Self-Regulatory Organizations; the Depository Trust Company; Notice of Filing of an Advance Notice To Amend Rule 4, 66666-66672 [2020-23143]
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act,32 and Rule
19b–4(f)(2) 33 thereunder. At any time
within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. If the Commission
takes such action, the Commission shall
institute proceedings to determine
whether the proposed rule should be
approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
PEARL–2020–19 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–PEARL–2020–19. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
32 15
33 17
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
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proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. 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–PEARL–2020–19 and
should be submitted on or before
November 10, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.34
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–23151 Filed 10–19–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90169; File No. SR–DTC–
2020–801]
Self-Regulatory Organizations; the
Depository Trust Company; Notice of
Filing of an Advance Notice To Amend
Rule 4
October 14, 2020.
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’’) 1 and Rule
19b–4(n)(1)(i) under the Securities
Exchange Act of 1934 (‘‘Act’’),2 notice is
hereby given that on September 9, 2020,
The Depository Trust Company (‘‘DTC’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) advance
notice SR–DTC–2020–801 (‘‘Advance
Notice’’) as described in Items I, II, and
III below, which Items have been
prepared by the clearing agency.3 The
34 17
CFR 200.30–3(a)(12).
U.S.C. 5465(e)(1).
2 17 CFR 240.19b–4(n)(1)(i).
3 On September 9, 2020, DTC filed the Advance
Notice as a proposed rule change (SR–DTC–2020–
011) with the Commission pursuant to Section
19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule
1 12
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Commission is publishing this notice to
solicit comments on the Advance Notice
from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Advance
Notice
This Advance Notice consists of
amendments to the Rules, By-Laws and
Organization Certificate of DTC
(‘‘Rules’’).4 The proposed change would
amend Rule 4 to provide expressly that
the Participants Fund continues to be a
liquidity resource that may be used by
DTC to fund a settlement funding gap to
complete settlement on a Business Day,
whether the funding gap is the result of
a Participant Default or otherwise. In
addition, the proposed change would
make other technical and clarifying
amendments to Rule 4 to provide
enhanced transparency with respect to
use of the Participants Fund and other
resources to complete settlement on a
Business Day, 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.
19b–4 thereunder, 17 CFR 240.19b–4. A copy of the
proposed rule change is available at https://
www.dtcc.com/legal/sec-rule-filings.aspx.
4 Each capitalized term not otherwise defined
herein has its respective meaning as set forth in
DTC’s rules, including, but not limited to, the Rules
and the DTC Settlement Service Guide (the
‘‘Settlement Guide’’), available at https://
www.dtcc.com/legal/rules-and-procedures.aspx.
The Settlement Guide is a Procedure of DTC filed
with the Commission that, among other things,
operationalizes and supplements the DTC Rules
that relate to settlement, including, but not limited
to, Rule 4 (Participants Fund and Participants
Investment).
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(B) Advance Notice Filed Pursuant to
Section 806(e) of the Clearing
Supervision Act
Description of Proposed Change
The proposed rule change would
amend Rule 4 to provide expressly that
the Participants Fund continues to be a
liquidity resource that may be used by
DTC to fund a settlement funding gap to
complete settlement on a Business Day,
whether the funding gap is the result of
a Participant Default or otherwise. In
addition, the proposed rule change
would make other technical and
clarifying amendments to Rule 4 to
provide enhanced transparency with
respect to use of the Participants Fund
and other resources to complete
settlement on a Business Day, as
discussed below.
(i) Background
A. DTC Settlement on a Business Day
DTC is the central securities
depository (‘‘CSD’’) for substantially all
corporate and municipal debt and
equity securities available for trading in
the United States. DTC plays a critical
role in the national financial
infrastructure.5 As a CSD, DTC provides
a central location in which securities
may be immobilized, and interests in
those securities are reflected in accounts
maintained for its Participants, which
are financial institutions such as brokers
or banks.6 As a CSD, DTC is structured
to provide for the settlement of bookentry transfers and pledges of interests
in securities between Participants, and
for end-of-day net funds settlement on
each Business Day.7
5 See Financial Stability Oversight Council
(‘‘FSOC’’) 2012 Annual Report, Appendix A at 166,
available at https://www.treasury.gov/initiatives/
fsoc/Documents/2012%20Appendix%20A
%20Designation%20of%20Systemically
%20Important%20Market%20Utilities.pdf.
6 See, e.g., Securities Exchange Act Release No.
20221 (September 23, 1983), 48 FR 45167, 45168
(October 3, 1983) (File No. 600–1) (‘‘A securities
depository is a ‘‘custodial’’ clearing agency that
operates a centralized system for the handling of
securities certificates. Depositories accept deposits
of securities from broker-dealers, banks, and other
financial institutions; credit those securities to the
depositing participants accounts; and, pursuant to
participant’s instructions, effect book-entry
movements of securities. The physical securities
deposited with a depository are held in a fungible
bulk; each participant or pledgee having an interest
in securities of a given issue credited to its account
has a pro rata interest in the physical securities of
the issue held in custody by the securities
depository in its nominee name. Depositories
collect and pay dividends and interest to
participants for securities held on deposit.
Depositories also provide facilities for payment by
participants to other participants in connection
with book-entry deliveries of securities . . . .’’).
7 See, e.g., Rule 9(A) (Transactions in Securities
and Money Payments), Rule 9(B) (Transactions in
Eligible Securities), Rule 9(C) (Transactions in MMI
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The DTC settlement system records
money debits and credits to Participant
settlement accounts throughout a
Business Day. Credits to a Participant
settlement account arise from deliveries
versus payment, receipt of payment
orders, principal and interest
distributions in respect of securities
held, intraday settlement progress
payments and any other items or
transactions that give rise to a credit.
Debits to a Participant settlement
account are primarily due to receives
versus payment, as well as other types
of charges to the account permitted
under the Rules. As these debits and
credits to a Participant’s settlement
account are recorded intraday, the
Participant’s settlement account will be
in a net debit balance or net credit
balance from time to time and, finally,
at the end of a Business Day, a net debit,
net credit or zero balance is determined.
This final net debit or net credit balance
determines whether the Participant has
an obligation to pay or to be paid in the
process of DTC completing settlement
on that Business Day. A Participant with
an end-of-day net debit balance has an
obligation to pay DTC that amount; a
Participant with an end-of-day net
credit balance is entitled to receive a
payment from DTC. When a Participant
has an end-of-day zero net balance or an
end-of-day net credit balance, it is
deemed to have satisfied its settlement
obligations for that Business Day, and
securities processed for delivery versus
payment for delivery to the Participant
will be credited to its account. When a
Participant with a net debit balance
pays its settlement obligation, and DTC
completes system-wide settlement, all
securities processed for delivery versus
payment to that Participant on that
Business Day will be credited to its
account and it will have paid for those
deliveries. As to payments due to the
Participant for its deliveries on that
Business Day, the Participant will have
been paid as well, because credits for
those deliveries intraday have offset and
reduced its other debit obligations, even
though, on balance, it finished the
Business Day with a settlement
obligation. A Participant that defaults
on its settlement obligations on a
Business Day will not have paid for the
securities processed for delivery versus
Securities), Rule 9(D) (Settling Banks), and Rule
9(E) (Clearing Agency Agreements), supra note 4,
which 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
Payment and Settlement Systems and the Technical
Committee of the International Organization of
Securities Commissions (April 2012), available at
https://www.bis.org/cpmi/publ/d101a.pdf).
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payment, and the securities will not be
credited to its account.
B. Settlement Gap on a Business Day
There may be circumstances in which
the amount of settlement payments
received or available to DTC on a
Business Day is not sufficient to pay all
Participants with an end-of-day net
credit balance on that Business Day (a
‘‘settlement gap’’). A settlement gap
could occur on a Business Day as a
result of, principally, a Participant
Default, where a Participant fails to pay
its settlement obligation (a ‘‘default
gap’’). A settlement gap could also occur
on a Business Day as a result of causes
other than a Participant Default (a ‘‘nondefault gap’’). For example, a nondefault gap could occur if the funds
required to complete settlement are not
available to DTC, in whole or in part,
due to an operational or data issue
arising at DTC, a Participant or Settling
Bank, or due to a cyber incident, or
other technological business disruption.
The Rules and Procedures of DTC
specify the extent of the obligation of
DTC to achieve settlement on each
Business Day, and, as DTC is not a
central counterparty (‘‘CCP’’), do not
guarantee settlement.8 However, as a
critical part of the national financial
infrastructure, if DTC does not complete
settlement on a given Business Day,
there could be significant market-wide
effects.9 The Rules and Procedures of
DTC are structured so that if there is a
settlement gap on a Business Day, DTC
has liquidity resources to mitigate the
risks relating to a disruption to
obligations settling at DTC on that
Business Day. If there is any problem
with the receipt or disbursement of
funds for settlement, the issue would
need to be addressed quickly. Access to
liquidity resources needs to be
optimized during the tight timeframe in
which settlement must be completed on
a Business Day, in order for DTC to
quickly and effectively respond to and
resolve any settlement gap, whether a
default gap or non-default gap.
8 See, e.g., Rule 9(B), supra note 4 (‘‘Each
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.’’).
9 Supra note 5.
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C. Participants Fund as a Liquidity
Resource To Complete Settlement on a
Business Day
The Participants Fund is designed to
be one of the foundational liquidity
resources available to DTC to fund a
settlement gap to complete settlement
on a Business Day. Rule 4 contains the
key provisions of the Rules and
Procedures specifying the rights, duties
and obligations of Participants and DTC
with respect to the Participants Fund.
Every Participant is required to make at
least a minimum deposit to the
Participants Fund, and Participants with
higher levels of activity that impose
greater liquidity risk to the DTC
settlement system have proportionally
larger required deposits. The principal
purpose of the Participants Fund is, and
historically has been, to provide a
mutualized liquidity resource to satisfy
DTC losses and liabilities attributable to
its business conducted for the benefit of
its Participants.10 Key among these is
daily settlement on each Business Day,
but also, historically, the Participants
Fund was a resource to cover losses and
other liabilities as well.11 Prior to
August 28, 2018, Rule 4 (‘‘Previous Rule
4’’), in particular Section 4 of Previous
Rule 4, provided a unified set of
provisions that addressed this
application of the Participants Fund ‘‘in
satisfaction of losses and liabilities of
10 See Settlement Guide at 48, supra note 4 (‘‘The
Participants Fund . . . provided in DTC Rule 4
create[s] liquidity and collateral resources to
support the business of DTC and to cover losses and
liabilities incident to that business.’’). The term
‘‘business’’ with respect to DTC means ‘‘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.’’ Rule 4, Section 1(f),
supra note 4. The first two paragraphs of Rule 6
describe services provided by DTC, including
settlement. Rule 6, supra note 4. DTC notes that, as
early as 1975, the Rules provided that ‘‘[t]he
Participants Fund may be used by the Corporation
for the purposes of its business . . . .’’ See DTC
CA–1 Application for Permanent Registration as a
Clearing Agency, dated December 15, 1980 (File
600–1) at page 588. In addition, the range of
permissible uses of a clearing or participants fund
as covering ‘‘all losses and liabilities incident to
clearance and settlement activities’’ of the clearing
agency was specifically noted in the 1983 order of
the Commission granting DTC full registration as a
clearing agency. Securities Exchange Act Release
No. 20221 (September 23, 1983), 48 FR 45167
(October 3, 1983) (File No. 600–1). The concept was
also in Rule 4 of Central Certificate Service, Inc., the
predecessor of DTC, filed with the Commission in
1972. Securities Exchange Act Release No. 9849
(November 8, 1972), 37 FR 24795 (November 21,
1972) (As described by the Commission: ‘‘Rule 4.
A participant’s fund will require deposits by
participants upon the basis of a formula established
by CCS, Inc., based upon usage. The minimum
contribution is $10,000. The fund is available for
the uses specified in the rules including for the
purposes of its business.’’).
11 See id.
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the Corporation incident to the business
of DTC.’’
On August 28, 2018, the Commission
approved a rule change filed by DTC
with respect to Rule 4 (‘‘Loss Allocation
Rule Change’’).12 A primary purpose of
the Loss Allocation Rule Change was to
harmonize the loss allocation provisions
of the Rules of DTC with similar
provisions of the rules of its two
affiliated CCPs, National Securities
Clearing Corporation (‘‘NSCC’’) and
Fixed Income Clearing Corporation
(‘‘FICC’’) (collectively, the ‘‘CCPs’’).
As part of the Loss Allocation Rule
Change, Previous Rule 4 was
restructured to provide separate and
distinct provisions for (i) in Section 4 of
Rule 4, the application of liquidity
resources, including, but not limited to,
the pro rata application of the
Participants Fund, in order to complete
settlement on a given Business Day
when there is a settlement gap, and (ii)
in Section 5 of Rule 4, the allocation of
losses and liabilities of DTC arising out
of Default Loss Events or Declared NonDefault Loss Events.13 Revised Section 4
of Rule 4 was meant to retain the core
principle of Previous Rule 4 for the
application of the Participants Fund as
a liquidity resource to complete
settlement.14 A new Section 5,
consisting of loss allocation provisions
that were revised for substantial
conformity with revisions for the CCPs,
was inserted into Rule 4 to provide a
discrete loss allocation waterfall (‘‘Loss
12 See Securities Exchange Act Release No. 83969
(August 28, 2018), 83 FR 44955 (September 4, 2018)
(SR–DTC–2017–022).
13 As a result, the main sections of Rule 4 relating
to the Participants Fund are: Section 1, which
focuses on Required Participants Fund Deposits and
Actual Participants Fund Deposits, and briefly
addresses the maintenance, permitted use and
investment of the Participants Fund; Section 3,
which provides for the application of a defaulting
Participant’s own Actual Participants Fund Deposit
to its unpaid settlement obligations; and Section 4,
which provides for, in relevant part, the pro rata
application of the Actual Participants Fund
Deposits of all Participants (except a defaulting
Participant) to fund a settlement gap on a Business
Day. DTC notes that Section 5 of Rule 4 does not
provide for the direct application of the Participants
Fund as part of the Loss Allocation Waterfall. The
reference in Section 1(f) of Rule 4 to the use of the
Actual Participants Fund Deposits ‘‘to satisfy losses
and liabilities of the Corporation incident to the
business of the Corporation, as provided in Section
5 of this Rule’’ refers to the application of the
Actual Participants Fund Deposit of a Participant
that fails to timely make its loss allocation payment
under the Loss Allocation Waterfall, as provided for
in Section 3 of Rule 4. Accordingly, this proposed
rule change has no relationship to or effect on the
Loss Allocation Waterfall. Nor do the proposed
drafting changes to Section 4 of Rule 4 affect, in any
degree, the likelihood of the occurrence of a Default
Loss Event or Declared Non-Default Loss Event
subject to Section 5.
14 See infra note 16.
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Allocation Waterfall’’) more comparable
to NSCC and FICC.
Nevertheless, as explained in more
detail below, DTC now recognizes that
certain of the provisions of amended
Section 4 of Rule 4 might be read in a
manner that conflicts with the stated,
and historical, purpose of the
Participants Fund.15 Specifically,
certain provisions might be construed to
narrow the scope of use of the
Participants Fund for settlement to a
default gap only.16 Therefore, because
settlement is a critical service of DTC,
and the Participants Fund is a critical
liquidity resource to fund any
settlement gap, DTC is proposing to
amend certain provisions of Section 4 of
Rule 4 to reflect expressly that the
Participants Fund continues to be a
liquidity resource that may be used by
DTC to fund a settlement gap to
complete settlement on a Business Day,
whether the settlement gap is the result
of a Participant Default, or otherwise.
(ii) Overview of Proposed Rule Change
A. Sections 3 and 4 of Rule 4
Currently, Sections 3 and 4 are the
primary sections of Rule 4 that are
relevant to the application of the
Participants Fund to fund a settlement
gap.
Section 3 of Rule 4 provides, in
relevant part, that ‘‘[i]f a Participant is
a Participant that is a Defaulting
Participant pursuant to Rule 9(B) or is
otherwise obligated to the Corporation
pursuant to these Rules and the
Procedures and fails to satisfy any such
obligation (a ‘‘Participant Default’’) . . .
the Corporation shall, to the extent
necessary to eliminate such obligation,
apply some or all of the Actual
Participants Fund Deposit of such
Participant to such obligation to satisfy
the Participant Default.’’ 17
Section 3 of Rule 4 is the basic
provision of remedies if a Participant
fails to satisfy an obligation to DTC.18 In
that case, DTC may apply the Actual
Participants Fund Deposit of the
responsible Participant to the extent
necessary to satisfy its Participant
Default. A Participant Default includes
a situation where a Participant fails to
15 See
supra note 10.
rule filing for the Loss Allocation Rule
Change did not mention any intention to narrow the
scope of the permitted use of the Participants Fund
under Rule 4. See Securities Exchange Act Release
No. 83629 (July 13, 2018), 83 FR 34246, 34248 (July
19, 2018) (SR–DTC–2017–022) (‘‘The proposed rule
change would retain the core principles of
[Previous] Rule 4 for both application of the
Participants Fund as a liquidity resource to
complete settlement and for loss allocation.’’).
17 Supra note 4.
18 Therefore, Section 3 of Rule 4 does not apply
to a situation where there is no Participant Default.
16 The
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pay its net debit balance at the end of
a Business Day. If the amount of the
Actual Participants Fund Deposit of the
responsible Participant is insufficient to
satisfy its net debit balance, DTC has
recourse to the Actual Participants Fund
Deposits of the other Participants, to be
charged pro rata in accordance with
Section 4 of Rule 4.
Section 4 of Rule 4 currently
provides:
The 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.
If the Participants Fund is applied to
complete settlement, the Corporation shall
promptly after the event notify each
Participant and the SEC of the amount
applied and the reasons therefor (‘‘Settlement
Charge Notice’’). Each non-defaulting
Participant’s pro rata share of such
application of the Participants Fund (each, a
‘‘pro rata settlement charge’’) shall be equal
to (i) its Required Participants Fund Deposit,
as such Required Participants Fund Deposit
was fixed on the Business Day of such
application 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.19
19 Supra note 4. The proposed rule change would
not affect the balance of Section 4 of Rule 4. Section
4 of Rule 4 also provides, in part, that a Participant
shall have a period of five Business Days following
issuance of a Settlement Charge Notice to notify
DTC of its election to terminate its business with
DTC and thereby cap its maximum obligation with
respect to other pro rata settlement charges
(‘‘Settlement Charge Cap’’). If the Participant gives
such notice, Section 4 of Rule 4 provides that DTC
may still 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. Section
4 of Rule 4 also provides that if the Actual
Participants Fund Deposit of a Participant is
applied pursuant to Section 4 of Rule 4, and, as a
result, the Actual Participants Fund Deposit of such
Participant is less than its Required Participants
Fund Deposit, the Participant must, upon the
demand of DTC and within such time as DTC may
require, deposit to the Participants Fund the
amount in cash needed to eliminate any resulting
deficiency in its Required Participants Fund
Deposit.
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The above provisions of Section 4 of
Rule 4 were drafted as part of the
restructuring and revision of Rule 4 in
connection to the Loss Allocation Rule
Change. The intention was that these
new provisions would track the
historical principle of Section 4 of
Previous Rule 4 that the Participants
Fund may be applied to a loss or
liability, including a settlement gap, that
could not be satisfied by charging the
Actual Participants Fund Deposit of a
Participant pursuant to Section 3 of
Rule 4. Nevertheless, because Section 4
of Rule 4 is now silent as to the use of
the Participants Fund to complete
settlement when there is a non-default
gap, it could be construed as limiting
the pro rata application of the
Participants Fund to fund a settlement
gap to default scenarios.
On each Business Day, settlement
occurs during a tight timeframe, in
conjunction with the Federal Reserve’s
National Settlement Service (NSS) and
Fedwire.20 If there is any problem with
the receipt or disbursement of funds for
settlement, it would need to be
addressed quickly. The Participants
Fund is designed as ready ‘‘cash on
hand’’ for settlement and is, typically,
the most available liquidity resource for
settlement. If the scope of the permitted
use of the Participants Fund to fund a
settlement gap on a Business Day is not
expressly stated in Rule 4, there is a
possibility that DTC’s ability on a
Business Day to quickly and effectively
respond to and resolve any settlement
gap could be adversely affected. Use of
the Participants Fund needs to be
optimized during the tight timeframe
because extensive settlement delays
might cause significant market
disruptive effects. The proposed rule
change is designed to confirm,
expressly, ready access to the
Participants Fund for settlement
purposes, whatever the settlement gap
scenario.
In light of the foregoing, in order to
facilitate timely action by DTC in
connection with any settlement gap,
DTC is proposing to amend Section 4 of
Rule 4 to provide expressly for the use
of the Participants Fund to fund
settlement irrespective of whether the
settlement gap is a default gap or a nondefault gap.
B. Technical and Clarifying Changes
DTC believes that certain other
amendments that were made pursuant
to the Loss Allocation Rule Change may
have impacted the transparency of
Section 4 of Rule 4 with respect to use
of the Participants Fund and other
20 See
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66669
resources for settlement. Therefore, as
described below, DTC is proposing to (i)
clarify that a Participant’s pro rata share
of an application of the Participants
Fund would be the same whether there
is a default gap or a non-default gap, (ii)
restore the express provision for the
optional use of a discretionary amount
of existing retained earnings of DTC to
fund settlement, (iii) specifically state
that DTC may apply its available
resources to fund settlement, in such
order and in such amounts as it
determines, in its sole discretion, and
(iv) make ministerial changes for
conformity and readability.
(ii) Proposed Rule Change
A. Section 4 of Rule 4
Section 4 of Rule 4, Heading:
In order to reflect that Section 4 of
Rule 4 would address the liquidity
resources to fund settlement, including
the application of the Participants Fund
to fund settlement when there is a
default gap or a non-default gap, DTC is
proposing to replace the current heading
of Section 4 of Rule 4 ‘‘Application of
Participants Fund Deposits of NonDefaulting Participants’’ with ‘‘Liquidity
Resources to Fund Settlement;
Application of Participants Fund.’’
Section 4 of Rule 4 (Proposed New
First Paragraph):
DTC is proposing to add a new
opening paragraph to Section 4 of Rule
4 that would reflect and summarize the
purpose of the proposed Section 4 of
Rule 4. Specifically, DTC is proposing to
add the following paragraph: ‘‘This
Section sets forth liquidity resources
available to the Corporation to fund
settlement on a Business Day, in the
event of a Participant Default or
otherwise.’’
Section 4 of Rule 4, First Paragraph
(Proposed Second Paragraph):
DTC is proposing to:
1. Streamline the language referring to
a settlement gap resulting from an
unsatisfied Participant Default 21 by
revising the text to state that, ‘‘If, on a
Business Day, there is a Participant
Default which is not satisfied pursuant
to Section 3 of this Rule by the
application of the Actual Participants
Fund Deposit of a Participant, . . .’’;
2. Expressly address a non-default gap
by adding the phrase ‘‘. . . or if Section
3 is not applicable, . . .’’ into the
description of the circumstances in
21 The current default gap language is ‘‘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.’’
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which DTC may apply the Participants
Fund to fund settlement; 22
3. Revise the language that refers to
DTC’s sole discretion to apply its
liquidity resources, including
Participants Fund, to fund settlement,23
to state, ‘‘. . . in such order and in such
amounts as the Corporation shall
determine, in its sole discretion, to the
extent necessary to fund settlement on
the Business Day:’’; and
4. Enhance the transparency of
Section 4 of Rule 4 with respect to
liquidity resources that may be available
to DTC to fund settlement by amending
Section 4 of Rule 4 to provide DTC may
apply:
(a) The Actual Participants Fund Deposits
of all Participants (other than a Participant
whose Actual Participants Fund Deposit is
exhausted pursuant to Section 3);
(b) the existing retained earnings or
undivided profits of DTC; or
(c) any other liquidity resources as may be
available to DTC from time to time,
including, but not limited to, the End-of-Day
Credit Facility.
Specifically, with respect to (a), DTC
is proposing to replace the reference in
the first paragraph of Section 4 of Rule
4 to ‘‘non-defaulting Participants’’ with
‘‘all Participants (other than a
Participant whose Actual Participants
Fund Deposit is exhausted pursuant to
Section 3).’’ The purpose of this change
is to provide expressly that (i) in the
case of a non-default gap, all
Participants would be charged a pro rata
share of the application of the
Participants Fund, and (ii) a Participant
that cured its Participant Default
pursuant to Section 3 by the application
of some, but not all, of its Actual
Participants Fund Deposit on that
Business Day, would still be subject to
a pro rata share of the application of the
Participants Fund to fund settlement, up
to the remaining balance of its Actual
Participants Fund Deposit, if there is (x)
a default gap (due to the default of
another Participant) or (y) a non-default
gap.
With respect to (b), in order to
enhance the transparency of available
resources to fund settlement, DTC is
proposing to restore the express
22 Section 3 of Rule 4 applies when there is a
Participant Default. If there is no Participant
Default, Section 3 of Rule 4 does not apply.
Therefore, if there is a settlement gap where Section
3 of Rule 4 is inapplicable, such settlement gap
could be considered a non-default gap.
23 Rule 4 currently states: ‘‘The 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 . . . and/or apply such other
liquidity resources as may be available to the
Corporation from time to time, including the Endof-Day Credit Facility.’’
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provision for the optional use of a
discretionary amount of existing
retained earnings of DTC 24 that had
appeared in previous versions of Rule 4,
including Section 4 of Previous Rule
4.25 With respect to (c), DTC is
proposing to insert the phrase ‘‘but not
limited to,’’ after ‘‘including,’’ in order
to make clear that DTC may have other
liquidity resources available in addition
to the End-of-Day Credit Facility.
In sum, pursuant to the above
proposed changes, the revised
paragraph would state:
If, on a Business Day, there is a Participant
Default which is not satisfied pursuant to
Section 3 of this Rule by the application of
the Actual Participants Fund Deposit of a
Participant, or if Section 3 is not applicable,
then the Corporation shall apply, in such
order and in such amounts as the
Corporation shall determine, in its sole
discretion, to the extent necessary to fund
settlement on the Business Day:
(a) The Actual Participants Fund Deposits
of all Participants (other than a Participant
whose Actual Participants Fund Deposit is
exhausted pursuant to Section 3);
(b) the existing retained earnings or
undivided profits of the Corporation; or
(c) any other liquidity resources as may be
available to the Corporation from time to
time, including, but not limited to, the Endof-Day Credit Facility.
Section 4 of Rule 4, Second Paragraph
(Proposed Fifth Paragraph):
For conformity, DTC is proposing to
modify this paragraph to conform with
the proposed changes to the third
paragraph. Specifically, pursuant to the
proposed rule change, this paragraph
would state: ‘‘If the Participants Fund is
applied pursuant to paragraph (a) of this
Section, the Corporation shall promptly
after the event notify each Participant
and the SEC of the amount of the
Participants Fund applied and the
reasons therefor (‘‘Settlement Charge
Notice’’).’’
In addition, to further streamline
Section 4 of Rule 4, DTC is proposing
to move the proposed amended
paragraph to follow the proposed fourth
paragraph.
Section 4 of Rule 4, Proposed Third
Paragraph:
For enhanced transparency with
respect to the governance relating to a
24 The
retained earnings of DTC are reflected in
its quarterly condensed consolidated financial
statements and annual financial statements,
available at https://www.dtcc.com/legal/financialstatements.
25 As noted above, the loss allocation provisions
of Rule 4 are not relevant to the application of
liquidity resources to a settlement gap on a given
Business Day. As such, the optional use of the
existing retained earnings of DTC to fund settlement
is separate and distinct from calculation of, or
application of, the Corporate Contribution required
in Section 5 of Rule 4.
PO 00000
Frm 00138
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pro rata application of the Participants
Fund, DTC is proposing to add the
following paragraph:
A determination to apply the
Participants Fund pursuant to this
Section shall be made by either the
Chief Executive Officer, Chief Risk
Officer, Chief Financial Officer, a
member of any management committee,
Treasurer or any Managing Director as
may be designated by the Chief Risk
Officer from time to time. The Board of
Directors (or an authorized Committee
thereof) shall be promptly informed of
the determination.
Section 4 of Rule 4, Third Paragraph
(Proposed Fourth Paragraph):
Pursuant to the proposed rule change,
DTC would revise this paragraph 26 to
make clarifying changes that reflect that
a Participant’s pro rata share of an
application of the Participants Fund
would be the same whether there is a
default gap or a non-default gap.
Specifically, DTC is proposing to (i)
remove the references to ‘‘nondefaulting Participants,’’ (ii) streamline
the language by representing the
calculation of a pro rata share as a ratio,
instead of a division calculation, (iii)
make conforming changes with the
foregoing, and (iv) for consistency and
clarity, make ministerial word changes
and replace references to ‘‘day’’ with the
defined term ‘‘Business Day.’’
In sum, DTC is proposing that this
paragraph be revised to state: ‘‘The pro
rata share of the Actual Participants
Fund Deposit of any Participant applied
pursuant to paragraph (a) shall be equal
to the ratio of (i) the Required
Participants Fund Deposit of the
Participant, as fixed on the Business
Day on which such charge is made less
its Additional Participants Fund
Deposit, if any, on that Business Day, to
(ii) the sum of the Required Participants
Fund Deposits, as fixed on the Business
Day on which such charge is made, of
all Participants so charged on that
Business Day, less the sum of the
Additional Participants Fund Deposits,
if any, of those Participants on that
Business Day. The amount so charged to
the Actual Participants Fund Deposit of
a Participant shall constitute a ‘‘pro rata
26 Currently, the paragraph states: ‘‘Each nondefaulting Participant’s pro rata share of such
application of the Participants Fund (each, a ‘‘pro
rata settlement charge’’) shall be equal to (i) its
Required Participants Fund Deposit, as such
Required Participants Fund Deposit was fixed on
the Business Day of such application 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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settlement charge’’ with respect to that
Participant.’’
Section 4 of Rule 4, Fifth, Sixth,
Seventh and Eighth Paragraphs
(Proposed Paragraphs Six, Seven, Eight
and Nine):
There would be no changes to these
paragraphs. The proposed rule change
would not affect the Settlement Charge
Termination Notification Period, the
Settlement Charge Cap, nor the right of
DTC to 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.
The proposed rule change would not
affect the requirement that if the Actual
Participants Fund Deposit of a
Participant is applied pursuant to
Section 4 of Rule 4, and, as a result, the
Actual Participants Fund Deposit of
such Participant is less than its
Required Participants Fund Deposit, the
Participant must, upon the demand of
DTC and within such time as DTC
would require, deposit to the
Participants Fund the amount in cash
needed to eliminate any resulting
deficiency in its Required Participants
Fund Deposit.
B. Section 1(f) of Rule 4
Section 1(f) of Rule 4 currently states,
in relevant part: ‘‘The Actual
Participants Fund Deposits of
Participants to the Participants Fund
shall be held by the Corporation and
may be used or invested as provided in
these Rules and as specified in the
Procedures. The Actual Participants
Fund Deposits of Participants may be
used (i) to satisfy the obligations of
Participants to the Corporation, as
provided in Section 3 of this Rule, (ii)
to fund settlement among nondefaulting Participants, as provided in
Section 4 of this Rule and (iii) to satisfy
losses and liabilities of the Corporation
incident to the business of the
Corporation, as provided in Section 5 of
this Rule.’’
In conformity with the proposed
changes to Section 4 of Rule 4, DTC is
proposing a ministerial change of
removing the word ‘‘non-defaulting’’
from Section 1(f) of Rule 4.
Anticipated Effect on and Management
of Risk
DTC believes that the proposed
change to (i) amend Rule 4 to provide
expressly that the Participants Fund
may be used by DTC to fund a
settlement gap, whether it is a default
gap or a non-default gap, and (ii) make
other technical changes, would provide
enhanced transparency with respect to
use of the Participants Fund and other
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resources to complete settlement. In this
way, the proposal would enhance the
overall efficiency and effectiveness of
end-of-day settlement in circumstances
where there is a settlement gap, thereby
reducing Participants’ risk exposure to a
possible delay in end-of-day settlement.
As a CSD, DTC plays a critical role in
the national financial infrastructure. As
a CSD, DTC is structured to provide for
the settlement of book-entry transfers
and pledges of interests in securities
between Participants, and for end-of-day
net funds settlement on each Business
Day. Given its critical role, if DTC does
not complete settlement on a given
Business Day, there could be significant
market-wide effects. Accordingly, if
there is a settlement gap on a Business
Day, access to liquidity resources needs
to be optimized during the tight
timeframe in which settlement must be
completed. The Participants Fund is
designed to be one of the foundational
liquidity resources available to DTC. If
there is uncertainty as to the scope and
manner of DTC’s use of the Participants
Fund to complete settlement on a given
Business Day, DTC’s ability to quickly
and effectively respond to and resolve
any settlement gap may be
compromised. If its ability to respond to
and resolve a settlement issue is
compromised, settlement may be
delayed, possibly causing complications
for Participants and the market.
DTC’s proposal, as described in detail
above, would enhance the overall
efficiency and effectiveness of
settlement on a Business Day in
circumstances where there is a
settlement gap by facilitating timely
action by DTC to complete settlement
on a Business Day when there is a
settlement gap, including, but not
limited to, in situations where Section
3 of Rule 4 is not applicable. The ability
of DTC to take timely action to fund a
settlement gap, including, but not
limited to, the pro rata application of
the Participants Fund, would allow DTC
to continue to support end-of-day net
funds settlement in connection with
book-entry transfers of securities on
each Business Day.
Consistency With the Clearing
Supervision Act
DTC believes the proposed change
would be consistent with the Clearing
Supervision Act, specifically with the
risk management objectives and
principles of Section 805(b), and with
certain of the risk management
standards adopted by the Commission
pursuant to Section 805(a)(2), for the
reasons described below.27
(i) Consistency With Section 805(b) of
the Clearing Supervision Act
Although the Clearing Supervision
Act does not specify a standard of
review for an advance notice, its stated
purpose is instructive: To mitigate
systemic risk in the financial system
and promote financial stability by,
among other things, promoting uniform
risk management standards for
systemically important financial market
utilities and strengthening the liquidity
of systemically important financial
market utilities.28
DTC believes the proposal is
consistent with the objectives and
principles of these risk management
standards as described in Section 805(b)
of the Clearing Supervision Act.29
First, the proposal would amend
Section 4 of Rule 4 to provide expressly
for the pro rata application of the
Participants Fund to any settlement gap,
including a non-default gap. As noted
above, if there were a question as to
DTC’s right to apply the Participants
Fund to a non-default gap, DTC’s ability
on a Business Day to quickly and
effectively respond to and resolve any
such settlement gap and complete
settlement might be adversely affected.
Second, the proposal would also (i)
clarify that a Participant’s pro rata share
of an application of the Participants
Fund would be the same whether there
is a default gap or a non-default gap, (ii)
restore the express provision for the
optional use of a discretionary amount
of existing retained earnings of DTC to
fund settlement, (iii) specifically state
that DTC may apply its available
resources to fund settlement, in such
order and in such amounts as it
determines, in its sole discretion, and
(iv) make ministerial changes for
conformity and readability. Without
these changes, DTC’s rights with respect
to the manner and use of its liquidity
resources to fund settlement might not
be promptly ascertainable, particularly
in a time of stress.
Taken together, the proposed changes
would enhance the transparency of
DTC’s use of the Participants Fund and
other resources to complete settlement
on a Business Day. 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 changes to (i) amend Rule 4 to
provide expressly that the Participants
28 12
27 12
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29 12
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U.S.C. 5461(b).
U.S.C. 5464(b).
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Fund may be used by DTC to fund a
settlement gap, whether it is a default
gap or a non-default gap, and (ii) make
other technical changes to provide
enhanced transparency with respect to
completing settlement when there is a
settlement gap, would be consistent
with the objectives and principles of
Section 805(b) of the Clearing
Supervision Act,30 which specify the
promotion of robust risk management,
promotion of safety and soundness,
reduction of systemic risks and support
of the stability of the broader financial
system by, among other things,
strengthening the liquidity of
systemically important financial market
utilities, such as DTC.
(ii) Consistency With Section 805(a)(2)
of the Clearing Supervision Act
Section 805(a)(2) of the Clearing
Supervision Act authorizes the
Commission to prescribe risk
management standards for the payment,
clearing and settlement activities of
designated clearing entities, like DTC,
and financial institutions engaged in
designated activities for which the
Commission is the supervisory agency
or the appropriate financial regulator.31
The Commission has accordingly
adopted risk management standards
under Section 805(a)(2) of the Clearing
Supervision Act 32 and Section 17A of
the Act (‘‘Covered Clearing Agency
Standards’’).33 The Covered Clearing
Agency Standards require covered
clearing agencies to establish,
implement, maintain, and enforce
written policies and procedures that are
reasonably designed to meet certain
minimum requirements for their
operations and risk management
practices on an ongoing basis.34
DTC believes the proposed changes
are consistent with Rule 17Ad–22(e)(1)
of the Covered Clearing Agency
Standards 35 for the reasons described
below.
Rule 17Ad–22(e)(1) under the Act
requires that DTC establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
provide for a well-founded, clear,
transparent and enforceable legal basis
for each aspect of its activities in all
relevant jurisdictions.36
As discussed above, changes to
Section 4 of Previous Rule 4 might be
construed as narrowing the scope of use
U.S.C. 5464(a)(2).
32 Id.
33 17
CFR 240.17Ad–22(e).
34 Id.
35 17
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.
The Commission may extend the
period for review by an additional 60
days if the proposed change raises novel
or complex issues, subject to the
Commission providing the clearing
agency with prompt written notice of
the extension. 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,
including whether the Advance Notice
30 Id.
31 12
of the Participants Fund for settlement
to a default gap, even though the
Participants Fund is a liquidity resource
that is available to fund any settlement
gap. By amending Rule 4 to provide
expressly that the Participants Fund
continues to be a liquidity resource that
may be used by DTC to fund a
settlement gap to complete settlement
on a Business Day, whether the
settlement gap is the result of a
Participant Default or otherwise, the
proposed changes are designed to
provide an expressly clear, transparent
and enforceable legal basis for the
application of the Participants Fund to
a settlement gap, whether or not caused
by a Participant Default. In this way,
DTC believes the proposal is consistent
with Rule 17Ad–22(e)(1) under the
Act.37
37 Id.
18:08 Oct 19, 2020
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–2020–801 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–2020–801. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the Advance Notice that
are filed with the Commission, and all
written communications relating to the
Advance Notice between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of DTC and on DTCC’s website
(https://dtcc.com/legal/sec-rulefilings.aspx). All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–DTC–
2020–801 and should be submitted on
or before November 4, 2020.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–23143 Filed 10–19–20; 8:45 am]
CFR 240.17Ad–22(e)(1).
36 Id.
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is consistent with the Clearing
Supervision Act. Comments may be
submitted by any of the following
methods:
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Agencies
[Federal Register Volume 85, Number 203 (Tuesday, October 20, 2020)]
[Notices]
[Pages 66666-66672]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23143]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90169; File No. SR-DTC-2020-801]
Self-Regulatory Organizations; the Depository Trust Company;
Notice of Filing of an Advance Notice To Amend Rule 4
October 14, 2020.
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'') \1\ and Rule 19b-4(n)(1)(i) under the Securities
Exchange Act of 1934 (``Act''),\2\ notice is hereby given that on
September 9, 2020, The Depository Trust Company (``DTC'') filed with
the Securities and Exchange Commission (``Commission'') advance notice
SR-DTC-2020-801 (``Advance Notice'') as described in Items I, II, and
III below, which Items have been prepared by the clearing agency.\3\
The Commission is publishing this notice to solicit comments on the
Advance Notice from interested persons.
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ On September 9, 2020, DTC filed the Advance Notice as a
proposed rule change (SR-DTC-2020-011) with the Commission pursuant
to Section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4
thereunder, 17 CFR 240.19b-4. A copy of the proposed rule change is
available at https://www.dtcc.com/legal/sec-rule-filings.aspx.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice
This Advance Notice consists of amendments to the Rules, By-Laws
and Organization Certificate of DTC (``Rules'').\4\ The proposed change
would amend Rule 4 to provide expressly that the Participants Fund
continues to be a liquidity resource that may be used by DTC to fund a
settlement funding gap to complete settlement on a Business Day,
whether the funding gap is the result of a Participant Default or
otherwise. In addition, the proposed change would make other technical
and clarifying amendments to Rule 4 to provide enhanced transparency
with respect to use of the Participants Fund and other resources to
complete settlement on a Business Day, as discussed below.
---------------------------------------------------------------------------
\4\ Each capitalized term not otherwise defined herein has its
respective meaning as set forth in DTC's rules, including, but not
limited to, the Rules and the DTC Settlement Service Guide (the
``Settlement Guide''), available at https://www.dtcc.com/legal/rules-and-procedures.aspx. The Settlement Guide is a Procedure of DTC
filed with the Commission that, among other things, operationalizes
and supplements the DTC Rules that relate to settlement, including,
but not limited to, Rule 4 (Participants Fund and Participants
Investment).
---------------------------------------------------------------------------
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.
[[Page 66667]]
(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing
Supervision Act
Description of Proposed Change
The proposed rule change would amend Rule 4 to provide expressly
that the Participants Fund continues to be a liquidity resource that
may be used by DTC to fund a settlement funding gap to complete
settlement on a Business Day, whether the funding gap is the result of
a Participant Default or otherwise. In addition, the proposed rule
change would make other technical and clarifying amendments to Rule 4
to provide enhanced transparency with respect to use of the
Participants Fund and other resources to complete settlement on a
Business Day, as discussed below.
(i) Background
A. DTC Settlement on a Business Day
DTC is the central securities depository (``CSD'') for
substantially all corporate and municipal debt and equity securities
available for trading in the United States. DTC plays a critical role
in the national financial infrastructure.\5\ As a CSD, DTC provides a
central location in which securities may be immobilized, and interests
in those securities are reflected in accounts maintained for its
Participants, which are financial institutions such as brokers or
banks.\6\ As a CSD, DTC is structured to provide for the settlement of
book-entry transfers and pledges of interests in securities between
Participants, and for end-of-day net funds settlement on each Business
Day.\7\
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\5\ See Financial Stability Oversight Council (``FSOC'') 2012
Annual Report, Appendix A at 166, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Appendix%20A%20Designation%20of%20Systemically%20Important%20Market%20Utilities.pdf.
\6\ See, e.g., Securities Exchange Act Release No. 20221
(September 23, 1983), 48 FR 45167, 45168 (October 3, 1983) (File No.
600-1) (``A securities depository is a ``custodial'' clearing agency
that operates a centralized system for the handling of securities
certificates. Depositories accept deposits of securities from
broker-dealers, banks, and other financial institutions; credit
those securities to the depositing participants accounts; and,
pursuant to participant's instructions, effect book-entry movements
of securities. The physical securities deposited with a depository
are held in a fungible bulk; each participant or pledgee having an
interest in securities of a given issue credited to its account has
a pro rata interest in the physical securities of the issue held in
custody by the securities depository in its nominee name.
Depositories collect and pay dividends and interest to participants
for securities held on deposit. Depositories also provide facilities
for payment by participants to other participants in connection with
book-entry deliveries of securities . . . .'').
\7\ See, e.g., 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), supra note 4, which
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 Payment
and Settlement Systems and the Technical Committee of the
International Organization of Securities Commissions (April 2012),
available at https://www.bis.org/cpmi/publ/d101a.pdf).
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The DTC settlement system records money debits and credits to
Participant settlement accounts throughout a Business Day. Credits to a
Participant settlement account arise from deliveries versus payment,
receipt of payment orders, principal and interest distributions in
respect of securities held, intraday settlement progress payments and
any other items or transactions that give rise to a credit. Debits to a
Participant settlement account are primarily due to receives versus
payment, as well as other types of charges to the account permitted
under the Rules. As these debits and credits to a Participant's
settlement account are recorded intraday, the Participant's settlement
account will be in a net debit balance or net credit balance from time
to time and, finally, at the end of a Business Day, a net debit, net
credit or zero balance is determined. This final net debit or net
credit balance determines whether the Participant has an obligation to
pay or to be paid in the process of DTC completing settlement on that
Business Day. A Participant with an end-of-day net debit balance has an
obligation to pay DTC that amount; a Participant with an end-of-day net
credit balance is entitled to receive a payment from DTC. When a
Participant has an end-of-day zero net balance or an end-of-day net
credit balance, it is deemed to have satisfied its settlement
obligations for that Business Day, and securities processed for
delivery versus payment for delivery to the Participant will be
credited to its account. When a Participant with a net debit balance
pays its settlement obligation, and DTC completes system-wide
settlement, all securities processed for delivery versus payment to
that Participant on that Business Day will be credited to its account
and it will have paid for those deliveries. As to payments due to the
Participant for its deliveries on that Business Day, the Participant
will have been paid as well, because credits for those deliveries
intraday have offset and reduced its other debit obligations, even
though, on balance, it finished the Business Day with a settlement
obligation. A Participant that defaults on its settlement obligations
on a Business Day will not have paid for the securities processed for
delivery versus payment, and the securities will not be credited to its
account.
B. Settlement Gap on a Business Day
There may be circumstances in which the amount of settlement
payments received or available to DTC on a Business Day is not
sufficient to pay all Participants with an end-of-day net credit
balance on that Business Day (a ``settlement gap''). A settlement gap
could occur on a Business Day as a result of, principally, a
Participant Default, where a Participant fails to pay its settlement
obligation (a ``default gap''). A settlement gap could also occur on a
Business Day as a result of causes other than a Participant Default (a
``non-default gap''). For example, a non-default gap could occur if the
funds required to complete settlement are not available to DTC, in
whole or in part, due to an operational or data issue arising at DTC, a
Participant or Settling Bank, or due to a cyber incident, or other
technological business disruption.
The Rules and Procedures of DTC specify the extent of the
obligation of DTC to achieve settlement on each Business Day, and, as
DTC is not a central counterparty (``CCP''), do not guarantee
settlement.\8\ However, as a critical part of the national financial
infrastructure, if DTC does not complete settlement on a given Business
Day, there could be significant market-wide effects.\9\ The Rules and
Procedures of DTC are structured so that if there is a settlement gap
on a Business Day, DTC has liquidity resources to mitigate the risks
relating to a disruption to obligations settling at DTC on that
Business Day. If there is any problem with the receipt or disbursement
of funds for settlement, the issue would need to be addressed quickly.
Access to liquidity resources needs to be optimized during the tight
timeframe in which settlement must be completed on a Business Day, in
order for DTC to quickly and effectively respond to and resolve any
settlement gap, whether a default gap or non-default gap.
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\8\ See, e.g., Rule 9(B), supra note 4 (``Each 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.'').
\9\ Supra note 5.
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[[Page 66668]]
C. Participants Fund as a Liquidity Resource To Complete Settlement on
a Business Day
The Participants Fund is designed to be one of the foundational
liquidity resources available to DTC to fund a settlement gap to
complete settlement on a Business Day. Rule 4 contains the key
provisions of the Rules and Procedures specifying the rights, duties
and obligations of Participants and DTC with respect to the
Participants Fund. Every Participant is required to make at least a
minimum deposit to the Participants Fund, and Participants with higher
levels of activity that impose greater liquidity risk to the DTC
settlement system have proportionally larger required deposits. The
principal purpose of the Participants Fund is, and historically has
been, to provide a mutualized liquidity resource to satisfy DTC losses
and liabilities attributable to its business conducted for the benefit
of its Participants.\10\ Key among these is daily settlement on each
Business Day, but also, historically, the Participants Fund was a
resource to cover losses and other liabilities as well.\11\ Prior to
August 28, 2018, Rule 4 (``Previous Rule 4''), in particular Section 4
of Previous Rule 4, provided a unified set of provisions that addressed
this application of the Participants Fund ``in satisfaction of losses
and liabilities of the Corporation incident to the business of DTC.''
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\10\ See Settlement Guide at 48, supra note 4 (``The
Participants Fund . . . provided in DTC Rule 4 create[s] liquidity
and collateral resources to support the business of DTC and to cover
losses and liabilities incident to that business.''). The term
``business'' with respect to DTC means ``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.'' Rule 4, Section 1(f), supra note
4. The first two paragraphs of Rule 6 describe services provided by
DTC, including settlement. Rule 6, supra note 4. DTC notes that, as
early as 1975, the Rules provided that ``[t]he Participants Fund may
be used by the Corporation for the purposes of its business . . .
.'' See DTC CA-1 Application for Permanent Registration as a
Clearing Agency, dated December 15, 1980 (File 600-1) at page 588.
In addition, the range of permissible uses of a clearing or
participants fund as covering ``all losses and liabilities incident
to clearance and settlement activities'' of the clearing agency was
specifically noted in the 1983 order of the Commission granting DTC
full registration as a clearing agency. Securities Exchange Act
Release No. 20221 (September 23, 1983), 48 FR 45167 (October 3,
1983) (File No. 600-1). The concept was also in Rule 4 of Central
Certificate Service, Inc., the predecessor of DTC, filed with the
Commission in 1972. Securities Exchange Act Release No. 9849
(November 8, 1972), 37 FR 24795 (November 21, 1972) (As described by
the Commission: ``Rule 4. A participant's fund will require deposits
by participants upon the basis of a formula established by CCS,
Inc., based upon usage. The minimum contribution is $10,000. The
fund is available for the uses specified in the rules including for
the purposes of its business.'').
\11\ See id.
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On August 28, 2018, the Commission approved a rule change filed by
DTC with respect to Rule 4 (``Loss Allocation Rule Change'').\12\ A
primary purpose of the Loss Allocation Rule Change was to harmonize the
loss allocation provisions of the Rules of DTC with similar provisions
of the rules of its two affiliated CCPs, National Securities Clearing
Corporation (``NSCC'') and Fixed Income Clearing Corporation (``FICC'')
(collectively, the ``CCPs'').
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\12\ See Securities Exchange Act Release No. 83969 (August 28,
2018), 83 FR 44955 (September 4, 2018) (SR-DTC-2017-022).
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As part of the Loss Allocation Rule Change, Previous Rule 4 was
restructured to provide separate and distinct provisions for (i) in
Section 4 of Rule 4, the application of liquidity resources, including,
but not limited to, the pro rata application of the Participants Fund,
in order to complete settlement on a given Business Day when there is a
settlement gap, and (ii) in Section 5 of Rule 4, the allocation of
losses and liabilities of DTC arising out of Default Loss Events or
Declared Non-Default Loss Events.\13\ Revised Section 4 of Rule 4 was
meant to retain the core principle of Previous Rule 4 for the
application of the Participants Fund as a liquidity resource to
complete settlement.\14\ A new Section 5, consisting of loss allocation
provisions that were revised for substantial conformity with revisions
for the CCPs, was inserted into Rule 4 to provide a discrete loss
allocation waterfall (``Loss Allocation Waterfall'') more comparable to
NSCC and FICC.
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\13\ As a result, the main sections of Rule 4 relating to the
Participants Fund are: Section 1, which focuses on Required
Participants Fund Deposits and Actual Participants Fund Deposits,
and briefly addresses the maintenance, permitted use and investment
of the Participants Fund; Section 3, which provides for the
application of a defaulting Participant's own Actual Participants
Fund Deposit to its unpaid settlement obligations; and Section 4,
which provides for, in relevant part, the pro rata application of
the Actual Participants Fund Deposits of all Participants (except a
defaulting Participant) to fund a settlement gap on a Business Day.
DTC notes that Section 5 of Rule 4 does not provide for the direct
application of the Participants Fund as part of the Loss Allocation
Waterfall. The reference in Section 1(f) of Rule 4 to the use of the
Actual Participants Fund Deposits ``to satisfy losses and
liabilities of the Corporation incident to the business of the
Corporation, as provided in Section 5 of this Rule'' refers to the
application of the Actual Participants Fund Deposit of a Participant
that fails to timely make its loss allocation payment under the Loss
Allocation Waterfall, as provided for in Section 3 of Rule 4.
Accordingly, this proposed rule change has no relationship to or
effect on the Loss Allocation Waterfall. Nor do the proposed
drafting changes to Section 4 of Rule 4 affect, in any degree, the
likelihood of the occurrence of a Default Loss Event or Declared
Non-Default Loss Event subject to Section 5.
\14\ See infra note 16.
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Nevertheless, as explained in more detail below, DTC now recognizes
that certain of the provisions of amended Section 4 of Rule 4 might be
read in a manner that conflicts with the stated, and historical,
purpose of the Participants Fund.\15\ Specifically, certain provisions
might be construed to narrow the scope of use of the Participants Fund
for settlement to a default gap only.\16\ Therefore, because settlement
is a critical service of DTC, and the Participants Fund is a critical
liquidity resource to fund any settlement gap, DTC is proposing to
amend certain provisions of Section 4 of Rule 4 to reflect expressly
that the Participants Fund continues to be a liquidity resource that
may be used by DTC to fund a settlement gap to complete settlement on a
Business Day, whether the settlement gap is the result of a Participant
Default, or otherwise.
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\15\ See supra note 10.
\16\ The rule filing for the Loss Allocation Rule Change did not
mention any intention to narrow the scope of the permitted use of
the Participants Fund under Rule 4. See Securities Exchange Act
Release No. 83629 (July 13, 2018), 83 FR 34246, 34248 (July 19,
2018) (SR-DTC-2017-022) (``The proposed rule change would retain the
core principles of [Previous] Rule 4 for both application of the
Participants Fund as a liquidity resource to complete settlement and
for loss allocation.'').
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(ii) Overview of Proposed Rule Change
A. Sections 3 and 4 of Rule 4
Currently, Sections 3 and 4 are the primary sections of Rule 4 that
are relevant to the application of the Participants Fund to fund a
settlement gap.
Section 3 of Rule 4 provides, in relevant part, that ``[i]f a
Participant is a Participant that is a Defaulting Participant pursuant
to Rule 9(B) or is otherwise obligated to the Corporation pursuant to
these Rules and the Procedures and fails to satisfy any such obligation
(a ``Participant Default'') . . . the Corporation shall, to the extent
necessary to eliminate such obligation, apply some or all of the Actual
Participants Fund Deposit of such Participant to such obligation to
satisfy the Participant Default.'' \17\
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\17\ Supra note 4.
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Section 3 of Rule 4 is the basic provision of remedies if a
Participant fails to satisfy an obligation to DTC.\18\ In that case,
DTC may apply the Actual Participants Fund Deposit of the responsible
Participant to the extent necessary to satisfy its Participant Default.
A Participant Default includes a situation where a Participant fails to
[[Page 66669]]
pay its net debit balance at the end of a Business Day. If the amount
of the Actual Participants Fund Deposit of the responsible Participant
is insufficient to satisfy its net debit balance, DTC has recourse to
the Actual Participants Fund Deposits of the other Participants, to be
charged pro rata in accordance with Section 4 of Rule 4.
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\18\ Therefore, Section 3 of Rule 4 does not apply to a
situation where there is no Participant Default.
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Section 4 of Rule 4 currently provides:
The 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.
If the Participants Fund is applied to complete settlement, the
Corporation shall promptly after the event notify each Participant
and the SEC of the amount applied and the reasons therefor
(``Settlement Charge Notice''). Each non-defaulting Participant's
pro rata share of such application of the Participants Fund (each, a
``pro rata settlement charge'') shall be equal to (i) its Required
Participants Fund Deposit, as such Required Participants Fund
Deposit was fixed on the Business Day of such application 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.\19\
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\19\ Supra note 4. The proposed rule change would not affect the
balance of Section 4 of Rule 4. Section 4 of Rule 4 also provides,
in part, that a Participant shall have a period of five Business
Days following issuance of a Settlement Charge Notice to notify DTC
of its election to terminate its business with DTC and thereby cap
its maximum obligation with respect to other pro rata settlement
charges (``Settlement Charge Cap''). If the Participant gives such
notice, Section 4 of Rule 4 provides that DTC may still 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. Section 4 of Rule
4 also provides that if the Actual Participants Fund Deposit of a
Participant is applied pursuant to Section 4 of Rule 4, and, as a
result, the Actual Participants Fund Deposit of such Participant is
less than its Required Participants Fund Deposit, the Participant
must, upon the demand of DTC and within such time as DTC may
require, deposit to the Participants Fund the amount in cash needed
to eliminate any resulting deficiency in its Required Participants
Fund Deposit.
The above provisions of Section 4 of Rule 4 were drafted as part of
the restructuring and revision of Rule 4 in connection to the Loss
Allocation Rule Change. The intention was that these new provisions
would track the historical principle of Section 4 of Previous Rule 4
that the Participants Fund may be applied to a loss or liability,
including a settlement gap, that could not be satisfied by charging the
Actual Participants Fund Deposit of a Participant pursuant to Section 3
of Rule 4. Nevertheless, because Section 4 of Rule 4 is now silent as
to the use of the Participants Fund to complete settlement when there
is a non-default gap, it could be construed as limiting the pro rata
application of the Participants Fund to fund a settlement gap to
default scenarios.
On each Business Day, settlement occurs during a tight timeframe,
in conjunction with the Federal Reserve's National Settlement Service
(NSS) and Fedwire.\20\ If there is any problem with the receipt or
disbursement of funds for settlement, it would need to be addressed
quickly. The Participants Fund is designed as ready ``cash on hand''
for settlement and is, typically, the most available liquidity resource
for settlement. If the scope of the permitted use of the Participants
Fund to fund a settlement gap on a Business Day is not expressly stated
in Rule 4, there is a possibility that DTC's ability on a Business Day
to quickly and effectively respond to and resolve any settlement gap
could be adversely affected. Use of the Participants Fund needs to be
optimized during the tight timeframe because extensive settlement
delays might cause significant market disruptive effects. The proposed
rule change is designed to confirm, expressly, ready access to the
Participants Fund for settlement purposes, whatever the settlement gap
scenario.
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\20\ See Settlement Guide at 19-20, supra note 4.
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In light of the foregoing, in order to facilitate timely action by
DTC in connection with any settlement gap, DTC is proposing to amend
Section 4 of Rule 4 to provide expressly for the use of the
Participants Fund to fund settlement irrespective of whether the
settlement gap is a default gap or a non-default gap.
B. Technical and Clarifying Changes
DTC believes that certain other amendments that were made pursuant
to the Loss Allocation Rule Change may have impacted the transparency
of Section 4 of Rule 4 with respect to use of the Participants Fund and
other resources for settlement. Therefore, as described below, DTC is
proposing to (i) clarify that a Participant's pro rata share of an
application of the Participants Fund would be the same whether there is
a default gap or a non-default gap, (ii) restore the express provision
for the optional use of a discretionary amount of existing retained
earnings of DTC to fund settlement, (iii) specifically state that DTC
may apply its available resources to fund settlement, in such order and
in such amounts as it determines, in its sole discretion, and (iv) make
ministerial changes for conformity and readability.
(ii) Proposed Rule Change
A. Section 4 of Rule 4
Section 4 of Rule 4, Heading:
In order to reflect that Section 4 of Rule 4 would address the
liquidity resources to fund settlement, including the application of
the Participants Fund to fund settlement when there is a default gap or
a non-default gap, DTC is proposing to replace the current heading of
Section 4 of Rule 4 ``Application of Participants Fund Deposits of Non-
Defaulting Participants'' with ``Liquidity Resources to Fund
Settlement; Application of Participants Fund.''
Section 4 of Rule 4 (Proposed New First Paragraph):
DTC is proposing to add a new opening paragraph to Section 4 of
Rule 4 that would reflect and summarize the purpose of the proposed
Section 4 of Rule 4. Specifically, DTC is proposing to add the
following paragraph: ``This Section sets forth liquidity resources
available to the Corporation to fund settlement on a Business Day, in
the event of a Participant Default or otherwise.''
Section 4 of Rule 4, First Paragraph (Proposed Second Paragraph):
DTC is proposing to:
1. Streamline the language referring to a settlement gap resulting
from an unsatisfied Participant Default \21\ by revising the text to
state that, ``If, on a Business Day, there is a Participant Default
which is not satisfied pursuant to Section 3 of this Rule by the
application of the Actual Participants Fund Deposit of a Participant, .
. .'';
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\21\ The current default gap language is ``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.''
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2. Expressly address a non-default gap by adding the phrase ``. . .
or if Section 3 is not applicable, . . .'' into the description of the
circumstances in
[[Page 66670]]
which DTC may apply the Participants Fund to fund settlement; \22\
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\22\ Section 3 of Rule 4 applies when there is a Participant
Default. If there is no Participant Default, Section 3 of Rule 4
does not apply. Therefore, if there is a settlement gap where
Section 3 of Rule 4 is inapplicable, such settlement gap could be
considered a non-default gap.
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3. Revise the language that refers to DTC's sole discretion to
apply its liquidity resources, including Participants Fund, to fund
settlement,\23\ to state, ``. . . in such order and in such amounts as
the Corporation shall determine, in its sole discretion, to the extent
necessary to fund settlement on the Business Day:''; and
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\23\ Rule 4 currently states: ``The 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 . . . 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.''
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4. Enhance the transparency of Section 4 of Rule 4 with respect to
liquidity resources that may be available to DTC to fund settlement by
amending Section 4 of Rule 4 to provide DTC may apply:
(a) The Actual Participants Fund Deposits of all Participants
(other than a Participant whose Actual Participants Fund Deposit is
exhausted pursuant to Section 3);
(b) the existing retained earnings or undivided profits of DTC;
or
(c) any other liquidity resources as may be available to DTC
from time to time, including, but not limited to, the End-of-Day
Credit Facility.
Specifically, with respect to (a), DTC is proposing to replace the
reference in the first paragraph of Section 4 of Rule 4 to ``non-
defaulting Participants'' with ``all Participants (other than a
Participant whose Actual Participants Fund Deposit is exhausted
pursuant to Section 3).'' The purpose of this change is to provide
expressly that (i) in the case of a non-default gap, all Participants
would be charged a pro rata share of the application of the
Participants Fund, and (ii) a Participant that cured its Participant
Default pursuant to Section 3 by the application of some, but not all,
of its Actual Participants Fund Deposit on that Business Day, would
still be subject to a pro rata share of the application of the
Participants Fund to fund settlement, up to the remaining balance of
its Actual Participants Fund Deposit, if there is (x) a default gap
(due to the default of another Participant) or (y) a non-default gap.
With respect to (b), in order to enhance the transparency of
available resources to fund settlement, DTC is proposing to restore the
express provision for the optional use of a discretionary amount of
existing retained earnings of DTC \24\ that had appeared in previous
versions of Rule 4, including Section 4 of Previous Rule 4.\25\ With
respect to (c), DTC is proposing to insert the phrase ``but not limited
to,'' after ``including,'' in order to make clear that DTC may have
other liquidity resources available in addition to the End-of-Day
Credit Facility.
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\24\ The retained earnings of DTC are reflected in its quarterly
condensed consolidated financial statements and annual financial
statements, available at https://www.dtcc.com/legal/financial-statements.
\25\ As noted above, the loss allocation provisions of Rule 4
are not relevant to the application of liquidity resources to a
settlement gap on a given Business Day. As such, the optional use of
the existing retained earnings of DTC to fund settlement is separate
and distinct from calculation of, or application of, the Corporate
Contribution required in Section 5 of Rule 4.
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In sum, pursuant to the above proposed changes, the revised
paragraph would state:
If, on a Business Day, there is a Participant Default which is
not satisfied pursuant to Section 3 of this Rule by the application
of the Actual Participants Fund Deposit of a Participant, or if
Section 3 is not applicable, then the Corporation shall apply, in
such order and in such amounts as the Corporation shall determine,
in its sole discretion, to the extent necessary to fund settlement
on the Business Day:
(a) The Actual Participants Fund Deposits of all Participants
(other than a Participant whose Actual Participants Fund Deposit is
exhausted pursuant to Section 3);
(b) the existing retained earnings or undivided profits of the
Corporation; or
(c) any other liquidity resources as may be available to the
Corporation from time to time, including, but not limited to, the
End-of-Day Credit Facility.
Section 4 of Rule 4, Second Paragraph (Proposed Fifth Paragraph):
For conformity, DTC is proposing to modify this paragraph to
conform with the proposed changes to the third paragraph. Specifically,
pursuant to the proposed rule change, this paragraph would state: ``If
the Participants Fund is applied pursuant to paragraph (a) of this
Section, the Corporation shall promptly after the event notify each
Participant and the SEC of the amount of the Participants Fund applied
and the reasons therefor (``Settlement Charge Notice'').''
In addition, to further streamline Section 4 of Rule 4, DTC is
proposing to move the proposed amended paragraph to follow the proposed
fourth paragraph.
Section 4 of Rule 4, Proposed Third Paragraph:
For enhanced transparency with respect to the governance relating
to a pro rata application of the Participants Fund, DTC is proposing to
add the following paragraph:
A determination to apply the Participants Fund pursuant to this
Section shall be made by either the Chief Executive Officer, Chief Risk
Officer, Chief Financial Officer, a member of any management committee,
Treasurer or any Managing Director as may be designated by the Chief
Risk Officer from time to time. The Board of Directors (or an
authorized Committee thereof) shall be promptly informed of the
determination.
Section 4 of Rule 4, Third Paragraph (Proposed Fourth Paragraph):
Pursuant to the proposed rule change, DTC would revise this
paragraph \26\ to make clarifying changes that reflect that a
Participant's pro rata share of an application of the Participants Fund
would be the same whether there is a default gap or a non-default gap.
Specifically, DTC is proposing to (i) remove the references to ``non-
defaulting Participants,'' (ii) streamline the language by representing
the calculation of a pro rata share as a ratio, instead of a division
calculation, (iii) make conforming changes with the foregoing, and (iv)
for consistency and clarity, make ministerial word changes and replace
references to ``day'' with the defined term ``Business Day.''
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\26\ Currently, the paragraph states: ``Each non-defaulting
Participant's pro rata share of such application of the Participants
Fund (each, a ``pro rata settlement charge'') shall be equal to (i)
its Required Participants Fund Deposit, as such Required
Participants Fund Deposit was fixed on the Business Day of such
application 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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In sum, DTC is proposing that this paragraph be revised to state:
``The pro rata share of the Actual Participants Fund Deposit of any
Participant applied pursuant to paragraph (a) shall be equal to the
ratio of (i) the Required Participants Fund Deposit of the Participant,
as fixed on the Business Day on which such charge is made less its
Additional Participants Fund Deposit, if any, on that Business Day, to
(ii) the sum of the Required Participants Fund Deposits, as fixed on
the Business Day on which such charge is made, of all Participants so
charged on that Business Day, less the sum of the Additional
Participants Fund Deposits, if any, of those Participants on that
Business Day. The amount so charged to the Actual Participants Fund
Deposit of a Participant shall constitute a ``pro rata
[[Page 66671]]
settlement charge'' with respect to that Participant.''
Section 4 of Rule 4, Fifth, Sixth, Seventh and Eighth Paragraphs
(Proposed Paragraphs Six, Seven, Eight and Nine):
There would be no changes to these paragraphs. The proposed rule
change would not affect the Settlement Charge Termination Notification
Period, the Settlement Charge Cap, nor the right of DTC to 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. The proposed rule change would not
affect the requirement that if the Actual Participants Fund Deposit of
a Participant is applied pursuant to Section 4 of Rule 4, and, as a
result, the Actual Participants Fund Deposit of such Participant is
less than its Required Participants Fund Deposit, the Participant must,
upon the demand of DTC and within such time as DTC would require,
deposit to the Participants Fund the amount in cash needed to eliminate
any resulting deficiency in its Required Participants Fund Deposit.
B. Section 1(f) of Rule 4
Section 1(f) of Rule 4 currently states, in relevant part: ``The
Actual Participants Fund Deposits of Participants to the Participants
Fund shall be held by the Corporation and may be used or invested as
provided in these Rules and as specified in the Procedures. The Actual
Participants Fund Deposits of Participants may be used (i) to satisfy
the obligations of Participants to the Corporation, as provided in
Section 3 of this Rule, (ii) to fund settlement among non-defaulting
Participants, as provided in Section 4 of this Rule and (iii) to
satisfy losses and liabilities of the Corporation incident to the
business of the Corporation, as provided in Section 5 of this Rule.''
In conformity with the proposed changes to Section 4 of Rule 4, DTC
is proposing a ministerial change of removing the word ``non-
defaulting'' from Section 1(f) of Rule 4.
Anticipated Effect on and Management of Risk
DTC believes that the proposed change to (i) amend Rule 4 to
provide expressly that the Participants Fund may be used by DTC to fund
a settlement gap, whether it is a default gap or a non-default gap, and
(ii) make other technical changes, would provide enhanced transparency
with respect to use of the Participants Fund and other resources to
complete settlement. In this way, the proposal would enhance the
overall efficiency and effectiveness of end-of-day settlement in
circumstances where there is a settlement gap, thereby reducing
Participants' risk exposure to a possible delay in end-of-day
settlement.
As a CSD, DTC plays a critical role in the national financial
infrastructure. As a CSD, DTC is structured to provide for the
settlement of book-entry transfers and pledges of interests in
securities between Participants, and for end-of-day net funds
settlement on each Business Day. Given its critical role, if DTC does
not complete settlement on a given Business Day, there could be
significant market-wide effects. Accordingly, if there is a settlement
gap on a Business Day, access to liquidity resources needs to be
optimized during the tight timeframe in which settlement must be
completed. The Participants Fund is designed to be one of the
foundational liquidity resources available to DTC. If there is
uncertainty as to the scope and manner of DTC's use of the Participants
Fund to complete settlement on a given Business Day, DTC's ability to
quickly and effectively respond to and resolve any settlement gap may
be compromised. If its ability to respond to and resolve a settlement
issue is compromised, settlement may be delayed, possibly causing
complications for Participants and the market.
DTC's proposal, as described in detail above, would enhance the
overall efficiency and effectiveness of settlement on a Business Day in
circumstances where there is a settlement gap by facilitating timely
action by DTC to complete settlement on a Business Day when there is a
settlement gap, including, but not limited to, in situations where
Section 3 of Rule 4 is not applicable. The ability of DTC to take
timely action to fund a settlement gap, including, but not limited to,
the pro rata application of the Participants Fund, would allow DTC to
continue to support end-of-day net funds settlement in connection with
book-entry transfers of securities on each Business Day.
Consistency With the Clearing Supervision Act
DTC believes the proposed change would be consistent with the
Clearing Supervision Act, specifically with the risk management
objectives and principles of Section 805(b), and with certain of the
risk management standards adopted by the Commission pursuant to Section
805(a)(2), for the reasons described below.\27\
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\27\ 12 U.S.C. 5464(a)(2) and (b).
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(i) Consistency With Section 805(b) of the Clearing Supervision Act
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, its stated purpose is instructive: To
mitigate systemic risk in the financial system and promote financial
stability by, among other things, promoting uniform risk management
standards for systemically important financial market utilities and
strengthening the liquidity of systemically important financial market
utilities.\28\
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\28\ 12 U.S.C. 5461(b).
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DTC believes the proposal is consistent with the objectives and
principles of these risk management standards as described in Section
805(b) of the Clearing Supervision Act.\29\
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\29\ 12 U.S.C. 5464(b).
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First, the proposal would amend Section 4 of Rule 4 to provide
expressly for the pro rata application of the Participants Fund to any
settlement gap, including a non-default gap. As noted above, if there
were a question as to DTC's right to apply the Participants Fund to a
non-default gap, DTC's ability on a Business Day to quickly and
effectively respond to and resolve any such settlement gap and complete
settlement might be adversely affected.
Second, the proposal would also (i) clarify that a Participant's
pro rata share of an application of the Participants Fund would be the
same whether there is a default gap or a non-default gap, (ii) restore
the express provision for the optional use of a discretionary amount of
existing retained earnings of DTC to fund settlement, (iii)
specifically state that DTC may apply its available resources to fund
settlement, in such order and in such amounts as it determines, in its
sole discretion, and (iv) make ministerial changes for conformity and
readability. Without these changes, DTC's rights with respect to the
manner and use of its liquidity resources to fund settlement might not
be promptly ascertainable, particularly in a time of stress.
Taken together, the proposed changes would enhance the transparency
of DTC's use of the Participants Fund and other resources to complete
settlement on a Business Day. 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 changes to (i) amend Rule
4 to provide expressly that the Participants
[[Page 66672]]
Fund may be used by DTC to fund a settlement gap, whether it is a
default gap or a non-default gap, and (ii) make other technical changes
to provide enhanced transparency with respect to completing settlement
when there is a settlement gap, would be consistent with the objectives
and principles of Section 805(b) of the Clearing Supervision Act,\30\
which specify the promotion of robust risk management, promotion of
safety and soundness, reduction of systemic risks and support of the
stability of the broader financial system by, among other things,
strengthening the liquidity of systemically important financial market
utilities, such as DTC.
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\30\ Id.
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(ii) Consistency With Section 805(a)(2) of the Clearing Supervision Act
Section 805(a)(2) of the Clearing Supervision Act authorizes the
Commission to prescribe risk management standards for the payment,
clearing and settlement activities of designated clearing entities,
like DTC, and financial institutions engaged in designated activities
for which the Commission is the supervisory agency or the appropriate
financial regulator.\31\ The Commission has accordingly adopted risk
management standards under Section 805(a)(2) of the Clearing
Supervision Act \32\ and Section 17A of the Act (``Covered Clearing
Agency Standards'').\33\ The Covered Clearing Agency Standards require
covered clearing agencies to establish, implement, maintain, and
enforce written policies and procedures that are reasonably designed to
meet certain minimum requirements for their operations and risk
management practices on an ongoing basis.\34\
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\31\ 12 U.S.C. 5464(a)(2).
\32\ Id.
\33\ 17 CFR 240.17Ad-22(e).
\34\ Id.
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DTC believes the proposed changes are consistent with Rule 17Ad-
22(e)(1) of the Covered Clearing Agency Standards \35\ for the reasons
described below.
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\35\ 17 CFR 240.17Ad-22(e)(1).
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Rule 17Ad-22(e)(1) under the Act requires that DTC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide for a well-founded, clear, transparent
and enforceable legal basis for each aspect of its activities in all
relevant jurisdictions.\36\
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\36\ Id.
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As discussed above, changes to Section 4 of Previous Rule 4 might
be construed as narrowing the scope of use of the Participants Fund for
settlement to a default gap, even though the Participants Fund is a
liquidity resource that is available to fund any settlement gap. By
amending Rule 4 to provide expressly that the Participants Fund
continues to be a liquidity resource that may be used by DTC to fund a
settlement gap to complete settlement on a Business Day, whether the
settlement gap is the result of a Participant Default or otherwise, the
proposed changes are designed to provide an expressly clear,
transparent and enforceable legal basis for the application of the
Participants Fund to a settlement gap, whether or not caused by a
Participant Default. In this way, DTC believes the proposal is
consistent with Rule 17Ad-22(e)(1) under the Act.\37\
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\37\ Id.
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III. Date of Effectiveness of the Advance Notice and Timing for
Commission Action
The proposed change may be implemented if the Commission does not
object to the proposed change within 60 days of the later of (i) the
date that the proposed change was filed with the Commission or (ii) the
date that any additional information requested by the Commission is
received. The clearing agency shall not implement the proposed change
if the Commission has any objection to the proposed change.
The Commission may extend the period for review by an additional 60
days if the proposed change raises novel or complex issues, subject to
the Commission providing the clearing agency with prompt written notice
of the extension. 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, including whether the Advance
Notice is consistent with the Clearing Supervision Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-DTC-2020-801 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-2020-801. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the Advance Notice that are filed with the
Commission, and all written communications relating to the Advance
Notice between the Commission and any person, other than those that may
be withheld from the public in accordance with the provisions of 5
U.S.C. 552, will be available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of DTC and on DTCC's website
(https://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-DTC-2020-801 and should be submitted on
or before November 4, 2020.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23143 Filed 10-19-20; 8:45 am]
BILLING CODE 8011-01-P