Self-Regulatory Organizations; The Depository Trust Company; Notice of No Objection To Advance Notice To Amend Rule 4, 71973-71977 [2020-25006]
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Federal Register / Vol. 85, No. 219 / Thursday, November 12, 2020 / Notices
descendants who are not Family
Members to whom the Applicant would
provide Advisory Services if relief were
granted. The Applicant estimates that if
the Additional Family Clients’ assets
were managed by the Applicant, the
assets owned by the Additional Family
Clients would represent less than five
percent (5%) of the Applicant’s assets
under management. From the
perspective of the Dewan Family,
allowing the Applicant to provide
Services to the Additional Family
Clients is consistent with the existing
familial relationship among family
members.
4. The Applicant also submits that
there is no public interest in requiring
the Applicant to be registered under the
Advisers Act. The Applicant states that
the office is a private organization that
was formed to be the ‘‘family office’’ for
the Dewan Family and that the office
does not have any public clients. The
Applicant maintains that the office’s
Advisory Services are exclusively
tailored to the needs of the Extended
Dewan Family. The Applicant argues
that the provision of Advisory Services
to the Additional Family Clients, does
not create any public interest that would
require the office to be registered under
the Advisers Act that is different in any
manner than the considerations that
apply to a ‘‘family office’’ that complies
in all respects with the Family Office
Rule.
5. The Applicant argues that although
the Family Office Rule largely codified
the exemptive orders that the
Commission had previously issued
before the enactment of the Dodd-Frank
Wall Street Reform and Consumer
Protection Act, the Commission
recognized in proposing the rule that
the exact representations, conditions, or
terms contained in every exemptive
order could not be captured in a rule of
general applicability. The Commission
noted that family offices would remain
free to seek a Commission exemptive
order to advise an individual or entity
that did not meet the proposed family
client definition, and that certain issues
would be more appropriately addressed
through an exemptive order process
where the Commission can consider the
specific facts and circumstances, than
through a rule of general applicability.
6. The Applicant maintains that,
based on its circumstances—desiring to
provide Advisory Services to certain
Additional Family Clients who are
relatives that have been considered and
treated as family members for twentyfive (25) years and whose status as
clients of the office would not change
the nature of the office’s operations to
that of a commercial advisory
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business—an exemptive order is
appropriate based on the Applicant’s
specific facts and circumstances.
7. For the foregoing reasons, the
Applicant requests an order declaring it
to be a person not within the intent of
Section 202(a)(11) of the Advisers Act.
The Applicant submits that the order is
necessary and appropriate, in the public
interest, consistent with the protection
of investors, and consistent with the
purposes fairly intended by the policy
and provisions of the Advisers Act.
The Applicant’s Conditions
1. The Applicant will offer and
provide Advisory Services only to
Family Clients and to the Additional
Family Clients, who generally will be
deemed to be, and be treated as if they
were, Family Clients; provided,
however, that the Additional Family
Clients will be deemed to be, and
treated as if they were, Family Members
for purposes of paragraph (b)(1) and for
purposes of paragraph (d)(4)(vi) of the
Family Office Rule.
2. The Applicant will at all times be
wholly owned by Family Clients and
exclusively controlled (directly or
indirectly) by one or more Family
Members and/or Family Entities
(excluding the Additional Family
Clients’ Family Entities) as defined in
paragraph (d)(5) of the Family Office
Rule.
3. At all times the assets beneficially
owned by Family Members and/or
Family Entities (excluding the
Additional Family Clients’ Family
Entities), will account for at least 95%
of the assets for which the Applicant
provides Advisory Services.
4. The Applicant will comply with all
the terms for exclusion from the
definition of investment adviser under
the Advisers Act set forth in the Family
Office Rule except for the limited
exception requested by this Application.
For the Commission, by the Division of
Investment Management, under delegated
authority.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–24956 Filed 11–10–20; 8:45 am]
BILLING CODE 8011–01–P
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90368; File No. SR–DTC–
2020–801]
Self-Regulatory Organizations; The
Depository Trust Company; Notice of
No Objection To Advance Notice To
Amend Rule 4
November 6, 2020.
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’’) pursuant to Section 806(e)(1) of
Title VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act,
entitled Payment, Clearing and
Settlement Supervision Act of 2010
(‘‘Clearing Supervision Act’’) 1 and Rule
19b–4(n)(1)(i) 2 under the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 3 to amend Rule 4 of the Rules, ByLaws and Organization Certificate of
DTC (the ‘‘Rules’’). The Advance Notice
was published for comment in the
Federal Register on October 20, 2020,4
and the Commission has not received
comments regarding the changes
proposed in the Advance Notice. This
publication serves as notice of no
objection to the Advance Notice.
I. The Advance Notice
A. Background
DTC is the central securities
depository (‘‘CSD’’) for substantially all
corporate and municipal debt and
equity securities available for trading in
the United States.5 As a covered
clearing agency that provides CSD
services,6 DTC provides a central
1 12
U.S.C. 5465(e)(1).
CFR 240.19b–4(n)(1)(i).
3 15 U.S.C. 78a et seq.
4 Securities Exchange Act Release No. 90169
(October 14, 2020), 85 FR 66666 (October 20, 2020)
(SR–DTC–2020–801) (‘‘Notice of Filing’’).
5 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, By-Laws and Organization Certificate of DTC
(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.
6 A covered clearing agency is defined as a
registered clearing agency that provides the services
of a central counterparty (‘‘CCP’’) or CSD. See 17
CFR 240.17Ad–22(a)(5). CSD services means
services of a clearing agency that is a securities
depository as described in Section 3(a)(23)(A) of the
Exchange Act. See 17 CFR 240.17Ad–22(a)(3).
Specifically, the definition of a clearing agency
includes, in part, ‘‘any person, such as a securities
depository that (i) acts as a custodian of securities
2 17
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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.7 DTC does not provide central
counterparty services and therefore does
not become party to its Participants’
transactions or guarantee settlement on
behalf of its Participants.8
DTC provides settlement services for
virtually all broker-to-broker equity and
listed corporate and municipal debt
securities transactions in the U.S., as
well as institutional trades, money
market instruments and other financial
obligations. For end-of-day net funds
settlement, the DTC settlement system
records money debits and credits to
Participant settlement accounts
throughout a Business Day.9 At the end
of a Business Day, a Participant’s
settlement account will have a net debit
(i.e., the sum of all money charges to a
Participant’s account exceeds the sum of
all money credits), net credit (i.e., the
sum of all money credits to a
Participant’s account exceeds the sum of
all money charges), or zero balance.
in connection with a system for the central
handling of securities whereby all securities of a
particular class or series of any issuer deposited
within the system are treated as fungible and may
be transferred, loaned, or pledged by bookkeeping
entry without physical delivery of securities
certificates, or (ii) otherwise permits or facilitates
the settlement of securities transactions or the
hypothecation or lending of securities without
physical delivery of securities certificates.’’ 15
U.S.C. 78c(a)(23)(A).
7 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 (sic) accounts; and,
pursuant to participant’s (sic) 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. . . .’’).
8 A clearing agency that provides central
counterparty services interposes itself between the
counterparties to securities transactions, acting
functionally as the buyer to every seller and the
seller to every buyer. 17 CFR 240.17Ad–22(a)(2).
9 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.
See Notice of Filing, supra note 4, 85 FR at 66667.
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This final balance will determine
whether the Participant has an
obligation to pay or to be paid as part
of the process of DTC completing
settlement on that Business Day. A
Participant that fails to pay its net debit
balance and therefore 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.
DTC represents that 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’’).10 A settlement gap could occur
on a Business Day as a result of 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’’). Examples
of a non-default gap could include a
scenario in which the funds required to
complete settlement are not available to
DTC due to an operational or data issue
arising at DTC or at a Participant or
Settling Bank, a cyber incident, or other
business disruption.11 According to
DTC, its failure to complete settlement
on a given Business day could cause
significant market-wide effects.12
B. The Participants Fund and Rule 4
The Participants Fund is prefunded
and represents the aggregate of the
deposits that each DTC Participant is
required to make under DTC’s Rules.13
The Rules provide for 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.14 DTC has stated that the
Participants Fund is a mutualized prefunded liquidity and loss resource, and
that DTC does not have an obligation to
repay the Participants Fund and the
application of the Participants Fund
does not convert to a loss.15 Once DTC
applies the Participants Fund, the
Participants are required, upon the
demand of DTC, to replenish their
shares of the Participants Fund to satisfy
their minimum deposits.16 DTC further
represents that the principal purpose of
the Participants Fund is to be one of the
foundational liquidity resources
available to DTC to fund a shortfall in
order to complete settlement on a
Business Day.17
Currently, Section 4 of Rule 4
provides that, 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 Rule 4 18 is not sufficient to
complete settlement, DTC may apply
the Actual Participants Fund Deposits of
Participants other than the Defaulting
Participant (each, a ‘‘non-defaulting
Participant’’), and apply such other
liquidity resources as may be available
to DTC, including, but not limited to,
the End-of-Day Credit Facility.19 DTC
recognizes that currently, certain
provisions of Rule 4 might be construed
to narrow the scope of use of the
Participants Fund (and any other
liquidity resources) for settlement to a
14 See
id.
15 Securities
10 See
id.
11 DTC is subject to a number of regulatory
requirements related to its operational and cyber
risks, including Rule 17Ad–22(e)(17) and
Regulation Systems Compliance and Integrity.
DTC’s overall approach to operational risk is
summarized in its Disclosure Framework, available
at https://www.dtcc.com/legal/policy-andcompliance. Among other things, DTC manages its
operational risk pursuant to the Clearing Agency
Operational Risk Management Framework, which
the Commission approved in a separate rule filing.
See Securities Exchange Act Release No. 81745
(September 28, 2017), 82 FR 46332 (October 4,
2017) (SR–DTC–2017–014).
12 See Notice of Filing, supra note 4, 85 FR at
66667 (citing, e.g., Rule 9(B), supra note 5, which
states: ‘‘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.’’).
13 See Rule 4 (Participants Fund and Participants
Investment), supra note 5.
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Exchange Act Release No. 83950
(August 27, 2018), 83 FR 44393 (August 30, 2018)
(SR–DTC–2017–804).
16 See Section 4 of Rule 4 (Participants Fund and
Participants Investment), supra note 5.
17 See Notice of Filing, supra note 4, 85 FR at
66668 (citing DTC’s Settlement Guide which
provides that the Participants Fund creates liquidity
and collateral resources to support the business of
DTC and to cover losses and liabilities incident to
that business).
18 Section 3 of Rule 4 provides that if a
Participant is obligated to DTC pursuant to the
Rules and the Procedures and fails to satisfy any
such obligation, DTC 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. See Section 3 of Rule 4, supra
note 5.
19 Section 2 of Rule 4 provides that ‘‘End-of-Day
Credit Facility’’ is any credit facility maintained by
DTC for the purpose of funding the end-of-day
settlement of transactions processed through the
facilities of DTC. See Section 2 of Rule 4, supra note
5. Also see Securities Exchange Act Release No.
80605 (May 5, 2017), 82 FR 21850 (May 10, 2017)
(SR–DTC–2017–802; NSCC–2017–802) (renewing
the committed revolving credit facility of DTC and
National Securities Clearing Corporation).
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default gap only.20 In order to ensure
that DTC may use the Participants Fund
and other liquidity resources to fund a
settlement gap regardless of its cause,
DTC has proposed revising Rule 4, as
discussed below.
C. Description of Proposed Changes
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DTC states that Section 4 of Rule 4
does not address the use of the
Participants Fund to complete
settlement when there is a non-default
gap and could be construed as limiting
the pro rata application of the
Participants Fund to fund a settlement
gap to default scenarios.21 DTC further
represents that, on each Business Day,
settlement occurs during a tight
timeframe, in conjunction with the
Federal Reserve’s National Settlement
Service and Fedwire.22 If there is a
delay with the receipt or disbursement
of funds for settlement, DTC would
need to address those problems quickly
in order to complete settlement on that
Business Day.23
In the Advance Notice, DTC describes
the proposed changes to address this
situation and expressly ensure that the
Participants Fund could be used to
complete settlement in the event of a
non-default gap. First, DTC proposes to
amend Section 4 of Rule 4 to state that
(i) the Participants Fund, (ii) the
existing retained earnings or undivided
profits of DTC, and (iii) any other
liquidity resources as may be available
(including, but not limited to, the Endof-Day Credit Facility), would be
available to DTC as liquidity resources
to fund settlement on a Business Day,
regardless of whether the settlement gap
is a default gap or a non-default gap.
The proposal would 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. Second, DTC proposes to
provide that a determination to apply
the Participants Fund 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 proposal
also states that the Board of Directors (or
an authorized Committee thereof) shall
be promptly informed of the
20 See Notice of Filing, supra note 4, 85 FR at
66668.
21 See Notice of Filing, supra note 4, 85 FR at
66669.
22 See id.; see also, Settlement Guide at 19–20,
supra note 5.
23 See Notice of Filing, supra note 4, 85 FR at
66669.
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determination.24 Third, DTC proposes
to make certain clarifying and
conforming changes, including to 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, and to
make minor changes for conformity and
readability.
II. Discussion and Recommendation
Although the Clearing Supervision
Act does not specify a standard of
review for an advance notice, the stated
purpose of the Clearing Supervision Act
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
(‘‘SIFMUs’’) and strengthening the
liquidity of SIFMUs.25
Section 805(a)(2) of the Clearing
Supervision Act authorizes the
Commission to prescribe regulations
containing risk management standards
for the payment, clearing, and
settlement activities of designated
clearing entities engaged in designated
activities for which the Commission is
the supervisory agency.26 Section 805(b)
of the Clearing Supervision Act
provides the following objectives and
principles for the Commission’s risk
management standards prescribed under
Section 805(a): 27
• To promote robust risk
management;
• To promote safety and soundness;
• To reduce systemic risks; and
• To support the stability of the
broader financial system.
Section 805(c) provides, in addition,
that the Commission’s risk management
standards may address such areas as
risk management and default policies
and procedures, among others areas.28
The Commission has adopted risk
management standards under Section
805(a)(2) of the Clearing Supervision
Act and Section 17A of the Exchange
Act (the ‘‘Clearing Agency Rules’’).29
The Clearing Agency Rules require,
24 The requirement that DTC would also promptly
notify the Commission in the event that the
Participants Fund were used to complete settlement
would remain unchanged.
25 See 12 U.S.C. 5461(b).
26 12 U.S.C. 5464(a)(2).
27 12 U.S.C. 5464(b).
28 12 U.S.C. 5464(c).
29 17 CFR 240.17Ad–22. See Securities Exchange
Act Release No. 68080 (October 22, 2012), 77 FR
66220 (November 2, 2012) (S7–08–11). See also
Securities Exchange Act Release No. 78961
(September 28, 2016), 81 FR 70786 (October 13,
2016) (S7–03–14) (Standards for Covered Clearing
Agencies). DTC is a ‘‘covered clearing agency,’’ as
defined in Rule 17Ad–22(a)(5). See supra note 6.
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among other things, each covered
clearing agency to establish, implement,
maintain, and enforce written policies
and procedures that are reasonably
designed to meet certain minimum
requirements for its operations and risk
management practices on an ongoing
basis.30 As such, it is appropriate for the
Commission to review advance notices
against the Clearing Agency Rules and
the objectives and principles of these
risk management standards as described
in Section 805(b) of the Clearing
Supervision Act. As discussed below,
the Commission believes the proposal in
the Advance Notice is consistent with
the objectives and principles described
in Section 805(b) of the Clearing
Supervision Act,31 and in the Clearing
Agency Rules, in particular Rule 17Ad–
22(e)(1), (e)(2)(i) and (v), and (e)(7).32
A. Consistency With Section 805(b) of
the Clearing Supervision Act
The Commission believes that the
Advance Notice is consistent with the
stated objectives and principles of
Section 805(b) of the Clearing
Supervision Act,33 because the changes
proposed in the Advance Notice are
consistent with promoting robust risk
management, promoting safety and
soundness, reducing systemic risks, and
supporting the broader financial system.
First, the Commission believes that
the proposal is consistent with
promoting robust risk management. DTC
proposes to amend Section 4 of Rule 4
to provide expressly for the pro rata
application of the Participants Fund,
retained earnings, and any other
liquidity resources, including DTC’s
credit facility, to any settlement gap,
including a non-default gap. As noted
above, settlement occurs during a tight
timeframe on each Business Day. If
there is a delay with the receipt or
disbursement of funds for settlement, it
would need to be addressed quickly in
order to complete settlement on that
Business Day. The proposal would
clarify which resources DTC can access
and use in the most time-efficient and
effective manner to ensure settlement.34
30 Id.
31 12
U.S.C. 5464(b).
CFR 240.17Ad–22(e)(1) and (e)(2)(i).
33 12 U.S.C. 5464(b).
34 The Commission further believes that use of the
Participants Fund may be the most efficient method
of completing settlement at the end of a Business
Day on a tight timeframe, as it generally consists of
cash which, pursuant to DTC’s Investment Policy,
must be held in demand deposit, savings or
checking bank accounts that provide same day
access to funds. See Exchange Act Release No.
88513 (March 30, 2020), 85 FR 19047, 19048 (April
3, 2020). The Commission observes that, as a
general matter, it likely could take more time to
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Moreover, the proposal would specify
the particular DTC personnel whose
approval could authorize the use of the
Participants Fund to finance a
settlement gap. The Commission
believes that the proposal is designed to
allow DTC to take timely and effective
action to fund a settlement gap,
regardless of whether it is a default or
non-default gap, and therefore complete
settlement, by identifying and applying
appropriate liquidity resources, which
is consistent with the promotion of
robust risk management.
Second, the Commission believes that
the proposal is consistent with the
promotion of safety and soundness of
DTC and, by extension, the broader
financial system. As stated above, the
proposal would expressly provide that
DTC may use the Participants Fund and
other specified resources as a liquidity
resources in the event of a settlement
gap. With this proposal, DTC would
expressly state how it would manage the
potential liquidity risk that may arise
from both the default of a Participant as
well as a non-default event, including
operational issues at DTC, a Participant,
or a Settling Bank. With the proposal,
DTC would be better positioned to
timely complete settlement if a default
or non-default gap arises. Accordingly,
the Commission believes that the
proposal is consistent with the
promotion of safety and soundness.
Finally, the Commission believes that
the proposal is consistent with reducing
systemic risks and supporting the
stability of the broader financial system.
With clear authority to use the
Participants Fund and other resources to
address both a default and non-default
settlement gap, DTC should be better
positioned to access sufficient liquidity,
and thus be better able to manage its
liquidity risks in the event of a
settlement gap. DTC is a SIFMU and
serves as the only central securities
depository in the United States, settling
virtually all broker-to-broker equity and
listed corporate and municipal debt
securities transactions in the United
States, as well as institutional trades,
money market instruments and other
financial obligations. This access to
liquidity during a stress event would
help mitigate any risk to settlement
finality due to DTC having insufficient
funds to meet payment obligations to its
Participants. As such, access to this
liquidity would help to strengthen the
liquidity of DTC and mitigate potential
risks to settlement finality, thereby
reducing systemic risks and supporting
the stability of the broader financial
system.
For the reasons stated above, the
Commission believes the changes
proposed in the Advance Notice are
consistent with Section 805(b) of the
Clearing Supervision Act.35
B. Consistency With Rule 17Ad–22(e)(1)
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, current Section 4
of Rule 4 does not address the use of the
Participants Fund or other liquidity
resources to complete settlement when
there is a non-default gap, and DTC is
concerned that it could be construed as
limiting the pro rata application of the
Participants Fund to fund a settlement
gap to default scenarios. The proposal
would amend Rule 4 to expressly state
that the Participants Fund, DTC’s
retained earnings, and other liquidity
resources 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. In
addition, the proposal makes clarifying
and conforming changes and provides
governance regarding the application of
the Participants Fund.
The Commission believes that the
above changes are designed to ensure
greater certainty in the Rules regarding
what resources would be available to
DTC to complete settlement in the event
of a settlement gap. The proposal would
provide a clear, transparent and
enforceable legal basis for DTC to apply
the Participants Fund, retained
earnings, or other liquidity resources to
any settlement gap. It would also 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, and
expressly 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.
Therefore, the Commission believes
the proposal is designed to help ensure
that DTC’s Rules remain well-founded,
transparent, and legally enforceable in
all relevant jurisdictions, consistent
with Rule 17Ad–22(e)(1) under the
Act.37
35 12
access retained earnings or draw down on the credit
facility.
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36 17
U.S.C. 5464(b).
CFR 240.17Ad–22(e)(1).
37 Id.
PO 00000
Frm 00102
C. Consistency With Rule 17Ad–
22(e)(2)(i) and (v)
Rule 17Ad–22(e)(2) under the Act
requires, in part, that DTC establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to provide for
governance arrangements that (i) are
clear and transparent, and (v) specify
clear and direct lines of responsibility.38
As discussed above, the proposal
would provide that a determination to
apply the Participants Fund 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 proposal would
also provide that the Board of Directors
(or an authorized Committee thereof)
shall be promptly informed of the
determination. With this proposal, the
Rules would expressly define who
would be responsible for making the
determination to apply the Participants
Fund to a settlement gap and would
require that the Board of Directors (or its
authorized Committee) would be
informed of such determination
promptly.
Therefore, the Commission believes
the proposal is designed to provide for
governance arrangements regarding the
use of the Participants Fund to complete
settlement that are clear and transparent
and specify clear and direct lines of
responsibility, consistent with Rule
17Ad–22(e)(2)(i) and (v) under the
Act.39
D. Consistency With Rule 17Ad–
22(e)(7)(i)
Rule 17Ad–22(e)(7)(i) under the Act
requires, in part, that a covered clearing
agency, like DTC, establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
effectively measure, monitor, and
manage the liquidity risk that arises in
or is borne by the covered clearing
agency, including measuring,
monitoring, and managing its settlement
and funding flows on an ongoing and
timely basis, and its use of intraday
liquidity, by maintaining sufficient
liquid resources to effect same-day
settlement of payment obligations with
a high degree of confidence under a
wide range of foreseeable stress
scenarios.40
As described above, the proposal
would clarify that the Participants Fund
and other resources may be applied by
38 17
40 17
Fmt 4703
Sfmt 4703
CFR 240.17Ad–22(e)(2)(i) and (v).
39 Id.
E:\FR\FM\12NON1.SGM
CFR 240.17Ad–22(e)(7)(i).
12NON1
Federal Register / Vol. 85, No. 219 / Thursday, November 12, 2020 / Notices
DTC to fund settlement in the event of
a default or non-default gap. The
proposed change is designed to help
ensure that DTC is able to manage its
settlement and funding flows on a
timely basis and effect same day
settlement of payment obligations in
certain foreseeable stress scenarios.
Therefore, the Commission believes
that the proposal is reasonably designed
to help DTC effectively manage liquidity
risk in a timely manner to complete
settlement, and accordingly is
consistent with Rule 17Ad–22(e)(7)(i).41
III. Conclusion
It is therefore noticed, pursuant to
Section 806(e)(1)(I) of the Clearing
Supervision Act, that the Commission
does not object to Advance Notice (SR–
DTC–2020–801) and that DTC is
authorized to implement the proposed
change as of the date of this notice or
the date of an order by the Commission
approving proposed rule change SR–
DTC–2020–011, whichever is later.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–25006 Filed 11–10–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90355; File No. SR–
NASDAQ–2020–017]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Order
Instituting Proceedings To Determine
Whether To Approve or Disapprove a
Proposed Rule Change To Amend
Nasdaq Rule 5704
jbell on DSKJLSW7X2PROD with NOTICES
November 5, 2020.
On July 23, 2020, The Nasdaq Stock
Market LLC (‘‘Exchange’’ or ‘‘Nasdaq’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to amend certain
listing requirements relating to
maintaining a minimum number of
beneficial holders and minimum
number of shares outstanding. The
proposed rule change was published for
comment in the Federal Register on
August 7, 2020.3
41 Id.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 89464
(August 4, 2020), 85 FR 48012 (‘‘Notice’’).
2 17
VerDate Sep<11>2014
17:07 Nov 10, 2020
Jkt 253001
On September 10, 2020, pursuant to
Section 19(b)(2) of the Exchange Act,4
the Commission designated a longer
period within which to approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether to
disapprove the proposed rule change.5
The Commission has received no
comments on the proposed rule change.
The Commission is issuing this order to
institute proceedings pursuant to
Section 19(b)(2)(B) of the Exchange Act 6
to determine whether to approve or
disapprove the proposed rule change.
I. Description of the Proposal
The Exchange proposes to amend
Nasdaq Rule 5704 to: (1) Remove the
requirement that, twelve months after
the commencement of trading on the
Exchange, a series of Exchange Traded
Fund Shares must have 50 or more
beneficial holders; and (2) replace its
existing minimum number of shares
requirement with a requirement that
each series of Exchange Traded Fund
Shares have a sufficient number of
shares outstanding at the
commencement of trading to facilitate
the formation of at least one creation
unit.7
The Exchange believes that the
requirement that a series of Exchange
Traded Fund Shares listed on the
Exchange must have at least 50
beneficial shareholders is no longer
necessary. The Exchange believes that
the requirements of Rule 6c–11 under
the Investment Company Act of 1940
(‘‘1940 Act’’), coupled with the existing
creation and redemption process,
mitigate the potential lack of liquidity
that, according to the Exchange, the
shareholder requirement was intended
to address.8 The Exchange further
believes that requiring at least one
creation unit to be outstanding at the
commencement of trading, together with
the daily portfolio transparency and
other enhanced disclosure requirements
4 15
U.S.C. 78s(b)(2).
Securities Exchange Act Release No. 89823,
85 FR 57895 (September 16, 2020). The
Commission designated November 5, 2020 as the
date by which the Commission shall approve or
disapprove, or institute proceedings to determine
whether to disapprove, the proposed rule change.
6 15 U.S.C. 78s(b)(2)(B).
7 Currently, Nasdaq Rule 5704(b)(1)(A) provides
that the Exchange will establish a minimum
number of Exchange Traded Fund Shares required
to be outstanding at the time of commencement of
trading on the Exchange.
8 In contrast, Nasdaq believes that the shareholder
requirement as it relates to common stock is a
measure of liquidity designed to help assure that
there will be sufficient investor interest and trading
to support price discovery once a security is listed.
See id. at 48012, n.6.
5 See
PO 00000
Frm 00103
Fmt 4703
Sfmt 4703
71977
of Rule 6c–11 under the 1940 Act,9 will
facilitate an effective arbitrage
mechanism and provide market
participants and investors with
sufficient transparency into the holdings
of the underlying portfolio, and ensure
that the trading price in the secondary
market remains in line with the value
per share of a fund’s portfolio.
Specifically with respect to arbitrage,
the Exchange states that the arbitrage
mechanism relies on the fact that shares
of the Fund can be created and
redeemed and that shares of the Fund
are able to flow into or out of the market
when the price of the Fund is not
aligned with the net asset value per
share of the portfolio. The resulting
buying and selling of the shares of the
Fund, as well as the underlying
portfolio components, generally causes
the market price and the net asset value
per share to converge. In addition, the
Exchange states that the proper
functioning of the arbitrage mechanism
is reliant on the presence of authorized
participants (‘‘APs’’) that are eligible to
facilitate creations and redemptions
with the fund and support the liquidity
of the fund. As a result, the Exchange
believes that the AP is able to buy and
sell Exchange Traded Fund Shares from
both the fund and investors. Because
Exchange Traded Fund Shares can be
created and redeemed ‘‘in-kind’’ and do
not have an upper limit of the number
of shares that can be outstanding, an AP
can fulfill customer orders or take
advantage of arbitrage opportunities
regardless of the number of shares
currently outstanding. Thus, the
Exchange believes that, unlike common
stock, the liquidity of Exchange Traded
Fund Shares is not dependent on the
number of shares currently outstanding
or the number of shareholders, but on
the availability of APs to transact in the
Exchange Traded Fund Shares primary
market.
To support these contentions, the
Exchange provides information, during
a two-month observation period,
regarding how closely two funds—the
SPY and QQQ—tracked their respective
underlying indexes, as well as data
regarding creation and redemption
activity in those two funds during the
same observation period. The Exchange
asserts that a symbiotic relationship
exists between the disclosure
requirements of Rule 6c–11 under the
9 As an example, the Exchange notes that Rule
6c–11(c)(1)(vi) requires additional disclosure if the
premium or discount is in excess of 2% for more
than seven consecutive days, so that there would
be transparency to investors in the event that the
trading value and the underlying portfolio deviate
for an extended period of time, which could
indicate an inefficient arbitrage mechanism.
E:\FR\FM\12NON1.SGM
12NON1
]]>Agencies
[Federal Register Volume 85, Number 219 (Thursday, November 12, 2020)]
[Notices]
[Pages 71973-71977]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25006]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90368; File No. SR-DTC-2020-801]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of No Objection To Advance Notice To Amend Rule 4
November 6, 2020.
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'') pursuant to Section
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, entitled Payment, Clearing and Settlement
Supervision Act of 2010 (``Clearing Supervision Act'') \1\ and Rule
19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934
(``Exchange Act'') \3\ to amend Rule 4 of the Rules, By-Laws and
Organization Certificate of DTC (the ``Rules''). The Advance Notice was
published for comment in the Federal Register on October 20, 2020,\4\
and the Commission has not received comments regarding the changes
proposed in the Advance Notice. This publication serves as notice of no
objection to the Advance Notice.
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ 15 U.S.C. 78a et seq.
\4\ Securities Exchange Act Release No. 90169 (October 14,
2020), 85 FR 66666 (October 20, 2020) (SR-DTC-2020-801) (``Notice of
Filing'').
---------------------------------------------------------------------------
I. The Advance Notice
A. Background
DTC is the central securities depository (``CSD'') for
substantially all corporate and municipal debt and equity securities
available for trading in the United States.\5\ As a covered clearing
agency that provides CSD services,\6\ DTC provides a central
[[Page 71974]]
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.\7\ DTC does
not provide central counterparty services and therefore does not become
party to its Participants' transactions or guarantee settlement on
behalf of its Participants.\8\
---------------------------------------------------------------------------
\5\ 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, By-Laws and Organization Certificate of DTC
(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.
\6\ A covered clearing agency is defined as a registered
clearing agency that provides the services of a central counterparty
(``CCP'') or CSD. See 17 CFR 240.17Ad-22(a)(5). CSD services means
services of a clearing agency that is a securities depository as
described in Section 3(a)(23)(A) of the Exchange Act. See 17 CFR
240.17Ad-22(a)(3). Specifically, the definition of a clearing agency
includes, in part, ``any person, such as a securities depository
that (i) acts as a custodian of securities in connection with a
system for the central handling of securities whereby all securities
of a particular class or series of any issuer deposited within the
system are treated as fungible and may be transferred, loaned, or
pledged by bookkeeping entry without physical delivery of securities
certificates, or (ii) otherwise permits or facilitates the
settlement of securities transactions or the hypothecation or
lending of securities without physical delivery of securities
certificates.'' 15 U.S.C. 78c(a)(23)(A).
\7\ 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 (sic) accounts; and,
pursuant to participant's (sic) 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. . . .'').
\8\ A clearing agency that provides central counterparty
services interposes itself between the counterparties to securities
transactions, acting functionally as the buyer to every seller and
the seller to every buyer. 17 CFR 240.17Ad-22(a)(2).
---------------------------------------------------------------------------
DTC provides settlement services for virtually all broker-to-broker
equity and listed corporate and municipal debt securities transactions
in the U.S., as well as institutional trades, money market instruments
and other financial obligations. For end-of-day net funds settlement,
the DTC settlement system records money debits and credits to
Participant settlement accounts throughout a Business Day.\9\ At the
end of a Business Day, a Participant's settlement account will have a
net debit (i.e., the sum of all money charges to a Participant's
account exceeds the sum of all money credits), net credit (i.e., the
sum of all money credits to a Participant's account exceeds the sum of
all money charges), or zero balance. This final balance will determine
whether the Participant has an obligation to pay or to be paid as part
of the process of DTC completing settlement on that Business Day. A
Participant that fails to pay its net debit balance and therefore
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.
---------------------------------------------------------------------------
\9\ 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. See
Notice of Filing, supra note 4, 85 FR at 66667.
---------------------------------------------------------------------------
DTC represents that 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'').\10\ A settlement
gap could occur on a Business Day as a result of 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'').
Examples of a non-default gap could include a scenario in which the
funds required to complete settlement are not available to DTC due to
an operational or data issue arising at DTC or at a Participant or
Settling Bank, a cyber incident, or other business disruption.\11\
According to DTC, its failure to complete settlement on a given
Business day could cause significant market-wide effects.\12\
---------------------------------------------------------------------------
\10\ See id.
\11\ DTC is subject to a number of regulatory requirements
related to its operational and cyber risks, including Rule 17Ad-
22(e)(17) and Regulation Systems Compliance and Integrity. DTC's
overall approach to operational risk is summarized in its Disclosure
Framework, available at https://www.dtcc.com/legal/policy-and-compliance. Among other things, DTC manages its operational risk
pursuant to the Clearing Agency Operational Risk Management
Framework, which the Commission approved in a separate rule filing.
See Securities Exchange Act Release No. 81745 (September 28, 2017),
82 FR 46332 (October 4, 2017) (SR-DTC-2017-014).
\12\ See Notice of Filing, supra note 4, 85 FR at 66667 (citing,
e.g., Rule 9(B), supra note 5, which states: ``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.'').
---------------------------------------------------------------------------
B. The Participants Fund and Rule 4
The Participants Fund is prefunded and represents the aggregate of
the deposits that each DTC Participant is required to make under DTC's
Rules.\13\ The Rules provide for 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.\14\ DTC has stated that the Participants Fund
is a mutualized pre-funded liquidity and loss resource, and that DTC
does not have an obligation to repay the Participants Fund and the
application of the Participants Fund does not convert to a loss.\15\
Once DTC applies the Participants Fund, the Participants are required,
upon the demand of DTC, to replenish their shares of the Participants
Fund to satisfy their minimum deposits.\16\ DTC further represents that
the principal purpose of the Participants Fund is to be one of the
foundational liquidity resources available to DTC to fund a shortfall
in order to complete settlement on a Business Day.\17\
---------------------------------------------------------------------------
\13\ See Rule 4 (Participants Fund and Participants Investment),
supra note 5.
\14\ See id.
\15\ Securities Exchange Act Release No. 83950 (August 27,
2018), 83 FR 44393 (August 30, 2018) (SR-DTC-2017-804).
\16\ See Section 4 of Rule 4 (Participants Fund and Participants
Investment), supra note 5.
\17\ See Notice of Filing, supra note 4, 85 FR at 66668 (citing
DTC's Settlement Guide which provides that the Participants Fund
creates liquidity and collateral resources to support the business
of DTC and to cover losses and liabilities incident to that
business).
---------------------------------------------------------------------------
Currently, Section 4 of Rule 4 provides that, 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 Rule 4 \18\ is not sufficient to complete settlement, DTC
may apply the Actual Participants Fund Deposits of Participants other
than the Defaulting Participant (each, a ``non-defaulting
Participant''), and apply such other liquidity resources as may be
available to DTC, including, but not limited to, the End-of-Day Credit
Facility.\19\ DTC recognizes that currently, certain provisions of Rule
4 might be construed to narrow the scope of use of the Participants
Fund (and any other liquidity resources) for settlement to a
[[Page 71975]]
default gap only.\20\ In order to ensure that DTC may use the
Participants Fund and other liquidity resources to fund a settlement
gap regardless of its cause, DTC has proposed revising Rule 4, as
discussed below.
---------------------------------------------------------------------------
\18\ Section 3 of Rule 4 provides that if a Participant is
obligated to DTC pursuant to the Rules and the Procedures and fails
to satisfy any such obligation, DTC 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. See Section 3 of Rule 4, supra note
5.
\19\ Section 2 of Rule 4 provides that ``End-of-Day Credit
Facility'' is any credit facility maintained by DTC for the purpose
of funding the end-of-day settlement of transactions processed
through the facilities of DTC. See Section 2 of Rule 4, supra note
5. Also see Securities Exchange Act Release No. 80605 (May 5, 2017),
82 FR 21850 (May 10, 2017) (SR-DTC-2017-802; NSCC-2017-802)
(renewing the committed revolving credit facility of DTC and
National Securities Clearing Corporation).
\20\ See Notice of Filing, supra note 4, 85 FR at 66668.
---------------------------------------------------------------------------
C. Description of Proposed Changes
DTC states that Section 4 of Rule 4 does not address the use of the
Participants Fund to complete settlement when there is a non-default
gap and could be construed as limiting the pro rata application of the
Participants Fund to fund a settlement gap to default scenarios.\21\
DTC further represents that, on each Business Day, settlement occurs
during a tight timeframe, in conjunction with the Federal Reserve's
National Settlement Service and Fedwire.\22\ If there is a delay with
the receipt or disbursement of funds for settlement, DTC would need to
address those problems quickly in order to complete settlement on that
Business Day.\23\
---------------------------------------------------------------------------
\21\ See Notice of Filing, supra note 4, 85 FR at 66669.
\22\ See id.; see also, Settlement Guide at 19-20, supra note 5.
\23\ See Notice of Filing, supra note 4, 85 FR at 66669.
---------------------------------------------------------------------------
In the Advance Notice, DTC describes the proposed changes to
address this situation and expressly ensure that the Participants Fund
could be used to complete settlement in the event of a non-default gap.
First, DTC proposes to amend Section 4 of Rule 4 to state that (i) the
Participants Fund, (ii) the existing retained earnings or undivided
profits of DTC, and (iii) any other liquidity resources as may be
available (including, but not limited to, the End-of-Day Credit
Facility), would be available to DTC as liquidity resources to fund
settlement on a Business Day, regardless of whether the settlement gap
is a default gap or a non-default gap. The proposal would 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. Second,
DTC proposes to provide that a determination to apply the Participants
Fund 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 proposal also states that the Board
of Directors (or an authorized Committee thereof) shall be promptly
informed of the determination.\24\ Third, DTC proposes to make certain
clarifying and conforming changes, including to 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,
and to make minor changes for conformity and readability.
---------------------------------------------------------------------------
\24\ The requirement that DTC would also promptly notify the
Commission in the event that the Participants Fund were used to
complete settlement would remain unchanged.
---------------------------------------------------------------------------
II. Discussion and Recommendation
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, the stated purpose of the Clearing
Supervision Act 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 (``SIFMUs'') and strengthening the
liquidity of SIFMUs.\25\
---------------------------------------------------------------------------
\25\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------
Section 805(a)(2) of the Clearing Supervision Act authorizes the
Commission to prescribe regulations containing risk management
standards for the payment, clearing, and settlement activities of
designated clearing entities engaged in designated activities for which
the Commission is the supervisory agency.\26\ Section 805(b) of the
Clearing Supervision Act provides the following objectives and
principles for the Commission's risk management standards prescribed
under Section 805(a): \27\
---------------------------------------------------------------------------
\26\ 12 U.S.C. 5464(a)(2).
\27\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
To promote robust risk management;
To promote safety and soundness;
To reduce systemic risks; and
To support the stability of the broader financial system.
Section 805(c) provides, in addition, that the Commission's risk
management standards may address such areas as risk management and
default policies and procedures, among others areas.\28\
---------------------------------------------------------------------------
\28\ 12 U.S.C. 5464(c).
---------------------------------------------------------------------------
The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act and Section 17A of the
Exchange Act (the ``Clearing Agency Rules'').\29\ The Clearing Agency
Rules require, among other things, each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures that are reasonably designed to meet certain minimum
requirements for its operations and risk management practices on an
ongoing basis.\30\ As such, it is appropriate for the Commission to
review advance notices against the Clearing Agency Rules and the
objectives and principles of these risk management standards as
described in Section 805(b) of the Clearing Supervision Act. As
discussed below, the Commission believes the proposal in the Advance
Notice is consistent with the objectives and principles described in
Section 805(b) of the Clearing Supervision Act,\31\ and in the Clearing
Agency Rules, in particular Rule 17Ad-22(e)(1), (e)(2)(i) and (v), and
(e)(7).\32\
---------------------------------------------------------------------------
\29\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No.
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11).
See also Securities Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (Standards for
Covered Clearing Agencies). DTC is a ``covered clearing agency,'' as
defined in Rule 17Ad-22(a)(5). See supra note 6.
\30\ Id.
\31\ 12 U.S.C. 5464(b).
\32\ 17 CFR 240.17Ad-22(e)(1) and (e)(2)(i).
---------------------------------------------------------------------------
A. Consistency With Section 805(b) of the Clearing Supervision Act
The Commission believes that the Advance Notice is consistent with
the stated objectives and principles of Section 805(b) of the Clearing
Supervision Act,\33\ because the changes proposed in the Advance Notice
are consistent with promoting robust risk management, promoting safety
and soundness, reducing systemic risks, and supporting the broader
financial system.
---------------------------------------------------------------------------
\33\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
First, the Commission believes that the proposal is consistent with
promoting robust risk management. DTC proposes to amend Section 4 of
Rule 4 to provide expressly for the pro rata application of the
Participants Fund, retained earnings, and any other liquidity
resources, including DTC's credit facility, to any settlement gap,
including a non-default gap. As noted above, settlement occurs during a
tight timeframe on each Business Day. If there is a delay with the
receipt or disbursement of funds for settlement, it would need to be
addressed quickly in order to complete settlement on that Business Day.
The proposal would clarify which resources DTC can access and use in
the most time-efficient and effective manner to ensure settlement.\34\
[[Page 71976]]
Moreover, the proposal would specify the particular DTC personnel whose
approval could authorize the use of the Participants Fund to finance a
settlement gap. The Commission believes that the proposal is designed
to allow DTC to take timely and effective action to fund a settlement
gap, regardless of whether it is a default or non-default gap, and
therefore complete settlement, by identifying and applying appropriate
liquidity resources, which is consistent with the promotion of robust
risk management.
---------------------------------------------------------------------------
\34\ The Commission further believes that use of the
Participants Fund may be the most efficient method of completing
settlement at the end of a Business Day on a tight timeframe, as it
generally consists of cash which, pursuant to DTC's Investment
Policy, must be held in demand deposit, savings or checking bank
accounts that provide same day access to funds. See Exchange Act
Release No. 88513 (March 30, 2020), 85 FR 19047, 19048 (April 3,
2020). The Commission observes that, as a general matter, it likely
could take more time to access retained earnings or draw down on the
credit facility.
---------------------------------------------------------------------------
Second, the Commission believes that the proposal is consistent
with the promotion of safety and soundness of DTC and, by extension,
the broader financial system. As stated above, the proposal would
expressly provide that DTC may use the Participants Fund and other
specified resources as a liquidity resources in the event of a
settlement gap. With this proposal, DTC would expressly state how it
would manage the potential liquidity risk that may arise from both the
default of a Participant as well as a non-default event, including
operational issues at DTC, a Participant, or a Settling Bank. With the
proposal, DTC would be better positioned to timely complete settlement
if a default or non-default gap arises. Accordingly, the Commission
believes that the proposal is consistent with the promotion of safety
and soundness.
Finally, the Commission believes that the proposal is consistent
with reducing systemic risks and supporting the stability of the
broader financial system. With clear authority to use the Participants
Fund and other resources to address both a default and non-default
settlement gap, DTC should be better positioned to access sufficient
liquidity, and thus be better able to manage its liquidity risks in the
event of a settlement gap. DTC is a SIFMU and serves as the only
central securities depository in the United States, settling virtually
all broker-to-broker equity and listed corporate and municipal debt
securities transactions in the United States, as well as institutional
trades, money market instruments and other financial obligations. This
access to liquidity during a stress event would help mitigate any risk
to settlement finality due to DTC having insufficient funds to meet
payment obligations to its Participants. As such, access to this
liquidity would help to strengthen the liquidity of DTC and mitigate
potential risks to settlement finality, thereby reducing systemic risks
and supporting the stability of the broader financial system.
For the reasons stated above, the Commission believes the changes
proposed in the Advance Notice are consistent with Section 805(b) of
the Clearing Supervision Act.\35\
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\35\ 12 U.S.C. 5464(b).
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B. Consistency With Rule 17Ad-22(e)(1)
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\ 17 CFR 240.17Ad-22(e)(1).
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As discussed above, current Section 4 of Rule 4 does not address
the use of the Participants Fund or other liquidity resources to
complete settlement when there is a non-default gap, and DTC is
concerned that it could be construed as limiting the pro rata
application of the Participants Fund to fund a settlement gap to
default scenarios. The proposal would amend Rule 4 to expressly state
that the Participants Fund, DTC's retained earnings, and other
liquidity resources 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. In addition, the
proposal makes clarifying and conforming changes and provides
governance regarding the application of the Participants Fund.
The Commission believes that the above changes are designed to
ensure greater certainty in the Rules regarding what resources would be
available to DTC to complete settlement in the event of a settlement
gap. The proposal would provide a clear, transparent and enforceable
legal basis for DTC to apply the Participants Fund, retained earnings,
or other liquidity resources to any settlement gap. It would also
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, and expressly 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.
Therefore, the Commission believes the proposal is designed to help
ensure that DTC's Rules remain well-founded, transparent, and legally
enforceable in all relevant jurisdictions, consistent with Rule 17Ad-
22(e)(1) under the Act.\37\
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\37\ Id.
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C. Consistency With Rule 17Ad-22(e)(2)(i) and (v)
Rule 17Ad-22(e)(2) under the Act requires, in part, that DTC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide for governance arrangements
that (i) are clear and transparent, and (v) specify clear and direct
lines of responsibility.\38\
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\38\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
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As discussed above, the proposal would provide that a determination
to apply the Participants Fund 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
proposal would also provide that the Board of Directors (or an
authorized Committee thereof) shall be promptly informed of the
determination. With this proposal, the Rules would expressly define who
would be responsible for making the determination to apply the
Participants Fund to a settlement gap and would require that the Board
of Directors (or its authorized Committee) would be informed of such
determination promptly.
Therefore, the Commission believes the proposal is designed to
provide for governance arrangements regarding the use of the
Participants Fund to complete settlement that are clear and transparent
and specify clear and direct lines of responsibility, consistent with
Rule 17Ad-22(e)(2)(i) and (v) under the Act.\39\
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\39\ Id.
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D. Consistency With Rule 17Ad-22(e)(7)(i)
Rule 17Ad-22(e)(7)(i) under the Act requires, in part, that a
covered clearing agency, like DTC, establish, implement, maintain and
enforce written policies and procedures reasonably designed to
effectively measure, monitor, and manage the liquidity risk that arises
in or is borne by the covered clearing agency, including measuring,
monitoring, and managing its settlement and funding flows on an ongoing
and timely basis, and its use of intraday liquidity, by maintaining
sufficient liquid resources to effect same-day settlement of payment
obligations with a high degree of confidence under a wide range of
foreseeable stress scenarios.\40\
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\40\ 17 CFR 240.17Ad-22(e)(7)(i).
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As described above, the proposal would clarify that the
Participants Fund and other resources may be applied by
[[Page 71977]]
DTC to fund settlement in the event of a default or non-default gap.
The proposed change is designed to help ensure that DTC is able to
manage its settlement and funding flows on a timely basis and effect
same day settlement of payment obligations in certain foreseeable
stress scenarios.
Therefore, the Commission believes that the proposal is reasonably
designed to help DTC effectively manage liquidity risk in a timely
manner to complete settlement, and accordingly is consistent with Rule
17Ad-22(e)(7)(i).\41\
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\41\ Id.
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III. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act, that the Commission does not object to
Advance Notice (SR-DTC-2020-801) and that DTC is authorized to
implement the proposed change as of the date of this notice or the date
of an order by the Commission approving proposed rule change SR-DTC-
2020-011, whichever is later.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-25006 Filed 11-10-20; 8:45 am]
BILLING CODE 8011-01-P
