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, 38357-38375 [2018-16714]
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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
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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
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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
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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
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, and on July 6, 2018,
submitted a response to the
Commission’s 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.4
Securities Exchange Act Release No. 82670
(February 8, 2018), 83 FR 6626 (February 14, 2018)
(SR–DTC–2017–022; SR–FICC–2017–022; SR–
NSCC–2017–018). 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. 82914 (March 20, 2018), 83 FR 12978 (March
26, 2018) (SR–DTC–2017–022). 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 Nos. 83510
(June 25, 2018), 83 FR 30791 (June 29, 2018) (SR–
DTC–2017–022; SR–FICC–2017–022; SR–NSCC–
2017–018). On June 28, 2018, DTC filed
Amendment No. 1 to the Proposed Rule Change.
See Securities Exchange Act Release No. 83629
(July 13, 2018), 83 FR 34246 (July 19, 2018) (SR–
DTC–2017–022). 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. 82582
(January 24, 2018), 83 FR 4297 (January 30, 2018)
(SR–DTC–2017–804). 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
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. 12 U.S.C.
5465(e)(1)(E) and (G); see Memorandum from the
Office of Clearance and Settlement Supervision,
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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
This advance notice is filed by The
Depository Trust Company (‘‘DTC’’) in
connection with proposed modifications
to the Rules, By-Laws and Organization
Certificate of DTC (‘‘Rules’’).5 The
proposed rule change would revise Rule
4 (Participants Fund and Participants
Investment) to (i) provide separate
sections for (x) the use of the
Participants Fund as a liquidity resource
for settlement and (y) loss allocation
among Participants of losses and
liabilities arising out of Participant
defaults or due to non-default events;
and (ii) enhance the resiliency of DTC’s
loss allocation process so that DTC can
take timely action to contain multiple
loss events that occur in succession
during a short period of time. In
connection therewith, the proposed rule
change would (i) align the loss
allocation rules of the three clearing
agencies of The Depository Trust &
Clearing Corporation (‘‘DTCC’’), namely
DTC, National Securities Clearing
Corporation (‘‘NSCC’’), and Fixed
Income Clearing Corporation (‘‘FICC’’)
(collectively, the ‘‘DTCC Clearing
Agencies’’), so as to provide consistent
treatment, to the extent practicable and
appropriate, especially for firms that are
participants of two or more DTCC
Clearing Agencies, (ii) increase
transparency and accessibility of the
provisions relating to the use of the
Participants Fund as a liquidity resource
for settlement and the loss allocation
provisions, by enhancing their
readability and clarity, (iii) require a
defined corporate contribution to losses
and liabilities that are incurred by DTC
prior to any allocation among
Participants, whether such losses and
liabilities arise out of Participant
defaults or due to non-default events,
(iv) reduce the time within which DTC
is required to return a former
Participant’s Actual Participants Fund
Deposit, and (v) make conforming and
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.
5 Each capitalized term not otherwise defined
herein has its respective meaning as set forth in the
Rules, available at https://www.dtcc.com/legal/rulesand-procedures.aspx.
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technical changes. In addition, the
proposed rule change would amend
Section 6 of Rule 4 to clarify the
requirements for a Participant that
wants to voluntarily terminate its
business with DTC, and to align, where
appropriate, with the proposed
voluntary termination provisions of the
NSCC and FICC rules. The proposed
rule change would also amend Rule 1
(Definitions; Governing Law) to add
cross-references to terms that would be
defined in proposed Rule 4, and would
amend Rule 2 (Participants and
Pledgees), in relevant part, to align with
proposed Section 6 of Rule 4, as
discussed 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
Written comments relating to this
proposal have not been solicited or
received. 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 previously filed by DTC on
December 18, 2017.6 This Amendment
amends and replaces the Advance
Notice in its entirety. DTC submits this
Amendment in order to further clarify
the operation of the proposed rule
changes on loss allocation by providing
additional information and examples.
This Amendment would also clarify the
requirements for a Participant that
wants to voluntarily terminate its
business with DTC. In particular, this
Amendment would:
(i) Clarify that the term ‘‘Participant
Default,’’ referring to the failure of a
Participant to satisfy any obligation to
6 See Securities Exchange Act Release No. 82582
(January 24, 2018), 83 FR 4297 (January 30, 2018)
(SR–DTC–2017–804).
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DTC, includes the failure of a Defaulting
Participant to satisfy its obligations as
provided in Rule 9(B).7
(ii) Add the defined term ‘‘CTA
Participant,’’ which would be defined as
a Participant for which the Corporation
has ceased to act pursuant to Rule 10
(Discretionary Termination), Rule 11
(Voluntary Termination) or Rule 12
(Insolvency).
(iii) Clarify which Participants would
be subject to loss allocation with respect
to Default Loss Events (defined below)
and Declared Non-Default Loss Events
(defined below) occurring during an
Event Period (defined below).
Specifically, pursuant to the
Amendment, proposed Section 5 of Rule
4 would provide that each Participant
that is a Participant on the first day of
an Event Period would be obligated to
pay its pro rata share of losses and
liabilities arising out of or relating to
each Default Loss Event (other than a
Default Loss Event with respect to
which it is the CTA Participant) and
each Declared Non-Default Loss Event
occurring during the Event Period. In
addition, proposed Section 5 of Rule 4
would make it clear that any CTA
Participant for which DTC ceases to act
on a non-Business Day, triggering an
Event Period that commences on the
next Business Day, would be deemed to
be a Participant on the first day of that
Event Period.
(iv) Clarify the obligations and Loss
Allocation Cap (defined below) of a
Participant that terminates its business
with DTC in respect of a loss allocation
round. Specifically, pursuant to the
Amendment, the Participant would
nevertheless remain obligated for its pro
rata share of losses and liabilities with
respect to any Event Period for which it
is otherwise obligated under Rule 4;
however, its aggregate obligation would
be limited to the amount of its Loss
Allocation Cap, as fixed in the loss
allocation round for which it withdrew.
(v) Clarify that each CTA Participant
would be obligated to DTC for the entire
amount of any loss or liability incurred
by DTC arising out of or relating to any
Default Loss Event with respect to such
CTA Participant. To the extent that such
loss or liability is not satisfied pursuant
to proposed Section 3 of Rule 4, DTC
would apply a Corporate Contribution
and charge the remaining amount of
7 Although Rule 4 is being amended to align with
NSCC and FICC, where appropriate, a ‘‘Defaulting
Participant’’ is not analogous to a ‘‘Defaulting
Member’’ under the proposed NSCC and FICC rules.
This is because the term ‘‘Defaulting Participant’’
already has a specific meaning pursuant to Rule
9(B) which is necessary and appropriate to that
Rule. Instead, the proposed new term ‘‘CTA
Participant’’ would be analogous to the NSCC and
FICC proposed term ‘‘Defaulting Member.’’
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such loss or liability as provided in
proposed Section 5 of Rule 4.
(vi) Clarify that, although a CTA
Participant would not be allocated a
ratable share of losses and liabilities
arising out of or relating to its own
Default Loss Event, it would remain
obligated to DTC for such losses and
liabilities. More particularly, pursuant
to the Amendment, the proposed rule
change would provide that no loss
allocation under proposed Rule 4 would
constitute a waiver of any claim DTC
may have against a Participant for any
losses or liabilities to which the
Participant is subject under DTC Rules
and Procedures, including, without
limitation, any loss or liability to which
it may be subject under proposed Rule
4.
(vii) For enhanced transparency and
to align, where appropriate, with the
rules of NSCC and FICC, clarify the
process for the Voluntary Retirement
(defined below) of a Participant.
In addition, pursuant to the
Amendment, DTC is making other
clarifying and technical changes to the
proposed rule change, as proposed
herein.
Nature of the Proposed Change
The proposed rule change would
revise Rule 4 (Participants Fund and
Participants Investment) to (i) provide
separate sections for (x) the use of the
Participants Fund as a liquidity resource
for settlement and (y) loss allocation
among Participants of losses and
liabilities arising out of Participant
defaults or due to non-default events;
and (ii) enhance the resiliency of DTC’s
loss allocation process so that DTC can
take timely action to contain multiple
loss events that occur in succession
during a short period of time. In
connection therewith, the proposed rule
change would (i) align the loss
allocation rules of the DTCC Clearing
Agencies, so as to provide consistent
treatment, to the extent practicable and
appropriate, especially for firms that are
participants of two or more DTCC
Clearing Agencies,8 (ii) increase
8 On December 18, 2017, NSCC and FICC
submitted proposed rule changes and advance
notices to enhance their rules regarding allocation
of losses. Securities Exchange Act Release Nos.
82428 (January 2, 2018), 83 FR 897 (January 8,
2018) (SR–NSCC–2017–018), and 82584 (January
24, 2018), 83 FR 4377 (January 30, 2018) (SR–
NSCC–2017–806); Securities Exchange Act Release
Nos. 82427 (January 2, 2018), 83 FR 854 (January
8, 2018) (SR–FICC–2017–022) and 82583 (January
24, 2018), 83 FR 4358 (January 30, 2018) (SR–FICC–
2017–806). On June 28, 2018, NSCC and FICC filed
proposed amendments to the proposed rule changes
and advance notices with the Commission and the
Board of Governors of the Federal Reserve System,
respectively, available at https://www.dtcc.com/
legal/sec-rule-filings.aspx.
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transparency and accessibility of the
provisions relating to the use of the
Participants Fund as a liquidity resource
for settlement and the loss allocation
provisions, by enhancing their
readability and clarity, (iii) require a
defined corporate contribution to losses
and liabilities that are incurred by DTC
prior to any allocation among
Participants, whether such losses and
liabilities arise out of Participant
defaults or due to non-default events,
(iv) reduce the time within which DTC
is required to return a former
Participant’s Actual Participants Fund
Deposit, and (v) make conforming and
technical changes. In addition, the
proposed rule change would amend
Section 6 of Rule 4 to clarify the
requirements for a Participant that
wants to voluntarily terminate its
business with DTC, and to align, where
appropriate, with the proposed
voluntary termination provisions of the
NSCC and FICC rules. The proposed
rule change would also amend Rule 1
(Definitions; Governing Law) to add
cross-references to terms that would be
defined in proposed Rule 4, and would
amend Rule 2 (Participants and
Pledgees), in relevant part, to align with
proposed Section 6 of Rule 4, as
discussed below.
(i) Background
Current Rule 4 provides a single set of
tools and a common process for the use
of the Participants Fund for both
liquidity purposes to complete
settlement among non-defaulting
Participants, if one or more Participants
fails to settle,9 and for the satisfaction of
9 DTC is a central securities depository providing
key services that are structured to support daily
settlement of book-entry transfers of securities, in
accordance with its Rules and Procedures. In
particular, Rule 9(A) (Transactions in Securities and
Money Payments), Rule 9(B) (Transactions in
Eligible Securities), Rule 9(C) (Transactions in MMI
Securities), Rule 9(D) (Settling Banks), and Rule
9(E) (Clearing Agency Agreements) provide the
mechanism to achieve a ‘‘DVP Model 2 Deferred
Net Settlement System’’ (as defined in Annex D of
the Principles for Financial Market Infrastructures
issued by The Committee on Payments and Market
Infrastructures and the Technical Committee of the
International Organization of Securities
Commissions (April 2012), available at https://
www.bis.org/cpmi/publ/d101a.pdf. Briefly, in
relevant part, Rule 9(B) provides that ‘‘[e]ach
Participant and the Corporation shall settle the
balance of the Settlement Account of the Participant
on a daily basis in accordance with these Rules and
the Procedures. Except as provided in the
Procedures, the Corporation shall not be obligated
to make any settlement payments to any
Participants until the Corporation has received all
of the settlement payments that Settling Banks and
Participants are required to make to the
Corporation.’’ Supra note 5. Pursuant to these
provisions of Rule 9(B), securities will be delivered
to Participants that satisfy their settlement
obligations in the end-of-day net settlement process.
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losses and liabilities due to Participant
defaults 10 or certain other losses or
liabilities incident to the business of
DTC.11 The proposed rule change would
amend and add provisions to separate
use of the Participants Fund as a
liquidity resource to complete
settlement, reflected in proposed
Section 4 of Rule 4, and for loss
allocation, reflected in proposed Section
5 of Rule 4. There wouldn’t be any
substantive change to the rights and
obligations of Participants under
proposed Sections 4 and 5 of Rule 4.12
10 The failure of a Participant to satisfy its
settlement obligation constitutes a liability to DTC.
Insofar as DTC undertakes to complete settlement
among Participants other than the Participant that
failed to settle, that liability may give rise to losses
as well. DTC is designed to provide settlement
finality at the end of the day and notwithstanding
the failure to settle of a Participant or Affiliated
Family of Participants with the largest net
settlement obligation, a ‘‘cover 1’’ standard. There
are no reversals of deliveries; a Participant that fails
to settle will not receive securities that were
intended to be delivered to it, because it has not
paid for them. These securities, among others, serve
as collateral for DTC to use to secure a borrowing
of funds in order, in accordance with its Rules and
Procedures, to settle with non-defaulting
Participants (including those delivering Participants
that delivered to the non-settling Participant). To
this end, delivery versus payment transactions
(‘‘DVP’’) will not be processed intraday to a
receiving Participant that will incur a related
payment obligation unless that Participant satisfies
risk management controls. The two risk
management controls are the Collateral Monitor and
Net Debit Cap. Net Debit Caps limit the potential
settlement obligation of any Participant to an
amount for which DTC has sufficient liquidity
resources to cover this risk. The Collateral Monitor
tests whether a Participant has sufficient collateral
for DTC to pledge or liquidate if that Participant
were to fail to meet its settlement obligation. To
process a DVP, the value of the delivery that is
debited to the receiving Participant cannot cause
the net debit balance of the Participant to exceed
its Net Debit Cap, and the amount of the net debit
balance after giving effect to the debit must be fully
collateralized. Accordingly, DTC may incur a
liability or loss whenever it completes settlement
despite the failure to settle of a Participant, or
Affiliated Family of Participants, because it is either
using the Participants Fund deposits of other
Participants in the manner specified in existing and
proposed Rule 4 and/or borrowing the necessary
funds. DTC obligations under the line of credit
include the obligation to pay interest on loans
outstanding and to repay the loan; the Participants
Fund is designed as not only a direct liquidity
resource but as a back-up liquidity resource to
satisfy these liabilities. As to the Participants Fund
itself, DTC undertakes in Section 9 of existing and
proposed Rule 4, to restore funds to Participants
whose deposits may have been charged if there is
ultimately any excess recovery. It should be noted
that the Defaulting Participant remains principally
obligated for all losses, costs and expenses
associated with its Participant Default and, so, a
recovery out of the estate of a Defaulting Participant
is at least a hypothetical possibility.
11 Section 1(f) of Rule 4 defines the term
‘‘business’’ with respect to DTC as ‘‘the doing of all
things in connection with or relating to the
Corporation’s performance of the services specified
in the first and second paragraphs of Rule 6 or the
cessation of such services.’’ Supra note 5.
12 It may be noted that absent extreme
circumstances, DTC believes that it is unlikely that
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The proposed rule changes reinforce the
distinction, conceptual and sequential,
between the mechanisms to complete
settlement on a Business Day and to
mutualize losses that may result from a
failure to settle, or other loss-generating
events. The change is also proposed so
that the loss allocation provisions of
proposed Section 5 of Rule 4 more
closely align to similar provisions of the
NSCC and FICC rules, to the extent
appropriate.
The proposed rule change would
retain the core principles of current
Rule 4 for both application of the
Participants Fund as a liquidity resource
to complete settlement and for loss
allocation, while clarifying or refining
certain provisions and introducing
certain new concepts relating to loss
allocation. In connection with the use of
the Participants Fund as a liquidity
resource to complete settlement when a
Participant fails to settle, the proposed
rule would introduce the term ‘‘pro rata
settlement charge,’’ for the use of the
Participants Fund to complete
settlement as apportioned among nondefaulting Participants. The existing
term generically applied to such a use
or to a loss allocation is simply a ‘‘pro
rata charge’’.13
For loss allocation, the proposed rule
change, like current Rule 4, would
continue to apply to both default and
non-default losses and liabilities, and, to
the extent allocated among Participants,
would be charged ratably in accordance
with their Required Participants Fund
Deposits.14 A new provision would
require DTC to contribute to a loss or
liability, either arising from a
Participant default or non-default event,
prior to any allocation among
Participants. The proposed rule change
would also introduce the new concepts
of an ‘‘Event Period’’ and a ‘‘round’’ to
address the allocation of losses arising
from multiple events that occur in
succession during a short period of
time. These proposed rule changes
would be substantially similar in these
respects to analogous proposed rule
changes for NSCC and FICC.
DTC would need to act under proposed Sections 4
or 5 of Rule 4.
13 See Rule 4, Section 5, supra note 5.
14 It may be noted that for NSCC and FICC, the
proposed rule changes for loss allocation include a
‘‘look-back’’ period to calculate a member’s pro rata
share and cap. The concept of a look-back or
average is already built into DTC’s calculation of
Participants Fund requirements, which are based on
a rolling sixty (60) day average of a Participant’s six
highest intraday net debit peaks.
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Current Rule 4 Provides for Application
of the Participants Fund Through Pro
Rata Charges
Current Rule 4 addresses the
Participants Fund and Participants
Investment requirements and, among
other things, the permitted uses of the
Participants Fund and Participants
Investment.15 Pursuant to current Rule
4, DTC maintains a cash Participants
Fund. The Required Participants Fund
Deposit for any Participant is based on
the liquidity risk it poses to DTC
relative to other Participants.
Default of a Participant. Under
current Section 3 of Rule 4, if a
Participant is obligated to DTC and fails
to satisfy any obligation, DTC may, in
such order and in such amounts as DTC
shall determine in its sole discretion: (a)
Apply some or all of the Actual
Participants Fund Deposit of such
Participant to such obligation; (b) Pledge
some or all of the shares of Preferred
Stock of such Participant to its lenders
as collateral security for a loan under
the End-of-Day Credit Facility; 16 and/or
(c) sell some or all of the shares of
Preferred Stock of such Participant to
other Participants (who shall be
required to purchase such shares pro
rata their Required Preferred Stock
Investments at the time of such
purchase), and apply the proceeds of
such sale to satisfy such obligation.
Application of the Participants Fund.
Current Section 4 of Rule 4 addresses
the application of the Participants Fund
if DTC incurs a loss or liability, which
would include application of the
Participants Fund to complete
settlement 17 or the allocation of losses
once determined, including non-default
losses. For both liquidity and loss
scenarios, current Section 4 of Rule 4
15 Each Participant is required to invest in DTC
Series A Preferred Stock, ratably on a basis
calculated in substantially the same manner as the
Required Participants Fund Deposit. The Preferred
Stock constitutes capital of DTC and is also
available for use as provided in current and
proposed Section 3 of Rule 4. This proposed rule
change does not alter the Required Preferred Stock
Investment.
16 As part of its liquidity risk management regime,
DTC maintains a 364-day committed revolving line
of credit with a syndicate of commercial lenders,
renewed every year. The committed aggregate
amount of the End-of-Day Credit Facility (currently
$1.9 billion) together with the Participants Fund
constitute DTC’s liquidity resources for settlement.
Based on these amounts, DTC sets Net Debit Caps
that limit settlement obligations.
17 In contrast to NSCC and FICC, DTC is not a
central counterparty and does not guarantee
obligations of its membership. The Participants
Fund is a mutualized pre-funded liquidity and loss
resource. As such, in contrast to NSCC and FICC,
DTC does not have an obligation to ‘‘repay’’ the
Participants Fund, and the application of the
Participants Fund does not convert to a loss. See
supra note 10.
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provides that an application of the
Participants Fund would be apportioned
among Participants ratably in
accordance with their Required
Participants Fund Deposits, less any
additional amount that a Participant
was required to Deposit to the
Participants Fund pursuant to Section 2
of Rule 9(A).18 It also provides for the
optional use of an amount of DTC’s
retained earnings and undivided profits.
After the Participants Fund is applied
pursuant to current Section 4, DTC must
promptly notify each Participant and
the Commission of the amount applied
and the reasons therefor.
Current Rule 4 further requires
Participants whose Actual Participants
Fund Deposits have been ratably
charged to restore their Required
Participants Fund Deposits, if such
charges create a deficiency. Such
payments are due upon demand.
Iterative pro rata charges relating to the
same loss or liability are permitted in
order to satisfy the loss or liability.
Rule 4 currently provides that a
Participant may, within ten (10)
Business Days after receipt of notice of
any pro rata charge, notify DTC of its
election to terminate its business with
DTC, and the exposure of the
terminating Participant for pro rata
charges would be capped at the greater
of (a) the amount of its Aggregate
Required Deposit and Investment, as
fixed immediately prior to the time of
the first pro rata charge, plus 100% of
the amount thereof, or (b) the amount of
all prior pro rata charges attributable to
the same loss or liability with respect to
which the Participant has not timely
exercised its right to terminate.
Overview of the Proposed Rule Changes
sradovich on DSK3GMQ082PROD with NOTICES
A. Application of Participants Fund to
Participant Default and for Settlement
Proposed Section 3 of Rule 4 would
retain the concept that when a
Participant is obligated to DTC and fails
to satisfy such obligation, which would
be defined as a ‘‘Participant Default,’’
DTC may apply the Actual Participants
Fund Deposit of the Participant to such
18 Section 2 of Rule 9(A) provides, in part, ‘‘At the
request of the Corporation, a Participant or Pledgee
shall immediately furnish the Corporation with
such assurances as the Corporation shall require of
the financial ability of the Participant or Pledgee to
fulfill its commitments and shall conform to any
conditions which the Corporation deems necessary
for the protection of the Corporation, other
Participants or Pledgees, including deposits to the
Participants Fund . . .’’ Supra note 5. Pursuant to
the proposed rule change, the additional amount
that a Participant is required to Deposit to the
Participants Fund pursuant to Section 2 of Rule
9(A) would be defined as an ‘‘Additional
Participants Fund Deposit.’’ This is not a new
concept, only the addition of a defined term for
greater clarity.
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obligation to satisfy the Participant
Default. The proposed rule change
would reflect that the defined term
‘‘Participant Default,’’ referring to the
failure of a Participant to satisfy any
obligation to DTC, includes the failure
of a Defaulting Participant to satisfy its
obligations as provided in Rule 9(B)
(where ‘‘Defaulting Participant’’ is
defined). The proposed definition of
‘‘Participant Default’’ is for drafting
clarity and use in related provisions of
proposed Rule 4.
Proposed Section 4 would address the
situation of a Defaulting Participant
failure to settle (which is one type of
Participant Default) if the application of
the Actual Participants Fund Deposit of
that Defaulting Participant, pursuant to
proposed Section 3, is not sufficient to
complete settlement among Participants
other than the Defaulting Participant
(each, a ‘‘non-defaulting Participant’’).19
Proposed Section 4 would expressly
state that the Participants Fund shall
constitute a liquidity resource which
may be applied by DTC, in such
amounts as it may determine, in its sole
discretion, to fund settlement among
non-defaulting Participants in the event
of the failure of a Defaulting Participant
to satisfy its settlement obligation on
any Business Day. Such an application
of the Participants Fund would be
charged ratably to the Actual
Participants Fund Deposits of the nondefaulting Participants on that Business
Day. The pro rata charge per nondefaulting Participant would be based
on the ratio of its Required Participants
Fund Deposit to the sum of the Required
Participants Fund Deposits of all such
Participants on that Business Day
(excluding any Additional Participants
Fund Deposits in both the numerator
and denominator of such ratio). The
proposed rule change would identify
this as a ‘‘pro rata settlement charge,’’ in
order to distinguish application of the
Participants Fund to fund settlement
from pro rata loss allocation charges that
19 As described above, proposed Rule 4 splits the
liquidity and loss provisions to more closely align
to similar loss allocation provisions in NSCC and
FICC rules. Pursuant to the proposed rule change,
DTC would also align, where appropriate, the
liquidity and loss provisions within proposed Rule
4. DTC would retain the existing Rule 4 concepts
of calculating the ratable share of a Participant,
charging each non-defaulting Participant a pro rata
share of an application of the Participants Fund to
complete settlement, providing notice to
Participants of such charge, and providing each
Participant the option to cap its liability for such
charges by electing to terminate its business with
DTC. However, pursuant to the proposed rule
change, DTC would modify these concepts and
certain associated processes to more closely align
with the analogous proposed loss allocation
provisions in proposed Rule 4 (e.g., Loss Allocation
Notice, Loss Allocation Termination Notification
Period, and Loss Allocation Cap).
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38361
would be established in proposed
Section 5 of Rule 4.
The calculation of each nondefaulting Participant’s pro rata
settlement charge would be similar to
the current Section 4 calculation of a
pro rata charge except that, for greater
simplicity, it would not include the
current distinction for common
members of another clearing agency
pursuant to a Clearing Agency
Agreement.20 For enhanced clarity as to
the date of determination of the ratio, it
would be based on the Required
Participants Fund Deposits as fixed on
the Business Day of the application of
the Participants Fund, as opposed to the
current language ‘‘at the time the loss or
liability was discovered.’’ 21
The proposed rule change would
retain the concept that requires DTC,
following the application of the
Participants Fund to complete
settlement, to notify each Participant
and the Commission of the charge and
the reasons therefor (‘‘Settlement Charge
Notice’’).
The proposed rule change also would
retain the concept of providing each
non-defaulting Participant an
opportunity to elect to terminate its
business with DTC and thereby cap its
exposure to further pro rata settlement
charges. The proposed rule change
would shorten the notification period
for the election to terminate from ten
(10) Business Days to five (5) Business
Days,22 and would also change the
beginning date of such notification
period from the receipt of the notice to
the date of the issuance of the
Settlement Charge Notice.23 A
Participant that elects to terminate its
business with DTC would, subject to its
cap, remain responsible for (i) its pro
rata settlement charge that was the
subject of the Settlement Charge Notice
20 Rule 4, Section 4(a)(1), supra note 5. DTC has
determined that this option is unnecessary because,
in practice, DTC would never have liability under
a Clearing Agency Agreement that exceeds the
excess assets of the Participant that defaulted.
21 DTC believes that this change would provide
an objective date that is more appropriate for the
application of the Participants Fund to complete
settlement, because the ‘‘time the loss or liability
was discovered’’ would necessarily have to be the
day the Participants Fund was applied to complete
settlement.
22 DTC believes this shorter period would be
sufficient for a Participant to decide whether to give
notice to terminate its business with DTC in
response to a settlement charge. In addition, a five
(5) Business Day pro rata settlement charge
notification period would conform to the proposed
loss allocation notification period in this proposed
rule change and in the proposed rule changes for
NSCC and FICC. See infra note 37.
23 DTC believes that setting the start date of the
notification period to an objective date would
enhance transparency and provide a common
timeframe to all affected Participants.
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and (ii) all other pro rata settlement
charges until the Participant
Termination Date (as defined below and
in the proposed rule change). The
proposed cap on pro rata settlement
charges of a Participant that has timely
notified DTC of its election to terminate
its business with DTC would be the
amount of its Aggregate Required
Deposit and Investment, as fixed on the
day of the pro rata settlement charge
that was the subject of the Settlement
Charge Notice, plus 100% of the amount
thereof (‘‘Settlement Charge Cap’’). The
proposed Settlement Charge Cap would
be no greater than the current cap.24
The pro rata application of the Actual
Participants Fund Deposits of nondefaulting Participants to complete
settlement when there is a Participant
Default is not the allocation of a loss. A
pro rata settlement charge would relate
solely to the completion of settlement.
New proposed loss allocation concepts
described below, including, but not
limited to, a ‘‘round,’’ ‘‘Event Period,’’
and ‘‘Corporate Contribution,’’ would
not apply to pro rata settlement
charges.25
24 Current Section 8 of Rule 4 provides for a cap
that is equal to the greater of (a) the amount of its
Aggregate Required Deposit and Investment, as
fixed immediately prior to the time of the first pro
rata charge, plus 100% of the amount thereof, or (b)
the amount of all prior pro rata charges attributable
to the same loss or liability with respect to which
the Participant has not timely exercised its right to
limit its obligation as provided above. Supra note
5. The alternative limit in clause (b) would be
eliminated in proposed Section 8(a) in favor of a
single defined standard.
25 Proposed Sections 3, 4 and 5 of Rule 4 together
relate, in whole or in part, to what may happen
when there is a Participant Default. Proposed
Section 3 is the basic provision of remedies if a
Participant fails to satisfy an obligation to DTC.
Proposed Section 4 is a specific remedy for a failure
to settle by a Defaulting Participant, i.e., a specific
type of Participant Default. Proposed Section 5 is
also a remedial provision for a Participant Default
when, additionally, DTC ceases to act for the
Participant and there are remaining losses or
liabilities. If a Participant Default occurs, the
application of proposed Section 3 would be
required, the application of proposed Section 4
would be at the discretion of DTC. Whether or not
proposed Section 4 has been applied, once there is
a loss due to a Participant Default and DTC ceases
to act for the Participant, proposed Section 5 would
apply. See supra note 10.
A principal type of Participant Default is a failure
to settle. A Participant’s obligation to pay any
amount due in settlement is secured by Collateral
of the Participant. When the Defaulting Participant
fails to pay its settlement obligation, under Rule
9(B), Section 2, DTC has the right to Pledge or sell
such Collateral to satisfy the obligation. Supra note
5. (It is more likely that DTC would borrow against
the Collateral to complete settlement on the
Business Day, because it is unlikely to be able to
liquidate Collateral for same day funds in time to
settle on that Business Day.) If DTC Pledges the
Collateral to secure a loan to fund settlement (e.g.,
under the End-of-Day Credit Facility), the Collateral
would have to be sold to obtain funds to repay the
loan. In any such sale of the Collateral, there is a
risk, heightened in times of market stress, that the
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B. Changes To Enhance Resiliency of
DTC’s Loss Allocation Process
In order to enhance the resiliency of
DTC’s loss allocation process and to
align, to the extent practicable and
appropriate, its loss allocation approach
to that of the other DTCC Clearing
Agencies, DTC proposes to introduce
certain new concepts and to modify
other aspects of its loss allocation
waterfall. The proposed rule change
would adopt an enhanced allocation
approach for losses, whether arising
from Default Loss Events or Declared
Non-Default Loss Events (as defined
below and in the proposed rule change).
In addition, the proposed rule change
would clarify the loss allocation process
as it relates to losses arising from or
relating to multiple default or nondefault events in a short period of time.
Accordingly, DTC is proposing four
(4) key changes to enhance DTC’s loss
allocation process:
(1) Mandatory Corporate Contribution
Current Section 4 of Rule 4 provides
that if there is an unsatisfied loss or
liability, DTC may, in its sole discretion
and in such amount as DTC would
determine, ‘‘charge the existing retained
earnings and undivided profits’’ of DTC.
Under the proposed rule change, DTC
would replace the discretionary
application of an unspecified amount of
retained earnings and undivided profits
with a mandatory, defined Corporate
Contribution (as defined below and in
the proposed rule change). The
Corporate Contribution would be used
for losses and liabilities that are
incurred by DTC with respect to an
Event Period (as defined below and in
the proposed rule change), whether
arising from a Default Loss Event or
Declared Non-Default Loss Event, before
the allocation of losses to Participants.
The proposed ‘‘Corporate
Contribution’’ would be defined to be an
amount equal to fifty percent (50%) of
DTC’s General Business Risk Capital
Requirement.26 DTC’s General Business
Risk Capital Requirement, as defined in
DTC’s Clearing Agency Policy on
Capital Requirements,27 is, at a
proceeds of the sale would be insufficient to repay
the loan. That deficiency would be a liability or loss
to which proposed Section 5 of Rule 4 would apply,
i.e., a Default Loss Event.
26 DTC calculates its General Business Risk
Capital Requirement as the amount equal to the
greatest of (i) an amount determined based on its
general business profile, (ii) an amount determined
based on the time estimated to execute a recovery
or orderly wind-down of DTC’s critical operations,
and (iii) an amount determined based on an
analysis of DTC’s estimated operating expenses for
a six (6) month period.
27 See Securities Exchange Act Release No. 81105
(July 7, 2017), 82 FR 32399 (July 13, 2017) (SR–
DTC–2017–003).
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minimum, equal to the regulatory
capital that DTC is required to maintain
in compliance with Rule 17Ad–
22(e)(15) under the Securities Exchange
Act of 1934, as amended (the ‘‘Act’’).28
The proposed Corporate Contribution
would be held in addition to DTC’s
General Business Risk Capital
Requirement.
The proposed Corporate Contribution
would apply to losses arising from
Default Loss Events and Declared NonDefault Loss Events, and would be a
mandatory contribution of DTC prior to
any allocation among Participants.29 As
proposed, if the proposed Corporate
Contribution is fully or partially used
against a loss or liability relating to an
Event Period, the Corporate
Contribution would be reduced to the
remaining unused amount, if any,
during the following two hundred fifty
(250) Business Days in order to permit
DTC to replenish the Corporate
Contribution.30 To ensure transparency,
Participants would receive notice of any
such reduction to the Corporate
Contribution.
By requiring a defined contribution of
DTC corporate funds towards losses and
liabilities arising from Default Loss
Events and Declared Non-Default Loss
Events, the proposed rule change would
limit Participant obligations to the
extent of such Corporate Contribution
and thereby provide greater clarity and
transparency to Participants as to the
calculation of their exposure to losses
and liabilities.
Proposed Rule 4 would also further
clarify that DTC can voluntarily apply
amounts greater than the Corporate
Contribution against any loss or liability
(including non-default losses) of DTC, if
the Board of Directors, in its sole
discretion, believes such to be
appropriate under the factual situation
existing at the time.
The proposed rule changes relating to
the calculation and mandatory
application of the Corporate
28 17
CFR 240.17Ad–22(e)(15).
proposed rule change would not require a
Corporate Contribution with respect to a pro rata
settlement charge. However, as discussed above, if,
after a Participant Default, the proceeds of the sale
of the Collateral of the Participant are insufficient
to repay the lenders under the End-of-Day Credit
Facility, and DTC has ceased to act for the
Participant, the shortfall would be a loss arising
from a Default Loss Event, subject to the Corporate
Contribution.
30 DTC believes that two hundred fifty (250)
Business Days would be a reasonable estimate of
the time frame that DTC would require to replenish
the Corporate Contribution by equity in accordance
with DTC’s Clearing Agency Policy on Capital
Requirements, including a conservative additional
period to account for any potential delays and/or
unknown exigencies in times of distress.
29 The
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Contribution are set forth in proposed
Section 5 of Rule 4.
sradovich on DSK3GMQ082PROD with NOTICES
(2) Introducing an Event Period
The proposed rule change would
clearly define the obligations of DTC
and its Participants regarding the
allocation of losses or liabilities relating
to or arising out of a Default Loss Event
or a Declared Non-Default Loss Event.
The proposed rule change would define
‘‘Default Loss Event’’ as the
determination by DTC to cease to act for
a Participant pursuant to Rule 10, Rule
11, or Rule 12 (such Participant, a ‘‘CTA
Participant’’). ‘‘Declared Non-Default
Loss Event’’ would be defined as the
determination by the Board of Directors
that a loss or liability incident to the
clearance and settlement business of
DTC may be a significant and
substantial loss or liability that may
materially impair the ability of DTC to
provide clearance and settlement
services in an orderly manner and will
potentially generate losses to be
mutualized among Participants in order
to ensure that DTC may continue to
offer clearance and settlement services
in an orderly manner. In order to
balance the need to manage the risk of
sequential loss events against
Participants’ need for certainty
concerning maximum loss allocation
exposures, DTC is proposing to
introduce the concept of an ‘‘Event
Period’’ to address the losses and
liabilities that may arise from or relate
to multiple Default Loss Events and/or
Declared Non-Default Loss Events that
arise in quick succession. Specifically,
the proposal would group Default Loss
Events and Declared Non-Default Loss
Events occurring in a period of ten (10)
Business Days (‘‘Event Period’’) for
purposes of allocating losses to
Participants in one or more rounds,
subject to the limits of loss allocation set
forth in the proposed rule change and as
explained below.31 In the case of a loss
or liability arising from or relating to a
Default Loss Event, an Event Period
would begin on the day on which DTC
notifies Participants that it has ceased to
act for a Participant (or the next
Business Day, if such day is not a
Business Day). In the case of a Declared
Non-Default Loss Event, the Event
Period would begin on the day that DTC
notifies Participants of the Declared
31 DTC believes that having a ten (10) Business
Day Event Period would provide a reasonable
period of time to encompass potential sequential
Default Loss Events and/or Declared Non-Default
Loss Events that are likely to be closely linked to
an initial event and/or a severe market dislocation
episode, while still providing appropriate certainty
for Participants concerning their maximum
exposure to allocated losses with respect to such
events.
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Non-Default Loss Event (or the next
Business Day, if such day is not a
Business Day). If a subsequent Default
Loss Event or Declared Non-Default
Loss Event occurs within the Event
Period, any losses or liabilities arising
out of or relating to any such subsequent
event would be resolved as losses or
liabilities that are part of the same Event
Period, without extending the duration
of such Event Period. An Event Period
may include both Default Loss Events
and Declared Non-Default Loss Events,
and there would not be separate Event
Periods for Default Loss Events or
Declared Non-Default Loss Events
occurring within overlapping ten (10)
Business Day periods.
The amount of losses that may be
allocated by DTC, subject to the
required Corporate Contribution, and to
which a Loss Allocation Cap would
apply for any Participant that elects to
terminate its business with DTC in
respect of a loss allocation round, would
include any and all losses from any
Default Loss Events and any Declared
Non-Default Loss Events during the
Event Period, regardless of the amount
of time, during or after the Event Period,
required for such losses to be
crystallized and allocated.32
The proposed rule changes relating to
the implementation of an Event Period
are set forth in proposed Section 5 of
Rule 4.
(3) Introducing the Concept of
‘‘Rounds’’ and Loss Allocation Notice
Pursuant to the proposed rule change,
a loss allocation ‘‘round’’ would mean a
series of loss allocations relating to an
Event Period, the aggregate amount of
which is limited by the sum of the Loss
Allocation Caps of affected Participants
(a ‘‘round cap’’). When the aggregate
amount of losses allocated in a round
equals the round cap, any additional
losses relating to the applicable Event
Period would be allocated in one or
more subsequent rounds, in each case
subject to a round cap for that round.
DTC would continue the loss allocation
process in successive rounds until all
losses from the Event Period are
allocated among Participants that have
not submitted a Termination Notice (as
defined below and in the proposed rule
change) in accordance with proposed
Section 6(b) of Rule 4.
32 As discussed below, each Participant that is a
Participant on the first day of an Event Period
would be obligated to pay its pro rata share of losses
and liabilities arising out of or relating to each
Default Loss Event (other than a Default Loss Event
with respect to which it is the CTA Participant) and
each Declared Non-Default Loss Event occurring
during the Event Period.
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Each loss allocation would be
communicated to Participants by the
issuance of a notice that advises each
Participant of the amount being
allocated to it (each, a ‘‘Loss Allocation
Notice’’). The calculation of each
Participant’s pro rata allocation charge
would be similar to the current Section
4 calculation of a pro rata charge except
that, for greater simplicity, it would not
include the current distinction for
common members of another clearing
agency pursuant to a Clearing Agency
Agreement.33 In addition, for enhanced
clarity as to the date of determination of
the ratio, it would be based on the
Required Participants Fund Deposits as
fixed on the first day of the Event
Period, as opposed to the current
language ‘‘at the time the loss or liability
was discovered.’’34
Each Loss Allocation Notice would
specify the relevant Event Period and
the round to which it relates.
Participants would receive two (2)
Business Days’ notice of a loss
allocation,35 and Participants would be
required to pay the requisite amount no
later than the second Business Day
following the issuance of such notice.36
Multiple Loss Allocation Notices may
33 See
supra note 20.
believes that this change would provide
an objective date that is appropriate for the new
proposed loss allocation process, which would be
designed to allocate aggregate losses relating to an
Event Period, rather than one loss at a time.
35 DTC believes allowing Participants two (2)
Business Days to satisfy their loss allocation
obligations would provide Participants sufficient
notice to arrange funding, if necessary, while
allowing DTC to address losses in a timely manner.
36 Current Section 4 of Rule 4 provides that if the
Participants Fund is applied to a loss or liability,
DTC must notify each Participant of the charge and
the reasons therefor. Proposed Section 5 would
modify this process to (i) require DTC to give prior
notice; and (ii) require Participants to pay loss
allocation charges, rather than directly charging
their Required Participants Fund Deposits. DTC
believes that shifting from the two-step
methodology of applying the Participants Fund and
then requiring Participants to immediately
replenish it to requiring direct payment would
increase efficiency, while preserving the right to
charge the Settlement Account of the Participant in
the event the Participant doesn’t timely pay. Such
a failure to pay would be, self-evidently, a
Participant Default, triggering recourse to the Actual
Participants Fund Deposit of the Participant under
proposed Section 3 of Rule 4. In addition, this
change would provide greater stability for DTC in
times of stress by allowing DTC to retain the
Participants Fund, its critical pre-funded resource,
while charging loss allocations. DTC believes doing
so would allow DTC to retain the Participants Fund
as a liquidity resource which may be applied to
fund settlement among non-defaulting Participants,
if a Defaulting Participant fails to settle. By being
able to manage its liquidity resources throughout
the loss allocation process, DTC would be able to
continue to provide its critical operations and
services during what would be expected to be a
stressful period.
34 DTC
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be issued with respect to each round, up
to the round cap.
The first Loss Allocation Notice in
any first, second, or subsequent round
would expressly state that such Loss
Allocation Notice reflects the beginning
of the first, second, or subsequent
round, as the case may be, and that each
Participant in that round has five (5)
Business Days 37 from the issuance 38 of
such first Loss Allocation Notice for the
round (such period, a ‘‘Loss Allocation
Termination Notification Period’’) to
notify DTC of its election to terminate
its business with DTC (such
notification, whether with respect to a
Settlement Charge Notice or Loss
Allocation Notice, a ‘‘Termination
Notice’’) pursuant to proposed Section
8(b) of Rule 4 and thereby benefit from
its Loss Allocation Cap.
The round cap of any second or
subsequent round may differ from the
first or preceding round cap because
there may be fewer Participants in a
second or subsequent round if
Participants elect to terminate their
business with DTC as provided in
proposed Section 8(b) of Rule 4
following the first Loss Allocation
Notice in any round.
For example, for illustrative purposes
only, after the required Corporate
Contribution, if DTC has a $4 billion
loss determined with respect to an
Event Period and the sum of Loss
Allocation Caps for all Participants
subject to the loss allocation is $3
billion, the first round would begin
when DTC issues the first Loss
Allocation Notice for that Event Period.
DTC could issue one or more Loss
Allocation Notices for the first round
until the sum of losses allocated equals
$3 billion. Once the $3 billion is
allocated, the first round would end and
DTC would need a second round in
order to allocate the remaining $1
billion of loss. DTC would then issue a
Loss Allocation Notice for the $1 billion
and this notice would be the first Loss
Allocation Notice for the second round.
The issuance of the Loss Allocation
Notice for the $1 billion would begin
the second round.
37 Current Section 8 of Rule 4 provides that the
time period for a Participant to give notice of its
election to terminate its business with DTC in
respect of a pro rata charge is ten (10) Business Days
after receiving notice of a pro rata charge. DTC
believes that it is appropriate to shorten such time
period from ten (10) Business Days to five (5)
Business Days because DTC needs timely notice of
which Participants would not be terminating their
business with DTC for the purpose of calculating
the loss allocation for any subsequent round. DTC
believes that five (5) Business Days would provide
Participants with sufficient time to decide whether
to cap their loss allocation obligations by
terminating their business with DTC.
38 See supra note 23.
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The proposed rule change would link
the Loss Allocation Cap to a round in
order to provide Participants the option
to limit their loss allocation exposure at
the beginning of each round. As
proposed, a Participant could limit its
loss allocation exposure to its Loss
Allocation Cap by providing notice of
its election to terminate its business
with DTC within five (5) Business Days
after the issuance of the first Loss
Allocation Notice in any round.
The proposed rule changes relating to
the implementation of ‘‘rounds’’ and
Loss Allocation Notices are set forth in
proposed Section 5 of Rule 4.
(4) Capping Terminating Participants’
Loss Allocation Exposure and Related
Changes
As discussed above, the proposed rule
change would continue to provide
Participants the opportunity to limit
their loss allocation exposure by
offering a termination option; however,
the associated termination process
would be modified.
As proposed, if a Participant timely
provides notice of its election to
terminate its business with DTC as
provided in proposed Section 8(b) of
Rule 4, its maximum payment
obligation with respect to any loss
allocation round would be the amount
of its Aggregate Required Deposit and
Investment, as fixed on the first day of
the Event Period, plus 100% of the
amount thereof (‘‘Loss Allocation
Cap’’),39 provided that the Participant
complies with the requirements of the
termination process in proposed Section
6(b) of Rule 4. DTC may retain the entire
Actual Participants Fund Deposit of a
Participant subject to loss allocation, up
to the Participant’s Loss Allocation Cap.
If a Participant’s Loss Allocation Cap
exceeds the Participant’s then-current
Required Participants Fund Deposit, it
must still pay the excess amount.
As proposed, Participants would have
five (5) Business Days from the issuance
of the first Loss Allocation Notice in any
round to decide whether to terminate its
business with DTC, and thereby benefit
from its Loss Allocation Cap. The start
of each round 40 would allow a
Participant the opportunity to notify
DTC of its election to terminate its
business with DTC after satisfaction of
the losses allocated in such round.
Specifically, the first round and each
subsequent round of loss allocation
39 The alternative limit in clause (b) would be
eliminated in proposed Section 8(b) in favor of a
single defined standard. See supra note 24.
40 i.e., a Participant will only have the
opportunity to terminate after the first Loss
Allocation Notice in any round, and not after each
Loss Allocation Notice in any round.
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would allocate losses up to a round cap
of the aggregate of all Loss Allocation
Caps of those Participants included in
the round. If a Participant provides
notice of its election to terminate its
business with DTC, it would be subject
to loss allocation in that round, up to its
Loss Allocation Cap. If the first round of
loss allocation does not fully cover
DTC’s losses, a second round will be
noticed to those Participants that did
not elect to terminate in the previous
round. As noted above, the amount of
any second or subsequent round cap
may differ from the first or preceding
round cap because there may be fewer
Participants in a second or subsequent
round if Participants elect to terminate
their business with DTC as provided in
proposed Section 8(b) of Rule 4
following the first Loss Allocation
Notice in any round.
Pursuant to the proposed rule change,
in order to avail itself of its Loss
Allocation Cap, the Participant would
need to follow the requirements in
proposed Section 6(b) of Rule 4. In
addition to retaining the substance of
the existing requirements for any
termination that are set forth in current
Section 6 of Rule 4, proposed Section 6
also would provide that a Participant
that provides a Termination Notice in
connection with a loss allocation must:
(1) Specify in the Termination Notice an
effective date of termination
(‘‘Participant Termination Date’’), which
date shall be no later than ten (10)
Business Days following the last day of
the applicable Loss Allocation
Termination Notification Period; (2)
cease all activities and use of the
Corporation’s services other than
activities and services necessary to
terminate the business of the Participant
with DTC; and (3) ensure that all
activities and use of DTC services by
such Participant cease on or prior to the
Participant Termination Date.
The proposed rule changes are
designed to enable DTC to continue the
loss allocation process in successive
rounds until all of DTC’s losses are
allocated. Until all losses related to an
Event Period are allocated and paid,
DTC may retain the entire Actual
Participants Fund Deposit of a
Participant subject to loss allocation, up
to the Participant’s Loss Allocation Cap.
The proposed rule changes relating to
capping terminating Participants’ loss
allocation exposure and related changes
to the termination process are set forth
in proposed Sections 5, 6, and 8 of Rule
4.
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C. Clarifying Changes Relating to Loss
Allocation for Non-Default Events
D. Loss Allocation Waterfall
Comparison
The proposed rule changes are
intended to make the provisions in the
Rules governing loss allocation more
transparent and accessible to
Participants. In particular, DTC is
proposing the following change relating
to loss allocation to provide clarity
around the governance for the allocation
of losses arising from a non-default
event.41
Currently, DTC can use the
Participants Fund to satisfy losses and
liabilities arising from a Participant
Default or arising from an event that is
not due to a Participant Default (i.e., a
non-default loss), provided that such
loss or liability is incident to the
business of DTC.42
DTC is proposing to clarify the
governance around non-default losses
that would trigger loss allocation to
Participants by specifying that the Board
of Directors would have to determine
that there is a non-default loss that may
be a significant and substantial loss or
liability that may materially impair the
ability of DTC to provide clearance and
settlement services in an orderly
manner and will potentially generate
losses to be mutualized among the
Participants in order to ensure that DTC
may continue to offer clearance and
settlement services in an orderly
manner. The proposed rule change
would provide that DTC would then be
required to promptly notify Participants
of this determination, which is referred
to in the proposed rule as a Declared
Non-Default Loss Event, as discussed
above.
Finally, as previously discussed,
pursuant to the proposed rule change,
proposed Rule 4 would include
language to clarify that (i) the Corporate
Contribution would apply to losses or
liabilities arising from a Default Loss
Event or a Declared Non-Default Loss
Event, and (ii) the loss allocation
waterfall would be applied in the same
manner regardless of whether a loss
arises from a Default Loss Event or a
Declared Non-Default Loss Event.
The proposed rule changes relating to
Declared Non-Default Loss Events and
Participants’ obligations for such events
are set forth in proposed Section 5 of
Rule 4.
The following example illustrates the
differences between the current and
proposed loss allocation provisions:
Assumptions:
(i) Participant A defaults on a
Business Day (Day 1). On the same day,
DTC ceases to act for Participant A, and
notifies Participants of the cease to act.
After applying Participant A’s
Participants Fund and liquidating
Participant A’s Collateral, DTC has a
loss of $350 million.
(ii) Participant X voluntarily retires
from membership five Business Days
after DTC ceases to act for Participant A
(Day 6).
(iii) Participant B defaults seven
Business Days after DTC ceases to act
for Participant A (Day 8). On the same
day, DTC ceases to act for Participant B,
and notifies Participants of the cease to
act. After applying Participant B’s
Participants Fund and liquidating
Participant B’s Collateral, DTC has a
loss of $350 million.
(iv) The current DTC loss allocation
provisions do not require a corporate
contribution. DTC may, in its sole
discretion and in such amounts as DTC
may determine, charge the existing
retained earnings and undivided profits
of DTC. For the purposes of this
example, it is assumed that DTC has
determined, in its discretion, that DTC
will contribute 25% of its retained
earnings and undivided profits. The
amount of DTC’s retained earnings and
undivided profits is $364 million.
(v) DTC’s General Business Risk
Capital Requirement is $158 million.
Current Loss Allocation:
Under the current loss allocation
provisions, with respect to the losses
arising out of Participant A’s default,
DTC will contribute $91 million ($364
million * 25%) from retained earnings
and undivided profits, and then allocate
the remaining loss of $259 million ($350
million ¥ $91 million) to Participants.
With respect to the losses arising out
of Participant B’s default, DTC will
contribute $68 million (($364 million ¥
$91 million) * 25%) from the balance of
its retained earnings and undivided
profits, and then allocate the remaining
loss of $282 million ($350 million ¥
$68 million) to Participants. Because
Participant X voluntarily retired before
DTC ceased to act for Participant B,
Participant X is not subject to loss
allocation with respect to losses arising
out of Participant B’s default.
Altogether, with respect to the losses
arising out of defaults of Participant A
and Participant B, DTC will contribute
$159 million of retained earnings and
41 Non-default losses may arise from events such
as damage to physical assets, a cyber-attack, or
custody and investment losses.
42 See supra note 11.
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38365
undivided profits, and will allocate
losses of $541 million to Participants.
Proposed Loss Allocation:
Under the proposed loss allocation
provisions, a Default Loss Event with
respect to Participant A’s default would
have occurred on Day 1, and a Default
Loss Event with respect to Participant
B’s default would have occurred on Day
8. Because the Default Loss Events
occurred during a 10-Business Day
period they would be grouped together
into an Event Period for purposes of
allocating losses to Participants. The
Event Period would begin on the 1st
Business Day and end on the 10th
Business Day.
With respect to losses arising out of
Participant A’s default, DTC would
apply a Corporate Contribution of $79
million ($158 million * 50%) and then
allocate the remaining loss of $271
million ($350 million ¥ $79 million) to
Participants. With respect to losses
arising out of Participant B’s default,
DTC would not apply a Corporate
Contribution since it would have
already contributed the maximum
Corporate Contribution of 50% of its
General Business Risk Capital
Requirement. DTC would allocate the
loss of $350 million arising out of
Participant B’s default to Participants.
Because Participant X was a Participant
on the first day of the Event Period, it
would be subject to loss allocation with
respect to all events occurring during
the Event Period, even if the event
occurred after its retirement. Therefore,
Participant X would be subject to loss
allocation with respect to Participant B’s
default.
Altogether, with respect to the losses
arising out of defaults of Participant A
and Participant B, DTC would apply a
Corporate Contribution of $79 million
and allocate losses of $621 million to
Participants.
The principal differences in the above
example are due to: (i) The proposed
changes to the calculation and
application of Corporate Contribution,
and (ii) the proposed introduction of an
Event Period.
E. Clarifying Changes Regarding
Voluntary Retirement
Section 1 of Rule 2 provides that a
Participant may terminate its business
with DTC by notifying DTC in the
appropriate manner.43 To provide
43 Section 1 of Rule 2 provides, in relevant part,
that ‘‘[a] Participant may terminate its business with
the Corporation by notifying the Corporation as
provided in Sections 7 or 8 of Rule 4 or, if for a
reason other than those specified in said Sections
7 and 8, by notifying the Corporation thereof; the
Participant shall, upon receipt of such notice by the
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additional transparency to Participants
with respect to the voluntary retirement
of a Participant, and to align, where
appropriate, with the proposed rule
changes of NSCC and FICC with respect
to voluntary termination, DTC is
proposing to add proposed Section 6(a)
to Rule 4, which would be titled, ‘‘Upon
Any Voluntary Retirement.’’ Proposed
Section 6(a) of Rule 4 would (i) clarify
the requirements 44 for a Participant that
wants to voluntarily terminate its
business with DTC, and (ii) address the
situation where a Participant submits a
Voluntary Retirement Notice (defined
below) and subsequently receives a
Settlement Charge Notice or the first
Loss Allocation Notice in a round on or
prior to the Voluntary Retirement Date
(defined below).
Specifically, DTC is proposing that if
a Participant elects to terminate its
business with DTC pursuant to Section
1 of Rule 2 for reasons other than those
specified in proposed Section 8 (a
‘‘Voluntary Retirement’’), the
Participant would be required to:
(1) Provide a written notice of such
termination to DTC (‘‘Voluntary
Retirement Notice’’), as provided for in
Section 1 of Rule 2;
(2) specify in the Voluntary
Retirement Notice a desired date for the
termination of its business with DTC
(‘‘Voluntary Retirement Date’’);
(3) cease all activities and use of DTC
services other than activities and
services necessary to terminate the
business of the Participant with DTC;
and
(4) ensure that all activities and use of
DTC services by the Participant cease on
or prior to the Voluntary Retirement
Date.45
Proposed Section 6(a) of Rule 4 would
provide that if the Participant fails to
comply with the requirements of
proposed Section 6(a), its Voluntary
Corporation, cease to be a Participant. In the event
that a Participant shall cease to be a Participant, the
Corporation shall thereupon cease to make sits
services available to the Participant, except that the
Corporation may perform services on behalf of the
Participant or its successor in interest necessary to
terminate the business of the Participant or its
successor with the Corporation, and the Participant
or its successor shall pay to the Corporation the fees
and charges provided by these Rules with respect
to services performed by the Corporation
subsequent to the time when the Participant ceases
to be a Participant.’’ Supra note 5. DTC is proposing
to modify the provision to clarify that the
termination would be subject to proposed Section
6 of Rule 4.
44 The requirements would reflect current
practice.
45 Typically, a Participant would ultimately
submit a notice after having ceased its transactions
and transferred all securities out of its Account.
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Retirement Notice would be deemed
void.46
Further, proposed Section 6(a) of Rule
4 would provide that if a Participant
submits a Voluntary Retirement Notice
and subsequently receives a Settlement
Charge Notice or the first Loss
Allocation Notice in a round on or prior
to the Voluntary Retirement Date, such
Participant must timely submit a
Termination Notice in order to benefit
from its Settlement Charge Cap or Loss
Allocation Cap, as the case may be. In
such a case, the Termination Notice
would supersede and void the pending
Voluntary Retirement Notice submitted
by the Participant.
F. Changes to the Retention Time for the
Actual Participants Fund Deposit of a
Former Participant
Current Rule 4 provides that after
three months from when a Person has
ceased to be a Participant, DTC shall
return to such Person (or its successor
in interest or legal representative) the
amount of the Actual Participants Fund
Deposit of the former Participant plus
accrued and unpaid interest to the date
of such payment (including any amount
added to the Actual Participants Fund
Deposit of the former Participant
through the sale of the Participant’s
Preferred Stock), provided that DTC
receives such indemnities and
guarantees as DTC deems satisfactory
with respect to the matured and
contingent obligations of the former
Participant to DTC. Otherwise, within
four years after a Person has ceased to
be a Participant, DTC shall return to
such Person (or its successor in interest
or legal representative) the amount of
the Actual Participants Fund Deposit of
the former Participant plus accrued and
unpaid interest to the date of such
payment, except that DTC may offset
against such payment the amount of any
known loss or liability to DTC arising
out of or related to the obligations of the
former Participant to DTC.
DTC is proposing to reduce the time,
after a Participant ceases to be a
46 The
purpose of this proposed provision is to
clarify that a failure of a Participant to comply with
proposed Section 6(a) of Rule 4 would mean that
the Participant would continue to be a Participant,
as if the Voluntary Retirement Notice had not been
received by DTC. For example, Participant A
submits a Voluntary Retirement Notice to DTC on
April 1st and indicates a Voluntary Retirement Date
of April 15th, but fails to comply with the
requirements of proposed Section 6(a) of Rule 4 by
the Voluntary Retirement Date. The Participant
would continue to be a Participant after the
Voluntary Retirement Date. If an Event Period
subsequently occurs before the Participant submits
a new Voluntary Retirement Notice and voluntarily
retires in compliance with proposed Section 6(a),
such Participant would be obligated to pay its pro
rata shares of losses and liabilities arising from that
Event Period.
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Participant, at which DTC would be
required to return the amount of the
Actual Participants Fund Deposit of the
former Participant plus accrued and
unpaid interest, whether the Participant
ceases to be such because it elected to
terminate its business with DTC in
response to a Settlement Charge Notice
or Loss Allocation Notice or otherwise.
Pursuant to the proposed rule change,
the time period would be reduced from
four (4) years to two (2) years. All other
requirements relating to the return of
the Actual Participants Fund Deposit
would remain the same.
The four (4) year retention period was
implemented at a time when there were
more deposits and processing of
physical certificates, as well as added
risks related to manual processing, and
related claims could surface many years
after an alleged event. DTC believes that
the change to two (2) years is
appropriate because, currently, as DTC
and the industry continue to move
toward automation and
dematerialization, claims typically
surface more quickly. Therefore, DTC
believes that a shorter retention period
of two (2) years would be sufficient to
maintain a reasonable level of coverage
for possible claims arising in connection
with the activities of a former
Participant, while allowing DTC to
provide some relief to former
Participants by returning their Actual
Participants Fund Deposits more
quickly.
(ii) Proposed Rule Changes
The foregoing changes as well as other
changes (including a number of
technical and conforming changes) that
DTC is proposing in order to improve
the transparency and accessibility of
Rule 4 are described in detail below.
A. Changes Relating To Participant
Default, Pro Rata Settlement Charges
and Loss Allocation
Section 3
As discussed above, current Section 3
of Rule 4 provides that, if a Participant
fails to satisfy an obligation to DTC,
DTC may, in such order and in such
amounts as DTC determines, apply the
Actual Participants Fund Deposit of the
defaulting Participant, Pledge the shares
of Preferred Stock of the defaulting
Participant to its lenders as collateral
security for a loan, and/or sell the shares
of Preferred Stock of the defaulting
Participant to other Participants.
Pursuant to the proposed rule change,
Section 3 would retain most of these
provisions, with the following
modifications:
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DTC proposes to add the term
‘‘Participant Default’’ in proposed
Section 3 as a defined term for the
failure of a Participant to satisfy an
obligation to DTC, for drafting clarity
and use in related provisions. The
proposed rule change would reflect that
the defined term ‘‘Participant Default,’’
referring to the failure of a Participant
to satisfy any obligation to DTC,
includes the failure of a Defaulting
Participant to satisfy its obligations as
provided in Rule 9(B). In addition, the
proposed rule change clarifies that, in
the case of a Participant Default, DTC
would first apply the Actual
Participants Fund Deposit of the
Participant to any unsatisfied
obligations, before taking any other
actions. This proposed clarification
would reflect the current practice of
DTC, and would provide Participants
with enhanced transparency into the
actions DTC would take with respect to
the Participants Fund deposits and
Participants Investment of a Participant
that has failed to satisfy its obligations
to DTC.
DTC proposes to correct the term
‘‘End-of-Day Facility,’’ to the existing
defined term ‘‘End-of-Day Credit
Facility.’’ DTC further proposes to
clarify that, if DTC Pledges some or all
of the shares of Preferred Stock of a
Participant to its lenders as collateral
security for a loan under the End-of-Day
Credit Facility, DTC would apply the
proceeds of such loan to the obligation
the Participant had failed to satisfy,
which is not expressly stated in current
Section 3 of Rule 4.
In addition, DTC is proposing to make
three ministerial changes to enhance
readability by: (i) Removing the
duplicative ‘‘in,’’ in the phrase ‘‘in such
order and in such amounts,’’ (ii)
replacing the word ‘‘eliminate’’ with
‘‘satisfy,’’ and (iii) to conform to
proposed changes, renumbering the list
of actions that DTC may take when there
is a Participant Default.
DTC is also proposing to add the
heading ‘‘Application of Participants
Fund Deposits and Preferred Stock
Investments to Participant Default’’ to
Section 3.
Section 4 and Section 5
As noted above, current Section 4 of
Rule 4 provides that if DTC incurs a loss
or liability which is not satisfied by
charging the Participant responsible for
the loss pursuant to Section 3 of Rule 4,
then DTC may, in any order and in any
amount as DTC may determine, in its
sole discretion, to the extent necessary
to satisfy such loss or liability, ratably
apply some or all of the Actual
Participants Fund Deposits of all other
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Participants to such loss or liability and/
or charge the existing retained earnings
and undivided profits of DTC. This
provision relates to losses and liabilities
that may be due to the failure of a
Participant to satisfy obligations to DTC,
if the Actual Participants Fund Deposit
of that Participant does not fully satisfy
the obligation, or to losses and liabilities
for which no single Participant is
obligated, i.e., a ‘‘non-default loss.’’
As discussed above, current Rule 4
currently provides a single set of tools
and common processes for using the
Participants Fund as both a liquidity
resource and for the satisfaction of other
losses and liabilities. The proposed rule
change would provide separate liquidity
and loss allocation provisions. More
specifically, proposed Section 4 of Rule
4 would reflect the process for a ‘‘pro
rata settlement charge,’’ the application
of the Actual Participants Fund Deposits
of non-defaulting Participants for
liquidity purposes in order to complete
settlement, when a Defaulting
Participant fails to satisfy its settlement
obligation and the amount charged to its
Actual Participants Fund Deposit by
DTC pursuant to Section 3 of Rule 4 is
insufficient to complete settlement.
Proposed Section 5 of Rule 4 would
contain the proposed loss allocation
provisions.
Proposed Section 4
Pursuant to the proposed rule change,
current Section 4 would be replaced in
its entirety by proposed Section 4, and
titled ‘‘Application of Participants Fund
Deposits of Non-Defaulting
Participants.’’ First, for clarity, proposed
Section 4 would expressly state that
‘‘[t]he Participants Fund shall constitute
a liquidity resource which may be
applied by the Corporation in such
amounts as the Corporation shall
determine, in its sole discretion, to fund
settlement if there is a Defaulting
Participant and the amount charged to
the Actual Participants Fund Deposit of
the Defaulting Participant pursuant to
Section 3 of this Rule is not sufficient
to complete settlement. In that case, the
Corporation may apply the Actual
Participants Fund Deposits of
Participants other than the Defaulting
Participant (each, a ‘‘non-defaulting
Participant’’) as provided in this Section
and/or apply such other liquidity
resources as may be available to the
Corporation from time to time,
including the End-of-Day Credit
Facility.’’
Proposed Section 4 would retain the
current principle that DTC must notify
Participants and the Commission when
it applies the Participants Fund deposits
of non-defaulting Participants, by
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38367
stating that if the Actual Participants
Fund Deposits of non-defaulting
Participants are applied to complete
settlement, DTC must promptly notify
each Participant and the Commission of
the amount of the charge and the
reasons therefor, and would define such
notice as a Settlement Charge Notice.
Proposed Section 4 would retain the
current calculation of pro rata charges
by providing that each non-defaulting
Participant’s pro rata share 47 of any
such application of the Participants
Fund, defined as a ‘‘pro rata settlement
charge,’’ would be equal to (i) its
Required Participants Fund Deposit, as
such Required Participants Fund
Deposit was fixed on the Business Day
of such application 48 less its Additional
Participants Fund Deposit, if any, on
that day, divided by (ii) the sum of the
Required Participants Fund Deposits of
all non-defaulting Participants, as such
Required Participants Fund Deposits
were fixed on that day, less the sum of
the Additional Participants Fund
Deposits, if any, of such non-defaulting
Participants on that day.
Proposed Section 4 would also
provide a period of time within which
a Participant could notify DTC of its
election to terminate its business with
DTC and thereby cap its liability, by
providing that a Participant would have
a period of five (5) Business Days
following the issuance of a Settlement
Charge Notice (‘‘Settlement Charge
Termination Notification Period’’) to
notify DTC of its election to terminate
its business with DTC pursuant to
proposed Section 8(a), and thereby
benefit from its Settlement Charge Cap,
as set forth in proposed Section 8(a).49
Proposed Section 4 would also require
that any Participant that gives DTC
notice of its election to terminate its
business with DTC must comply with
proposed Section 6(b) of Rule 4,50 and
if it does not, its election to terminate
would be deemed void.
Proposed Section 4 would further
provide that DTC may retain the entire
amount of the Actual Participants Fund
Deposit of a Participant subject to a pro
rata settlement charge, up to the amount
of the Participant’s Settlement Charge
Cap in accordance with proposed
Section 8(a) of Rule 4.
Current Section 5 of Rule 4 provides
that ‘‘[e]xcept as provided in Section 8
of this Rule, if a pro rata charge is made
pursuant to Section 4 of the current
Rule against the Required Participants
Fund Deposit of a Participant, and, as a
47 See
supra note 20.
supra note 21.
49 See supra note 22.
50 Proposed Section 6(b) is discussed below.
48 See
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consequence, the Actual Participants
Fund Deposit of such Participant is less
than its Required Participants Fund
Deposit, the Participant shall, upon the
demand of the Corporation, within such
time as the Corporation shall require,
Deposit to the Participants Fund the
amount in cash needed to eliminate any
resulting deficiency in its Required
Participants Fund Deposit. If the
Participant shall fail to make such
deposit to the Participants Fund, the
Corporation may take disciplinary
action against the Participant pursuant
to these Rules. Any disciplinary action
which the Corporation takes pursuant to
these Rules, or the voluntary or
involuntary cessation of participation by
the Participant, shall not affect the
obligations of the Participant to the
Corporation or any remedy to which the
Corporation may be entitled under
applicable law.’’
Proposed Section 4 would incorporate
current Section 5 of Rule 4, modified as
follows: (i) Conformed to reflect the
consolidation of Section 5 into proposed
Section 4, (ii) replacement of ‘‘Except as
provided in’’ with ‘‘Subject to,’’ to
harmonize with language used
elsewhere in proposed Rule 4, and (iii)
corrections of two typographical errors,
in order to accurately reflect that the
Actual Participants Fund Deposit of a
Participant would be applied, and not
the Required Participants Fund Deposit,
and to capitalize the word ‘‘deposit’’
because it is a defined term.
Proposed Section 5
Proposed Section 5 of Rule 4 would
address the substantially new and
revised proposed loss allocation, which
would apply to losses and liabilities
relating to or arising out of a Default
Loss Event or a Declared Non-Default
Loss Event. Pursuant to the proposed
rule change, DTC would restructure and
modify its existing loss allocation
waterfall as described below. The
heading ‘‘Loss Allocation Waterfall’’
would be added to proposed Section 5.
Proposed Section 5 would establish
the concept of an ‘‘Event Period’’ to
provide for a clear and transparent way
of handling multiple loss events
occurring in a period of ten (10)
Business Days, which would be grouped
into an Event Period. As stated above,
both Default Loss Events and Declared
Non-Default Loss Events could occur
within the same Event Period.
The Event Period with respect to a
Default Loss Event would begin on the
day on which DTC notifies Participants
that it has ceased to act for the
Participant (or the next Business Day, if
such day is not a Business Day). In the
case of a Declared Non-Default Loss
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Event, the Event Period would begin on
the day that DTC notifies Participants of
the Declared Non-Default Loss Event (or
the next Business Day, if such day is not
a Business Day). Proposed Section 5
would provide that if a subsequent
Default Loss Event or Declared NonDefault Loss Event occurs during an
Event Period, any losses or liabilities
arising out of or relating to any such
subsequent event would be resolved as
losses or liabilities that are part of the
same Event Period, without extending
the duration of such Event Period.
As proposed, each CTA Participant
would be obligated to DTC for the entire
amount of any loss or liability incurred
by DTC arising out of or relating to any
Default Loss Event with respect to such
CTA Participant. Under the proposal, to
the extent that such loss or liability is
not satisfied pursuant to proposed
Section 3 of Rule 4, DTC would apply
a Corporate Contribution thereto and
charge the remaining amount of such
loss or liability as provided in proposed
Section 5.
Under proposed Section 5, the loss
allocation waterfall would begin with a
new mandatory Corporate Contribution
from DTC. Rule 4 currently provides
that the use of any retained earnings and
undivided profits by DTC is a voluntary
contribution of a discretionary amount
of its retained earnings. Proposed
Section 5 of Rule 4 would, instead,
require a defined corporate contribution
to losses and liabilities that are incurred
by DTC with respect to an Event Period.
As proposed, the Corporate
Contribution to losses or liabilities that
are incurred by DTC with respect to an
Event Period would be defined as an
amount that is equal to fifty percent
(50%) of the amount calculated by DTC
in respect of its General Business Risk
Capital Requirement as of the end of the
calendar quarter immediately preceding
the Event Period.51 DTC’s General
Business Risk Capital Requirement, as
defined in DTC’s Clearing Agency
Policy on Capital Requirements,52 is, at
a minimum, equal to the regulatory
capital that DTC is required to maintain
in compliance with Rule 17Ad–
22(e)(15) under the Act.53
If DTC applies the Corporate
Contribution to a loss or liability arising
out of or relating to one or more Default
Loss Events or Declared Non-Default
Loss Events relating to an Event Period,
then for any subsequent Event Periods
that occur during the next two hundred
fifty (250) Business Days, the Corporate
Contribution would be reduced to the
51 See
supra note 26.
supra note 27.
53 17 CFR 240.17Ad–22(e)(15).
remaining unused portion of the
Corporate Contribution amount that was
applied for the first Event Period.54
Proposed Section 5 would require DTC
to notify Participants of any such
reduction to the Corporate Contribution.
Proposed Section 5 of Rule 4 would
provide that nothing in the Rules would
prevent DTC from voluntarily applying
amounts greater than the Corporate
Contribution against any DTC loss or
liability, if the Board of Directors, in its
sole discretion, believes such to be
appropriate under the factual situation
existing at the time.
Proposed Section 5 of Rule 4 would
provide that DTC shall apply the
Corporate Contribution to losses and
liabilities that arise out of or relate to
one or more Default Loss Events and/or
Declared Non-Default Loss Events that
occur within an Event Period. The
proposed rule change also provides that
if losses and liabilities with respect to
such Event Period remain unsatisfied
following application of the Corporate
Contribution, DTC would allocate such
losses and liabilities to Participants, as
described below.
Proposed Section 5 of Rule 4 would
state that each Participant that is a
Participant on the first day of an Event
Period would be obligated to pay its pro
rata share of losses and liabilities arising
out of or relating to each Default Loss
Event (other than a Default Loss Event
with respect to which it is the CTA
Participant) and each Declared NonDefault Loss Event occurring during the
Event Period. In addition, proposed
Section 5 of Rule 4 would make it clear
that any CTA Participant for which DTC
ceases to act on a non-Business Day,
triggering an Event Period that
commences on the next Business Day,
would be deemed to be a Participant on
the first day of that Event Period. In
addition, DTC is proposing to clarify
that after a first round of loss allocations
with respect to an Event Period, only
Participants that have not submitted a
Termination Notice in accordance with
proposed Section 6(b) of Rule 4 would
be subject to loss allocations with
respect to subsequent rounds relating to
that Event Period. The proposed change
would also provide that DTC may retain
the entire Actual Participants Fund
Deposit of a Participant subject to loss
allocation, up to the Participant’s Loss
Allocation Cap in accordance with
proposed Section 8(b) of Rule 4.
Pursuant to the proposed rule change,
DTC would notify Participants subject
to loss allocation of the amounts being
allocated to them by a Loss Allocation
Notice in successive rounds of loss
52 See
PO 00000
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54 See
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allocations. Proposed Section 5 would
state that a loss allocation ‘‘round’’
would mean a series of loss allocations
relating to an Event Period, the
aggregate amount of which is limited by
the sum of the Loss Allocation Caps of
affected Participants (a ‘‘round cap’’).
When the aggregate amount of losses
allocated in a round equals the round
cap, any additional losses relating to the
applicable Event Period would be
allocated in one or more subsequent
rounds, in each case subject to a round
cap for that round. DTC may continue
the loss allocation process in successive
rounds until all losses from the Event
Period are allocated among Participants
that have not submitted a Termination
Notice in accordance with proposed
Section 6(b) of Rule 4.
Each Loss Allocation Notice would
specify the relevant Event Period and
the round to which it relates. The first
Loss Allocation Notice in any first,
second, or subsequent round would
expressly state that such Loss Allocation
Notice reflects the beginning of the first,
second, or subsequent round, as the case
may be, and that each Participant in that
round has five (5) Business Days from
the issuance of such first Loss
Allocation Notice for the round 55 to
notify DTC of its election to terminate
its business with DTC pursuant to
proposed Section 8(b) of Rule 4, and
thereby benefit from its Loss Allocation
Cap.56
Loss allocation obligations would
continue to be calculated based upon a
Participant’s pro rata share of the loss.57
As proposed, each Participant’s pro rata
share of losses and liabilities to be
allocated in any round would be equal
to (i) (A) its Required Participants Fund
Deposit, as such Required Participants
Fund Deposit was fixed on the first day
of the Event Period,58 less (B) its
Additional Participants Fund Deposit, if
any, on such day, divided by (ii) (A) the
sum of the Required Participants Fund
Deposits of all Participants subject to
loss allocation in such round, as such
Required Participants Fund Deposits
were fixed on such day, less (B) the sum
of any Additional Participants Fund
Deposits, if any, of all Participants
subject to loss allocation in such round
on such day.59
As proposed, Participants would have
two (2) Business Days after DTC issues
a first round Loss Allocation Notice to
pay the amount specified in any such
55 i.e., the Loss Allocation Termination
Notification Period for that round.
56 See supra note 37.
57 See supra note 20.
58 See supra note 21.
59 See supra note 16.
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notice. In contrast to the current Section
4, under which DTC may apply the
Actual Participants Fund Deposits of
Participants directly to the satisfaction
of loss allocation amounts, under
proposed Section 5, DTC would require
Participants to pay their loss allocation
amounts (leaving their Actual
Participants Fund Deposits intact).60 On
a subsequent round (i.e., if the first
round did not cover the entire loss of
the Event Period because DTC was only
able to allocate up to the sum of the
Loss Allocation Caps of those
Participants included in the round),
Participants would also have two (2)
Business Days after notice by DTC to
pay their loss allocation amounts (again
subject to their Loss Allocation Caps),
unless a Participant timely notified (or
will timely notify) DTC of its election to
terminate its business with DTC with
respect to a prior loss allocation round.
Under the proposal, if a Participant
fails to make its required payment in
respect of a Loss Allocation Notice by
the time such payment is due, DTC
would have the right to proceed against
such Participant as a Participant that
has failed to satisfy an obligation in
accordance with proposed Section 3 of
Rule 4 described above. For additional
clarity, proposed Section 5 of Rule 4
would state that all amounts due from
a Participant pursuant to proposed
Section 5 of Rule 4 may be debited from
the Settlement Account of such
Participant. Proposed Section 5 of Rule
4 would also provide that DTC may
retain the entire Actual Participants
Fund Deposit of a Participant subject to
loss allocation, up to the Participant’s
Loss Allocation Cap in accordance with
Section 8(b) of Rule 4. Participants that
wish to terminate their business with
DTC would be required to comply with
the requirements in proposed Section
6(b) of Rule 4, described further below.
Specifically, proposed Section 5 would
provide that if, after notifying DTC of its
election to terminate its business with
DTC pursuant to proposed Section 8(b)
of Rule 4, the Participant fails to comply
with the provisions of proposed Section
6(b) of Rule 4, its notice of termination
would be deemed void and any further
losses resulting from the applicable
Event Period may be allocated against it
as if it had not given such notice.
Section 6
Section 6 of Rule 4 currently provides
that whenever a Participant ceases to be
such, it continues to be obligated (a) to
satisfy any deficiency in the amount of
its Required Participants Fund Deposit
and/or Required Preferred Stock
60 See
PO 00000
supra note 36.
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38369
Investment that it did not satisfy prior
to such time, including (i) any
deficiency resulting from a pro rata
charge with respect to which the
Participant has given notice to DTC of
its election to terminate its business
with DTC pursuant to Section 8 of Rule
4 and (ii) any deficiency the Participant
is required to satisfy pursuant to
Sections 3 (an obligation that a
Participant failed to satisfy) or 5 (the
requirement of a Participant to eliminate
the deficiency in its Required
Participants Fund Deposit) of Rule 4
and (b) to discharge any liability of the
Participant to DTC resulting from the
transactions of the Participant open at
the time it ceases to be a Participant or
on account of transactions occurring
while it was a Participant.
The heading ‘‘Obligations of
Participant Upon Termination’’ would
be added to Section 6 of Rule 4. As
discussed above, DTC is proposing to
add proposed Section 6(a) to Rule 4,
which would (i) clarify the requirements
for the Voluntary Retirement of a
Participant, and (ii) address the
situation where a Participant submits a
Voluntary Retirement Notice and
subsequently receives a Settlement
Charge Cap or the first Loss Allocation
Notice in a round on or prior to the
Voluntary Retirement Date. Proposed
Section 6(a) of Rule 4 would also
provide that if a Participant submits a
Voluntary Retirement Notice and
subsequently receives a Settlement
Charge Notice or the first Loss
Allocation Notice in a round on or prior
to the Voluntary Retirement Date, such
Participant must timely submit a
Termination Notice in order to benefit
from its Settlement Charge Cap or Loss
Allocation Cap, respectively. In such a
case, the Termination Notice would
supersede and void the pending
Voluntary Retirement Notice submitted
by the Participant.
DTC is proposing to add Proposed
Section 6(b), titled ‘‘Upon Termination
Following Settlement Charge or Loss
Allocation.’’ Proposed Section 6(b)
would state that if a Participant timely
notifies DTC of its election to terminate
its business with DTC in respect of a pro
rata settlement charge as set forth in
proposed Section 4 of Rule 4 or a loss
allocation as set forth in proposed
Section 5 of Rule 4, defined as a
‘‘Termination Notice’’, the Participant
would be required to: (1) Specify in the
Termination Notice a Participant
Termination Date, which date shall be
no later than ten Business Days
following the last day of the applicable
Settlement Charge Termination
Notification Period or Loss Allocation
Termination Notification Period; (2)
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cease all activities and use of the
Corporation’s services other than
activities and services necessary to
terminate the business of the Participant
with DTC; and (3) ensure that all
activities and use of DTC services by
such Participant cease on or prior to the
Participant Termination Date.
Proposed Section 6(b) of Rule 4 would
provide that a Participant that
terminates its business with DTC in
compliance with proposed Section 6(b)
would remain obligated for its pro rata
share of losses and liabilities with
respect to any Event Period for which it
is otherwise obligated; however, its
aggregate obligation would be limited to
the amount of its Loss Allocation Cap
(as fixed in the round for which it
withdrew).
DTC is proposing to include a
sentence in proposed Section 6(b) to
make it clear that if the Participant fails
to comply with the requirements set
forth in this section, its Termination
Notice will be deemed void, and the
Participant will remain subject to
further pro rata settlement charges
pursuant to proposed Section 4 of Rule
4 or loss allocations pursuant to
proposed Section 5 of Rule 4, as
applicable, as if it had not given such
notice.
For clarity, DTC is proposing to
consolidate the requirements from
current Section 6 of Rule 4 into
proposed Section 6(c) of Rule 4, titled
‘‘After Any Termination,’’ and modify
them to conform to other proposed rule
changes. In particular, DTC is proposing
to clarify that a Participant that ceases
to be such would continue to be subject
to proposed Section 5 of Rule 4 for any
Event Period for which it was a
Participant on the first day of the Event
Period. Proposed Section 6(c) of Rule 4
would state that whenever a Participant
ceases to be such, it would continue to
be obligated (i) to satisfy any deficiency
in the amounts of its Required
Participants Fund Deposit and/or
Required Preferred Stock Investment
that it did not satisfy prior to such time,
including any deficiency the Participant
is required to satisfy pursuant to
proposed Sections 3 or 4 of Rule 4, (ii)
subject to proposed Section 8, to satisfy
any loss allocation pursuant to proposed
Section 5 of Rule 4, and (iii) to
discharge any liability of the Participant
to DTC resulting from the transactions
of the Participant open at the time it
ceases to be a Participant or on account
of transactions occurring while it was a
Participant.
Section 8
Pursuant to the proposed rule change,
Section 8 would be titled ‘‘Termination;
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Obligation for Pro Rata Settlement
Charges and Loss Allocations,’’ and
would be divided among proposed
Section 8(a) ‘‘Settlement Charges,’’
proposed Section 8(b) ‘‘Loss
Allocations,’’ proposed Section 8(c)
‘‘Maximum Obligation,’’ and proposed
Section 8(d) ‘‘Obligation to Replenish
Deposit.’’
Pursuant to proposed Section 8(a), if
a Participant, within five (5) Business
Days after issuance of a Settlement
Charge Notice pursuant to proposed
Section 4 of Rule 4, gives notice to DTC
of its election to terminate its business
with DTC, the Participant would remain
obligated for (i) its pro rata settlement
charge that was the subject of such
Settlement Charge Notice and (ii) all
other pro rata settlement charges made
by DTC until the Participant
Termination Date. Subject to proposed
Section 8(c), the terminating
Participant’s obligation would be
limited to the amount of its Aggregate
Required Deposit and Investment, as
fixed on the day of the pro rata
settlement charge that was the subject of
the Settlement Charge Notice, plus
100% of the amount thereof, which is
substantively the same limitation as
provided for pro rata charges in current
Section 8 of Rule 4.61
Pursuant to proposed Section 8(b), if
a Participant, within five (5) Business
Days after the issuance of a first Loss
Allocation Notice for any round
pursuant to proposed Section 5 of Rule
4 gives notice to DTC of its election to
terminate its business with DTC, the
Participant would remain liable for (i)
the loss allocation that was the subject
of such notice and (ii) all other loss
allocations made by DTC with respect to
the same Event Period. Subject to
proposed Section 8(c), the obligation of
a Participant which elects to terminate
its business with DTC would be limited
to the amount of its Aggregate Required
Deposit and Investment, as fixed on the
first day of the Event Period, plus 100%
of the amount thereof, which is
substantively the same limitation as
provided for pro rata charges in current
Section 8 of Rule 4.62
Proposed Section 8(c) would provide
that under no circumstances would the
aggregate obligation of a Participant
under proposed Section 8(a) and
proposed Section 8(b) exceed the
amount of its Aggregate Required
Deposit and Investment, as fixed on the
earlier of the (i) day of the pro rata
settlement charge that was the subject of
the Settlement Charge Notice giving rise
to a Termination Notice, and (ii) first
61 See
62 See
PO 00000
supra note 24.
supra note 39.
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day of the Event Period that was the
subject of the first Loss Allocation
Notice in a round giving rise to a
Termination Notice, plus 100% of the
amount thereof. The purpose of
proposed Section 8(c) is to address a
situation where a Participant could
otherwise be subject to both a
Settlement Charge Cap and Loss
Allocation Cap.
Proposed Section 8(d) would retain
the last paragraph in current Section 8
of Rule 4, replacing ‘‘pro rata charge’’
with ‘‘pro rata settlement charge’’ and
‘‘loss allocation.’’ 63 Proposed Section
8(d) would provide that if the amount
of the Actual Participants Fund Deposit
of a Participant is insufficient to satisfy
a pro rata settlement charge pursuant to
proposed Section 4 and proposed
Section 8(a) or a loss allocation
pursuant to proposed Section 5 and
proposed Section 8(b), the Participant
would be obligated to Deposit the
amount of any such deficiency to the
Participants Fund notwithstanding the
fact that the Participant subsequently
ceases to be a Participant.
Section 9
Pursuant to the proposed rule change,
proposed Section 9 of Rule 4 would
provide that the recovery and
repayment provisions in current Rule 4
apply to both pro rata settlement
charges and loss allocations.64
Specifically, proposed Section 9 would
provide that if an amount is charged
ratably pursuant to proposed Section 4
or allocated ratably pursuant to
proposed Section 5 and such amount is
recovered by DTC, in whole or in part,
the net amount of the recovery shall be
repaid ratably (on the same basis that it
was originally charged or allocated) to
the Persons against which the amount
was originally charged or allocated by
(i) crediting the appropriate amounts to
the Actual Participants Fund Deposits of
Persons which are still Participants and
(ii) paying the appropriate amounts in
cash to Persons which are not still
Participants. In addition, proposed
Section 9 would clarify that no loss
allocation under proposed Rule 4 would
constitute a waiver of any claim DTC
may have against a Participant for any
63 This is a ministerial change because this
paragraph currently applies to current Section 4 of
Rule 4, which includes charges to complete
settlement and for loss allocation, as would be
provided in proposed Section 4 and proposed
Section 5 of
Rule 4.
64 This is a ministerial change because Section 9
currently applies to current Section 4 of Rule 4,
which includes charges to complete settlement and
for loss allocation, as would be provided in
proposed Section 4 and proposed Section 5 of Rule
4.
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losses or liabilities to which the
Participant is subject under DTC Rules
and Procedures, including, without
limitation, any loss or liability to which
it may be subject under proposed
Rule 4.
DTC further proposes to add the
heading ‘‘No Waiver; Recovery and
Repayment’’ to proposed Section 9.
B. Other Proposed Clarifying,
Conforming and Technical Changes to
Rule 4
Section 1
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Section 1(a) and Section 1(b). Section
1(a) addresses, among other things, the
formula for determining the Required
Participants Fund Deposits of
Participants. DTC is proposing to insert
the words ‘‘or wind-down’’ to make it
clear that the formulas for determining
the Required Participants Fund Deposits
of Participants and the amount of the
minimum Required Participants Fund
Deposit would be fixed by DTC so as to
assure that the aggregate amount of
Required Participants Fund Deposits of
Participants will be increased to provide
for the costs and expenses incurred by
it incidental to the wind-down of DTC,
in addition to the voluntary liquidation
of DTC.65 Further, DTC proposes to
delete the extraneous phrase ‘‘if any.’’
For increased clarity and readability,
DTC is proposing to consolidate Section
1(b) into Section 1(a), and to relocate the
sentences ‘‘The Corporation may require
a Participant to Deposit an additional
amount to the Participants Fund
pursuant to Section 2 of Rule 9(A). Any
such additional amount shall be part of
the Required Participants Fund Deposit
of such Participant.’’ from Section 1(a)
to a new proposed Section 1(b). In
addition to the relocation, DTC would
add a defined term for such additional
amount, as ‘‘Additional Participants
Fund Deposit,’’ for drafting convenience
and transparency throughout proposed
Rule 4. Further, DTC proposes to add
the headings ‘‘Required Participants
Fund Deposits’’ and ‘‘Additional
Participants Fund Deposits’’ to Section
65 On December 18, 2017, DTC submitted a
proposed rule change and advance notice to adopt
the Recovery & Wind-down Plan of DTC, and
amend the Rules in order to adopt Rule 32(A)
(Wind-down of the Corporation) and Rule 38
(Market Disruption and Force Majeure). 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).
On June 28, 2018, DTC filed amendments to the
proposed rule change and advance notice with the
Commission and the Board of Governors of the
Federal Reserve System, respectively, available at
https://www.dtcc.com/legal/sec-rule-filings.aspx.
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1(a) and proposed Section 1(b),
respectively.
Section 1(c). For enhanced
readability, DTC is proposing to add the
heading ‘‘Voluntary Participants Fund
Deposits’’ to Section 1(c) of Rule 4, and
to replace the word ‘‘as’’ with ‘‘in the
manner.’’
Section 1(d). For enhanced clarity,
DTC is proposing to modify Section 1(d)
to make it clear that any Additional
Participants Fund Deposit is required to
be in cash. DTC is also proposing to
delete the extraneous phrase ‘‘pursuant
to this Section’’ and to replace language
regarding Section 2 of Rule 9(A) with
the proposed defined term ‘‘Additional
Participants Fund Deposit.’’ Further,
DTC proposes to add the heading ‘‘Cash
Participants Fund’’ to Section 1(d) of
Rule 4.
Section 1(e). For enhanced clarity,
DTC is proposing to add the language
‘‘among Account Families’’ to clarify the
scope of the allocation described in
Section 1(e). In addition, DTC proposes
to add the heading ‘‘Allocation of
Participants Fund Deposits Among
Account Families’’ to Section 1(e) of
Rule 4.
Section 1(f). Section 1(f) addresses,
among other things, the permitted use of
the Participants Fund. For consistency
with the balance of Section 1(f), the first
paragraph would be amended to state
that the Actual Participants Fund
Deposits of Participants ‘‘may be used or
invested’’ instead of stating ‘‘shall be
applied.’’ Section 1(f) provides, in part,
that the Participants Fund is limited to
the satisfaction of losses or liabilities of
DTC incident to the business of DTC.
Section 1(f) currently defines
‘‘business’’ with respect to DTC as ‘‘the
doing of all things in connection with or
relating to [DTC’s] performance of the
services specified in the first and second
paragraphs of Rule 6 or the cessation of
such services.’’ For enhanced
transparency of the permitted uses of
the Participants Fund, proposed Section
1(f) would be amended to explicitly
state that the Actual Participants Fund
Deposits of Participants may be used (i)
to satisfy the obligations of Participants
to DTC, as provided in proposed Section
3, (ii) to fund settlement among nondefaulting Participants, as provided in
proposed Section 4 and (iii) to satisfy
losses and liabilities of DTC incident to
the business of DTC, as provided in
proposed Section 5. Section 1(f) would
also be amended to make the definition
of ‘‘business’’ applicable to the entirety
of Rule 4, instead of just Section 1(f), as
the term would appear elsewhere in the
rule pursuant to the proposed rule
change. In addition, DTC proposes to
add the heading ‘‘Maintenance,
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38371
Permitted Use and Investment of
Participants Fund’’ to Section 1(f) of
Rule 4.
Section 1(g) (consolidated into
proposed Section 1(f)). Pursuant to the
proposed rule change, DTC would
consolidate current Section 1(g) into
proposed Section 1(f), and modify
language to make it clear that DTC may
invest cash in the Participants Fund in
accordance with the Clearing Agency
Investment Policy adopted by DTC.66
Further, language would be streamlined
by replacing ‘‘securities, repurchase
agreements or deposits’’ with ‘‘financial
assets,’’ and ‘‘securities and repurchase
agreements in which such cash is
invested’’ with ‘‘its investment of such
cash.’’
Section 1(h) (proposed Section 1(g)).
As discussed above, DTC is proposing to
replace ‘‘four’’ years with ‘‘two’’ years,
in order to reduce the time within
which DTC would be required to return
the Actual Participants Fund Deposit of
a former Participant. In addition, DTC is
proposing to (i) add the heading ‘‘Return
of Participants Fund Deposits to
Participants’’ to proposed Section 1(g),
(ii) update a cross reference, and (iii)
correct two typographical errors.
Section 2
Pursuant to the proposed rule change,
Section 2 of Rule 4 would be titled
‘‘Participants Investment.’’
Section 2(a)–2(d) (Proposed Section
2(a)). For clarity, DTC is proposing to
consolidate Sections 2(b)–2(d) into
proposed Section 2(a) and would add
the heading ‘‘Required Preferred Stock
Investments’’ to proposed Section 2(a).
In addition, DTC proposes to modify
certain language to update references
and cross-references to specific
subsections to reflect the proposed
changes to the numbering of the
66 See Securities Exchange Act Release No. 79528
(December 12, 2016), 81 FR 91232 (December 16,
2016) (SR–DTC–2016–007). The Clearing Agency
Investment Policy (the ‘‘Policy’’) governs the
management, custody, and investment of cash
deposited to the Participants Fund, the proprietary
liquid net assets (cash and cash equivalents) of DTC
and other funds held by DTC. The Policy sets forth
guiding principles for the investment of those
funds, which include adherence to a conservative
investment philosophy that places the highest
priority on maximizing liquidity and avoiding risk,
as well as mandating the segregation and separation
of funds. The Policy also addresses the process for
evaluating credit ratings of counterparties and
identifies permitted investments within specified
parameters. In general, assets are required to be
held by regulated and creditworthy financial
institution counterparties and invested in financial
instruments that, with respect to the Participants
Fund, may include deposits with banks, including
the Federal Reserve Bank of New York,
collateralized reverse-repurchase agreements, direct
obligations of the U.S. government and moneymarket mutual funds.
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sradovich on DSK3GMQ082PROD with NOTICES
subsections in proposed Section 2 of
Rule 4.
Section 2(e) (Proposed Section 2(b)).
For enhanced clarity, DTC is proposing
to add the language ‘‘among Account
Families’’ to clarify the scope of the
allocation described in proposed
Section 2(b). In addition, DTC proposes
to add the heading ‘‘Allocation of
Preferred Stock Investments Among
Account Families’’ to proposed Section
2(b) of Rule 4.
Section 2(f) (Proposed Section 2(c)).
DTC is proposing to add language to
clarify that when any Pledge of a
Preferred Stock Security Interest
pursuant to proposed Section 2(c) of
Rule 4 is made by appropriate entries on
the books of DTC, the Rules, in addition
to such entries, shall be deemed to be
a security agreement for purposes of the
New York Uniform Commercial Code.
In addition, DTC proposes to update a
cross-reference to proposed Section 2(c).
In addition, DTC proposes to add the
heading ‘‘Security Interest in Preferred
Stock Investments of Participants’’ to
proposed Section 2(c).
Sections 2(g)–2(i) (Proposed Sections
2(d)–2(f)). DTC proposes to add the
headings ‘‘Dividends on Preferred Stock
Investments of Participants,’’ ‘‘Sale of
Preferred Stock Investments of
Participants,’’ and ‘‘Permitted Transfers
of Preferred Stock Investments of
Participants’’ to proposed Sections 2(d),
2(e), and 2(f), respectively. Proposed
Sections 2(e) and 2(f) would be
modified to update cross-references to
certain subsections. In addition,
proposed Section 2(f) would be
modified to renumber paragraphs and
internal lists for consistency with the
numbering schemes in Rule 4.
Section 7. For clarity, DTC is
proposing to amend Section 7 of Rule 4
to (i) replace language referencing
Additional Participants Fund Deposits
with the proposed defined term, (ii)
update cross-references to reflect
proposed renumbering, and (iii) add the
headings ‘‘Increased Participants Fund
Deposits and Preferred Stock
Investments,’’ ‘‘Required Participants
Fund Deposits,’’ and ‘‘Required
Preferred Stock Investments’’ to
proposed Sections 7, 7(a) and 7(b) of
Rule 4, respectively.
C. Proposed Changes to Rule 1
DTC is proposing to amend Rule 1
(Definitions; Governing Law) to add
cross-references to proposed terms that
would be defined in Rule 4, and to
delete one defined term. The defined
terms to be added are: ‘‘Additional
Participants Fund Deposit,’’ ‘‘Corporate
Contribution,’’ ‘‘CTA Participant,’’
‘‘Declared Non-Default Loss Event,’’
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‘‘Default Loss Event,’’ ‘‘Event Period,’’
‘‘Loss Allocation Cap,’’ ‘‘Loss Allocation
Notice,’’ ‘‘Loss Allocation Termination
Notification Period,’’ ‘‘Participant
Default,’’ ‘‘Participant Termination
Date,’’ ‘‘Settlement Charge Cap,’’
‘‘Settlement Charge Notice,’’
‘‘Settlement Charge Termination
Notification Period,’’ ‘‘Termination
Notice,’’ ‘‘Voluntary Retirement,’’
Voluntary Retirement Date,’’ and
‘‘Voluntary Retirement Notice’’. The
term ‘‘Section 8 Pro Rata Charge’’ would
be deleted from Rule 1, because it
would be deleted from proposed Rule 4
as no longer necessary.
D. Proposed Changes to Rule 2
Section 1. The proposed rule change
would modify Section 1 of Rule 2 by
adding ‘‘subject to Section 6 of Rule 4’’
to the end of the following provision:
‘‘A Participant may terminate its
business with the Corporation by
notifying the Corporation as provided in
Sections 7 or 8 of Rule 4 or, if for a
reason other than those specified in said
Sections 7 and 8, by notifying the
Corporation thereof; the Participant
shall, upon receipt of such notice by the
Corporation, cease to be a Participant.’’
DTC is proposing to add this language
in order to clarify that the termination
would be subject to the requirements in
proposed Section 6 of Rule 4.
Participant Outreach
Beginning in August 2017, DTC has
conducted outreach to Participants in
order to provide them with advance
notice of the proposed changes. As of
the date of this filing, no written
comments relating to the proposed
changes have been received in response
to this outreach. The Commission will
be notified of any written comments
received.
Implementation Timeframe
Pending Commission approval, DTC
expects to implement this proposal
within two (2) Business Days after
approval. Participants would be advised
of the implementation date of this
proposal through issuance of a DTC
Important Notice.
Expected Effect on Risks to the Clearing
Agency, Its Participants and the Market
DTC believes that the proposed rule
changes to clarify the remedies available
to DTC with respect to a Participant
Default, including the application of the
Participants Fund as a liquidity
resource, and by clarifying and
providing the related processes, would
provide clarity as to the application of
the Participants Fund to fund settlement
and would mitigate any risk to
PO 00000
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Fmt 4703
Sfmt 4703
settlement finality due to Participant
Default.
DTC believes that the proposed rule
change to enhance the resiliency of
DTC’s loss allocation process and to
shorten the time within which DTC is
required to return the Actual
Participants Fund Deposit of a former
Participant would reduce the risk of
uncertainty to DTC, its Participants and
the market overall.
By replacing the discretionary
application of DTC retained earnings to
losses and liabilities with a mandatory
and defined amount of the Corporate
Contribution, the proposed rule change
is designed to provide enhanced
transparency and accessibility to
Participants as to how much DTC would
contribute in the event of a loss or
liability. The proposed rule change also
clarifies that the proposed Corporate
Contribution would apply to both
Default Loss Events and Declared NonDefault Loss Events. The proposed rule
change would provide greater
transparency as to the proposed
replenishment period for the Corporate
Contribution, which would allow
Participants to better assess the
adequacy of DTC’s loss allocation
process. Taken together, the proposed
rule changes with respect to the
Corporate Contribution would enhance
the overall resiliency of DTC’s loss
allocation process by specifying the
calculation and application of DTC’s
Corporate Contribution, including the
proposed replenishment period, and
would allow Participants to better assess
the adequacy of DTC’s loss allocation
process.
By introducing the concept of an
Event Period, DTC would be able to
group Default Loss Events and Declared
Non-Default Loss Events occurring
within a period of ten (10) Business
Days for purposes of allocating losses to
Participants. DTC believes that the
Event Period would provide a defined
structure for the loss allocation process
to encompass potential sequential
Default Loss Events or Declared NonDefault Loss Events that may or may not
be closely linked to an initial event and/
or a market dislocation episode. Having
this structure would enhance the overall
resiliency of DTC’s loss allocation
process because the proposed rule
would expressly address losses that may
arise from multiple Default Loss Events
and/or Declared Non-Default Loss
Events that arise in quick succession.
Moreover, the proposed Event Period
structure would provide certainty for
Participants concerning their maximum
exposure to mutualized loss allocation
with respect to such events.
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By introducing the concept of
‘‘rounds’’ (and accompanying Loss
Allocation Notices) and applying this
concept to the timing of loss allocation
payments and the Participant
termination process in connection with
the loss allocation process, DTC would
(i) set forth a defined amount that it
would allocate to Participants during
each round (i.e., the round cap), (ii)
advise Participants of loss allocation
obligation information as well as round
information through the issuance of
Loss Allocation Notices, and (iii)
provide Participants with the option to
limit their loss allocation exposure after
the issuance of the first Loss Allocation
Notice in each round. These proposed
rule changes would enhance the overall
resiliency of DTC’s loss allocation
process because they would expressly
permit DTC to continue the loss
allocation process in successive rounds
until all of DTC’s losses are allocated
and enable DTC to identify continuing
Participants for purposes of calculating
subsequent loss allocation obligations in
successive rounds. Moreover, the
proposed rule changes would define for
Participants a clear manner and process
in which they could cap their loss
allocation exposure to DTC.
By reducing the time within which
DTC is required to return the Actual
Participants Fund Deposit of a former
Participant, DTC would enable firms
that have exited DTC to have access to
their funds sooner than under current
Rule 4 while maintaining the protection
of DTC and its provision of clearance
and settlement services. DTC would
continue to be protected under the
proposed rule change, which will
maintain the provision that DTC may
offset the return of funds against the
amount of any loss or liability of DTC
arising out of or relating to the
obligations of the former Participant to
DTC, and would provide that DTC could
retain the funds for up to two (2) years.
As such, DTC would maintain a
necessary level of coverage for possible
claims arising in connection with the
DTC activities of a former Participant.
sradovich on DSK3GMQ082PROD with NOTICES
Management of Identified Risks
DTC is proposing the rule changes as
described in detail above in order to (i)
provide clarity as to the application of
the Participants Fund to fund settlement
when a Participant fails to settle, (ii)
enhance the resiliency of DTC’s loss
allocation process, (iii) provide clarity
and certainty to Participants regarding
DTC’s loss allocation process, (iv)
provide clarity with respect to the
Voluntary Retirement of a Participant.
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Consistency With the Clearing
Supervision Act
The proposed rule change would be
consistent with Section 805(b) 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’’).67 The
objectives and principles of Section
805(b) of the Clearing Supervision Act
are to promote robust risk management,
promote safety and soundness, reduce
systemic risks, and support the stability
of the broader financial system.68
The proposed rule change would
provide clarity and certainty around the
use of the Participants Fund in
connection with a Participant Default by
expressly providing for the application
of the Actual Participants Fund Deposit
of the defaulting Participant to its
unpaid obligations, and by providing a
defined process for pro rata settlement
charges to non-defaulting Participants
that is separate from the loss allocation
process. Together, these proposed rule
changes more clearly specify the rights
and obligations of DTC and its
Participants in respect of the application
of the Participants Fund. Reducing the
risk of uncertainty to DTC, its
Participants, and the market overall
would promote robust risk management,
promote safety and soundness, reduce
systemic risks, and support the stability
of the broader financial system.
Therefore, DTC believes that the
proposed rule changes to provide clarity
and certainty around the use of the
Participants Fund in connection with a
Participant Default, and to provide a
defined process for pro rata settlement
charges to the Actual Participants Fund
Deposits of non-defaulting Participants,
are consistent with the objectives and
principles of Section 805(b) of the
Clearing Supervision Act cited above.
The proposed rule change would
enhance the resiliency of DTC’s loss
allocation process by (1) requiring a
defined contribution of DTC corporate
funds to a loss, (2) introducing an Event
Period, and (3) introducing the concept
of ‘‘rounds’’ (and accompanying Loss
Allocation Notices) and applying this
concept to the timing of loss allocation
payments and the Participant
termination process in connection with
the loss allocation process. Together,
these proposed rule changes would (i)
create greater certainty for Participants
regarding DTC’s obligation towards a
loss, (ii) more clearly specify DTC’s and
Participants’ obligations toward a loss
67 12
U.S.C. 5464(b).
Frm 00101
Fmt 4703
and balance the need to manage the risk
of sequential defaults and other
potential loss events against
Participants’ need for certainty
concerning their maximum exposures,
and (iii) provide Participants the
opportunity to limit their exposure to
DTC by capping their exposure to loss
allocation. Reducing the risk of
uncertainty to DTC, its Participants and
the market overall would promote
robust risk management, promote safety
and soundness, reduce systemic risks,
and support the stability of the broader
financial system. Therefore, DTC
believes that the proposed rule change
to enhance the resiliency of DTC’s loss
allocation process is consistent with the
objectives and principles of Section
805(b) of the Clearing Supervision Act
cited above.
By reducing the time within which
DTC is required to return the Actual
Participants Fund Deposit of a former
Participant, DTC would enable firms
that have exited DTC to have access to
their funds sooner than under current
Rule 4 while maintaining the protection
of DTC and its provision of clearance
and settlement services. DTC would
continue to be protected under the
proposed rule change, which will
maintain the provision that DTC may
offset the return of funds against the
amount of any loss or liability of DTC
arising out of or relating to the
obligations of the former Participant to
DTC, and would provide that DTC could
retain the funds for up to two (2) years.
As such, DTC would maintain a
necessary level of coverage for possible
claims arising in connection with the
DTC activities of a former Participant.
Enabling DTC to continue to meet its
clearance and settlement obligations
would promote robust risk management,
promote safety and soundness, reduce
systemic risks, and support the stability
of the broader financial system.
Therefore, DTC believes that this
proposed rule change is consistent with
the objectives and principles of Section
805(b) of the Clearing Supervision Act
cited above.
The proposed rule change is also
consistent with Rules 17Ad–22(e)(7)(i),
17Ad–22(e)(13), and 17Ad–22 (e)(23)(i),
promulgated under the Act.69
Rule 17Ad–22(e)(7)(i) under the Act
requires, in part, that DTC establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to effectively
measure, monitor, and manage the
liquidity risk that arises in or is borne
by DTC, including measuring,
69 17 CFR 240.17Ad–22(e)(7)(i), (e)(13) and
(e)(23)(i).
68 Id.
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monitoring, and managing its settlement
and funding flows on an ongoing and
timely basis, and its use of intraday
liquidity, by maintaining sufficient
liquid resources to effect same-day
settlement of payment obligations with
a high degree of confidence under a
wide range of foreseeable stress
scenarios.70 By clarifying the remedies
available to DTC with respect to a
Participant Default, including the
application of the Participants Fund as
a liquidity resource, and by clarifying
and providing the related processes, the
proposed rule change is designed so that
DTC may manage its settlement and
funding flows on a timely basis and
apply the Participants Fund as a liquid
resource in order to effect same day
settlement of payment obligations with
a high degree of confidence. Therefore,
DTC believes that the proposed rule
changes with respect to the application
of the Actual Participants Fund Deposits
of non-defaulting Participants to
complete settlement are consistent with
Rule 17Ad–22(e)(7)(i) under the Act.
Rule 17Ad–22(e)(13) under the Act
requires, in part, that DTC establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to ensure DTC has
the authority and operational capacity
to take timely action to contain losses
and liquidity demands and continue to
meet its obligations.71 The proposed
rule changes to (1) require a defined
Corporate Contribution to a loss, (2)
introduce an Event Period, (3) introduce
the concept of ‘‘rounds’’ (and
accompanying Loss Allocation Notices)
and apply this concept to the timing of
loss allocation payments and the
Participant termination process in
connection with the loss allocation
process, taken together, are designed to
enhance the resiliency of DTC’s loss
allocation process. Having a resilient
loss allocation process would help
ensure that DTC can effectively and
timely address losses relating to or
arising out of Default Loss Events and/
or Declared Non-Default Loss Events,
which in turn would help DTC contain
losses and continue to conduct its
clearance and settlement business. In
addition, by providing clarity as to the
application of the Participants Fund to
fund settlement in the event of a
Participant Default, the proposed rule
change is designed to clarify that DTC
is authorized to use the Participants
Fund to fund settlement. Therefore,
DTC believes that the proposed rule
changes to enhance the resiliency of
DTC’s loss allocation process, and to
70 Id.
71 Id.
at 240.17Ad–22(e)(7)(i).
at 240.17Ad–22(e)(13).
VerDate Sep<11>2014
17:36 Aug 03, 2018
provide clarity as to the application of
the Participants Fund to fund
settlement, are consistent with Rule
17Ad–22(e)(13) under the Act.
Rule 17Ad–22(e)(23)(i) under the Act
requires DTC to establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
publicly disclose all relevant rules and
material procedures, including key
aspects of DTC’s default rules and
procedures.72 The proposed rule
changes to (i) separate the provisions for
the use of the Participants Fund for
settlement and for loss allocation, (ii)
make clarifying changes to the
provisions regarding the application of
the Participants Fund to complete
settlement and for the allocation of
losses, (iii) further align the loss
allocation rules of the DTCC Clearing
Agencies, (iv) improve the overall
transparency and accessibility of the
provisions in the Rules governing loss
allocation, and (v) make technical and
conforming changes, would not only
ensure that DTC’s loss allocation rules
are, to the extent practicable and
appropriate, consistent with the loss
allocation rules of the other DTCC
Clearing Agencies, but also would help
to ensure that DTC’s loss allocation
rules are transparent and clear to
Participants. Aligning the loss allocation
rules of the DTCC Clearing Agencies
would provide consistent treatment, to
the extent practicable and appropriate,
especially for firms that are participants
of two or more DTCC Clearing Agencies.
Having transparent and clear loss
allocation rules would enable
Participants to better understand the key
aspects of DTC’s Rules and Procedures
relating to Participant Default, as well as
non-default events, and provide
Participants with increased
predictability and certainty regarding
their exposures and obligations. As
such, DTC believes that the proposed
rule changes with respect to pro rata
settlement charges, and to align the loss
allocation rules across the DTCC
Clearing Agencies and to improve the
overall transparency and accessibility of
DTC’s loss allocation rules are
consistent with Rule 17Ad-22(e)(23)(i)
under the Act.
The proposed rule changes to clarify
the Voluntary Retirement of a
Participant would improve the clarity of
the Rules and help to ensure that DTC’s
Voluntary Retirement process is
transparent and clear to Participants.
Having clear Voluntary Retirement
provisions would enable Participants to
better understand the Voluntary
Retirement process and provide
72 Id.
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at 240.17Ad–22(e)(23)(i).
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Participants with increased
predictability and certainty regarding
their rights and obligations with respect
to such process. As such, DTC believes
that the proposed rule changes with
respect to Voluntary Retirement are also
consistent with Rule 17Ad–22(e)(23)(i)
under the Act.
III. Date of Effectiveness of the Advance
Notice, and Timing for Commission
Action
The proposed change may be
implemented if the Commission does
not object to the proposed change
within 60 days of the later of (i) the date
that the proposed change was filed with
the Commission or (ii) the date that any
additional information requested by the
Commission is received. 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–2017–804 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–DTC–2017–804. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
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only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the Advance Notice that
are filed with the Commission, and all
written communications relating to the
Advance Notice between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of DTC and on DTCC’s website
(https://dtcc.com/legal/sec-rulefilings.aspx). All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–DTC–
2017–804 and should be submitted on
or before August 21, 2018.
By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018–16714 Filed 8–3–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83748; File No. SR–NSCC–
2017–806]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of
Amendment No. 1 to an Advance
Notice To Amend the Loss Allocation
Rules and Make Other Changes
sradovich on DSK3GMQ082PROD with NOTICES
July 31, 2018.
On December 18, 2017, National
Securities Clearing Corporation
(‘‘NSCC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
advance notice SR–NSCC–2017–806
(‘‘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
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17:36 Aug 03, 2018
Jkt 244001
(‘‘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
On April 10, 2018, the Commission
required additional information from
NSCC 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, NSCC 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, and on July 6, 2018,
submitted a response to the
Commission’s request for additional
1 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b–
4(n)(1)(i), respectively. On December 18, 2017,
NSCC filed the Advance Notice as a proposed rule
change (SR–NSCC–2017–018) 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.
82428 (January 2, 2018), 83 FR 897 (January 8,
2018) (SR–NSCC–2017–018). 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. 82670
(February 8, 2018), 83 FR 6626 (February 14, 2018)
(SR–DTC–2017–022; SR–FICC–2017–022; SR–
NSCC–2017–018). 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. 82910 (March 20, 2018), 83 FR 12968 (March
26, 2018) (SR–NSCC–2017–018). 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 Nos. 83510
(June 25, 2018), 83 FR 30791 (June 29, 2018) (SR–
DTC–2017–022; SR–FICC–2017–022; SR–NSCC–
2017–018). On June 28, 2018, NSCC filed
Amendment No. 1 to the Proposed Rule Change.
See Securities Exchange Act Release No. 83633
(July 13, 2018), 83 FR 34227 (July 19, 2018) (SR–
NSCC–2017–018). 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. 82584
(January 24, 2018), 83 FR 4377 (January 30, 2018)
(SR–NSCC–2017–806). 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
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/nscc-an.htm.
PO 00000
Frm 00103
Fmt 4703
Sfmt 4703
38375
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.4
The Advance Notice, as amended by
Amendment No. 1, is described in Items
I and II below, which Items have been
prepared by NSCC. 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
This Advance Notice consists of
proposed modifications to NSCC’s Rules
and Procedures (‘‘Rules’’) in order to
amend provisions in the Rules regarding
loss allocation as well as make other
changes, as described in greater detail
below.5
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
Written comments relating to this
proposal have not been solicited or
received. NSCC will notify the
Commission of any written comments
received by NSCC.
4 To promote the public availability and
transparency of its post-notice amendment, NSCC
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/nscc-an.htm and thus been
publicly available since June 29, 2018. 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/nscc-an.htm.
5 Capitalized terms not defined herein are defined
in the Rules, available at https://www.dtcc.com/∼/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
E:\FR\FM\06AUN1.SGM
06AUN1
]]>Agencies
[Federal Register Volume 83, Number 151 (Monday, August 6, 2018)]
[Notices]
[Pages 38357-38375]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-16714]
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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
[[Page 38358]]
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\
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\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 Securities Exchange Act Release No. 82670 (February 8, 2018), 83
FR 6626 (February 14, 2018) (SR-DTC-2017-022; SR-FICC-2017-022; SR-
NSCC-2017-018). 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. 82914
(March 20, 2018), 83 FR 12978 (March 26, 2018) (SR-DTC-2017-022). 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 Nos. 83510 (June 25, 2018), 83 FR 30791 (June 29, 2018) (SR-
DTC-2017-022; SR-FICC-2017-022; SR-NSCC-2017-018). On June 28, 2018,
DTC filed Amendment No. 1 to the Proposed Rule Change. See
Securities Exchange Act Release No. 83629 (July 13, 2018), 83 FR
34246 (July 19, 2018) (SR-DTC-2017-022). 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. 82582 (January 24,
2018), 83 FR 4297 (January 30, 2018) (SR-DTC-2017-804). 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
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, and on July 6, 2018,
submitted a response to the Commission's 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.\4\
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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. 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
This advance notice is filed by The Depository Trust Company
(``DTC'') in connection with proposed modifications to the Rules, By-
Laws and Organization Certificate of DTC (``Rules'').\5\ The proposed
rule change would revise Rule 4 (Participants Fund and Participants
Investment) to (i) provide separate sections for (x) the use of the
Participants Fund as a liquidity resource for settlement and (y) loss
allocation among Participants of losses and liabilities arising out of
Participant defaults or due to non-default events; and (ii) enhance the
resiliency of DTC's loss allocation process so that DTC can take timely
action to contain multiple loss events that occur in succession during
a short period of time. In connection therewith, the proposed rule
change would (i) align the loss allocation rules of the three clearing
agencies of The Depository Trust & Clearing Corporation (``DTCC''),
namely DTC, National Securities Clearing Corporation (``NSCC''), and
Fixed Income Clearing Corporation (``FICC'') (collectively, the ``DTCC
Clearing Agencies''), so as to provide consistent treatment, to the
extent practicable and appropriate, especially for firms that are
participants of two or more DTCC Clearing Agencies, (ii) increase
transparency and accessibility of the provisions relating to the use of
the Participants Fund as a liquidity resource for settlement and the
loss allocation provisions, by enhancing their readability and clarity,
(iii) require a defined corporate contribution to losses and
liabilities that are incurred by DTC prior to any allocation among
Participants, whether such losses and liabilities arise out of
Participant defaults or due to non-default events, (iv) reduce the time
within which DTC is required to return a former Participant's Actual
Participants Fund Deposit, and (v) make conforming and technical
changes. In addition, the proposed rule change would amend Section 6 of
Rule 4 to clarify the requirements for a Participant that wants to
voluntarily terminate its business with DTC, and to align, where
appropriate, with the proposed voluntary termination provisions of the
NSCC and FICC rules. The proposed rule change would also amend Rule 1
(Definitions; Governing Law) to add cross-references to terms that
would be defined in proposed Rule 4, and would amend Rule 2
(Participants and Pledgees), in relevant part, to align with proposed
Section 6 of Rule 4, as discussed below.
---------------------------------------------------------------------------
\5\ Each capitalized term not otherwise defined herein has its
respective meaning as set forth in the Rules, available at https://www.dtcc.com/legal/rules-and-procedures.aspx.
---------------------------------------------------------------------------
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
Written comments relating to this proposal have not been solicited
or received. 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 previously filed by DTC on December 18, 2017.\6\ This
Amendment amends and replaces the Advance Notice in its entirety. DTC
submits this Amendment in order to further clarify the operation of the
proposed rule changes on loss allocation by providing additional
information and examples. This Amendment would also clarify the
requirements for a Participant that wants to voluntarily terminate its
business with DTC. In particular, this Amendment would:
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 82582 (January 24,
2018), 83 FR 4297 (January 30, 2018) (SR-DTC-2017-804).
---------------------------------------------------------------------------
(i) Clarify that the term ``Participant Default,'' referring to the
failure of a Participant to satisfy any obligation to
[[Page 38359]]
DTC, includes the failure of a Defaulting Participant to satisfy its
obligations as provided in Rule 9(B).\7\
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\7\ Although Rule 4 is being amended to align with NSCC and
FICC, where appropriate, a ``Defaulting Participant'' is not
analogous to a ``Defaulting Member'' under the proposed NSCC and
FICC rules. This is because the term ``Defaulting Participant''
already has a specific meaning pursuant to Rule 9(B) which is
necessary and appropriate to that Rule. Instead, the proposed new
term ``CTA Participant'' would be analogous to the NSCC and FICC
proposed term ``Defaulting Member.''
---------------------------------------------------------------------------
(ii) Add the defined term ``CTA Participant,'' which would be
defined as a Participant for which the Corporation has ceased to act
pursuant to Rule 10 (Discretionary Termination), Rule 11 (Voluntary
Termination) or Rule 12 (Insolvency).
(iii) Clarify which Participants would be subject to loss
allocation with respect to Default Loss Events (defined below) and
Declared Non-Default Loss Events (defined below) occurring during an
Event Period (defined below). Specifically, pursuant to the Amendment,
proposed Section 5 of Rule 4 would provide that each Participant that
is a Participant on the first day of an Event Period would be obligated
to pay its pro rata share of losses and liabilities arising out of or
relating to each Default Loss Event (other than a Default Loss Event
with respect to which it is the CTA Participant) and each Declared Non-
Default Loss Event occurring during the Event Period. In addition,
proposed Section 5 of Rule 4 would make it clear that any CTA
Participant for which DTC ceases to act on a non-Business Day,
triggering an Event Period that commences on the next Business Day,
would be deemed to be a Participant on the first day of that Event
Period.
(iv) Clarify the obligations and Loss Allocation Cap (defined
below) of a Participant that terminates its business with DTC in
respect of a loss allocation round. Specifically, pursuant to the
Amendment, the Participant would nevertheless remain obligated for its
pro rata share of losses and liabilities with respect to any Event
Period for which it is otherwise obligated under Rule 4; however, its
aggregate obligation would be limited to the amount of its Loss
Allocation Cap, as fixed in the loss allocation round for which it
withdrew.
(v) Clarify that each CTA Participant would be obligated to DTC for
the entire amount of any loss or liability incurred by DTC arising out
of or relating to any Default Loss Event with respect to such CTA
Participant. To the extent that such loss or liability is not satisfied
pursuant to proposed Section 3 of Rule 4, DTC would apply a Corporate
Contribution and charge the remaining amount of such loss or liability
as provided in proposed Section 5 of Rule 4.
(vi) Clarify that, although a CTA Participant would not be
allocated a ratable share of losses and liabilities arising out of or
relating to its own Default Loss Event, it would remain obligated to
DTC for such losses and liabilities. More particularly, pursuant to the
Amendment, the proposed rule change would provide that no loss
allocation under proposed Rule 4 would constitute a waiver of any claim
DTC may have against a Participant for any losses or liabilities to
which the Participant is subject under DTC Rules and Procedures,
including, without limitation, any loss or liability to which it may be
subject under proposed Rule 4.
(vii) For enhanced transparency and to align, where appropriate,
with the rules of NSCC and FICC, clarify the process for the Voluntary
Retirement (defined below) of a Participant.
In addition, pursuant to the Amendment, DTC is making other
clarifying and technical changes to the proposed rule change, as
proposed herein.
Nature of the Proposed Change
The proposed rule change would revise Rule 4 (Participants Fund and
Participants Investment) to (i) provide separate sections for (x) the
use of the Participants Fund as a liquidity resource for settlement and
(y) loss allocation among Participants of losses and liabilities
arising out of Participant defaults or due to non-default events; and
(ii) enhance the resiliency of DTC's loss allocation process so that
DTC can take timely action to contain multiple loss events that occur
in succession during a short period of time. In connection therewith,
the proposed rule change would (i) align the loss allocation rules of
the DTCC Clearing Agencies, so as to provide consistent treatment, to
the extent practicable and appropriate, especially for firms that are
participants of two or more DTCC Clearing Agencies,\8\ (ii) increase
transparency and accessibility of the provisions relating to the use of
the Participants Fund as a liquidity resource for settlement and the
loss allocation provisions, by enhancing their readability and clarity,
(iii) require a defined corporate contribution to losses and
liabilities that are incurred by DTC prior to any allocation among
Participants, whether such losses and liabilities arise out of
Participant defaults or due to non-default events, (iv) reduce the time
within which DTC is required to return a former Participant's Actual
Participants Fund Deposit, and (v) make conforming and technical
changes. In addition, the proposed rule change would amend Section 6 of
Rule 4 to clarify the requirements for a Participant that wants to
voluntarily terminate its business with DTC, and to align, where
appropriate, with the proposed voluntary termination provisions of the
NSCC and FICC rules. The proposed rule change would also amend Rule 1
(Definitions; Governing Law) to add cross-references to terms that
would be defined in proposed Rule 4, and would amend Rule 2
(Participants and Pledgees), in relevant part, to align with proposed
Section 6 of Rule 4, as discussed below.
---------------------------------------------------------------------------
\8\ On December 18, 2017, NSCC and FICC submitted proposed rule
changes and advance notices to enhance their rules regarding
allocation of losses. Securities Exchange Act Release Nos. 82428
(January 2, 2018), 83 FR 897 (January 8, 2018) (SR-NSCC-2017-018),
and 82584 (January 24, 2018), 83 FR 4377 (January 30, 2018) (SR-
NSCC-2017-806); Securities Exchange Act Release Nos. 82427 (January
2, 2018), 83 FR 854 (January 8, 2018) (SR-FICC-2017-022) and 82583
(January 24, 2018), 83 FR 4358 (January 30, 2018) (SR-FICC-2017-
806). On June 28, 2018, NSCC and FICC filed proposed amendments to
the proposed rule changes and advance notices with the Commission
and the Board of Governors of the Federal Reserve System,
respectively, available at https://www.dtcc.com/legal/sec-rule-filings.aspx.
---------------------------------------------------------------------------
(i) Background
Current Rule 4 provides a single set of tools and a common process
for the use of the Participants Fund for both liquidity purposes to
complete settlement among non-defaulting Participants, if one or more
Participants fails to settle,\9\ and for the satisfaction of
[[Page 38360]]
losses and liabilities due to Participant defaults \10\ or certain
other losses or liabilities incident to the business of DTC.\11\ The
proposed rule change would amend and add provisions to separate use of
the Participants Fund as a liquidity resource to complete settlement,
reflected in proposed Section 4 of Rule 4, and for loss allocation,
reflected in proposed Section 5 of Rule 4. There wouldn't be any
substantive change to the rights and obligations of Participants under
proposed Sections 4 and 5 of Rule 4.\12\ The proposed rule changes
reinforce the distinction, conceptual and sequential, between the
mechanisms to complete settlement on a Business Day and to mutualize
losses that may result from a failure to settle, or other loss-
generating events. The change is also proposed so that the loss
allocation provisions of proposed Section 5 of Rule 4 more closely
align to similar provisions of the NSCC and FICC rules, to the extent
appropriate.
---------------------------------------------------------------------------
\9\ DTC is a central securities depository providing key
services that are structured to support daily settlement of book-
entry transfers of securities, in accordance with its Rules and
Procedures. In particular, Rule 9(A) (Transactions in Securities and
Money Payments), Rule 9(B) (Transactions in Eligible Securities),
Rule 9(C) (Transactions in MMI Securities), Rule 9(D) (Settling
Banks), and Rule 9(E) (Clearing Agency Agreements) provide the
mechanism to achieve a ``DVP Model 2 Deferred Net Settlement
System'' (as defined in Annex D of the Principles for Financial
Market Infrastructures issued by The Committee on Payments and
Market Infrastructures and the Technical Committee of the
International Organization of Securities Commissions (April 2012),
available at https://www.bis.org/cpmi/publ/d101a.pdf. Briefly, in
relevant part, Rule 9(B) provides that ``[e]ach Participant and the
Corporation shall settle the balance of the Settlement Account of
the Participant on a daily basis in accordance with these Rules and
the Procedures. Except as provided in the Procedures, the
Corporation shall not be obligated to make any settlement payments
to any Participants until the Corporation has received all of the
settlement payments that Settling Banks and Participants are
required to make to the Corporation.'' Supra note 5. Pursuant to
these provisions of Rule 9(B), securities will be delivered to
Participants that satisfy their settlement obligations in the end-
of-day net settlement process.
\10\ The failure of a Participant to satisfy its settlement
obligation constitutes a liability to DTC. Insofar as DTC undertakes
to complete settlement among Participants other than the Participant
that failed to settle, that liability may give rise to losses as
well. DTC is designed to provide settlement finality at the end of
the day and notwithstanding the failure to settle of a Participant
or Affiliated Family of Participants with the largest net settlement
obligation, a ``cover 1'' standard. There are no reversals of
deliveries; a Participant that fails to settle will not receive
securities that were intended to be delivered to it, because it has
not paid for them. These securities, among others, serve as
collateral for DTC to use to secure a borrowing of funds in order,
in accordance with its Rules and Procedures, to settle with non-
defaulting Participants (including those delivering Participants
that delivered to the non-settling Participant). To this end,
delivery versus payment transactions (``DVP'') will not be processed
intraday to a receiving Participant that will incur a related
payment obligation unless that Participant satisfies risk management
controls. The two risk management controls are the Collateral
Monitor and Net Debit Cap. Net Debit Caps limit the potential
settlement obligation of any Participant to an amount for which DTC
has sufficient liquidity resources to cover this risk. The
Collateral Monitor tests whether a Participant has sufficient
collateral for DTC to pledge or liquidate if that Participant were
to fail to meet its settlement obligation. To process a DVP, the
value of the delivery that is debited to the receiving Participant
cannot cause the net debit balance of the Participant to exceed its
Net Debit Cap, and the amount of the net debit balance after giving
effect to the debit must be fully collateralized. Accordingly, DTC
may incur a liability or loss whenever it completes settlement
despite the failure to settle of a Participant, or Affiliated Family
of Participants, because it is either using the Participants Fund
deposits of other Participants in the manner specified in existing
and proposed Rule 4 and/or borrowing the necessary funds. DTC
obligations under the line of credit include the obligation to pay
interest on loans outstanding and to repay the loan; the
Participants Fund is designed as not only a direct liquidity
resource but as a back-up liquidity resource to satisfy these
liabilities. As to the Participants Fund itself, DTC undertakes in
Section 9 of existing and proposed Rule 4, to restore funds to
Participants whose deposits may have been charged if there is
ultimately any excess recovery. It should be noted that the
Defaulting Participant remains principally obligated for all losses,
costs and expenses associated with its Participant Default and, so,
a recovery out of the estate of a Defaulting Participant is at least
a hypothetical possibility.
\11\ Section 1(f) of Rule 4 defines the term ``business'' with
respect to DTC as ``the doing of all things in connection with or
relating to the Corporation's performance of the services specified
in the first and second paragraphs of Rule 6 or the cessation of
such services.'' Supra note 5.
\12\ It may be noted that absent extreme circumstances, DTC
believes that it is unlikely that DTC would need to act under
proposed Sections 4 or 5 of Rule 4.
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The proposed rule change would retain the core principles of
current Rule 4 for both application of the Participants Fund as a
liquidity resource to complete settlement and for loss allocation,
while clarifying or refining certain provisions and introducing certain
new concepts relating to loss allocation. In connection with the use of
the Participants Fund as a liquidity resource to complete settlement
when a Participant fails to settle, the proposed rule would introduce
the term ``pro rata settlement charge,'' for the use of the
Participants Fund to complete settlement as apportioned among non-
defaulting Participants. The existing term generically applied to such
a use or to a loss allocation is simply a ``pro rata charge''.\13\
---------------------------------------------------------------------------
\13\ See Rule 4, Section 5, supra note 5.
---------------------------------------------------------------------------
For loss allocation, the proposed rule change, like current Rule 4,
would continue to apply to both default and non-default losses and
liabilities, and, to the extent allocated among Participants, would be
charged ratably in accordance with their Required Participants Fund
Deposits.\14\ A new provision would require DTC to contribute to a loss
or liability, either arising from a Participant default or non-default
event, prior to any allocation among Participants. The proposed rule
change would also introduce the new concepts of an ``Event Period'' and
a ``round'' to address the allocation of losses arising from multiple
events that occur in succession during a short period of time. These
proposed rule changes would be substantially similar in these respects
to analogous proposed rule changes for NSCC and FICC.
---------------------------------------------------------------------------
\14\ It may be noted that for NSCC and FICC, the proposed rule
changes for loss allocation include a ``look-back'' period to
calculate a member's pro rata share and cap. The concept of a look-
back or average is already built into DTC's calculation of
Participants Fund requirements, which are based on a rolling sixty
(60) day average of a Participant's six highest intraday net debit
peaks.
---------------------------------------------------------------------------
Current Rule 4 Provides for Application of the Participants Fund
Through Pro Rata Charges
Current Rule 4 addresses the Participants Fund and Participants
Investment requirements and, among other things, the permitted uses of
the Participants Fund and Participants Investment.\15\ Pursuant to
current Rule 4, DTC maintains a cash Participants Fund. The Required
Participants Fund Deposit for any Participant is based on the liquidity
risk it poses to DTC relative to other Participants.
---------------------------------------------------------------------------
\15\ Each Participant is required to invest in DTC Series A
Preferred Stock, ratably on a basis calculated in substantially the
same manner as the Required Participants Fund Deposit. The Preferred
Stock constitutes capital of DTC and is also available for use as
provided in current and proposed Section 3 of Rule 4. This proposed
rule change does not alter the Required Preferred Stock Investment.
---------------------------------------------------------------------------
Default of a Participant. Under current Section 3 of Rule 4, if a
Participant is obligated to DTC and fails to satisfy any obligation,
DTC may, in such order and in such amounts as DTC shall determine in
its sole discretion: (a) Apply some or all of the Actual Participants
Fund Deposit of such Participant to such obligation; (b) Pledge some or
all of the shares of Preferred Stock of such Participant to its lenders
as collateral security for a loan under the End-of-Day Credit Facility;
\16\ and/or (c) sell some or all of the shares of Preferred Stock of
such Participant to other Participants (who shall be required to
purchase such shares pro rata their Required Preferred Stock
Investments at the time of such purchase), and apply the proceeds of
such sale to satisfy such obligation.
---------------------------------------------------------------------------
\16\ As part of its liquidity risk management regime, DTC
maintains a 364-day committed revolving line of credit with a
syndicate of commercial lenders, renewed every year. The committed
aggregate amount of the End-of-Day Credit Facility (currently $1.9
billion) together with the Participants Fund constitute DTC's
liquidity resources for settlement. Based on these amounts, DTC sets
Net Debit Caps that limit settlement obligations.
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Application of the Participants Fund. Current Section 4 of Rule 4
addresses the application of the Participants Fund if DTC incurs a loss
or liability, which would include application of the Participants Fund
to complete settlement \17\ or the allocation of losses once
determined, including non-default losses. For both liquidity and loss
scenarios, current Section 4 of Rule 4
[[Page 38361]]
provides that an application of the Participants Fund would be
apportioned among Participants ratably in accordance with their
Required Participants Fund Deposits, less any additional amount that a
Participant was required to Deposit to the Participants Fund pursuant
to Section 2 of Rule 9(A).\18\ It also provides for the optional use of
an amount of DTC's retained earnings and undivided profits.
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\17\ In contrast to NSCC and FICC, DTC is not a central
counterparty and does not guarantee obligations of its membership.
The Participants Fund is a mutualized pre-funded liquidity and loss
resource. As such, in contrast to NSCC and FICC, DTC does not have
an obligation to ``repay'' the Participants Fund, and the
application of the Participants Fund does not convert to a loss. See
supra note 10.
\18\ Section 2 of Rule 9(A) provides, in part, ``At the request
of the Corporation, a Participant or Pledgee shall immediately
furnish the Corporation with such assurances as the Corporation
shall require of the financial ability of the Participant or Pledgee
to fulfill its commitments and shall conform to any conditions which
the Corporation deems necessary for the protection of the
Corporation, other Participants or Pledgees, including deposits to
the Participants Fund . . .'' Supra note 5. Pursuant to the proposed
rule change, the additional amount that a Participant is required to
Deposit to the Participants Fund pursuant to Section 2 of Rule 9(A)
would be defined as an ``Additional Participants Fund Deposit.''
This is not a new concept, only the addition of a defined term for
greater clarity.
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After the Participants Fund is applied pursuant to current Section
4, DTC must promptly notify each Participant and the Commission of the
amount applied and the reasons therefor.
Current Rule 4 further requires Participants whose Actual
Participants Fund Deposits have been ratably charged to restore their
Required Participants Fund Deposits, if such charges create a
deficiency. Such payments are due upon demand. Iterative pro rata
charges relating to the same loss or liability are permitted in order
to satisfy the loss or liability.
Rule 4 currently provides that a Participant may, within ten (10)
Business Days after receipt of notice of any pro rata charge, notify
DTC of its election to terminate its business with DTC, and the
exposure of the terminating Participant for pro rata charges would be
capped at the greater of (a) the amount of its Aggregate Required
Deposit and Investment, as fixed immediately prior to the time of the
first pro rata charge, plus 100% of the amount thereof, or (b) the
amount of all prior pro rata charges attributable to the same loss or
liability with respect to which the Participant has not timely
exercised its right to terminate.
Overview of the Proposed Rule Changes
A. Application of Participants Fund to Participant Default and for
Settlement
Proposed Section 3 of Rule 4 would retain the concept that when a
Participant is obligated to DTC and fails to satisfy such obligation,
which would be defined as a ``Participant Default,'' DTC may apply the
Actual Participants Fund Deposit of the Participant to such obligation
to satisfy the Participant Default. The proposed rule change would
reflect that the defined term ``Participant Default,'' referring to the
failure of a Participant to satisfy any obligation to DTC, includes the
failure of a Defaulting Participant to satisfy its obligations as
provided in Rule 9(B) (where ``Defaulting Participant'' is defined).
The proposed definition of ``Participant Default'' is for drafting
clarity and use in related provisions of proposed Rule 4.
Proposed Section 4 would address the situation of a Defaulting
Participant failure to settle (which is one type of Participant
Default) if the application of the Actual Participants Fund Deposit of
that Defaulting Participant, pursuant to proposed Section 3, is not
sufficient to complete settlement among Participants other than the
Defaulting Participant (each, a ``non-defaulting Participant'').\19\
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\19\ As described above, proposed Rule 4 splits the liquidity
and loss provisions to more closely align to similar loss allocation
provisions in NSCC and FICC rules. Pursuant to the proposed rule
change, DTC would also align, where appropriate, the liquidity and
loss provisions within proposed Rule 4. DTC would retain the
existing Rule 4 concepts of calculating the ratable share of a
Participant, charging each non-defaulting Participant a pro rata
share of an application of the Participants Fund to complete
settlement, providing notice to Participants of such charge, and
providing each Participant the option to cap its liability for such
charges by electing to terminate its business with DTC. However,
pursuant to the proposed rule change, DTC would modify these
concepts and certain associated processes to more closely align with
the analogous proposed loss allocation provisions in proposed Rule 4
(e.g., Loss Allocation Notice, Loss Allocation Termination
Notification Period, and Loss Allocation Cap).
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Proposed Section 4 would expressly state that the Participants Fund
shall constitute a liquidity resource which may be applied by DTC, in
such amounts as it may determine, in its sole discretion, to fund
settlement among non-defaulting Participants in the event of the
failure of a Defaulting Participant to satisfy its settlement
obligation on any Business Day. Such an application of the Participants
Fund would be charged ratably to the Actual Participants Fund Deposits
of the non-defaulting Participants on that Business Day. The pro rata
charge per non-defaulting Participant would be based on the ratio of
its Required Participants Fund Deposit to the sum of the Required
Participants Fund Deposits of all such Participants on that Business
Day (excluding any Additional Participants Fund Deposits in both the
numerator and denominator of such ratio). The proposed rule change
would identify this as a ``pro rata settlement charge,'' in order to
distinguish application of the Participants Fund to fund settlement
from pro rata loss allocation charges that would be established in
proposed Section 5 of Rule 4.
The calculation of each non-defaulting Participant's pro rata
settlement charge would be similar to the current Section 4 calculation
of a pro rata charge except that, for greater simplicity, it would not
include the current distinction for common members of another clearing
agency pursuant to a Clearing Agency Agreement.\20\ For enhanced
clarity as to the date of determination of the ratio, it would be based
on the Required Participants Fund Deposits as fixed on the Business Day
of the application of the Participants Fund, as opposed to the current
language ``at the time the loss or liability was discovered.'' \21\
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\20\ Rule 4, Section 4(a)(1), supra note 5. DTC has determined
that this option is unnecessary because, in practice, DTC would
never have liability under a Clearing Agency Agreement that exceeds
the excess assets of the Participant that defaulted.
\21\ DTC believes that this change would provide an objective
date that is more appropriate for the application of the
Participants Fund to complete settlement, because the ``time the
loss or liability was discovered'' would necessarily have to be the
day the Participants Fund was applied to complete settlement.
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The proposed rule change would retain the concept that requires
DTC, following the application of the Participants Fund to complete
settlement, to notify each Participant and the Commission of the charge
and the reasons therefor (``Settlement Charge Notice'').
The proposed rule change also would retain the concept of providing
each non-defaulting Participant an opportunity to elect to terminate
its business with DTC and thereby cap its exposure to further pro rata
settlement charges. The proposed rule change would shorten the
notification period for the election to terminate from ten (10)
Business Days to five (5) Business Days,\22\ and would also change the
beginning date of such notification period from the receipt of the
notice to the date of the issuance of the Settlement Charge Notice.\23\
A Participant that elects to terminate its business with DTC would,
subject to its cap, remain responsible for (i) its pro rata settlement
charge that was the subject of the Settlement Charge Notice
[[Page 38362]]
and (ii) all other pro rata settlement charges until the Participant
Termination Date (as defined below and in the proposed rule change).
The proposed cap on pro rata settlement charges of a Participant that
has timely notified DTC of its election to terminate its business with
DTC would be the amount of its Aggregate Required Deposit and
Investment, as fixed on the day of the pro rata settlement charge that
was the subject of the Settlement Charge Notice, plus 100% of the
amount thereof (``Settlement Charge Cap''). The proposed Settlement
Charge Cap would be no greater than the current cap.\24\
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\22\ DTC believes this shorter period would be sufficient for a
Participant to decide whether to give notice to terminate its
business with DTC in response to a settlement charge. In addition, a
five (5) Business Day pro rata settlement charge notification period
would conform to the proposed loss allocation notification period in
this proposed rule change and in the proposed rule changes for NSCC
and FICC. See infra note 37.
\23\ DTC believes that setting the start date of the
notification period to an objective date would enhance transparency
and provide a common timeframe to all affected Participants.
\24\ Current Section 8 of Rule 4 provides for a cap that is
equal to the greater of (a) the amount of its Aggregate Required
Deposit and Investment, as fixed immediately prior to the time of
the first pro rata charge, plus 100% of the amount thereof, or (b)
the amount of all prior pro rata charges attributable to the same
loss or liability with respect to which the Participant has not
timely exercised its right to limit its obligation as provided
above. Supra note 5. The alternative limit in clause (b) would be
eliminated in proposed Section 8(a) in favor of a single defined
standard.
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The pro rata application of the Actual Participants Fund Deposits
of non-defaulting Participants to complete settlement when there is a
Participant Default is not the allocation of a loss. A pro rata
settlement charge would relate solely to the completion of settlement.
New proposed loss allocation concepts described below, including, but
not limited to, a ``round,'' ``Event Period,'' and ``Corporate
Contribution,'' would not apply to pro rata settlement charges.\25\
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\25\ Proposed Sections 3, 4 and 5 of Rule 4 together relate, in
whole or in part, to what may happen when there is a Participant
Default. Proposed Section 3 is the basic provision of remedies if a
Participant fails to satisfy an obligation to DTC. Proposed Section
4 is a specific remedy for a failure to settle by a Defaulting
Participant, i.e., a specific type of Participant Default. Proposed
Section 5 is also a remedial provision for a Participant Default
when, additionally, DTC ceases to act for the Participant and there
are remaining losses or liabilities. If a Participant Default
occurs, the application of proposed Section 3 would be required, the
application of proposed Section 4 would be at the discretion of DTC.
Whether or not proposed Section 4 has been applied, once there is a
loss due to a Participant Default and DTC ceases to act for the
Participant, proposed Section 5 would apply. See supra note 10.
A principal type of Participant Default is a failure to settle.
A Participant's obligation to pay any amount due in settlement is
secured by Collateral of the Participant. When the Defaulting
Participant fails to pay its settlement obligation, under Rule 9(B),
Section 2, DTC has the right to Pledge or sell such Collateral to
satisfy the obligation. Supra note 5. (It is more likely that DTC
would borrow against the Collateral to complete settlement on the
Business Day, because it is unlikely to be able to liquidate
Collateral for same day funds in time to settle on that Business
Day.) If DTC Pledges the Collateral to secure a loan to fund
settlement (e.g., under the End-of-Day Credit Facility), the
Collateral would have to be sold to obtain funds to repay the loan.
In any such sale of the Collateral, there is a risk, heightened in
times of market stress, that the proceeds of the sale would be
insufficient to repay the loan. That deficiency would be a liability
or loss to which proposed Section 5 of Rule 4 would apply, i.e., a
Default Loss Event.
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B. Changes To Enhance Resiliency of DTC's Loss Allocation Process
In order to enhance the resiliency of DTC's loss allocation process
and to align, to the extent practicable and appropriate, its loss
allocation approach to that of the other DTCC Clearing Agencies, DTC
proposes to introduce certain new concepts and to modify other aspects
of its loss allocation waterfall. The proposed rule change would adopt
an enhanced allocation approach for losses, whether arising from
Default Loss Events or Declared Non-Default Loss Events (as defined
below and in the proposed rule change). In addition, the proposed rule
change would clarify the loss allocation process as it relates to
losses arising from or relating to multiple default or non-default
events in a short period of time.
Accordingly, DTC is proposing four (4) key changes to enhance DTC's
loss allocation process:
(1) Mandatory Corporate Contribution
Current Section 4 of Rule 4 provides that if there is an
unsatisfied loss or liability, DTC may, in its sole discretion and in
such amount as DTC would determine, ``charge the existing retained
earnings and undivided profits'' of DTC.
Under the proposed rule change, DTC would replace the discretionary
application of an unspecified amount of retained earnings and undivided
profits with a mandatory, defined Corporate Contribution (as defined
below and in the proposed rule change). The Corporate Contribution
would be used for losses and liabilities that are incurred by DTC with
respect to an Event Period (as defined below and in the proposed rule
change), whether arising from a Default Loss Event or Declared Non-
Default Loss Event, before the allocation of losses to Participants.
The proposed ``Corporate Contribution'' would be defined to be an
amount equal to fifty percent (50%) of DTC's General Business Risk
Capital Requirement.\26\ DTC's General Business Risk Capital
Requirement, as defined in DTC's Clearing Agency Policy on Capital
Requirements,\27\ is, at a minimum, equal to the regulatory capital
that DTC is required to maintain in compliance with Rule 17Ad-22(e)(15)
under the Securities Exchange Act of 1934, as amended (the
``Act'').\28\ The proposed Corporate Contribution would be held in
addition to DTC's General Business Risk Capital Requirement.
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\26\ DTC calculates its General Business Risk Capital
Requirement as the amount equal to the greatest of (i) an amount
determined based on its general business profile, (ii) an amount
determined based on the time estimated to execute a recovery or
orderly wind-down of DTC's critical operations, and (iii) an amount
determined based on an analysis of DTC's estimated operating
expenses for a six (6) month period.
\27\ See Securities Exchange Act Release No. 81105 (July 7,
2017), 82 FR 32399 (July 13, 2017) (SR-DTC-2017-003).
\28\ 17 CFR 240.17Ad-22(e)(15).
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The proposed Corporate Contribution would apply to losses arising
from Default Loss Events and Declared Non-Default Loss Events, and
would be a mandatory contribution of DTC prior to any allocation among
Participants.\29\ As proposed, if the proposed Corporate Contribution
is fully or partially used against a loss or liability relating to an
Event Period, the Corporate Contribution would be reduced to the
remaining unused amount, if any, during the following two hundred fifty
(250) Business Days in order to permit DTC to replenish the Corporate
Contribution.\30\ To ensure transparency, Participants would receive
notice of any such reduction to the Corporate Contribution.
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\29\ The proposed rule change would not require a Corporate
Contribution with respect to a pro rata settlement charge. However,
as discussed above, if, after a Participant Default, the proceeds of
the sale of the Collateral of the Participant are insufficient to
repay the lenders under the End-of-Day Credit Facility, and DTC has
ceased to act for the Participant, the shortfall would be a loss
arising from a Default Loss Event, subject to the Corporate
Contribution.
\30\ DTC believes that two hundred fifty (250) Business Days
would be a reasonable estimate of the time frame that DTC would
require to replenish the Corporate Contribution by equity in
accordance with DTC's Clearing Agency Policy on Capital
Requirements, including a conservative additional period to account
for any potential delays and/or unknown exigencies in times of
distress.
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By requiring a defined contribution of DTC corporate funds towards
losses and liabilities arising from Default Loss Events and Declared
Non-Default Loss Events, the proposed rule change would limit
Participant obligations to the extent of such Corporate Contribution
and thereby provide greater clarity and transparency to Participants as
to the calculation of their exposure to losses and liabilities.
Proposed Rule 4 would also further clarify that DTC can voluntarily
apply amounts greater than the Corporate Contribution against any loss
or liability (including non-default losses) of DTC, if the Board of
Directors, in its sole discretion, believes such to be appropriate
under the factual situation existing at the time.
The proposed rule changes relating to the calculation and mandatory
application of the Corporate
[[Page 38363]]
Contribution are set forth in proposed Section 5 of Rule 4.
(2) Introducing an Event Period
The proposed rule change would clearly define the obligations of
DTC and its Participants regarding the allocation of losses or
liabilities relating to or arising out of a Default Loss Event or a
Declared Non-Default Loss Event. The proposed rule change would define
``Default Loss Event'' as the determination by DTC to cease to act for
a Participant pursuant to Rule 10, Rule 11, or Rule 12 (such
Participant, a ``CTA Participant''). ``Declared Non-Default Loss
Event'' would be defined as the determination by the Board of Directors
that a loss or liability incident to the clearance and settlement
business of DTC may be a significant and substantial loss or liability
that may materially impair the ability of DTC to provide clearance and
settlement services in an orderly manner and will potentially generate
losses to be mutualized among Participants in order to ensure that DTC
may continue to offer clearance and settlement services in an orderly
manner. In order to balance the need to manage the risk of sequential
loss events against Participants' need for certainty concerning maximum
loss allocation exposures, DTC is proposing to introduce the concept of
an ``Event Period'' to address the losses and liabilities that may
arise from or relate to multiple Default Loss Events and/or Declared
Non-Default Loss Events that arise in quick succession. Specifically,
the proposal would group Default Loss Events and Declared Non-Default
Loss Events occurring in a period of ten (10) Business Days (``Event
Period'') for purposes of allocating losses to Participants in one or
more rounds, subject to the limits of loss allocation set forth in the
proposed rule change and as explained below.\31\ In the case of a loss
or liability arising from or relating to a Default Loss Event, an Event
Period would begin on the day on which DTC notifies Participants that
it has ceased to act for a Participant (or the next Business Day, if
such day is not a Business Day). In the case of a Declared Non-Default
Loss Event, the Event Period would begin on the day that DTC notifies
Participants of the Declared Non-Default Loss Event (or the next
Business Day, if such day is not a Business Day). If a subsequent
Default Loss Event or Declared Non-Default Loss Event occurs within the
Event Period, any losses or liabilities arising out of or relating to
any such subsequent event would be resolved as losses or liabilities
that are part of the same Event Period, without extending the duration
of such Event Period. An Event Period may include both Default Loss
Events and Declared Non-Default Loss Events, and there would not be
separate Event Periods for Default Loss Events or Declared Non-Default
Loss Events occurring within overlapping ten (10) Business Day periods.
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\31\ DTC believes that having a ten (10) Business Day Event
Period would provide a reasonable period of time to encompass
potential sequential Default Loss Events and/or Declared Non-Default
Loss Events that are likely to be closely linked to an initial event
and/or a severe market dislocation episode, while still providing
appropriate certainty for Participants concerning their maximum
exposure to allocated losses with respect to such events.
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The amount of losses that may be allocated by DTC, subject to the
required Corporate Contribution, and to which a Loss Allocation Cap
would apply for any Participant that elects to terminate its business
with DTC in respect of a loss allocation round, would include any and
all losses from any Default Loss Events and any Declared Non-Default
Loss Events during the Event Period, regardless of the amount of time,
during or after the Event Period, required for such losses to be
crystallized and allocated.\32\
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\32\ As discussed below, each Participant that is a Participant
on the first day of an Event Period would be obligated to pay its
pro rata share of losses and liabilities arising out of or relating
to each Default Loss Event (other than a Default Loss Event with
respect to which it is the CTA Participant) and each Declared Non-
Default Loss Event occurring during the Event Period.
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The proposed rule changes relating to the implementation of an
Event Period are set forth in proposed Section 5 of Rule 4.
(3) Introducing the Concept of ``Rounds'' and Loss Allocation Notice
Pursuant to the proposed rule change, a loss allocation ``round''
would mean a series of loss allocations relating to an Event Period,
the aggregate amount of which is limited by the sum of the Loss
Allocation Caps of affected Participants (a ``round cap''). When the
aggregate amount of losses allocated in a round equals the round cap,
any additional losses relating to the applicable Event Period would be
allocated in one or more subsequent rounds, in each case subject to a
round cap for that round. DTC would continue the loss allocation
process in successive rounds until all losses from the Event Period are
allocated among Participants that have not submitted a Termination
Notice (as defined below and in the proposed rule change) in accordance
with proposed Section 6(b) of Rule 4.
Each loss allocation would be communicated to Participants by the
issuance of a notice that advises each Participant of the amount being
allocated to it (each, a ``Loss Allocation Notice''). The calculation
of each Participant's pro rata allocation charge would be similar to
the current Section 4 calculation of a pro rata charge except that, for
greater simplicity, it would not include the current distinction for
common members of another clearing agency pursuant to a Clearing Agency
Agreement.\33\ In addition, for enhanced clarity as to the date of
determination of the ratio, it would be based on the Required
Participants Fund Deposits as fixed on the first day of the Event
Period, as opposed to the current language ``at the time the loss or
liability was discovered.''\34\
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\33\ See supra note 20.
\34\ DTC believes that this change would provide an objective
date that is appropriate for the new proposed loss allocation
process, which would be designed to allocate aggregate losses
relating to an Event Period, rather than one loss at a time.
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Each Loss Allocation Notice would specify the relevant Event Period
and the round to which it relates. Participants would receive two (2)
Business Days' notice of a loss allocation,\35\ and Participants would
be required to pay the requisite amount no later than the second
Business Day following the issuance of such notice.\36\ Multiple Loss
Allocation Notices may
[[Page 38364]]
be issued with respect to each round, up to the round cap.
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\35\ DTC believes allowing Participants two (2) Business Days to
satisfy their loss allocation obligations would provide Participants
sufficient notice to arrange funding, if necessary, while allowing
DTC to address losses in a timely manner.
\36\ Current Section 4 of Rule 4 provides that if the
Participants Fund is applied to a loss or liability, DTC must notify
each Participant of the charge and the reasons therefor. Proposed
Section 5 would modify this process to (i) require DTC to give prior
notice; and (ii) require Participants to pay loss allocation
charges, rather than directly charging their Required Participants
Fund Deposits. DTC believes that shifting from the two-step
methodology of applying the Participants Fund and then requiring
Participants to immediately replenish it to requiring direct payment
would increase efficiency, while preserving the right to charge the
Settlement Account of the Participant in the event the Participant
doesn't timely pay. Such a failure to pay would be, self-evidently,
a Participant Default, triggering recourse to the Actual
Participants Fund Deposit of the Participant under proposed Section
3 of Rule 4. In addition, this change would provide greater
stability for DTC in times of stress by allowing DTC to retain the
Participants Fund, its critical pre-funded resource, while charging
loss allocations. DTC believes doing so would allow DTC to retain
the Participants Fund as a liquidity resource which may be applied
to fund settlement among non-defaulting Participants, if a
Defaulting Participant fails to settle. By being able to manage its
liquidity resources throughout the loss allocation process, DTC
would be able to continue to provide its critical operations and
services during what would be expected to be a stressful period.
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The first Loss Allocation Notice in any first, second, or
subsequent round would expressly state that such Loss Allocation Notice
reflects the beginning of the first, second, or subsequent round, as
the case may be, and that each Participant in that round has five (5)
Business Days \37\ from the issuance \38\ of such first Loss Allocation
Notice for the round (such period, a ``Loss Allocation Termination
Notification Period'') to notify DTC of its election to terminate its
business with DTC (such notification, whether with respect to a
Settlement Charge Notice or Loss Allocation Notice, a ``Termination
Notice'') pursuant to proposed Section 8(b) of Rule 4 and thereby
benefit from its Loss Allocation Cap.
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\37\ Current Section 8 of Rule 4 provides that the time period
for a Participant to give notice of its election to terminate its
business with DTC in respect of a pro rata charge is ten (10)
Business Days after receiving notice of a pro rata charge. DTC
believes that it is appropriate to shorten such time period from ten
(10) Business Days to five (5) Business Days because DTC needs
timely notice of which Participants would not be terminating their
business with DTC for the purpose of calculating the loss allocation
for any subsequent round. DTC believes that five (5) Business Days
would provide Participants with sufficient time to decide whether to
cap their loss allocation obligations by terminating their business
with DTC.
\38\ See supra note 23.
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The round cap of any second or subsequent round may differ from the
first or preceding round cap because there may be fewer Participants in
a second or subsequent round if Participants elect to terminate their
business with DTC as provided in proposed Section 8(b) of Rule 4
following the first Loss Allocation Notice in any round.
For example, for illustrative purposes only, after the required
Corporate Contribution, if DTC has a $4 billion loss determined with
respect to an Event Period and the sum of Loss Allocation Caps for all
Participants subject to the loss allocation is $3 billion, the first
round would begin when DTC issues the first Loss Allocation Notice for
that Event Period. DTC could issue one or more Loss Allocation Notices
for the first round until the sum of losses allocated equals $3
billion. Once the $3 billion is allocated, the first round would end
and DTC would need a second round in order to allocate the remaining $1
billion of loss. DTC would then issue a Loss Allocation Notice for the
$1 billion and this notice would be the first Loss Allocation Notice
for the second round. The issuance of the Loss Allocation Notice for
the $1 billion would begin the second round.
The proposed rule change would link the Loss Allocation Cap to a
round in order to provide Participants the option to limit their loss
allocation exposure at the beginning of each round. As proposed, a
Participant could limit its loss allocation exposure to its Loss
Allocation Cap by providing notice of its election to terminate its
business with DTC within five (5) Business Days after the issuance of
the first Loss Allocation Notice in any round.
The proposed rule changes relating to the implementation of
``rounds'' and Loss Allocation Notices are set forth in proposed
Section 5 of Rule 4.
(4) Capping Terminating Participants' Loss Allocation Exposure and
Related Changes
As discussed above, the proposed rule change would continue to
provide Participants the opportunity to limit their loss allocation
exposure by offering a termination option; however, the associated
termination process would be modified.
As proposed, if a Participant timely provides notice of its
election to terminate its business with DTC as provided in proposed
Section 8(b) of Rule 4, its maximum payment obligation with respect to
any loss allocation round would be the amount of its Aggregate Required
Deposit and Investment, as fixed on the first day of the Event Period,
plus 100% of the amount thereof (``Loss Allocation Cap''),\39\ provided
that the Participant complies with the requirements of the termination
process in proposed Section 6(b) of Rule 4. DTC may retain the entire
Actual Participants Fund Deposit of a Participant subject to loss
allocation, up to the Participant's Loss Allocation Cap. If a
Participant's Loss Allocation Cap exceeds the Participant's then-
current Required Participants Fund Deposit, it must still pay the
excess amount.
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\39\ The alternative limit in clause (b) would be eliminated in
proposed Section 8(b) in favor of a single defined standard. See
supra note 24.
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As proposed, Participants would have five (5) Business Days from
the issuance of the first Loss Allocation Notice in any round to decide
whether to terminate its business with DTC, and thereby benefit from
its Loss Allocation Cap. The start of each round \40\ would allow a
Participant the opportunity to notify DTC of its election to terminate
its business with DTC after satisfaction of the losses allocated in
such round.
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\40\ i.e., a Participant will only have the opportunity to
terminate after the first Loss Allocation Notice in any round, and
not after each Loss Allocation Notice in any round.
---------------------------------------------------------------------------
Specifically, the first round and each subsequent round of loss
allocation would allocate losses up to a round cap of the aggregate of
all Loss Allocation Caps of those Participants included in the round.
If a Participant provides notice of its election to terminate its
business with DTC, it would be subject to loss allocation in that
round, up to its Loss Allocation Cap. If the first round of loss
allocation does not fully cover DTC's losses, a second round will be
noticed to those Participants that did not elect to terminate in the
previous round. As noted above, the amount of any second or subsequent
round cap may differ from the first or preceding round cap because
there may be fewer Participants in a second or subsequent round if
Participants elect to terminate their business with DTC as provided in
proposed Section 8(b) of Rule 4 following the first Loss Allocation
Notice in any round.
Pursuant to the proposed rule change, in order to avail itself of
its Loss Allocation Cap, the Participant would need to follow the
requirements in proposed Section 6(b) of Rule 4. In addition to
retaining the substance of the existing requirements for any
termination that are set forth in current Section 6 of Rule 4, proposed
Section 6 also would provide that a Participant that provides a
Termination Notice in connection with a loss allocation must: (1)
Specify in the Termination Notice an effective date of termination
(``Participant Termination Date''), which date shall be no later than
ten (10) Business Days following the last day of the applicable Loss
Allocation Termination Notification Period; (2) cease all activities
and use of the Corporation's services other than activities and
services necessary to terminate the business of the Participant with
DTC; and (3) ensure that all activities and use of DTC services by such
Participant cease on or prior to the Participant Termination Date.
The proposed rule changes are designed to enable DTC to continue
the loss allocation process in successive rounds until all of DTC's
losses are allocated. Until all losses related to an Event Period are
allocated and paid, DTC may retain the entire Actual Participants Fund
Deposit of a Participant subject to loss allocation, up to the
Participant's Loss Allocation Cap.
The proposed rule changes relating to capping terminating
Participants' loss allocation exposure and related changes to the
termination process are set forth in proposed Sections 5, 6, and 8 of
Rule 4.
[[Page 38365]]
C. Clarifying Changes Relating to Loss Allocation for Non-Default
Events
The proposed rule changes are intended to make the provisions in
the Rules governing loss allocation more transparent and accessible to
Participants. In particular, DTC is proposing the following change
relating to loss allocation to provide clarity around the governance
for the allocation of losses arising from a non-default event.\41\
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\41\ Non-default losses may arise from events such as damage to
physical assets, a cyber-attack, or custody and investment losses.
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Currently, DTC can use the Participants Fund to satisfy losses and
liabilities arising from a Participant Default or arising from an event
that is not due to a Participant Default (i.e., a non-default loss),
provided that such loss or liability is incident to the business of
DTC.\42\
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\42\ See supra note 11.
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DTC is proposing to clarify the governance around non-default
losses that would trigger loss allocation to Participants by specifying
that the Board of Directors would have to determine that there is a
non-default loss that may be a significant and substantial loss or
liability that may materially impair the ability of DTC to provide
clearance and settlement services in an orderly manner and will
potentially generate losses to be mutualized among the Participants in
order to ensure that DTC may continue to offer clearance and settlement
services in an orderly manner. The proposed rule change would provide
that DTC would then be required to promptly notify Participants of this
determination, which is referred to in the proposed rule as a Declared
Non-Default Loss Event, as discussed above.
Finally, as previously discussed, pursuant to the proposed rule
change, proposed Rule 4 would include language to clarify that (i) the
Corporate Contribution would apply to losses or liabilities arising
from a Default Loss Event or a Declared Non-Default Loss Event, and
(ii) the loss allocation waterfall would be applied in the same manner
regardless of whether a loss arises from a Default Loss Event or a
Declared Non-Default Loss Event.
The proposed rule changes relating to Declared Non-Default Loss
Events and Participants' obligations for such events are set forth in
proposed Section 5 of Rule 4.
D. Loss Allocation Waterfall Comparison
The following example illustrates the differences between the
current and proposed loss allocation provisions:
Assumptions:
(i) Participant A defaults on a Business Day (Day 1). On the same
day, DTC ceases to act for Participant A, and notifies Participants of
the cease to act. After applying Participant A's Participants Fund and
liquidating Participant A's Collateral, DTC has a loss of $350 million.
(ii) Participant X voluntarily retires from membership five
Business Days after DTC ceases to act for Participant A (Day 6).
(iii) Participant B defaults seven Business Days after DTC ceases
to act for Participant A (Day 8). On the same day, DTC ceases to act
for Participant B, and notifies Participants of the cease to act. After
applying Participant B's Participants Fund and liquidating Participant
B's Collateral, DTC has a loss of $350 million.
(iv) The current DTC loss allocation provisions do not require a
corporate contribution. DTC may, in its sole discretion and in such
amounts as DTC may determine, charge the existing retained earnings and
undivided profits of DTC. For the purposes of this example, it is
assumed that DTC has determined, in its discretion, that DTC will
contribute 25% of its retained earnings and undivided profits. The
amount of DTC's retained earnings and undivided profits is $364
million.
(v) DTC's General Business Risk Capital Requirement is $158
million.
Current Loss Allocation:
Under the current loss allocation provisions, with respect to the
losses arising out of Participant A's default, DTC will contribute $91
million ($364 million * 25%) from retained earnings and undivided
profits, and then allocate the remaining loss of $259 million ($350
million - $91 million) to Participants.
With respect to the losses arising out of Participant B's default,
DTC will contribute $68 million (($364 million - $91 million) * 25%)
from the balance of its retained earnings and undivided profits, and
then allocate the remaining loss of $282 million ($350 million - $68
million) to Participants. Because Participant X voluntarily retired
before DTC ceased to act for Participant B, Participant X is not
subject to loss allocation with respect to losses arising out of
Participant B's default.
Altogether, with respect to the losses arising out of defaults of
Participant A and Participant B, DTC will contribute $159 million of
retained earnings and undivided profits, and will allocate losses of
$541 million to Participants.
Proposed Loss Allocation:
Under the proposed loss allocation provisions, a Default Loss Event
with respect to Participant A's default would have occurred on Day 1,
and a Default Loss Event with respect to Participant B's default would
have occurred on Day 8. Because the Default Loss Events occurred during
a 10-Business Day period they would be grouped together into an Event
Period for purposes of allocating losses to Participants. The Event
Period would begin on the 1st Business Day and end on the 10th Business
Day.
With respect to losses arising out of Participant A's default, DTC
would apply a Corporate Contribution of $79 million ($158 million *
50%) and then allocate the remaining loss of $271 million ($350 million
- $79 million) to Participants. With respect to losses arising out of
Participant B's default, DTC would not apply a Corporate Contribution
since it would have already contributed the maximum Corporate
Contribution of 50% of its General Business Risk Capital Requirement.
DTC would allocate the loss of $350 million arising out of Participant
B's default to Participants. Because Participant X was a Participant on
the first day of the Event Period, it would be subject to loss
allocation with respect to all events occurring during the Event
Period, even if the event occurred after its retirement. Therefore,
Participant X would be subject to loss allocation with respect to
Participant B's default.
Altogether, with respect to the losses arising out of defaults of
Participant A and Participant B, DTC would apply a Corporate
Contribution of $79 million and allocate losses of $621 million to
Participants.
The principal differences in the above example are due to: (i) The
proposed changes to the calculation and application of Corporate
Contribution, and (ii) the proposed introduction of an Event Period.
E. Clarifying Changes Regarding Voluntary Retirement
Section 1 of Rule 2 provides that a Participant may terminate its
business with DTC by notifying DTC in the appropriate manner.\43\ To
provide
[[Page 38366]]
additional transparency to Participants with respect to the voluntary
retirement of a Participant, and to align, where appropriate, with the
proposed rule changes of NSCC and FICC with respect to voluntary
termination, DTC is proposing to add proposed Section 6(a) to Rule 4,
which would be titled, ``Upon Any Voluntary Retirement.'' Proposed
Section 6(a) of Rule 4 would (i) clarify the requirements \44\ for a
Participant that wants to voluntarily terminate its business with DTC,
and (ii) address the situation where a Participant submits a Voluntary
Retirement Notice (defined below) and subsequently receives a
Settlement Charge Notice or the first Loss Allocation Notice in a round
on or prior to the Voluntary Retirement Date (defined below).
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\43\ Section 1 of Rule 2 provides, in relevant part, that ``[a]
Participant may terminate its business with the Corporation by
notifying the Corporation as provided in Sections 7 or 8 of Rule 4
or, if for a reason other than those specified in said Sections 7
and 8, by notifying the Corporation thereof; the Participant shall,
upon receipt of such notice by the Corporation, cease to be a
Participant. In the event that a Participant shall cease to be a
Participant, the Corporation shall thereupon cease to make sits
services available to the Participant, except that the Corporation
may perform services on behalf of the Participant or its successor
in interest necessary to terminate the business of the Participant
or its successor with the Corporation, and the Participant or its
successor shall pay to the Corporation the fees and charges provided
by these Rules with respect to services performed by the Corporation
subsequent to the time when the Participant ceases to be a
Participant.'' Supra note 5. DTC is proposing to modify the
provision to clarify that the termination would be subject to
proposed Section 6 of Rule 4.
\44\ The requirements would reflect current practice.
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Specifically, DTC is proposing that if a Participant elects to
terminate its business with DTC pursuant to Section 1 of Rule 2 for
reasons other than those specified in proposed Section 8 (a ``Voluntary
Retirement''), the Participant would be required to:
(1) Provide a written notice of such termination to DTC
(``Voluntary Retirement Notice''), as provided for in Section 1 of Rule
2;
(2) specify in the Voluntary Retirement Notice a desired date for
the termination of its business with DTC (``Voluntary Retirement
Date'');
(3) cease all activities and use of DTC services other than
activities and services necessary to terminate the business of the
Participant with DTC; and
(4) ensure that all activities and use of DTC services by the
Participant cease on or prior to the Voluntary Retirement Date.\45\
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\45\ Typically, a Participant would ultimately submit a notice
after having ceased its transactions and transferred all securities
out of its Account.
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Proposed Section 6(a) of Rule 4 would provide that if the
Participant fails to comply with the requirements of proposed Section
6(a), its Voluntary Retirement Notice would be deemed void.\46\
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\46\ The purpose of this proposed provision is to clarify that a
failure of a Participant to comply with proposed Section 6(a) of
Rule 4 would mean that the Participant would continue to be a
Participant, as if the Voluntary Retirement Notice had not been
received by DTC. For example, Participant A submits a Voluntary
Retirement Notice to DTC on April 1st and indicates a Voluntary
Retirement Date of April 15th, but fails to comply with the
requirements of proposed Section 6(a) of Rule 4 by the Voluntary
Retirement Date. The Participant would continue to be a Participant
after the Voluntary Retirement Date. If an Event Period subsequently
occurs before the Participant submits a new Voluntary Retirement
Notice and voluntarily retires in compliance with proposed Section
6(a), such Participant would be obligated to pay its pro rata shares
of losses and liabilities arising from that Event Period.
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Further, proposed Section 6(a) of Rule 4 would provide that if a
Participant submits a Voluntary Retirement Notice and subsequently
receives a Settlement Charge Notice or the first Loss Allocation Notice
in a round on or prior to the Voluntary Retirement Date, such
Participant must timely submit a Termination Notice in order to benefit
from its Settlement Charge Cap or Loss Allocation Cap, as the case may
be. In such a case, the Termination Notice would supersede and void the
pending Voluntary Retirement Notice submitted by the Participant.
F. Changes to the Retention Time for the Actual Participants Fund
Deposit of a Former Participant
Current Rule 4 provides that after three months from when a Person
has ceased to be a Participant, DTC shall return to such Person (or its
successor in interest or legal representative) the amount of the Actual
Participants Fund Deposit of the former Participant plus accrued and
unpaid interest to the date of such payment (including any amount added
to the Actual Participants Fund Deposit of the former Participant
through the sale of the Participant's Preferred Stock), provided that
DTC receives such indemnities and guarantees as DTC deems satisfactory
with respect to the matured and contingent obligations of the former
Participant to DTC. Otherwise, within four years after a Person has
ceased to be a Participant, DTC shall return to such Person (or its
successor in interest or legal representative) the amount of the Actual
Participants Fund Deposit of the former Participant plus accrued and
unpaid interest to the date of such payment, except that DTC may offset
against such payment the amount of any known loss or liability to DTC
arising out of or related to the obligations of the former Participant
to DTC.
DTC is proposing to reduce the time, after a Participant ceases to
be a Participant, at which DTC would be required to return the amount
of the Actual Participants Fund Deposit of the former Participant plus
accrued and unpaid interest, whether the Participant ceases to be such
because it elected to terminate its business with DTC in response to a
Settlement Charge Notice or Loss Allocation Notice or otherwise.
Pursuant to the proposed rule change, the time period would be reduced
from four (4) years to two (2) years. All other requirements relating
to the return of the Actual Participants Fund Deposit would remain the
same.
The four (4) year retention period was implemented at a time when
there were more deposits and processing of physical certificates, as
well as added risks related to manual processing, and related claims
could surface many years after an alleged event. DTC believes that the
change to two (2) years is appropriate because, currently, as DTC and
the industry continue to move toward automation and dematerialization,
claims typically surface more quickly. Therefore, DTC believes that a
shorter retention period of two (2) years would be sufficient to
maintain a reasonable level of coverage for possible claims arising in
connection with the activities of a former Participant, while allowing
DTC to provide some relief to former Participants by returning their
Actual Participants Fund Deposits more quickly.
(ii) Proposed Rule Changes
The foregoing changes as well as other changes (including a number
of technical and conforming changes) that DTC is proposing in order to
improve the transparency and accessibility of Rule 4 are described in
detail below.
A. Changes Relating To Participant Default, Pro Rata Settlement Charges
and Loss Allocation
Section 3
As discussed above, current Section 3 of Rule 4 provides that, if a
Participant fails to satisfy an obligation to DTC, DTC may, in such
order and in such amounts as DTC determines, apply the Actual
Participants Fund Deposit of the defaulting Participant, Pledge the
shares of Preferred Stock of the defaulting Participant to its lenders
as collateral security for a loan, and/or sell the shares of Preferred
Stock of the defaulting Participant to other Participants. Pursuant to
the proposed rule change, Section 3 would retain most of these
provisions, with the following modifications:
[[Page 38367]]
DTC proposes to add the term ``Participant Default'' in proposed
Section 3 as a defined term for the failure of a Participant to satisfy
an obligation to DTC, for drafting clarity and use in related
provisions. The proposed rule change would reflect that the defined
term ``Participant Default,'' referring to the failure of a Participant
to satisfy any obligation to DTC, includes the failure of a Defaulting
Participant to satisfy its obligations as provided in Rule 9(B). In
addition, the proposed rule change clarifies that, in the case of a
Participant Default, DTC would first apply the Actual Participants Fund
Deposit of the Participant to any unsatisfied obligations, before
taking any other actions. This proposed clarification would reflect the
current practice of DTC, and would provide Participants with enhanced
transparency into the actions DTC would take with respect to the
Participants Fund deposits and Participants Investment of a Participant
that has failed to satisfy its obligations to DTC.
DTC proposes to correct the term ``End-of-Day Facility,'' to the
existing defined term ``End-of-Day Credit Facility.'' DTC further
proposes to clarify that, if DTC Pledges some or all of the shares of
Preferred Stock of a Participant to its lenders as collateral security
for a loan under the End-of-Day Credit Facility, DTC would apply the
proceeds of such loan to the obligation the Participant had failed to
satisfy, which is not expressly stated in current Section 3 of Rule 4.
In addition, DTC is proposing to make three ministerial changes to
enhance readability by: (i) Removing the duplicative ``in,'' in the
phrase ``in such order and in such amounts,'' (ii) replacing the word
``eliminate'' with ``satisfy,'' and (iii) to conform to proposed
changes, renumbering the list of actions that DTC may take when there
is a Participant Default.
DTC is also proposing to add the heading ``Application of
Participants Fund Deposits and Preferred Stock Investments to
Participant Default'' to Section 3.
Section 4 and Section 5
As noted above, current Section 4 of Rule 4 provides that if DTC
incurs a loss or liability which is not satisfied by charging the
Participant responsible for the loss pursuant to Section 3 of Rule 4,
then DTC may, in any order and in any amount as DTC may determine, in
its sole discretion, to the extent necessary to satisfy such loss or
liability, ratably apply some or all of the Actual Participants Fund
Deposits of all other Participants to such loss or liability and/or
charge the existing retained earnings and undivided profits of DTC.
This provision relates to losses and liabilities that may be due to the
failure of a Participant to satisfy obligations to DTC, if the Actual
Participants Fund Deposit of that Participant does not fully satisfy
the obligation, or to losses and liabilities for which no single
Participant is obligated, i.e., a ``non-default loss.''
As discussed above, current Rule 4 currently provides a single set
of tools and common processes for using the Participants Fund as both a
liquidity resource and for the satisfaction of other losses and
liabilities. The proposed rule change would provide separate liquidity
and loss allocation provisions. More specifically, proposed Section 4
of Rule 4 would reflect the process for a ``pro rata settlement
charge,'' the application of the Actual Participants Fund Deposits of
non-defaulting Participants for liquidity purposes in order to complete
settlement, when a Defaulting Participant fails to satisfy its
settlement obligation and the amount charged to its Actual Participants
Fund Deposit by DTC pursuant to Section 3 of Rule 4 is insufficient to
complete settlement. Proposed Section 5 of Rule 4 would contain the
proposed loss allocation provisions.
Proposed Section 4
Pursuant to the proposed rule change, current Section 4 would be
replaced in its entirety by proposed Section 4, and titled
``Application of Participants Fund Deposits of Non-Defaulting
Participants.'' First, for clarity, proposed Section 4 would expressly
state that ``[t]he Participants Fund shall constitute a liquidity
resource which may be applied by the Corporation in such amounts as the
Corporation shall determine, in its sole discretion, to fund settlement
if there is a Defaulting Participant and the amount charged to the
Actual Participants Fund Deposit of the Defaulting Participant pursuant
to Section 3 of this Rule is not sufficient to complete settlement. In
that case, the Corporation may apply the Actual Participants Fund
Deposits of Participants other than the Defaulting Participant (each, a
``non-defaulting Participant'') as provided in this Section and/or
apply such other liquidity resources as may be available to the
Corporation from time to time, including the End-of-Day Credit
Facility.''
Proposed Section 4 would retain the current principle that DTC must
notify Participants and the Commission when it applies the Participants
Fund deposits of non-defaulting Participants, by stating that if the
Actual Participants Fund Deposits of non-defaulting Participants are
applied to complete settlement, DTC must promptly notify each
Participant and the Commission of the amount of the charge and the
reasons therefor, and would define such notice as a Settlement Charge
Notice.
Proposed Section 4 would retain the current calculation of pro rata
charges by providing that each non-defaulting Participant's pro rata
share \47\ of any such application of the Participants Fund, defined as
a ``pro rata settlement charge,'' would be equal to (i) its Required
Participants Fund Deposit, as such Required Participants Fund Deposit
was fixed on the Business Day of such application \48\ less its
Additional Participants Fund Deposit, if any, on that day, divided by
(ii) the sum of the Required Participants Fund Deposits of all non-
defaulting Participants, as such Required Participants Fund Deposits
were fixed on that day, less the sum of the Additional Participants
Fund Deposits, if any, of such non-defaulting Participants on that day.
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\47\ See supra note 20.
\48\ See supra note 21.
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Proposed Section 4 would also provide a period of time within which
a Participant could notify DTC of its election to terminate its
business with DTC and thereby cap its liability, by providing that a
Participant would have a period of five (5) Business Days following the
issuance of a Settlement Charge Notice (``Settlement Charge Termination
Notification Period'') to notify DTC of its election to terminate its
business with DTC pursuant to proposed Section 8(a), and thereby
benefit from its Settlement Charge Cap, as set forth in proposed
Section 8(a).\49\ Proposed Section 4 would also require that any
Participant that gives DTC notice of its election to terminate its
business with DTC must comply with proposed Section 6(b) of Rule 4,\50\
and if it does not, its election to terminate would be deemed void.
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\49\ See supra note 22.
\50\ Proposed Section 6(b) is discussed below.
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Proposed Section 4 would further provide that DTC may retain the
entire amount of the Actual Participants Fund Deposit of a Participant
subject to a pro rata settlement charge, up to the amount of the
Participant's Settlement Charge Cap in accordance with proposed Section
8(a) of Rule 4.
Current Section 5 of Rule 4 provides that ``[e]xcept as provided in
Section 8 of this Rule, if a pro rata charge is made pursuant to
Section 4 of the current Rule against the Required Participants Fund
Deposit of a Participant, and, as a
[[Page 38368]]
consequence, the Actual Participants Fund Deposit of such Participant
is less than its Required Participants Fund Deposit, the Participant
shall, upon the demand of the Corporation, within such time as the
Corporation shall require, Deposit to the Participants Fund the amount
in cash needed to eliminate any resulting deficiency in its Required
Participants Fund Deposit. If the Participant shall fail to make such
deposit to the Participants Fund, the Corporation may take disciplinary
action against the Participant pursuant to these Rules. Any
disciplinary action which the Corporation takes pursuant to these
Rules, or the voluntary or involuntary cessation of participation by
the Participant, shall not affect the obligations of the Participant to
the Corporation or any remedy to which the Corporation may be entitled
under applicable law.''
Proposed Section 4 would incorporate current Section 5 of Rule 4,
modified as follows: (i) Conformed to reflect the consolidation of
Section 5 into proposed Section 4, (ii) replacement of ``Except as
provided in'' with ``Subject to,'' to harmonize with language used
elsewhere in proposed Rule 4, and (iii) corrections of two
typographical errors, in order to accurately reflect that the Actual
Participants Fund Deposit of a Participant would be applied, and not
the Required Participants Fund Deposit, and to capitalize the word
``deposit'' because it is a defined term.
Proposed Section 5
Proposed Section 5 of Rule 4 would address the substantially new
and revised proposed loss allocation, which would apply to losses and
liabilities relating to or arising out of a Default Loss Event or a
Declared Non-Default Loss Event. Pursuant to the proposed rule change,
DTC would restructure and modify its existing loss allocation waterfall
as described below. The heading ``Loss Allocation Waterfall'' would be
added to proposed Section 5.
Proposed Section 5 would establish the concept of an ``Event
Period'' to provide for a clear and transparent way of handling
multiple loss events occurring in a period of ten (10) Business Days,
which would be grouped into an Event Period. As stated above, both
Default Loss Events and Declared Non-Default Loss Events could occur
within the same Event Period.
The Event Period with respect to a Default Loss Event would begin
on the day on which DTC notifies Participants that it has ceased to act
for the Participant (or the next Business Day, if such day is not a
Business Day). In the case of a Declared Non-Default Loss Event, the
Event Period would begin on the day that DTC notifies Participants of
the Declared Non-Default Loss Event (or the next Business Day, if such
day is not a Business Day). Proposed Section 5 would provide that if a
subsequent Default Loss Event or Declared Non-Default Loss Event occurs
during an Event Period, any losses or liabilities arising out of or
relating to any such subsequent event would be resolved as losses or
liabilities that are part of the same Event Period, without extending
the duration of such Event Period.
As proposed, each CTA Participant would be obligated to DTC for the
entire amount of any loss or liability incurred by DTC arising out of
or relating to any Default Loss Event with respect to such CTA
Participant. Under the proposal, to the extent that such loss or
liability is not satisfied pursuant to proposed Section 3 of Rule 4,
DTC would apply a Corporate Contribution thereto and charge the
remaining amount of such loss or liability as provided in proposed
Section 5.
Under proposed Section 5, the loss allocation waterfall would begin
with a new mandatory Corporate Contribution from DTC. Rule 4 currently
provides that the use of any retained earnings and undivided profits by
DTC is a voluntary contribution of a discretionary amount of its
retained earnings. Proposed Section 5 of Rule 4 would, instead, require
a defined corporate contribution to losses and liabilities that are
incurred by DTC with respect to an Event Period. As proposed, the
Corporate Contribution to losses or liabilities that are incurred by
DTC with respect to an Event Period would be defined as an amount that
is equal to fifty percent (50%) of the amount calculated by DTC in
respect of its General Business Risk Capital Requirement as of the end
of the calendar quarter immediately preceding the Event Period.\51\
DTC's General Business Risk Capital Requirement, as defined in DTC's
Clearing Agency Policy on Capital Requirements,\52\ is, at a minimum,
equal to the regulatory capital that DTC is required to maintain in
compliance with Rule 17Ad-22(e)(15) under the Act.\53\
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\51\ See supra note 26.
\52\ See supra note 27.
\53\ 17 CFR 240.17Ad-22(e)(15).
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If DTC applies the Corporate Contribution to a loss or liability
arising out of or relating to one or more Default Loss Events or
Declared Non-Default Loss Events relating to an Event Period, then for
any subsequent Event Periods that occur during the next two hundred
fifty (250) Business Days, the Corporate Contribution would be reduced
to the remaining unused portion of the Corporate Contribution amount
that was applied for the first Event Period.\54\ Proposed Section 5
would require DTC to notify Participants of any such reduction to the
Corporate Contribution.
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\54\ See supra note 30.
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Proposed Section 5 of Rule 4 would provide that nothing in the
Rules would prevent DTC from voluntarily applying amounts greater than
the Corporate Contribution against any DTC loss or liability, if the
Board of Directors, in its sole discretion, believes such to be
appropriate under the factual situation existing at the time.
Proposed Section 5 of Rule 4 would provide that DTC shall apply the
Corporate Contribution to losses and liabilities that arise out of or
relate to one or more Default Loss Events and/or Declared Non-Default
Loss Events that occur within an Event Period. The proposed rule change
also provides that if losses and liabilities with respect to such Event
Period remain unsatisfied following application of the Corporate
Contribution, DTC would allocate such losses and liabilities to
Participants, as described below.
Proposed Section 5 of Rule 4 would state that each Participant that
is a Participant on the first day of an Event Period would be obligated
to pay its pro rata share of losses and liabilities arising out of or
relating to each Default Loss Event (other than a Default Loss Event
with respect to which it is the CTA Participant) and each Declared Non-
Default Loss Event occurring during the Event Period. In addition,
proposed Section 5 of Rule 4 would make it clear that any CTA
Participant for which DTC ceases to act on a non-Business Day,
triggering an Event Period that commences on the next Business Day,
would be deemed to be a Participant on the first day of that Event
Period. In addition, DTC is proposing to clarify that after a first
round of loss allocations with respect to an Event Period, only
Participants that have not submitted a Termination Notice in accordance
with proposed Section 6(b) of Rule 4 would be subject to loss
allocations with respect to subsequent rounds relating to that Event
Period. The proposed change would also provide that DTC may retain the
entire Actual Participants Fund Deposit of a Participant subject to
loss allocation, up to the Participant's Loss Allocation Cap in
accordance with proposed Section 8(b) of Rule 4.
Pursuant to the proposed rule change, DTC would notify Participants
subject to loss allocation of the amounts being allocated to them by a
Loss Allocation Notice in successive rounds of loss
[[Page 38369]]
allocations. Proposed Section 5 would state that a loss allocation
``round'' would mean a series of loss allocations relating to an Event
Period, the aggregate amount of which is limited by the sum of the Loss
Allocation Caps of affected Participants (a ``round cap''). When the
aggregate amount of losses allocated in a round equals the round cap,
any additional losses relating to the applicable Event Period would be
allocated in one or more subsequent rounds, in each case subject to a
round cap for that round. DTC may continue the loss allocation process
in successive rounds until all losses from the Event Period are
allocated among Participants that have not submitted a Termination
Notice in accordance with proposed Section 6(b) of Rule 4.
Each Loss Allocation Notice would specify the relevant Event Period
and the round to which it relates. The first Loss Allocation Notice in
any first, second, or subsequent round would expressly state that such
Loss Allocation Notice reflects the beginning of the first, second, or
subsequent round, as the case may be, and that each Participant in that
round has five (5) Business Days from the issuance of such first Loss
Allocation Notice for the round \55\ to notify DTC of its election to
terminate its business with DTC pursuant to proposed Section 8(b) of
Rule 4, and thereby benefit from its Loss Allocation Cap.\56\
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\55\ i.e., the Loss Allocation Termination Notification Period
for that round.
\56\ See supra note 37.
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Loss allocation obligations would continue to be calculated based
upon a Participant's pro rata share of the loss.\57\ As proposed, each
Participant's pro rata share of losses and liabilities to be allocated
in any round would be equal to (i) (A) its Required Participants Fund
Deposit, as such Required Participants Fund Deposit was fixed on the
first day of the Event Period,\58\ less (B) its Additional Participants
Fund Deposit, if any, on such day, divided by (ii) (A) the sum of the
Required Participants Fund Deposits of all Participants subject to loss
allocation in such round, as such Required Participants Fund Deposits
were fixed on such day, less (B) the sum of any Additional Participants
Fund Deposits, if any, of all Participants subject to loss allocation
in such round on such day.\59\
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\57\ See supra note 20.
\58\ See supra note 21.
\59\ See supra note 16.
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As proposed, Participants would have two (2) Business Days after
DTC issues a first round Loss Allocation Notice to pay the amount
specified in any such notice. In contrast to the current Section 4,
under which DTC may apply the Actual Participants Fund Deposits of
Participants directly to the satisfaction of loss allocation amounts,
under proposed Section 5, DTC would require Participants to pay their
loss allocation amounts (leaving their Actual Participants Fund
Deposits intact).\60\ On a subsequent round (i.e., if the first round
did not cover the entire loss of the Event Period because DTC was only
able to allocate up to the sum of the Loss Allocation Caps of those
Participants included in the round), Participants would also have two
(2) Business Days after notice by DTC to pay their loss allocation
amounts (again subject to their Loss Allocation Caps), unless a
Participant timely notified (or will timely notify) DTC of its election
to terminate its business with DTC with respect to a prior loss
allocation round.
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\60\ See supra note 36.
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Under the proposal, if a Participant fails to make its required
payment in respect of a Loss Allocation Notice by the time such payment
is due, DTC would have the right to proceed against such Participant as
a Participant that has failed to satisfy an obligation in accordance
with proposed Section 3 of Rule 4 described above. For additional
clarity, proposed Section 5 of Rule 4 would state that all amounts due
from a Participant pursuant to proposed Section 5 of Rule 4 may be
debited from the Settlement Account of such Participant. Proposed
Section 5 of Rule 4 would also provide that DTC may retain the entire
Actual Participants Fund Deposit of a Participant subject to loss
allocation, up to the Participant's Loss Allocation Cap in accordance
with Section 8(b) of Rule 4. Participants that wish to terminate their
business with DTC would be required to comply with the requirements in
proposed Section 6(b) of Rule 4, described further below. Specifically,
proposed Section 5 would provide that if, after notifying DTC of its
election to terminate its business with DTC pursuant to proposed
Section 8(b) of Rule 4, the Participant fails to comply with the
provisions of proposed Section 6(b) of Rule 4, its notice of
termination would be deemed void and any further losses resulting from
the applicable Event Period may be allocated against it as if it had
not given such notice.
Section 6
Section 6 of Rule 4 currently provides that whenever a Participant
ceases to be such, it continues to be obligated (a) to satisfy any
deficiency in the amount of its Required Participants Fund Deposit and/
or Required Preferred Stock Investment that it did not satisfy prior to
such time, including (i) any deficiency resulting from a pro rata
charge with respect to which the Participant has given notice to DTC of
its election to terminate its business with DTC pursuant to Section 8
of Rule 4 and (ii) any deficiency the Participant is required to
satisfy pursuant to Sections 3 (an obligation that a Participant failed
to satisfy) or 5 (the requirement of a Participant to eliminate the
deficiency in its Required Participants Fund Deposit) of Rule 4 and (b)
to discharge any liability of the Participant to DTC resulting from the
transactions of the Participant open at the time it ceases to be a
Participant or on account of transactions occurring while it was a
Participant.
The heading ``Obligations of Participant Upon Termination'' would
be added to Section 6 of Rule 4. As discussed above, DTC is proposing
to add proposed Section 6(a) to Rule 4, which would (i) clarify the
requirements for the Voluntary Retirement of a Participant, and (ii)
address the situation where a Participant submits a Voluntary
Retirement Notice and subsequently receives a Settlement Charge Cap or
the first Loss Allocation Notice in a round on or prior to the
Voluntary Retirement Date. Proposed Section 6(a) of Rule 4 would also
provide that if a Participant submits a Voluntary Retirement Notice and
subsequently receives a Settlement Charge Notice or the first Loss
Allocation Notice in a round on or prior to the Voluntary Retirement
Date, such Participant must timely submit a Termination Notice in order
to benefit from its Settlement Charge Cap or Loss Allocation Cap,
respectively. In such a case, the Termination Notice would supersede
and void the pending Voluntary Retirement Notice submitted by the
Participant.
DTC is proposing to add Proposed Section 6(b), titled ``Upon
Termination Following Settlement Charge or Loss Allocation.'' Proposed
Section 6(b) would state that if a Participant timely notifies DTC of
its election to terminate its business with DTC in respect of a pro
rata settlement charge as set forth in proposed Section 4 of Rule 4 or
a loss allocation as set forth in proposed Section 5 of Rule 4, defined
as a ``Termination Notice'', the Participant would be required to: (1)
Specify in the Termination Notice a Participant Termination Date, which
date shall be no later than ten Business Days following the last day of
the applicable Settlement Charge Termination Notification Period or
Loss Allocation Termination Notification Period; (2)
[[Page 38370]]
cease all activities and use of the Corporation's services other than
activities and services necessary to terminate the business of the
Participant with DTC; and (3) ensure that all activities and use of DTC
services by such Participant cease on or prior to the Participant
Termination Date.
Proposed Section 6(b) of Rule 4 would provide that a Participant
that terminates its business with DTC in compliance with proposed
Section 6(b) would remain obligated for its pro rata share of losses
and liabilities with respect to any Event Period for which it is
otherwise obligated; however, its aggregate obligation would be limited
to the amount of its Loss Allocation Cap (as fixed in the round for
which it withdrew).
DTC is proposing to include a sentence in proposed Section 6(b) to
make it clear that if the Participant fails to comply with the
requirements set forth in this section, its Termination Notice will be
deemed void, and the Participant will remain subject to further pro
rata settlement charges pursuant to proposed Section 4 of Rule 4 or
loss allocations pursuant to proposed Section 5 of Rule 4, as
applicable, as if it had not given such notice.
For clarity, DTC is proposing to consolidate the requirements from
current Section 6 of Rule 4 into proposed Section 6(c) of Rule 4,
titled ``After Any Termination,'' and modify them to conform to other
proposed rule changes. In particular, DTC is proposing to clarify that
a Participant that ceases to be such would continue to be subject to
proposed Section 5 of Rule 4 for any Event Period for which it was a
Participant on the first day of the Event Period. Proposed Section 6(c)
of Rule 4 would state that whenever a Participant ceases to be such, it
would continue to be obligated (i) to satisfy any deficiency in the
amounts of its Required Participants Fund Deposit and/or Required
Preferred Stock Investment that it did not satisfy prior to such time,
including any deficiency the Participant is required to satisfy
pursuant to proposed Sections 3 or 4 of Rule 4, (ii) subject to
proposed Section 8, to satisfy any loss allocation pursuant to proposed
Section 5 of Rule 4, and (iii) to discharge any liability of the
Participant to DTC resulting from the transactions of the Participant
open at the time it ceases to be a Participant or on account of
transactions occurring while it was a Participant.
Section 8
Pursuant to the proposed rule change, Section 8 would be titled
``Termination; Obligation for Pro Rata Settlement Charges and Loss
Allocations,'' and would be divided among proposed Section 8(a)
``Settlement Charges,'' proposed Section 8(b) ``Loss Allocations,''
proposed Section 8(c) ``Maximum Obligation,'' and proposed Section 8(d)
``Obligation to Replenish Deposit.''
Pursuant to proposed Section 8(a), if a Participant, within five
(5) Business Days after issuance of a Settlement Charge Notice pursuant
to proposed Section 4 of Rule 4, gives notice to DTC of its election to
terminate its business with DTC, the Participant would remain obligated
for (i) its pro rata settlement charge that was the subject of such
Settlement Charge Notice and (ii) all other pro rata settlement charges
made by DTC until the Participant Termination Date. Subject to proposed
Section 8(c), the terminating Participant's obligation would be limited
to the amount of its Aggregate Required Deposit and Investment, as
fixed on the day of the pro rata settlement charge that was the subject
of the Settlement Charge Notice, plus 100% of the amount thereof, which
is substantively the same limitation as provided for pro rata charges
in current Section 8 of Rule 4.\61\
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\61\ See supra note 24.
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Pursuant to proposed Section 8(b), if a Participant, within five
(5) Business Days after the issuance of a first Loss Allocation Notice
for any round pursuant to proposed Section 5 of Rule 4 gives notice to
DTC of its election to terminate its business with DTC, the Participant
would remain liable for (i) the loss allocation that was the subject of
such notice and (ii) all other loss allocations made by DTC with
respect to the same Event Period. Subject to proposed Section 8(c), the
obligation of a Participant which elects to terminate its business with
DTC would be limited to the amount of its Aggregate Required Deposit
and Investment, as fixed on the first day of the Event Period, plus
100% of the amount thereof, which is substantively the same limitation
as provided for pro rata charges in current Section 8 of Rule 4.\62\
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\62\ See supra note 39.
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Proposed Section 8(c) would provide that under no circumstances
would the aggregate obligation of a Participant under proposed Section
8(a) and proposed Section 8(b) exceed the amount of its Aggregate
Required Deposit and Investment, as fixed on the earlier of the (i) day
of the pro rata settlement charge that was the subject of the
Settlement Charge Notice giving rise to a Termination Notice, and (ii)
first day of the Event Period that was the subject of the first Loss
Allocation Notice in a round giving rise to a Termination Notice, plus
100% of the amount thereof. The purpose of proposed Section 8(c) is to
address a situation where a Participant could otherwise be subject to
both a Settlement Charge Cap and Loss Allocation Cap.
Proposed Section 8(d) would retain the last paragraph in current
Section 8 of Rule 4, replacing ``pro rata charge'' with ``pro rata
settlement charge'' and ``loss allocation.'' \63\ Proposed Section 8(d)
would provide that if the amount of the Actual Participants Fund
Deposit of a Participant is insufficient to satisfy a pro rata
settlement charge pursuant to proposed Section 4 and proposed Section
8(a) or a loss allocation pursuant to proposed Section 5 and proposed
Section 8(b), the Participant would be obligated to Deposit the amount
of any such deficiency to the Participants Fund notwithstanding the
fact that the Participant subsequently ceases to be a Participant.
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\63\ This is a ministerial change because this paragraph
currently applies to current Section 4 of Rule 4, which includes
charges to complete settlement and for loss allocation, as would be
provided in proposed Section 4 and proposed Section 5 of Rule 4.
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Section 9
Pursuant to the proposed rule change, proposed Section 9 of Rule 4
would provide that the recovery and repayment provisions in current
Rule 4 apply to both pro rata settlement charges and loss
allocations.\64\ Specifically, proposed Section 9 would provide that if
an amount is charged ratably pursuant to proposed Section 4 or
allocated ratably pursuant to proposed Section 5 and such amount is
recovered by DTC, in whole or in part, the net amount of the recovery
shall be repaid ratably (on the same basis that it was originally
charged or allocated) to the Persons against which the amount was
originally charged or allocated by (i) crediting the appropriate
amounts to the Actual Participants Fund Deposits of Persons which are
still Participants and (ii) paying the appropriate amounts in cash to
Persons which are not still Participants. In addition, proposed Section
9 would clarify that no loss allocation under proposed Rule 4 would
constitute a waiver of any claim DTC may have against a Participant for
any
[[Page 38371]]
losses or liabilities to which the Participant is subject under DTC
Rules and Procedures, including, without limitation, any loss or
liability to which it may be subject under proposed Rule 4.
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\64\ This is a ministerial change because Section 9 currently
applies to current Section 4 of Rule 4, which includes charges to
complete settlement and for loss allocation, as would be provided in
proposed Section 4 and proposed Section 5 of Rule 4.
---------------------------------------------------------------------------
DTC further proposes to add the heading ``No Waiver; Recovery and
Repayment'' to proposed Section 9.
B. Other Proposed Clarifying, Conforming and Technical Changes to Rule
4
Section 1
Section 1(a) and Section 1(b). Section 1(a) addresses, among other
things, the formula for determining the Required Participants Fund
Deposits of Participants. DTC is proposing to insert the words ``or
wind-down'' to make it clear that the formulas for determining the
Required Participants Fund Deposits of Participants and the amount of
the minimum Required Participants Fund Deposit would be fixed by DTC so
as to assure that the aggregate amount of Required Participants Fund
Deposits of Participants will be increased to provide for the costs and
expenses incurred by it incidental to the wind-down of DTC, in addition
to the voluntary liquidation of DTC.\65\ Further, DTC proposes to
delete the extraneous phrase ``if any.'' For increased clarity and
readability, DTC is proposing to consolidate Section 1(b) into Section
1(a), and to relocate the sentences ``The Corporation may require a
Participant to Deposit an additional amount to the Participants Fund
pursuant to Section 2 of Rule 9(A). Any such additional amount shall be
part of the Required Participants Fund Deposit of such Participant.''
from Section 1(a) to a new proposed Section 1(b). In addition to the
relocation, DTC would add a defined term for such additional amount, as
``Additional Participants Fund Deposit,'' for drafting convenience and
transparency throughout proposed Rule 4. Further, DTC proposes to add
the headings ``Required Participants Fund Deposits'' and ``Additional
Participants Fund Deposits'' to Section 1(a) and proposed Section 1(b),
respectively.
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\65\ On December 18, 2017, DTC submitted a proposed rule change
and advance notice to adopt the Recovery & Wind-down Plan of DTC,
and amend the Rules in order to adopt Rule 32(A) (Wind-down of the
Corporation) and Rule 38 (Market Disruption and Force Majeure). 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). On June 28,
2018, DTC filed amendments to the proposed rule change and advance
notice with the Commission and the Board of Governors of the Federal
Reserve System, respectively, available at https://www.dtcc.com/legal/sec-rule-filings.aspx.
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Section 1(c). For enhanced readability, DTC is proposing to add the
heading ``Voluntary Participants Fund Deposits'' to Section 1(c) of
Rule 4, and to replace the word ``as'' with ``in the manner.''
Section 1(d). For enhanced clarity, DTC is proposing to modify
Section 1(d) to make it clear that any Additional Participants Fund
Deposit is required to be in cash. DTC is also proposing to delete the
extraneous phrase ``pursuant to this Section'' and to replace language
regarding Section 2 of Rule 9(A) with the proposed defined term
``Additional Participants Fund Deposit.'' Further, DTC proposes to add
the heading ``Cash Participants Fund'' to Section 1(d) of Rule 4.
Section 1(e). For enhanced clarity, DTC is proposing to add the
language ``among Account Families'' to clarify the scope of the
allocation described in Section 1(e). In addition, DTC proposes to add
the heading ``Allocation of Participants Fund Deposits Among Account
Families'' to Section 1(e) of Rule 4.
Section 1(f). Section 1(f) addresses, among other things, the
permitted use of the Participants Fund. For consistency with the
balance of Section 1(f), the first paragraph would be amended to state
that the Actual Participants Fund Deposits of Participants ``may be
used or invested'' instead of stating ``shall be applied.'' Section
1(f) provides, in part, that the Participants Fund is limited to the
satisfaction of losses or liabilities of DTC incident to the business
of DTC. Section 1(f) currently defines ``business'' with respect to DTC
as ``the doing of all things in connection with or relating to [DTC's]
performance of the services specified in the first and second
paragraphs of Rule 6 or the cessation of such services.'' For enhanced
transparency of the permitted uses of the Participants Fund, proposed
Section 1(f) would be amended to explicitly state that the Actual
Participants Fund Deposits of Participants may be used (i) to satisfy
the obligations of Participants to DTC, as provided in proposed Section
3, (ii) to fund settlement among non-defaulting Participants, as
provided in proposed Section 4 and (iii) to satisfy losses and
liabilities of DTC incident to the business of DTC, as provided in
proposed Section 5. Section 1(f) would also be amended to make the
definition of ``business'' applicable to the entirety of Rule 4,
instead of just Section 1(f), as the term would appear elsewhere in the
rule pursuant to the proposed rule change. In addition, DTC proposes to
add the heading ``Maintenance, Permitted Use and Investment of
Participants Fund'' to Section 1(f) of Rule 4.
Section 1(g) (consolidated into proposed Section 1(f)). Pursuant to
the proposed rule change, DTC would consolidate current Section 1(g)
into proposed Section 1(f), and modify language to make it clear that
DTC may invest cash in the Participants Fund in accordance with the
Clearing Agency Investment Policy adopted by DTC.\66\ Further, language
would be streamlined by replacing ``securities, repurchase agreements
or deposits'' with ``financial assets,'' and ``securities and
repurchase agreements in which such cash is invested'' with ``its
investment of such cash.''
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\66\ See Securities Exchange Act Release No. 79528 (December 12,
2016), 81 FR 91232 (December 16, 2016) (SR-DTC-2016-007). The
Clearing Agency Investment Policy (the ``Policy'') governs the
management, custody, and investment of cash deposited to the
Participants Fund, the proprietary liquid net assets (cash and cash
equivalents) of DTC and other funds held by DTC. The Policy sets
forth guiding principles for the investment of those funds, which
include adherence to a conservative investment philosophy that
places the highest priority on maximizing liquidity and avoiding
risk, as well as mandating the segregation and separation of funds.
The Policy also addresses the process for evaluating credit ratings
of counterparties and identifies permitted investments within
specified parameters. In general, assets are required to be held by
regulated and creditworthy financial institution counterparties and
invested in financial instruments that, with respect to the
Participants Fund, may include deposits with banks, including the
Federal Reserve Bank of New York, collateralized reverse-repurchase
agreements, direct obligations of the U.S. government and money-
market mutual funds.
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Section 1(h) (proposed Section 1(g)). As discussed above, DTC is
proposing to replace ``four'' years with ``two'' years, in order to
reduce the time within which DTC would be required to return the Actual
Participants Fund Deposit of a former Participant. In addition, DTC is
proposing to (i) add the heading ``Return of Participants Fund Deposits
to Participants'' to proposed Section 1(g), (ii) update a cross
reference, and (iii) correct two typographical errors.
Section 2
Pursuant to the proposed rule change, Section 2 of Rule 4 would be
titled ``Participants Investment.''
Section 2(a)-2(d) (Proposed Section 2(a)). For clarity, DTC is
proposing to consolidate Sections 2(b)-2(d) into proposed Section 2(a)
and would add the heading ``Required Preferred Stock Investments'' to
proposed Section 2(a). In addition, DTC proposes to modify certain
language to update references and cross-references to specific
subsections to reflect the proposed changes to the numbering of the
[[Page 38372]]
subsections in proposed Section 2 of Rule 4.
Section 2(e) (Proposed Section 2(b)). For enhanced clarity, DTC is
proposing to add the language ``among Account Families'' to clarify the
scope of the allocation described in proposed Section 2(b). In
addition, DTC proposes to add the heading ``Allocation of Preferred
Stock Investments Among Account Families'' to proposed Section 2(b) of
Rule 4.
Section 2(f) (Proposed Section 2(c)). DTC is proposing to add
language to clarify that when any Pledge of a Preferred Stock Security
Interest pursuant to proposed Section 2(c) of Rule 4 is made by
appropriate entries on the books of DTC, the Rules, in addition to such
entries, shall be deemed to be a security agreement for purposes of the
New York Uniform Commercial Code. In addition, DTC proposes to update a
cross-reference to proposed Section 2(c). In addition, DTC proposes to
add the heading ``Security Interest in Preferred Stock Investments of
Participants'' to proposed Section 2(c).
Sections 2(g)-2(i) (Proposed Sections 2(d)-2(f)). DTC proposes to
add the headings ``Dividends on Preferred Stock Investments of
Participants,'' ``Sale of Preferred Stock Investments of
Participants,'' and ``Permitted Transfers of Preferred Stock
Investments of Participants'' to proposed Sections 2(d), 2(e), and
2(f), respectively. Proposed Sections 2(e) and 2(f) would be modified
to update cross-references to certain subsections. In addition,
proposed Section 2(f) would be modified to renumber paragraphs and
internal lists for consistency with the numbering schemes in Rule 4.
Section 7. For clarity, DTC is proposing to amend Section 7 of Rule
4 to (i) replace language referencing Additional Participants Fund
Deposits with the proposed defined term, (ii) update cross-references
to reflect proposed renumbering, and (iii) add the headings ``Increased
Participants Fund Deposits and Preferred Stock Investments,''
``Required Participants Fund Deposits,'' and ``Required Preferred Stock
Investments'' to proposed Sections 7, 7(a) and 7(b) of Rule 4,
respectively.
C. Proposed Changes to Rule 1
DTC is proposing to amend Rule 1 (Definitions; Governing Law) to
add cross-references to proposed terms that would be defined in Rule 4,
and to delete one defined term. The defined terms to be added are:
``Additional Participants Fund Deposit,'' ``Corporate Contribution,''
``CTA Participant,'' ``Declared Non-Default Loss Event,'' ``Default
Loss Event,'' ``Event Period,'' ``Loss Allocation Cap,'' ``Loss
Allocation Notice,'' ``Loss Allocation Termination Notification
Period,'' ``Participant Default,'' ``Participant Termination Date,''
``Settlement Charge Cap,'' ``Settlement Charge Notice,'' ``Settlement
Charge Termination Notification Period,'' ``Termination Notice,''
``Voluntary Retirement,'' Voluntary Retirement Date,'' and ``Voluntary
Retirement Notice''. The term ``Section 8 Pro Rata Charge'' would be
deleted from Rule 1, because it would be deleted from proposed Rule 4
as no longer necessary.
D. Proposed Changes to Rule 2
Section 1. The proposed rule change would modify Section 1 of Rule
2 by adding ``subject to Section 6 of Rule 4'' to the end of the
following provision: ``A Participant may terminate its business with
the Corporation by notifying the Corporation as provided in Sections 7
or 8 of Rule 4 or, if for a reason other than those specified in said
Sections 7 and 8, by notifying the Corporation thereof; the Participant
shall, upon receipt of such notice by the Corporation, cease to be a
Participant.'' DTC is proposing to add this language in order to
clarify that the termination would be subject to the requirements in
proposed Section 6 of Rule 4.
Participant Outreach
Beginning in August 2017, DTC has conducted outreach to
Participants in order to provide them with advance notice of the
proposed changes. As of the date of this filing, no written comments
relating to the proposed changes have been received in response to this
outreach. The Commission will be notified of any written comments
received.
Implementation Timeframe
Pending Commission approval, DTC expects to implement this proposal
within two (2) Business Days after approval. Participants would be
advised of the implementation date of this proposal through issuance of
a DTC Important Notice.
Expected Effect on Risks to the Clearing Agency, Its Participants and
the Market
DTC believes that the proposed rule changes to clarify the remedies
available to DTC with respect to a Participant Default, including the
application of the Participants Fund as a liquidity resource, and by
clarifying and providing the related processes, would provide clarity
as to the application of the Participants Fund to fund settlement and
would mitigate any risk to settlement finality due to Participant
Default.
DTC believes that the proposed rule change to enhance the
resiliency of DTC's loss allocation process and to shorten the time
within which DTC is required to return the Actual Participants Fund
Deposit of a former Participant would reduce the risk of uncertainty to
DTC, its Participants and the market overall.
By replacing the discretionary application of DTC retained earnings
to losses and liabilities with a mandatory and defined amount of the
Corporate Contribution, the proposed rule change is designed to provide
enhanced transparency and accessibility to Participants as to how much
DTC would contribute in the event of a loss or liability. The proposed
rule change also clarifies that the proposed Corporate Contribution
would apply to both Default Loss Events and Declared Non-Default Loss
Events. The proposed rule change would provide greater transparency as
to the proposed replenishment period for the Corporate Contribution,
which would allow Participants to better assess the adequacy of DTC's
loss allocation process. Taken together, the proposed rule changes with
respect to the Corporate Contribution would enhance the overall
resiliency of DTC's loss allocation process by specifying the
calculation and application of DTC's Corporate Contribution, including
the proposed replenishment period, and would allow Participants to
better assess the adequacy of DTC's loss allocation process.
By introducing the concept of an Event Period, DTC would be able to
group Default Loss Events and Declared Non-Default Loss Events
occurring within a period of ten (10) Business Days for purposes of
allocating losses to Participants. DTC believes that the Event Period
would provide a defined structure for the loss allocation process to
encompass potential sequential Default Loss Events or Declared Non-
Default Loss Events that may or may not be closely linked to an initial
event and/or a market dislocation episode. Having this structure would
enhance the overall resiliency of DTC's loss allocation process because
the proposed rule would expressly address losses that may arise from
multiple Default Loss Events and/or Declared Non-Default Loss Events
that arise in quick succession. Moreover, the proposed Event Period
structure would provide certainty for Participants concerning their
maximum exposure to mutualized loss allocation with respect to such
events.
[[Page 38373]]
By introducing the concept of ``rounds'' (and accompanying Loss
Allocation Notices) and applying this concept to the timing of loss
allocation payments and the Participant termination process in
connection with the loss allocation process, DTC would (i) set forth a
defined amount that it would allocate to Participants during each round
(i.e., the round cap), (ii) advise Participants of loss allocation
obligation information as well as round information through the
issuance of Loss Allocation Notices, and (iii) provide Participants
with the option to limit their loss allocation exposure after the
issuance of the first Loss Allocation Notice in each round. These
proposed rule changes would enhance the overall resiliency of DTC's
loss allocation process because they would expressly permit DTC to
continue the loss allocation process in successive rounds until all of
DTC's losses are allocated and enable DTC to identify continuing
Participants for purposes of calculating subsequent loss allocation
obligations in successive rounds. Moreover, the proposed rule changes
would define for Participants a clear manner and process in which they
could cap their loss allocation exposure to DTC.
By reducing the time within which DTC is required to return the
Actual Participants Fund Deposit of a former Participant, DTC would
enable firms that have exited DTC to have access to their funds sooner
than under current Rule 4 while maintaining the protection of DTC and
its provision of clearance and settlement services. DTC would continue
to be protected under the proposed rule change, which will maintain the
provision that DTC may offset the return of funds against the amount of
any loss or liability of DTC arising out of or relating to the
obligations of the former Participant to DTC, and would provide that
DTC could retain the funds for up to two (2) years. As such, DTC would
maintain a necessary level of coverage for possible claims arising in
connection with the DTC activities of a former Participant.
Management of Identified Risks
DTC is proposing the rule changes as described in detail above in
order to (i) provide clarity as to the application of the Participants
Fund to fund settlement when a Participant fails to settle, (ii)
enhance the resiliency of DTC's loss allocation process, (iii) provide
clarity and certainty to Participants regarding DTC's loss allocation
process, (iv) provide clarity with respect to the Voluntary Retirement
of a Participant.
Consistency With the Clearing Supervision Act
The proposed rule change would be consistent with Section 805(b) 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'').\67\ The objectives and principles
of Section 805(b) of the Clearing Supervision Act are to promote robust
risk management, promote safety and soundness, reduce systemic risks,
and support the stability of the broader financial system.\68\
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\67\ 12 U.S.C. 5464(b).
\68\ Id.
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The proposed rule change would provide clarity and certainty around
the use of the Participants Fund in connection with a Participant
Default by expressly providing for the application of the Actual
Participants Fund Deposit of the defaulting Participant to its unpaid
obligations, and by providing a defined process for pro rata settlement
charges to non-defaulting Participants that is separate from the loss
allocation process. Together, these proposed rule changes more clearly
specify the rights and obligations of DTC and its Participants in
respect of the application of the Participants Fund. Reducing the risk
of uncertainty to DTC, its Participants, and the market overall would
promote robust risk management, promote safety and soundness, reduce
systemic risks, and support the stability of the broader financial
system. Therefore, DTC believes that the proposed rule changes to
provide clarity and certainty around the use of the Participants Fund
in connection with a Participant Default, and to provide a defined
process for pro rata settlement charges to the Actual Participants Fund
Deposits of non-defaulting Participants, are consistent with the
objectives and principles of Section 805(b) of the Clearing Supervision
Act cited above.
The proposed rule change would enhance the resiliency of DTC's loss
allocation process by (1) requiring a defined contribution of DTC
corporate funds to a loss, (2) introducing an Event Period, and (3)
introducing the concept of ``rounds'' (and accompanying Loss Allocation
Notices) and applying this concept to the timing of loss allocation
payments and the Participant termination process in connection with the
loss allocation process. Together, these proposed rule changes would
(i) create greater certainty for Participants regarding DTC's
obligation towards a loss, (ii) more clearly specify DTC's and
Participants' obligations toward a loss and balance the need to manage
the risk of sequential defaults and other potential loss events against
Participants' need for certainty concerning their maximum exposures,
and (iii) provide Participants the opportunity to limit their exposure
to DTC by capping their exposure to loss allocation. Reducing the risk
of uncertainty to DTC, its Participants and the market overall would
promote robust risk management, promote safety and soundness, reduce
systemic risks, and support the stability of the broader financial
system. Therefore, DTC believes that the proposed rule change to
enhance the resiliency of DTC's loss allocation process is consistent
with the objectives and principles of Section 805(b) of the Clearing
Supervision Act cited above.
By reducing the time within which DTC is required to return the
Actual Participants Fund Deposit of a former Participant, DTC would
enable firms that have exited DTC to have access to their funds sooner
than under current Rule 4 while maintaining the protection of DTC and
its provision of clearance and settlement services. DTC would continue
to be protected under the proposed rule change, which will maintain the
provision that DTC may offset the return of funds against the amount of
any loss or liability of DTC arising out of or relating to the
obligations of the former Participant to DTC, and would provide that
DTC could retain the funds for up to two (2) years. As such, DTC would
maintain a necessary level of coverage for possible claims arising in
connection with the DTC activities of a former Participant. Enabling
DTC to continue to meet its clearance and settlement obligations would
promote robust risk management, promote safety and soundness, reduce
systemic risks, and support the stability of the broader financial
system. Therefore, DTC believes that this proposed rule change is
consistent with the objectives and principles of Section 805(b) of the
Clearing Supervision Act cited above.
The proposed rule change is also consistent with Rules 17Ad-
22(e)(7)(i), 17Ad-22(e)(13), and 17Ad-22 (e)(23)(i), promulgated under
the Act.\69\
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\69\ 17 CFR 240.17Ad-22(e)(7)(i), (e)(13) and (e)(23)(i).
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Rule 17Ad-22(e)(7)(i) under the Act requires, in part, that DTC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to effectively measure, monitor, and
manage the liquidity risk that arises in or is borne by DTC, including
measuring,
[[Page 38374]]
monitoring, and managing its settlement and funding flows on an ongoing
and timely basis, and its use of intraday liquidity, by maintaining
sufficient liquid resources to effect same-day settlement of payment
obligations with a high degree of confidence under a wide range of
foreseeable stress scenarios.\70\ By clarifying the remedies available
to DTC with respect to a Participant Default, including the application
of the Participants Fund as a liquidity resource, and by clarifying and
providing the related processes, the proposed rule change is designed
so that DTC may manage its settlement and funding flows on a timely
basis and apply the Participants Fund as a liquid resource in order to
effect same day settlement of payment obligations with a high degree of
confidence. Therefore, DTC believes that the proposed rule changes with
respect to the application of the Actual Participants Fund Deposits of
non-defaulting Participants to complete settlement are consistent with
Rule 17Ad-22(e)(7)(i) under the Act.
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\70\ Id. at 240.17Ad-22(e)(7)(i).
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Rule 17Ad-22(e)(13) under the Act requires, in part, that DTC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to ensure DTC has the authority and
operational capacity to take timely action to contain losses and
liquidity demands and continue to meet its obligations.\71\ The
proposed rule changes to (1) require a defined Corporate Contribution
to a loss, (2) introduce an Event Period, (3) introduce the concept of
``rounds'' (and accompanying Loss Allocation Notices) and apply this
concept to the timing of loss allocation payments and the Participant
termination process in connection with the loss allocation process,
taken together, are designed to enhance the resiliency of DTC's loss
allocation process. Having a resilient loss allocation process would
help ensure that DTC can effectively and timely address losses relating
to or arising out of Default Loss Events and/or Declared Non-Default
Loss Events, which in turn would help DTC contain losses and continue
to conduct its clearance and settlement business. In addition, by
providing clarity as to the application of the Participants Fund to
fund settlement in the event of a Participant Default, the proposed
rule change is designed to clarify that DTC is authorized to use the
Participants Fund to fund settlement. Therefore, DTC believes that the
proposed rule changes to enhance the resiliency of DTC's loss
allocation process, and to provide clarity as to the application of the
Participants Fund to fund settlement, are consistent with Rule 17Ad-
22(e)(13) under the Act.
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\71\ Id. at 240.17Ad-22(e)(13).
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Rule 17Ad-22(e)(23)(i) under the Act requires DTC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to publicly disclose all relevant rules and
material procedures, including key aspects of DTC's default rules and
procedures.\72\ The proposed rule changes to (i) separate the
provisions for the use of the Participants Fund for settlement and for
loss allocation, (ii) make clarifying changes to the provisions
regarding the application of the Participants Fund to complete
settlement and for the allocation of losses, (iii) further align the
loss allocation rules of the DTCC Clearing Agencies, (iv) improve the
overall transparency and accessibility of the provisions in the Rules
governing loss allocation, and (v) make technical and conforming
changes, would not only ensure that DTC's loss allocation rules are, to
the extent practicable and appropriate, consistent with the loss
allocation rules of the other DTCC Clearing Agencies, but also would
help to ensure that DTC's loss allocation rules are transparent and
clear to Participants. Aligning the loss allocation rules of the DTCC
Clearing Agencies would provide consistent treatment, to the extent
practicable and appropriate, especially for firms that are participants
of two or more DTCC Clearing Agencies. Having transparent and clear
loss allocation rules would enable Participants to better understand
the key aspects of DTC's Rules and Procedures relating to Participant
Default, as well as non-default events, and provide Participants with
increased predictability and certainty regarding their exposures and
obligations. As such, DTC believes that the proposed rule changes with
respect to pro rata settlement charges, and to align the loss
allocation rules across the DTCC Clearing Agencies and to improve the
overall transparency and accessibility of DTC's loss allocation rules
are consistent with Rule 17Ad-22(e)(23)(i) under the Act.
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\72\ Id. at 240.17Ad-22(e)(23)(i).
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The proposed rule changes to clarify the Voluntary Retirement of a
Participant would improve the clarity of the Rules and help to ensure
that DTC's Voluntary Retirement process is transparent and clear to
Participants. Having clear Voluntary Retirement provisions would enable
Participants to better understand the Voluntary Retirement process and
provide Participants with increased predictability and certainty
regarding their rights and obligations with respect to such process. As
such, DTC believes that the proposed rule changes with respect to
Voluntary Retirement are also consistent with Rule 17Ad-22(e)(23)(i)
under the Act.
III. Date of Effectiveness of the Advance Notice, and Timing for
Commission Action
The proposed change may be implemented if the Commission does not
object to the proposed change within 60 days of the later of (i) the
date that the proposed change was filed with the Commission or (ii) the
date that any additional information requested by the Commission is
received. 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-2017-804 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-DTC-2017-804. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use
[[Page 38375]]
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-2017-804 and should be submitted on
or before August 21, 2018.
By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-16714 Filed 8-3-18; 8:45 am]
BILLING CODE 8011-01-P
