347 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 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 (referred to in the Plan as E:\FR\FM\06AUN1.SGM 06AUN1 38348 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES the ‘‘Participant Default phase’’),21 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 pursuant to the Rules.22 For ease of reference, the R&W Plan would, for purposes of the Plan, use the term ‘‘Participant Default Losses’’ to refer to losses that arise out of or relate to the Participant Default and resulting cease to act (including any losses that arise from liquidation of the Participant’s Collateral). 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.23 While Collateral securities are subject to market price risk, DTC manages its liquidity and market risks 21 The Plan defines an ‘‘Affiliated Family’’ of Participants as a number of affiliated entities that are all Participants of DTC. 22 In the Plan, ‘‘cease to act’’ and the actions that may lead to such decision, are used within the context of 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 6. Further, the term ‘‘Participant Default’’ would also be used in the Plan as such term is defined in Rule 4, as proposed to be amended by the Loss Allocation filing, supra note 11. 23 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). VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 through the calculation of the required deposits to the Participants Fund 24 and risk management controls, i.e., collateral haircuts, the Collateral Monitor 25 and Net Debit Cap.26 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 24 See Rule 4 (Participants Fund and Participants Investment), supra note 6. 25 See Rule 1, Section 1, supra note 6. For DTC, credit risk and market risk are closely related, as DTC monitors credit exposures from Participants through these risk management controls, which limit Participant settlement obligations to the amount of available liquidity resources and require those obligations to be fully collateralized. The pledge or liquidation of collateral in an amount sufficient to restore liquidity resources depends on market values and demand, i.e., market risk exposure. Such risk management controls are part of DTC’s 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). 26 Id. PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 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.27 The Recovery Plan would describe some of the indicators of the stress 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.28 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 Defaulting Participant’s Collateral securities through close collaboration and coordination across multiple functions. Management of liquidity risk through this phase would involve ongoing monitoring of, among other things, the adequacy of the Participants Fund and risk controls, and the Recovery Plan would identify certain actions DTC may deploy as it deems necessary to mitigate a potential liquidity shortfall, which 27 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). 28 See Rule 10 (Discretionary Termination); Rule 11 (Mandatory Termination); Rule 12 (Insolvency), supra note 6. E:\FR\FM\06AUN1.SGM 06AUN1 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES 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 remaining after application of the Defaulting Participant’s resources be satisfied first by applying a ‘‘Corporate Contribution,’’ and then, if necessary, by allocating remaining losses among the membership in accordance with such Rule 4, as amended.29 In order to provide for an effective and timely recovery, the Recovery Plan would describe the period of time that would occur near the end of the Participant Default phase, 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 (referred to in the Plan as the ‘‘Recovery Corridor’’). The Recovery Plan would then describe the recovery phase of the Crisis Continuum, 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.’’ 30 The recovery 29 See supra note 11. 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 9; 17 CFR 240.17Ad–22(e)(15). 30 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 proposed Rule 4) of those Participants included in the round. See supra note 11. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 phase would describe actions that DTC may take to avoid entering into a winddown of its business. DTC expects that significant deterioration of liquidity resources would cause it to enter the Recovery Corridor. As such, the Plan would describe the actions DTC may take aimed at replenishing those resources Recovery Corridor indicators 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 corridor indicator metrics. 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,31 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 set out in the Recovery Plan, would be 31 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. PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 38349 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 at the time, 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, which would occur when and in the order provided in Rule 4, as amended.32 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 as appropriate during 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 33 and Net Credit Reductions.34 The Recovery Plan would state that the availability and capacity of these liquidity tools cannot be accurately predicted and are dependent on the circumstances of the applicable stress period, including market price volatility, actual or perceived 32 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 11. 33 See Securities Exchange Act Release No. 80605 (May 5, 2017), 82 FR 21850 (May 10, 2017) (SR– DTC–2017–802; SR–NSCC–2017–802). 34 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). E:\FR\FM\06AUN1.SGM 06AUN1 sradovich on DSK3GMQ082PROD with NOTICES 38350 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 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 each phase of 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 various indicators and metrics applicable to that phase of the Crisis Continuum, and would follow relevant 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 VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 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.35 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,36 (b) the Corporate Contribution,37 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 4.38 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 35 This ‘‘three lines of defense’’ approach to risk management includes (1) a first line of defense comprised of the various business lines and functional units that support the products and services offered by DTC; (2) a second line of defense comprised of control functions that support DTC, including the risk management, legal and compliance areas; and (3) a third line of defense, which is performed by an internal audit group. 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). 36 See supra note 29. 37 See supra note 29. 38 See supra note 11. PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 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.39 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 is expected to exceed DTC’s excess LNA amounts, or is large relative thereto, and the Board has declared the event a ‘‘Declared NonDefault Loss Event’’ pursuant to Rule 4.40 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, 39 See 40 See E:\FR\FM\06AUN1.SGM supra note 9. supra note 11. 06AUN1 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES 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.41 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,42 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 41 Standards for Covered Clearing Agencies, Securities Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786 (October 13, 2016) (S7–03–14). 42 11 U.S.C. 1101 et seq. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 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.43 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 44 43 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. 44 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. PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 38351 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.45 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.46 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 45 11 U.S.C. 1101 et seq. id. at 363. 46 See E:\FR\FM\06AUN1.SGM 06AUN1 38352 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES 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.47 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 47 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. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 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.48 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.49 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)), 48 See 49 See PO 00000 supra note 9. supra note 9. Frm 00080 Fmt 4703 Sfmt 4703 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 E:\FR\FM\06AUN1.SGM 06AUN1 sradovich on DSK3GMQ082PROD with NOTICES Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 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 VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 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 PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 38353 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 E:\FR\FM\06AUN1.SGM 06AUN1 sradovich on DSK3GMQ082PROD with NOTICES 38354 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 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 VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 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.50 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. The purpose of the limitation of liability is to facilitate and protect DTC’s ability to act expeditiously in response to extraordinary events. As noted, such limitation of liability would be available only following triggering of the Winddown Plan. In addition, and as a separate matter, the limitation of liability provides Participants with transparency for the unlikely situation when those extraordinary events could occur, as well supporting the legal framework within which DTC would take such actions. These provisions, collectively, are designed to enable DTC to take such acts as the Board determines necessary to effectuate an orderly transfer and wind-down of its business should recovery efforts prove unsuccessful. 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 50 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. PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 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, including notification when an event is no longer continuing and the relevant actions are terminated. 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 and of actions taken or intended to be taken thereunder. 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. The purpose of the limitation of liability would be similar to the purpose of the analogous provision in the proposed Wind-down Rule, which is to facilitate and protect E:\FR\FM\06AUN1.SGM 06AUN1 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices DTC’s ability to act expeditiously in response to extraordinary events. sradovich on DSK3GMQ082PROD with NOTICES 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 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 Title VIII 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 VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 of systemically important financial market utilities.51 Section 805(a)(2) of the Clearing Supervision Act 52 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 53 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 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.54 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,55 the R&W Plan and each of the Proposed Rules are consistent with Rule 17Ad– 22(e)(3)(ii) under the Act,56 and the R&W Plan is consistent with Rule 17Ad–22(e)(15)(ii) under the Act,57 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.58 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 54 Id. 55 15 U.S.C. 78q–1(b)(3)(F). CFR 240.17Ad–22(e)(3)(ii). 57 Id. at 240.17Ad–22(e)(15)(ii). 58 15 U.S.C. 78q–1(b)(3)(F). 51 12 U.S.C. 5461(b). 52 Id. at 5464(a)(2). 53 Id. at 5464(b). PO 00000 Frm 00083 Fmt 4703 56 17 Sfmt 4703 38355 E:\FR\FM\06AUN1.SGM 06AUN1 sradovich on DSK3GMQ082PROD with NOTICES 38356 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices enable them to address stress situations in a manner most appropriate for the circumstances. Therefore, the Recovery Plan and the proposed Force Majeure Rule would also contribute to the safeguarding of securities and funds which are in the custody or control of DTC or for which it is responsible by enabling actions that would address and minimize losses. The Wind-down Plan and the proposed Wind-down Rule, which would facilitate the implementation of the Wind-down Plan, would also promote the prompt and accurate clearance and settlement of securities transactions and assure the safeguarding of securities and funds which are in the custody or control of DTC or for which it is responsible. The Wind-down Plan and the proposed Wind-down Rule would collectively establish a framework for the transfer and orderly wind-down of DTC’s business. These proposals would establish clear mechanisms for the transfer of DTC’s critical services and membership as well as clear provision for the transfer of the securities inventory it holds in fungible bulk for Participants. By doing so, the 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.59 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.60 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.61 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).62 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. 60 17 As such, DTC also believes the Proposed Rules meet the requirements of Rule 17Ad–22(e)(3)(ii).63 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,64 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 CFR 240.17Ad–22(e)(3)(ii). 61 Id. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 63 Id. 62 Id. 59 Id. 64 Id. PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 E:\FR\FM\06AUN1.SGM at 240.19b–4. 06AUN1 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES 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).65 Therefore, DTC believes the R&W Plan and each of the Proposed Rules are consistent with Rule 17Ad– 22(e)(3)(ii).66 Rule 17Ad–22(e)(15)(ii) under the Act requires DTC to establish, implement, maintain and enforce written policies and procedures reasonably designed to identify, monitor, and manage its general business risk and hold sufficient LNA to cover potential general business losses so that DTC can continue operations and services as a going concern if those losses materialize, including by holding LNA equal to the greater of either (x) six months of the covered clearing agency’s current operating expenses, or (y) the amount determined by the board of directors to be sufficient to ensure a recovery or orderly wind-down of critical operations and services of the covered clearing agency.67 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).68 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 65 Supra note 41. CFR 240.17Ad–22(e)(3)(ii). 67 Id. at 240.17Ad–22(e)(15)(ii). 68 Id. 66 17 VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 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. The clearing agency shall not implement the proposed change if the Commission has any objection to the proposed change. A proposed change may be implemented in less than 60 days from the date the advance notice is filed, or the date further information requested by the Commission is received, if the Commission notifies the clearing agency in writing that it does not object to the proposed change and authorizes the clearing agency to implement the proposed change on an earlier date, subject to any conditions imposed by the Commission. 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. 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–2017–803 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 PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 38357 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 August 21, 2018. By the Commission. Robert W. Errett, Deputy Secretary. [FR Doc. 2018–16708 Filed 8–3–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–83746; File No. SR–DTC– 2017–804] Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of Amendment No. 1 to an Advance Notice To Amend the Loss Allocation Rules and Make Other Changes July 31, 2018. On December 18, 2017, The Depository Trust Company (‘‘DTC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) advance notice SR–DTC–2017–804 (‘‘Advance Notice’’) 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 19b–4(n)(1)(i) under the Securities Exchange Act of 1934 (‘‘Act’’).1 The 1 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b– 4(n)(1)(i), respectively. On December 18, 2017, DTC filed the Advance Notice as a proposed rule change (SR–DTC–2017–022) with the Commission pursuant to Section 19(b)(1) of the Act and Rule 19b–4 thereunder (‘‘Proposed Rule Change’’). (17 CFR 240.19b–4 and 17 CFR 240.19b–4, respectively.) The Proposed Rule Change was published in the Federal Register on January 8, 2018. See Securities Exchange Act Release No. 82426 (January 2, 2018), 83 FR 913 (January 8, 2018) (SR–DTC–2017–022). On February 8, 2018, the Commission designated a longer period within which to approve, disapprove, or institute proceedings to determine whether to approve or disapprove the Proposed Rule Change. See E:\FR\FM\06AUN1.SGM Continued 06AUN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 83, Number 151 (Monday, August 6, 2018)]
[Notices]
[Pages 38344-38357]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-16708]



[[Page 38344]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83743; File No. SR-DTC-2017-803]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Amendment No. 1 to an Advance Notice To Adopt a 
Recovery & Wind-Down Plan and Related Rules

July 31, 2018.
    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'') 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 19b-
4(n)(1)(i) under the Securities Exchange Act of 1934 (``Act'').\1\ The 
notice of filing and extension of the review period of the Advance 
Notice was published for comment in the Federal Register on January 30, 
2018.\2\
---------------------------------------------------------------------------

    \1\ 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-4(n)(1)(i), 
respectively. 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 and Rule 19b-4 thereunder 
(``Proposed Rule Change''). (17 CFR 240.19b-4 and 17 CFR 240.19b-4, 
respectively.) The Proposed Rule Change was published in the Federal 
Register on January 8, 2018. See Securities Exchange Act Release No. 
82432 (January 2, 2018), 83 FR 884 (January 8, 2018) (SR-DTC-2017-
021). On February 8, 2018, the Commission designated a longer period 
within which to approve, disapprove, or institute proceedings to 
determine whether to approve or disapprove the Proposed Rule Change. 
See Securities Exchange Act Release No. 82669 (February 8, 2018), 83 
FR 6653 (February 14, 2018) (SR-DTC-2017-021; SR-FICC-2017-021; SR-
NSCC-2017-017). On March 20, 2018, the Commission instituted 
proceedings to determine whether to approve or disapprove the 
Proposed Rule Change. See Securities Exchange Act Release No. 82912 
(March 20, 2018), 83 FR 12999 (March 26, 2018) (SR-DTC-2017-021). On 
June 25, 2018, the Commission designated a longer period for 
Commission action on the proceedings to determine whether to approve 
or disapprove the Proposed Rule Change. Therefore, September 5, 2018 
is the date by which the Commission should either approve or 
disapprove the Proposed Rule Change. See Securities Exchange Act 
Release No. 83509 (June 25, 2018), 83 FR 30785 (June 29, 2018) (SR-
DTC-2017-021; SR-FICC-2017-021; SR-NSCC-2017-017). On June 28, 2018, 
DTC filed Amendment No. 1 to the Proposed Rule Change. See 
Securities Exchange Act Release No. 83628 (July 13, 2018), 83 FR 
34263 (July 19, 2018) (SR-DTC-2017-021). As of the date of this 
release, the Commission has not received any comments on the 
Proposed Rule Change.
    \2\ Securities Exchange Act Release No. 82579 (January 24, 
2018), 83 FR 4310 (January 30, 2018) (SR-DTC-2017-803). Pursuant to 
Section 806(e)(1)(H) of the Clearing Supervision Act, 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. 12 U.S.C. 
5465(e)(1)(H). The Commission found that the Advance Notice raised 
novel and complex issues and, accordingly, extended the review 
period of the Advance Notice for an additional 60 days until April 
17, 2018, pursuant to Section 806(e)(1)(H). Id.
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    On April 10, 2018, the Commission required additional information 
from DTC pursuant to Section 806(e)(1)(D) of the Clearing Supervision 
Act, which tolled the Commission's period of review of the Advance 
Notice.\3\ On June 28, 2018, DTC filed Amendment No. 1 to the Advance 
Notice to amend and replace in its entirety the Advance Notice as 
originally submitted on December 18, 2017.\4\ On July 6, 2018, the 
Commission received a response to its request for additional 
information in consideration of the Advance Notice, which added a 
further 60-days to the review period pursuant to Section 806(e)(1)(E) 
and (G) of the Clearing Supervision Act.\5\
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    \3\ 12 U.S.C. 5465(e)(1)(D); see Memorandum from the Office of 
Clearance and Settlement Supervision, Division of Trading and 
Markets, titled ``Commission's Request for Additional Information,'' 
available at https://www.sec.gov/rules/sro/dtc-an.shtml.
    \4\ To promote the public availability and transparency of its 
post-notice amendment, DTC submitted a copy of Amendment No. 1 
through the Commission's electronic public comment letter mechanism. 
Accordingly, Amendment No. 1 has been posted on the Commission's 
website at https://www.sec.gov/rules/sro/dtc-an.shtml and thus been 
publicly available since June 29, 2018.
    \5\ 12 U.S.C. 5465(e)(1)(E) and (G); see Memorandum from the 
Office of Clearance and Settlement Supervision, Division of Trading 
and Markets, titled ``Response to the Commission's Request for 
Additional Information,'' available at https://www.sec.gov/rules/sro/dtc-an.shtml.
---------------------------------------------------------------------------

    The Advance Notice, as amended by Amendment No. 1, is described in 
Items I and II below, which Items have been prepared by DTC. The 
Commission is publishing this notice to solicit comments on the Advance 
Notice, as amended by Amendment No. 1, from interested persons.

I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    The Advance Notice of DTC proposes 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'') \6\ 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'').
---------------------------------------------------------------------------

    \6\ Capitalized terms used herein and not otherwise defined 
herein are defined in the Rules, available at https://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.\7\ 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.
---------------------------------------------------------------------------

    \7\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------

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 Amendment No. 1
    This filing constitutes Amendment No. 1 (``Amendment'') to the 
Advance Notice (also referred to below as the ``Original Filing'') 
previously filed by DTC.\8\ DTC is amending the proposed R&W Plan and 
the Original Filing in order to clarify certain matters and make minor 
technical and conforming

[[Page 38345]]

changes to the R&W Plan, as described below and as marked on Exhibit 4 
hereto. To the extent such changes to the Plan require changes to the 
Original Filing, the information provided under ``Description of 
Proposed Changes'' in the Original Filing has been amended and is 
restated in its entirety below. Other sections of the Original Filing 
are unchanged and are restated in their entity for convenience.
---------------------------------------------------------------------------

    \8\ See Securities Exchange Act Release No. 82579 (January 24, 
2018), 83 FR 4310 (January 30, 2018) (SR-DTC-2017-803).
---------------------------------------------------------------------------

    First, this Amendment would clarify the use in the Plan of the term 
``Participant Default Losses.'' This Amendment would also clarify the 
actions and tools available in the third phase of the Crisis Continuum, 
which is referred to as the ``Participant Default phase.'' This 
Amendment would also make conforming changes as necessary to reflect 
the use of these terms.
    Second, this Amendment would clarify that actions and tools 
described in the Plan that are available in one phase of the Crisis 
Continuum may be used in subsequent phases of the Crisis Continuum, 
when appropriate to address the applicable situation. This Amendment 
would also clarify that allocation of losses resulting from a 
Participant Default would be applied when provide for in, and in 
accordance with, Rule 4.
    Third, this Amendment would clarify that the Recovery Corridor (as 
defined therein) is not a ``sub-phase'' of the recovery phase. Rather, 
the Recovery Corridor is a period of time that would occur toward the 
end of the Participant Default phase, when indicators are that DTC may 
transition into the recovery phase. Thus, the Recovery Corridor 
precedes the recovery phase.
    Fourth, this Amendment would make revisions to address the 
allocation of losses resulting from a Participant Default in order to 
more closely conform such statements to the changes proposed by the 
Loss Allocation Filing, as defined below.
    Fifth, this Amendment would clarify the notifications that DTC 
would be required to make under the Proposed Rule 38 (Market Disruption 
and Force Majeure).
    Finally, this Amendment would make minor, technical and conforming 
revisions to correct typographical errors and to simplify descriptions. 
For example, such revisions would use lower case for terms that are not 
defined therein, and would use upper case for terms that are defined. 
The Amendment would also simplify certain descriptions by removing 
extraneous words and statements that are repetitive. These minor, 
technical revisions would not alter the substance of the proposal.
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 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''),\9\ (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,\10\ and (iii) the process for the 
allocation of losses among Participants as provided in Rule 4.\11\ The 
R&W Plan

[[Page 38346]]

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.
---------------------------------------------------------------------------

    \9\ 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).
    \10\ See id.
    \11\ See Rule 4 (Participants Fund and Participants Investment), 
supra note 6. DTC is proposing changes to Rule 4 regarding 
allocation of losses in a separate filing submitted simultaneously 
with the Original Filing. See Securities Exchange Act Release Nos. 
82432 (January 2, 2018), 83 FR 884 (January 8, 2018) (SR-DTC-2017-
021) and 82579 (January 24, 2018), 83 FR 4310 (January 30, 2018) 
(SR-DTC-2017-803) (collectively referred to herein as the ``Loss 
Allocation Filing''). DTC has submitted an amendment to the Loss 
Allocation Filing. A copy of the amendment to the Loss Allocation 
Filing is available at https://www.dtcc.com/legal/sec-rule-filings.aspx. DTC expects the Commission to review both proposals, 
as amended, together, and, as such, the proposal described in this 
filing anticipates the approval and implementation of those proposed 
changes to the Rules.
---------------------------------------------------------------------------

    The development of the R&W Plan is facilitated by the Office of 
Recovery & Resolution Planning (``R&R Team'') of DTCC.\12\ 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.
---------------------------------------------------------------------------

    \12\ 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 \13\ by 
providing plans for the recovery and orderly wind-down of DTC.
---------------------------------------------------------------------------

    \13\ 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.\14\ 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.
---------------------------------------------------------------------------

    \14\ 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 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

[[Page 38347]]

applicability of these four criteria. Such critical services would 
include, for example, MMIs and Commercial Paper Processing,\15\ 
Mandatory and Voluntary Corporate Actions,\16\ Cash and Stock 
Distributions,\17\ and End of Day Net Money Settlement.\18\ The R&W 
Plan would also include a non-exhaustive list of DTC services that are 
not deemed critical.
---------------------------------------------------------------------------

    \15\ See Rule 9(C) (Transactions in MMI Securities), supra note 
6.
    \16\ See DTC Reorganizations Service Guide, available at 
www.dtcc.com/~/media/Files/Downloads/legal/service-guides/
Reorganizations.pdf.
    \17\ See DTC Distributions Service Guide, available at https://
www.dtcc.com/~/media/Files/Downloads/legal/service-guides/
Service%20Guide%20Distributions.pdf.
    \18\ 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.\19\ 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.
---------------------------------------------------------------------------

    \19\ 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.\20\ More generally, the Plan 
would state that the type of loss and the nature and circumstances of 
the events that lead to the loss would dictate the components of 
governance to address that loss, including the escalation path to 
authorize those actions. As described further below, both the Recovery 
Plan and the Wind-down Plan would describe the governance of 
escalations, decisions, and actions under each of those plans.
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    \20\ The Plan would state that these groups would be involved to 
address how to mitigate the financial impact of non-default losses, 
and in recommending mitigating actions, the Management Committee 
would consider information and recommendations from relevant subject 
matter experts based on the nature and circumstances of the non-
default event. Any necessary operational response to these events, 
however, would be managed in accordance with applicable incident 
response/business continuity process; for example, processes 
established by the DTCC Technology Risk Management group would be 
followed in response to a cyber event.
---------------------------------------------------------------------------

    Finally, the Plan would describe the role of the R&R Team in 
managing the overall recovery and wind-down program and plans for each 
of the Clearing Agencies.
DTC Recovery Plan
    The Recovery Plan is intended to be a roadmap of those actions that 
DTC may employ to monitor and, as needed, stabilize its financial 
condition. As each event that could lead to a financial loss could be 
unique in its circumstances, the Recovery Plan would not be 
prescriptive and would permit DTC to maintain flexibility in its use of 
identified tools and in the sequence in which such tools are used, 
subject to any conditions in the Rules or the contractual arrangement 
on which such tool is based. DTC's Recovery Plan would consist of (1) a 
description of the risk management surveillance, tools, and governance 
that DTC would employ across evolving stress scenarios that it may face 
as it transitions through a ``Crisis Continuum,'' described below; (2) 
a description of DTC's risk of losses that may result from non-default 
events, and the financial resources and recovery tools available to DTC 
to manage those risks and any resulting losses; and (3) an evaluation 
of the characteristics of the recovery tools that may be used in 
response to either losses arising out of a Participant Default (as 
defined below) or non-default losses, as described in greater detail 
below. In all cases, DTC would act in accordance with the Rules, within 
the governance structure described in the R&W Plan, and in accordance 
with applicable regulatory oversight to address each situation in order 
to best protect DTC, its Participants and the markets in which it 
operates.
    Managing Participant Default Losses and Liquidity Needs Through the 
Crisis Continuum. The Plan would describe the risk management 
surveillance, tools, and governance that DTC may employ across an 
increasing stress environment, which is referred to as the ``Crisis 
Continuum.'' This description would identify those tools that can be 
employed to mitigate losses, and mitigate or minimize liquidity needs, 
as the market environment becomes increasingly stressed. The phases of 
the Crisis Continuum would include (1) a stable market phase, (2) a 
stressed market phase, (3) a phase commencing with DTC's decision to 
cease to act for a Participant or Affiliated Family of Participants 
(referred to in the Plan as

[[Page 38348]]

the ``Participant Default phase''),\21\ 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 pursuant 
to the Rules.\22\ For ease of reference, the R&W Plan would, for 
purposes of the Plan, use the term ``Participant Default Losses'' to 
refer to losses that arise out of or relate to the Participant Default 
and resulting cease to act (including any losses that arise from 
liquidation of the Participant's Collateral).
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    \21\ The Plan defines an ``Affiliated Family'' of Participants 
as a number of affiliated entities that are all Participants of DTC.
    \22\ In the Plan, ``cease to act'' and the actions that may lead 
to such decision, are used within the context of 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 6. 
Further, the term ``Participant Default'' would also be used in the 
Plan as such term is defined in Rule 4, as proposed to be amended by 
the Loss Allocation filing, supra note 11.
---------------------------------------------------------------------------

    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.\23\ 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 \24\ and risk management controls, i.e., 
collateral haircuts, the Collateral Monitor \25\ and Net Debit Cap.\26\
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    \23\ 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).
    \24\ See Rule 4 (Participants Fund and Participants Investment), 
supra note 6.
    \25\ See Rule 1, Section 1, supra note 6. For DTC, credit risk 
and market risk are closely related, as DTC monitors credit 
exposures from Participants through these risk management controls, 
which limit Participant settlement obligations to the amount of 
available liquidity resources and require those obligations to be 
fully collateralized. The pledge or liquidation of collateral in an 
amount sufficient to restore liquidity resources depends on market 
values and demand, i.e., market risk exposure. Such risk management 
controls are part of DTC's 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).
    \26\ Id.
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    The Recovery Plan would outline the metrics and indicators that DTC 
has developed to evaluate a stress situation against established risk 
tolerance thresholds. Each risk mitigation tool identified in the 
Recovery Plan would include a description of the escalation thresholds 
that allow for effective and timely reporting to the appropriate 
internal management staff and committees, or to the Board. The Recovery 
Plan would make clear that these tools and escalation protocols would 
be calibrated across each phase of the Crisis Continuum. The Recovery 
Plan would also establish that DTC would retain the flexibility to 
deploy such tools either separately or in a coordinated approach, and 
to use other alternatives to these actions and tools as necessitated by 
the circumstances of a particular Participant Default event, in 
accordance with the Rules. Therefore, the Recovery Plan would both 
provide DTC with a roadmap to follow within each phase of the Crisis 
Continuum, and would permit it to adjust its risk management measures 
to address the unique circumstances of each event.
    The Recovery Plan would describe the conditions that mark each 
phase of the Crisis Continuum, and would identify actions that DTC 
could take as it transitions through each phase in order to both 
prevent losses from materializing through active risk management, and 
to restore the financial health of DTC during a period of stress.
    The stable market phase of the Crisis Continuum would describe 
active risk management activities in the normal course of business. 
These activities would include performing (1) backtests to evaluate the 
adequacy of the collateral level and the haircut sufficiency for 
covering market price volatility and (2) stress testing to cover market 
price moves under real historical and hypothetical scenarios to assess 
the haircut adequacy under extreme but plausible market conditions. The 
backtesting and stress testing results are escalated, as necessary, to 
internal and Board committees.\27\
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    \27\ 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).
---------------------------------------------------------------------------

    The Recovery Plan would describe some of the indicators of the 
stress 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.\28\ 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 Defaulting Participant's Collateral 
securities through close collaboration and coordination across multiple 
functions. Management of liquidity risk through this phase would 
involve ongoing monitoring of, among other things, the adequacy of the 
Participants Fund and risk controls, and the Recovery Plan would 
identify certain actions DTC may deploy as it deems necessary to 
mitigate a potential liquidity shortfall, which

[[Page 38349]]

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.
---------------------------------------------------------------------------

    \28\ See Rule 10 (Discretionary Termination); Rule 11 (Mandatory 
Termination); Rule 12 (Insolvency), supra note 6.
---------------------------------------------------------------------------

    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 remaining after 
application of the Defaulting Participant's resources be satisfied 
first by applying a ``Corporate Contribution,'' and then, if necessary, 
by allocating remaining losses among the membership in accordance with 
such Rule 4, as amended.\29\
---------------------------------------------------------------------------

    \29\ See supra note 11. 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 9; 17 CFR 240.17Ad-22(e)(15).
---------------------------------------------------------------------------

    In order to provide for an effective and timely recovery, the 
Recovery Plan would describe the period of time that would occur near 
the end of the Participant Default phase, 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 (referred 
to in the Plan as the ``Recovery Corridor''). The Recovery Plan would 
then describe the recovery phase of the Crisis Continuum, 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.'' \30\ The recovery phase would describe actions that DTC may 
take to avoid entering into a wind-down of its business.
---------------------------------------------------------------------------

    \30\ 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 11.
---------------------------------------------------------------------------

    DTC expects that significant deterioration of liquidity resources 
would cause it to enter the Recovery Corridor. As such, the Plan would 
describe the actions DTC may take aimed at replenishing those resources 
Recovery Corridor indicators 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 corridor indicator metrics.
    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,\31\ 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.
---------------------------------------------------------------------------

    \31\ 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.
---------------------------------------------------------------------------

    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 at the 
time, 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, which would occur when and in the order provided in Rule 4, as 
amended.\32\ 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 as appropriate during 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 \33\ and Net Credit Reductions.\34\ The Recovery Plan would 
state that the availability and capacity of these liquidity tools 
cannot be accurately predicted and are dependent on the circumstances 
of the applicable stress period, including market price volatility, 
actual or perceived

[[Page 38350]]

disruptions in financial markets, the costs to DTC of utilizing these 
tools, and any potential impact on DTC's credit rating.
---------------------------------------------------------------------------

    \32\ 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 11.
    \33\ See Securities Exchange Act Release No. 80605 (May 5, 
2017), 82 FR 21850 (May 10, 2017) (SR-DTC-2017-802; SR-NSCC-2017-
802).
    \34\ DTC may borrow amounts needed to complete settlement from 
Participants by net credit reductions to their settlement accounts, 
secured by the Collateral of the defaulting Participant. See 
Securities Exchange Act Release Nos. 24689 (July 9, 1987), 52 FR 
26613 (July 15, 1987) (SR-DTC-87-4); 41879 (September 15, 1999), 64 
FR 51360 (September 22, 1999) (SR-DTC-99-15); 42281 (December 28, 
1999), 65 FR 1420 (January 10, 2000) (SR-DTC-99-25).
---------------------------------------------------------------------------

    As stated above, the Recovery Plan would state that DTC will have 
entered the recovery phase on the date that it issues the first Loss 
Allocation Notice of the second loss allocation round with respect to a 
given Event Period. The Recovery Plan would provide that, during the 
recovery phase, DTC would continue and, as needed, enhance, the 
monitoring and remedial actions already described in connection with 
previous phases of the Crisis Continuum, and would remain in the 
recovery phase until its financial resources are expected to be or are 
fully replenished, or until the Wind-down Plan is triggered, as 
described below.
    The Recovery Plan would describe governance for the actions and 
tools that may be employed within each phase of 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 various indicators and metrics applicable to that phase 
of the Crisis Continuum, and would follow relevant 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.\35\ 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.
---------------------------------------------------------------------------

    \35\ This ``three lines of defense'' approach to risk management 
includes (1) a first line of defense comprised of the various 
business lines and functional units that support the products and 
services offered by DTC; (2) a second line of defense comprised of 
control functions that support DTC, including the risk management, 
legal and compliance areas; and (3) a third line of defense, which 
is performed by an internal audit group. 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).
---------------------------------------------------------------------------

    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,\36\ (b) the Corporate 
Contribution,\37\ 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.\38\
---------------------------------------------------------------------------

    \36\ See supra note 29.
    \37\ See supra note 29.
    \38\ See supra note 11.
---------------------------------------------------------------------------

    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.\39\ 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 is expected to exceed 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.\40\
---------------------------------------------------------------------------

    \39\ See supra note 9.
    \40\ See supra note 11.
---------------------------------------------------------------------------

    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 38351]]

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.\41\ 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.
---------------------------------------------------------------------------

    \41\ Standards for Covered Clearing Agencies, Securities 
Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786 
(October 13, 2016) (S7-03-14).
---------------------------------------------------------------------------

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,\42\ 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.
---------------------------------------------------------------------------

    \42\ 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.\43\ 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.
---------------------------------------------------------------------------

    \43\ 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 \44\ 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.\45\ 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.\46\
---------------------------------------------------------------------------

    \44\ 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.
    \45\ 11 U.S.C. 1101 et seq.
    \46\ See id. at 363.
---------------------------------------------------------------------------

    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 38352]]

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.\47\
---------------------------------------------------------------------------

    \47\ 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.
---------------------------------------------------------------------------

    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.\48\ 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.\49\
---------------------------------------------------------------------------

    \48\ See supra note 9.
    \49\ See supra note 9.
---------------------------------------------------------------------------

    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 38353]]

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 38354]]

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.\50\
---------------------------------------------------------------------------

    \50\ 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. The 
purpose of the limitation of liability is to facilitate and protect 
DTC's ability to act expeditiously in response to extraordinary events. 
As noted, such limitation of liability would be available only 
following triggering of the Wind-down Plan. In addition, and as a 
separate matter, the limitation of liability provides Participants with 
transparency for the unlikely situation when those extraordinary events 
could occur, as well supporting the legal framework within which DTC 
would take such actions. These provisions, collectively, are designed 
to enable DTC to take such acts as the Board determines necessary to 
effectuate an orderly transfer and wind-down of its business should 
recovery efforts prove unsuccessful.
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, including notification when an 
event is no longer continuing and the relevant actions are terminated. 
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 and of actions taken or intended to 
be taken thereunder.
    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. The purpose of the limitation of liability would be similar to 
the purpose of the analogous provision in the proposed Wind-down Rule, 
which is to facilitate and protect

[[Page 38355]]

DTC's ability to act expeditiously in response to extraordinary events.
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 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 Title VIII 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.\51\ Section 805(a)(2) of the Clearing Supervision Act \52\ 
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 \53\ 
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.
---------------------------------------------------------------------------

    \51\ 12 U.S.C. 5461(b).
    \52\ Id. at 5464(a)(2).
    \53\ 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.\54\
---------------------------------------------------------------------------

    \54\ 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,\55\ the R&W Plan and each of the 
Proposed Rules are consistent with Rule 17Ad-22(e)(3)(ii) under the 
Act,\56\ and the R&W Plan is consistent with Rule 17Ad-22(e)(15)(ii) 
under the Act,\57\ for the reasons described below.
---------------------------------------------------------------------------

    \55\ 15 U.S.C. 78q-1(b)(3)(F).
    \56\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \57\ 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.\58\ 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

[[Page 38356]]

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.
---------------------------------------------------------------------------

    \58\ 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 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.\59\
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    \59\ 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.\60\ The R&W Plan and each 
of the Proposed Rules are designed to meet the requirements of Rule 
17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------

    \60\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    The R&W Plan would be maintained by DTC in compliance with Rule 
17Ad-22(e)(3)(ii) in that it provides plans for the recovery and 
orderly wind-down of DTC necessitated by credit losses, liquidity 
shortfalls, losses from general business risk, or any other losses, as 
described above.\61\ Specifically, the Recovery Plan would define the 
risk management activities, stress conditions and indicators, and tools 
that DTC may use to address stress scenarios that could eventually 
prevent it from being able to provide its critical services as a going 
concern. Through the framework of the Crisis Continuum, the Recovery 
Plan would address measures that DTC may take to address risks of 
credit losses and liquidity shortfalls, and other losses that could 
arise from a Participant Default. The Recovery Plan would also address 
the management of general business risks and other non-default risks 
that could lead to losses.
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    \61\ Id.
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    The Wind-down Plan would be triggered by a determination by the 
Board that recovery efforts have not been, or are unlikely to be, 
successful in returning DTC to viability as a going concern. Once 
triggered, the Wind-down Plan would set forth clear mechanisms for the 
transfer of DTC's membership and business, and would be designed to 
facilitate continued access to DTC's critical services and to minimize 
market impact of the transfer. By establishing the framework and 
strategy for the execution of the transfer and wind-down of DTC in 
order to facilitate continuous access to DTC's critical services, the 
Wind-down Plan establishes a plan for the orderly wind-down of DTC. 
Therefore, DTC believes the R&W Plan would provide plans for the 
recovery and orderly wind-down of the covered clearing agency 
necessitated by credit losses, liquidity shortfalls, losses from 
general business risk, or any other losses, and, as such, meets the 
requirements of Rule 17Ad-22(e)(3)(ii).\62\
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    \62\ Id.
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    As described in greater detail above, the Proposed Rules are 
designed to facilitate the execution of the R&W Plan, provide 
Participants with transparency regarding the material provisions of the 
Plan, and provide DTC with a legal basis for implementation of those 
provisions. As such, DTC also believes the Proposed Rules meet the 
requirements of Rule 17Ad-22(e)(3)(ii).\63\
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    \63\ 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,\64\ 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.
---------------------------------------------------------------------------

    \64\ 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

[[Page 38357]]

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).\65\
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    \65\ Supra note 41.
---------------------------------------------------------------------------

    Therefore, DTC believes the R&W Plan and each of the Proposed Rules 
are consistent with Rule 17Ad-22(e)(3)(ii).\66\
---------------------------------------------------------------------------

    \66\ 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 be sufficient to ensure a recovery or orderly 
wind-down of critical operations and services of the covered clearing 
agency.\67\ 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).\68\
---------------------------------------------------------------------------

    \67\ Id. at 240.17Ad-22(e)(15)(ii).
    \68\ Id.
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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. The clearing agency shall not implement the proposed change 
if the Commission has any objection to the proposed change.
    A proposed change may be implemented in less than 60 days from the 
date the advance notice is filed, or the date further information 
requested by the Commission is received, if the Commission notifies the 
clearing agency in writing that it does not object to the proposed 
change and authorizes the clearing agency to implement the proposed 
change on an earlier date, subject to any conditions imposed by the 
Commission.
    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.

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 August 21, 2018.

    By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-16708 Filed 8-3-18; 8:45 am]
 BILLING CODE 8011-01-P

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