Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of Advance Notice To Raise Prefunded Liquidity Resources Through the Periodic Issuance and Private Placement of Senior Notes, 60251-60255 [2023-18776]
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Federal Register / Vol. 88, No. 168 / Thursday, August 31, 2023 / Notices
the reorganization were paid by the
applicant and the applicant’s
investment adviser.
Filing Date: The application was filed
on July 21, 2023.
Applicant’s Address: 100 Bellevue
Parkway, Wilmington, Delaware 19809.
BlackRock New York Municipal
Income Quality Trust [File No. 811–
21179]
Summary: Applicant, a closed-end
investment company, seeks an order
declaring that it has ceased to be an
investment company. The applicant has
transferred its assets to BlackRock New
York Municipal Income Trust, and on
May 3, 2021 made a final distribution to
its shareholders based on net asset
value. Expenses of $149,154 incurred in
connection with the reorganization were
paid by the applicant and the
applicant’s investment adviser.
Filing Date: The application was filed
on July 21, 2023.
Applicant’s Address: 100 Bellevue
Parkway, Wilmington, Delaware 19809.
ddrumheller on DSK120RN23PROD with NOTICES1
BlackRock New York Municipal
Income Trust II [File No. 811–21124]
Summary: Applicant, a closed-end
investment company, seeks an order
declaring that it has ceased to be an
investment company. The applicant has
transferred its assets to BlackRock New
York Municipal Income Trust, and on
May 3, 2021 made a final distribution to
its shareholders based on net asset
value. Expenses of $134,844 incurred in
connection with the reorganization were
paid by the applicant and the
applicant’s investment adviser.
Filing Date: The application was filed
on July 21, 2023.
Applicant’s Address: 100 Bellevue
Parkway, Wilmington, Delaware 19809.
BlackRock Strategic Municipal Trust
[File No. 811–09401]
Summary: Applicant, a closed-end
investment company, seeks an order
declaring that it has ceased to be an
investment company. The applicant has
transferred its assets to BlackRock
Municipal Income Trust II, and on May
3, 2021 made a final distribution to its
shareholders based on net asset value.
Expenses of $210,319 incurred in
connection with the reorganization were
paid by the applicant and the
applicant’s investment adviser.
Filing Date: The application was filed
on July 21, 2023.
Applicant’s Address: 100 Bellevue
Parkway, Wilmington, Delaware 19809.
Hartford Funds NextShares Trust [File
No. 811–23215]
Summary: Applicant seeks an order
declaring that it has ceased to be an
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investment company. On June 11, 2019,
applicant made a liquidating
distribution to its shareholders based on
net asset value. Expenses of $21,000
incurred in connection with the
liquidation were paid by the applicant’s
investment adviser.
Filing Date: The application was filed
on July 6, 2023.
Applicant’s Address: 690 Lee Road,
Wayne, Pennsylvania 19087.
USCF Mutual Funds Trust [File No.
811–23213]
Summary: Applicant seeks an order
declaring that it has ceased to be an
investment company. On March 21,
2019, applicant made a liquidating
distribution to its shareholders based on
net asset value. Expenses of $10,000
incurred in connection with the
liquidation were paid by the applicant’s
investment adviser.
Filing Date: The application was filed
on July 28, 2023.
Applicant’s Address: 1850 Mt. Diablo
Boulevard, Suite 640, Walnut Creek,
California 94596.
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023–18771 Filed 8–30–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98227; File No. SR–DTC–
2023–801]
Self-Regulatory Organizations; The
Depository Trust Company; Notice of
Filing of Advance Notice To Raise
Prefunded Liquidity Resources
Through the Periodic Issuance and
Private Placement of Senior Notes
August 25, 2023.
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 August 15, 2023,
The Depository Trust Company (‘‘DTC’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
advance notice SR–DTC–2023–801
(‘‘Advance Notice’’) as described in
Items I, II and III below, which Items
have been prepared by the clearing
1 12
2 17
PO 00000
U.S.C. 5465(e)(1).
CFR 240.19b–4(n)(1)(i).
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60251
agency. The 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 is filed by DTC
in connection with a proposal to raise
prefunded liquidity resources through
the periodic issuance and private
placement of senior notes (‘‘Debt
Issuance’’). The proceeds from the Debt
Issuance would supplement DTC’s
existing default liquidity risk
management resources, as described in
greater detail below.3
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 on the advance
notice have not been solicited or
received. DTC will notify the
Commission of any written comments
received by DTC.
(B) Advance Notice Filed Pursuant to
Section 806(e) of the Clearing
Supervision Act
Description of Proposed Change
DTC is proposing to raise prefunded
liquidity through the periodic issuance
and private placement of senior notes to
qualified institutional investors in an
aggregate amount not to exceed $5
billion, as described in greater detail
below. The proceeds of the Debt
Issuance would supplement DTC’s
qualifying liquidity resources, which are
described in the Clearing Agency
Liquidity Risk Management Framework
(‘‘Framework’’) 4 and include cash
3 Capitalized terms not defined herein are defined
in the Rules, By-Laws and Organization Certificate
of DTC (‘‘Rules’’) available at www.dtcc.com/∼/
media/Files/Downloads/legal/rules/dtc_rules.pdf.
4 See Securities Exchange Act Release Nos. 82377
(Dec. 21, 2017), 82 FR 61617 (Dec. 28, 2017) (SR–
DTC–2017–004; SR–FICC–2017–008; SR–NSCC–
2017–005). Following the completion of the initial
Continued
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deposits to its Participants Fund and
cash that would be obtained by drawing
upon DTC’s committed 364-day credit
facility with a consortium of banks
(‘‘Line of Credit’’).5
More precisely, while the specific
terms of any future Debt Issuance would
depend on a number of factors, as
described in greater detail below, DTC
is requesting the authority to use the
proceeds of any Debt Issuance as default
liquidity.6
DTC, along with its affiliates, National
Securities Clearing Corporation
(‘‘NSCC’’) and Fixed Income Clearing
Corporation (‘‘FICC,’’ and, together with
NSCC and DTC, the ‘‘Clearing
Agencies’’), maintain the Framework
which sets forth the manner in which
DTC measures, monitors and manages
the liquidity risks that arise in or are
borne by it.7 DTC’s liquidity risk
management strategy and tools are
designed to maintain sufficient available
liquid resources to complete systemwide settlement on each business day,
with a high degree of confidence and
notwithstanding the failure to settle of
the Participant, or affiliated family of
Participants, with the largest settlement
obligation.8
The proposed Debt Issuance would
provide DTC with an additional source
of default liquidity, which would allow
it to diversify its sources of default
liquidity and mitigate risks to DTC that
it is unable to secure default liquidity
resources in an amount necessary to
meet its liquidity needs. DTC utilizes
certain rules-based tools, including the
Net Debit Cap and the Collateral
Monitor, to manage the liquidity risks
its Participants’ present to it.9 These two
issuance and private placement of senior notes, the
Clearing Agencies would file a proposed rule
change to amend the Framework to include the
proceeds of the Debt Issuance as an additional
qualifying liquidity resource of DTC.
5 Capitalized terms not defined herein are defined
in the Rules, By-Laws and Organization Certificate
of DTC (‘‘Rules’’) available at www.dtcc.com/∼/
media/Files/Downloads/legal/rules/dtc_rules.pdf.
See also Securities Exchange Act Release No. 80605
(May 5, 2017), 82 FR 21850 (May 10, 2017) (SR–
DTC–2017–802; SR–NSCC–2017–802).
6 In addition to default liquidity, DTC may use the
proceeds of a Debt Issuance to prepay a prior Debt
Issuance before maturity but would not use the
proceeds for any other purpose. DTC filed as a
confidential exhibit to this filing a sample term
sheet that may be indicative of the possible terms
of any future Debt Issuance.
7 Supra note 4. Each of the Clearing Agencies is
a wholly-owned subsidiary of The Depository Trust
& Clearing Corporation, which operates on a shared
service model with respect to the Clearing
Agencies. Most corporate functions are established
and managed on an enterprise-wide basis pursuant
to intercompany agreements under which it is
generally DTCC that provides relevant services to
the Clearing Agencies.
8 Id.
9 A description of the calculation of each
Participant’s Net Debit Cap and Collateral Monitor
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controls work together to protect the
DTC settlement system in the event of
a Participant default. The Collateral
Monitor requires net debit settlement
obligations, as they accrue intraday, to
be fully collateralized and the Net Debit
Cap limits the amount of any
Participant’s net debit settlement
obligation to an amount that can be
satisfied with DTC’s default liquidity
resources. As stated above, DTC
currently maintains two key default
liquidity resources to draw upon in the
event of a Participant default: cash
deposits to its Participants Fund and
cash that would be obtained by drawing
upon the Line of Credit.10 By allowing
DTC to diversify its sources of default
liquidity, the proposal would mitigate
the risk, for example, that DTC is unable
to renew its Line of Credit at the
targeted amount by providing DTC with
an alternative and supplemental source
of default liquidity.
Terms of the Debt Issuance. DTC does
not have immediate plans to initiate the
Debt Issuance. The timing of a Debt
Issuance would depend on a number of
factors, including, for example, market
conditions for the issuance of senior
notes and the timing of any changes to
DTC’s liquidity needs. However, when
it determines to do so it would engage
a trustee and underwriting banks to
issue the senior notes to qualified
institutional investors through a private
placement and offering in reliance on an
exemption from registration under
section 4(a)(2) of the Securities Act of
1933.11 DTC would be party to certain
transaction documents in connection
with each issuance and private
placement, including an indenture with
the trustee and purchase agreements.
The purchase agreements would each be
based on the standard form of dealer
agreement for similar debt issuances,
which is published by the Securities
Industry and Financial Markets
Association.
While the anticipated material terms
and conditions of a future Debt Issuance
are summarized below, the actual terms
of a future Debt Issuance would depend
on a number of factors, including DTC’s
liquidity needs and the debt market
is available in the Settlement Service Guide. See
DTC Settlement Service Guide, available at
www.dtcc.com/-/media/Files/Downloads/legal/
service-guides/Settlement.pdf.
10 Under DTC Rule 10 (Discretionary
Termination) and DTC Rule 11 (Mandatory
Termination), a Participant will be in default if it
fails to pay any amount due to DTC within
specified timeframes, including the failure to fund
a settlement obligation, to pay required deposits to
the Participants Fund or to pay adequate assurances
to DTC within the required timeframes. See supra
note 5.
11 15 U.S.C. 77d(a)(2).
PO 00000
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conditions at the time of issuance.
Therefore, with the exception of the
authorized aggregate amount that DTC
may issue of $5 billion, the anticipated
terms summarized below are reasonable
estimates, but may not reflect the actual
terms of a future Debt Issuance.
DTC is proposing to issue up to an
aggregate amount of $5 billion in senior
notes, with an expected average amount
issued and outstanding at any time of
approximately $2–3 billion, as DTC
deems reasonable, or as necessitated by
liquidity needs. While, at the time of
this filing, DTC would not need to issue
up to the aggregate amount of $5 billion
based on its current liquidity
requirements, DTC believes that is
advisable to authorize up to this
aggregate amount in order to help
manage its potential future liquidity
needs and the potential risk that it is not
able to obtain the requisite amounts
from its other sources of default
liquidity.
DTC estimates that each issuance
would be in an amount between
approximately $250 million and $1.5
billion, with an initial issuance
expected to be between approximately
$500 million and $1 billion.12 DTC
believes an initial issuance should be at
an amount that would attract the
attention of potential investors.
Therefore, DTC believes that between
approximately $500 million and $1
billion would be an appropriate amount
for the initial issuance for this reason.
The senior notes would be
represented by unsecured,
unsubordinated and non-convertible
medium-term and long-term global
notes held in the name of DTC (as the
central securities depository) or its
nominee, Cede & Co. The notes would
be issued and transferred only through
the book-entry system of DTC. The
senior notes would be interest bearing at
either fixed or floating interest rates that
are set at market rates customary for
such type of debt and reflective of the
creditworthiness of DTC.
DTC expects the average maturity of
the senior notes issued under the Debt
Issuance would be no shorter than
approximately two years and no longer
than approximately ten years, which are
the typical lengths of medium-term and
long-term debt. DTC does not believe
maturities over ten years would be
suitable as debt with longer maturities
are generally more expensive to issue
and may present higher risks related to
interest rates. DTC would time each
debt issuance and stagger maturity dates
12 If market conditions at the time of the inaugural
issuance are favorable, DTC may issue an initial
aggregate amount of more than $1 billion.
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of each issuance in order to ladder the
maturities. DTC would have the ability
to make use of optional features to
redeem the issued senior notes, in
whole or in part, at any time prior to the
maturity date of notes. More
specifically, DTC would have the option
to prepay any amount of principal owed
on the issued senior notes before such
payment is due, i.e., before the maturity
date.
DTC would hold the proceeds from
the Debt Issuance in either its cash
deposit account at the Federal Reserve
Bank of New York (‘‘FRBNY’’) or in
accounts at other creditworthy financial
institutions in accordance with the
Clearing Agency Investment Policy.13
These amounts would be available to
draw to complete settlement as needed.
DTC Liquidity Risk Management.
DTC’s liquidity needs for settlement are
driven by protecting DTC against the
possibility that a Participant may fail to
pay its settlement obligations on a
business day. The tools available to DTC
under its Rules (e.g., the Participants
Fund, Net Debit Cap and Collateral
Monitor) allow it to regularly test the
sufficiency of liquid resources on an
intraday and end-of-day basis and adjust
to stressed circumstances during a
settlement day to protect itself and
Participants against liquidity exposure
under normal and stressed market
conditions.14 DTC calculates its
liquidity needs per Participant (at a
legal entity level) and further aggregates
these amounts at a family level (that is,
including all affiliated Participants,
based on the assumption that all such
affiliates may fail simultaneously). In
this regard, DTC monitors settlement
flows and net-debit obligations on a
daily basis, determines the
appropriateness of each Participant’s
Net Debit Cap and monitors net
settlement activity.
As noted above, the Framework
describes DTC’s liquidity risk
management strategy, which is designed
to maintain sufficient liquid resources
to complete system-wide settlement on
each business day, with a high degree of
13 See Securities Exchange Act Release Nos.
79528 (Dec. 12, 2016), 81 FR 91232 (Dec. 16, 2016)
(SR–DTC–2016–007, SR–FICC–2016–005, SR–
NSCC–2016–003); 84949 (Dec. 21, 2018), 83 FR
67779 (Dec. 31, 2018) (SR–DTC–2018–012, SR–
FICC–2018–014, SR–NSCC–2018–013). Following
the issuance of a Notice of No Objection by the
Commission of this proposal, the Clearing Agencies
would file a proposed rule change to amend the
Clearing Agency Investment Policy to include the
proceeds as default liquidity funds, within the
definition of ‘‘Investable Funds,’’ as such term is
defined therein, and provide that such amounts
would be held in bank deposits at eligible
commercial banks or at DTC’s cash deposit account
at the FRBNY.
14 Supra note 4.
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confidence and notwithstanding the
failure to settle of the Participant, or
affiliated family of Participants, with the
largest settlement obligation.15 The
Framework also describes how DTC
meets its requirement to hold qualifying
liquid resources, as such term is defined
in Rule 17Ad–22(a)(14) under the
Securities Exchange Act of 1934
(‘‘Act’’),16 sufficient to meet its
minimum liquidity resource
requirement in each relevant currency
for which it has payment obligations
owed to its Participants. DTC considers
each of its existing default liquidity
resources to be qualifying liquid
resources, and the proceeds from the
Debt Issuance would also be default
liquidity that is considered a qualifying
liquid resource.
The proceeds from the Debt Issuance
would provide DTC with additional,
prefunded, and readily available
qualifying liquid resources to be used to
complete system-wide settlement if a
Participant defaults. For DTC, the
Participants Fund, Net Debit Cap and
Collateral Monitor tools work together
to limit potential liquidity requirements
in default scenarios both on an intra-day
and end-of-day basis. So, while DTC’s
current available liquidity resources are
sufficient to satisfy the single-largest
family default under stressed but
plausible conditions, the Debt Issuance
would allow DTC to diversify its
sources of default liquidity and mitigate
risks to DTC that it is unable to secure
default liquidity resources in an amount
necessary to meet its liquidity needs.
More specifically, the proposal would
provide DTC with the flexibility to
reduce its reliance on the Line of Credit,
which is renewed annually and
dependent on continued lender interest
and meet any increased liquidity needs
it may face in the future. As a source of
prefunded, default liquidity, the Debt
Issuance would provide additional
certainty, stability, and safety to DTC,
its Participants, and the U.S. markets
that it serves.
By diversifying DTC’s sources of
qualifying liquid resources, the Debt
Issuance could also mitigate
concentration risks related to its
liquidity providers. More specifically,
while DTC would not limit the potential
qualified institutional investors that
purchase senior notes and, therefore, is
not able to ensure that the Debt Issuance
would reduce concentration risk, the
types of entities who typically invest in
senior notes (for example, insurance
companies, asset managers and pension
funds) are generally not Participants of
15 Supra
16 17
PO 00000
note 5.
CFR 240.17Ad–22(a)(14).
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60253
DTC or lenders under the Line of Credit.
Therefore, the prospective investors in
the senior notes are not expected to be
the same firms that currently provide
any material amount of default liquidity
resources to DTC either through the
Line of Credit, or as DTC Participants.
In this way, the proposed Debt Issuance
would reduce the concentration risk
related to its liquidity providers, by
reducing the likelihood that an
impairment of a liquidity provider to
perform under one qualifying liquid
resource would impact DTC’s ability to
fully access its other qualifying liquid
resources.
Anticipated Effect on and Management
of Risk
In connection with its role as a central
securities depository (‘‘CSD’’), DTC
provides for both the settlement of bookentry transfer and pledge of interests in
eligible deposited securities and net
funds settlement. A financially strong
and well-managed, well-designed CSD,
with appropriate risk management
arrangements, can reduce the risk faced
by participants, contributing to the goal
of systemic financial stability. In order
to sufficiently perform this role, it is
critical that DTC has access to adequate
liquidity resources to enable it to
complete system-wide settlement every
business day, including following a
Participant default. DTC believes that
the overall impact of the proposed Debt
Issuance on risks presented by DTC
would be to reduce the liquidity risks
associated with DTC’s net settlement
obligations by providing it with an
additional source of liquidity to
complete system-wide settlement in the
event of a Participant default. DTC
further believes that a reduction in its
liquidity risk would reduce systemic
risk and would have a positive impact
on the safety and soundness of the
wider financial system.
While the proposed Debt Issuance,
like any liquidity resource, would
involve certain risks, most of these risks
are standard in any debt issuance. One
risk associated with the proposed Debt
Issuance would be the risk that DTC
does not have sufficient funds to repay
issued senior notes when the notes
mature. DTC believes that this risk is
extremely remote, as the proceeds of the
Debt Issuance would be used only in the
event of a Participant default, and DTC
would replenish that cash, as it would
replenish any of its liquidity resources
that are used to facilitate settlement in
the event of a Participant default, with
the proceeds of the close out of that
defaulted Participant’s portfolio. This
notwithstanding, in the event that
proceeds from the close out are
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insufficient to fully repay a liquidity
borrowing, then DTC would look to its
loss waterfall to repay any outstanding
liquidity borrowings.17 DTC would
further mitigate this risk through the
timing of each debt issuance and by
staggering the maturity dates of the
issued senior notes in a way that would
provide DTC with time to complete the
close out of a defaulted Participant’s
portfolio. A second risk is that DTC may
be unable to issue new senior notes as
issued notes mature due to, for example,
stressed markets at the time the issued
debt matures. This risk is mitigated by
the fact that DTC maintains a number of
different default liquidity resources,
described above, and would not depend
on the Debt Issuance as its sole source
of liquidity.
DTC may be exposed to interest rate
risk, which is the risk that a change in
interest rates could cause an increase to
the net cost of carry of the Debt
Issuance.18 DTC would mitigate this risk
by issuing senior notes at different
maturities and at both fixed interest
rates and floating interest rates. The
interest rates for the senior notes issued
at floating interest rates would generally
correlate with the rates on investments
of those proceeds 19 and would be
expected to result in a largely stable net
spread between the borrowing interest
rate and the investment interest rate,
mitigating this risk. For the senior notes
issued with a fixed interest rate, DTC
would consider interest rate swaps as a
method to mitigate interest rate risk,
depending on market environment at
that time.
DTC could also face a related
financial risk that the expense of a Debt
Issuance exceeds DTC’s income and
may have a negative impact on DTC’s
financial health or its creditworthiness.
DTC would mitigate this risk by
evaluating the expected net cost of carry
(discussed above) of a Debt Issuance
prior to issuing any debt, and if the
financing costs for the issuance of senior
notes increase, such that it is not
financially advisable to issue additional
senior notes, then DTC may determine
to use its alternative liquidity resources
to meet its liquidity needs during those
market conditions.
DTC believes that the significant
systemic risk mitigation benefits of
providing DTC with additional,
prefunded liquidity resources outweigh
these risks.
17 See Rule 4 (Participants Fund and Participants
Investment) of the Rules, supra note 5.
18 The ‘‘net cost of carry’’ generally refers to the
difference between the interest earned on the
invested proceeds of an issuance and the interest
rate paid on that issuance.
19 See supra note 12.
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Consistency With Clearing Supervision
Act
DTC believes that that proposal would
be consistent with 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’’), specifically with the
risk management objectives and
principles of section 802(b)(1), and with
certain of the risk management
standards adopted by the Commission
pursuant to section 805(a)(2), for the
reasons described below.20
(i) Consistency With Section 805(b)(1) 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.21
DTC believes the proposal is
consistent with section 805(b)(1) of the
Clearing Supervision Act because it
would support the mitigation of
systemic risk in the financial system
and promote financial stability in the
event of a Participant default by
strengthening DTC’s liquidity. The
proposed Debt Issuance is designed to
reduce DTC’s liquidity risks by
providing it with an additional source of
liquidity to complete system-wide
settlement in the event of a Participant
default. By supplementing DTC’s
existing default liquidity resources with
prefunded liquidity, the proposal would
contribute to DTC’s goal of assuring that
DTC has adequate liquidity resources to
meet its settlement obligations
notwithstanding the default of any of its
Participants.
In its critical role as a CSD, DTC
provides for both the settlement of bookentry transfer and pledge of interests in
eligible deposited securities and net
funds settlement. In order to sufficiently
perform this role, it is critical that DTC
has access to adequate liquidity
resources to enable it to complete
system-wide settlement every business
day, including following a Participant
default. Therefore, a reduction in DTC’s
liquidity risk would reduce systemic
risk and would have a positive impact
on the safety and soundness of the
wider financial system.
As a result, DTC believes the
proposed Debt Issuance would be
consistent with the objectives and
principles of section 805(b)(1) of the
Clearing Supervision Act, 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 Rule 17Ad–
22(e)(7)(i) and (ii) Under the 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.22
The Commission has accordingly
adopted risk management standards
under section 805(a)(2) of the Clearing
Supervision Act 23 and section 17A of
the Act (‘‘Covered Clearing Agency
Standards’’).24 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.25
DTC believes that the proposed Debt
Issuance is consistent with Rule 17Ad–
22(e)(7)(i) and (ii) of the Covered
Clearing Agency Standards for the
reasons described below.26
Rule 17Ad–22(e)(7)(i) under the Act
requires that DTC establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
maintain sufficient liquid resources at
the minimum in all relevant currencies
to effect same-day and, where
appropriate, intraday and multiday
settlement of payment obligations with
a high degree of confidence under a
wide range of foreseeable stress
scenarios that includes, but is not
limited to, the default of the participant
family that would generate the largest
aggregate payment obligation for the
covered clearing agency in extreme but
plausible market conditions.27 Rule
22 12
U.S.C. 5464(a)(2).
23 Id.
24 17
CFR 240.17Ad–22(e).
25 Id.
20 12
21 12
PO 00000
U.S.C. 5464(a)(2) and (b)(1).
U.S.C. 5464(b)(1).
Frm 00087
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26 17
27 17
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CFR 240.17Ad–22(e)(7)(i), (ii).
CFR 240.17Ad–22(e)(7)(i).
31AUN1
Federal Register / Vol. 88, No. 168 / Thursday, August 31, 2023 / Notices
17Ad–22(e)(7)(ii) under the Act requires
that DTC establish, implement, maintain
and enforce written policies and
procedures reasonably designed to hold
qualifying liquid resources sufficient to
meet the minimum liquidity resource
requirement under Rule 17Ad–
22(e)(7)(i) in each relevant currency for
which DTC has payment obligations
owed to its Participants.28
As described above, the proposed
Debt Issuance would provide DTC with
an additional resource of prefunded
default liquidity, which it would use to
complete system-wide settlement every
business day, including following a
Participant default. The proceeds of the
Debt Issuance would be cash held by
DTC at either its cash deposit account
at the FRBNY or at a creditworthy
commercial bank, pursuant to the
Clearing Agency Investment Policy.29
Therefore, the proceeds of the Debt
Issuance would be considered a
qualifying liquid resource, as defined by
Rule 17Ad–22(a)(14).30 As such, the
proposed Debt Issuance would support
DTC’s ability to hold sufficient
qualifying liquid resources to meet its
minimum liquidity resource
requirement under Rule 17Ad–
22(e)(7)(i).31
For these reasons, DTC believes the
proposal would support DTC’s
compliance with Rule 17Ad–22(e)(7)(i)
and (ii) by providing it with an
additional qualifying liquid resource.32
ddrumheller on DSK120RN23PROD with NOTICES1
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
28 17 CFR 240.17Ad–22(e)(7)(ii). For purposes of
this Rule, ‘‘qualifying liquid resources’’ are defined
in Rule 17Ad–22(a)(14) as including, in part, cash
held either at the central bank of issue or at
creditworthy commercial banks. 17 CFR 240.17Ad–
22(a)(14).
29 Supra note 13.
30 17 CFR 240.17Ad–22(a)(14).
31 17 CFR 240.17Ad–22(e)(7)(i).
32 17 CFR 240.17Ad–22(e)(7)(i), (ii).
VerDate Sep<11>2014
18:04 Aug 30, 2023
Jkt 259001
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.
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 rule-comments@
sec.gov. Please include file number SR–
DTC–2023–801 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549.
All submissions should refer to file
number SR–DTC–2023–801. 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
a.m. and 3 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).
PO 00000
Frm 00088
Fmt 4703
Sfmt 4703
60255
Do not include personal identifiable
information in submissions; you should
submit only information that you wish
to make available publicly. We may
redact in part or withhold entirely from
publication submitted material that is
obscene or subject to copyright
protection. All submissions should refer
to File Number SR–DTC–2023–801 and
should be submitted on or before
September 21, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023–18776 Filed 8–30–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98225; File No. SR–
NASDAQ–2023–030]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule To Delay
Implementation of Pending
Amendments to Equity 4, Rules 4120,
4702 and 4703 and To Make Further
Amendments to Rules 4702 and 4703
August 25, 2023.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on August
16, 2023, The Nasdaq Stock Market LLC
(‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to delay
implementation of pending
amendments to Equity 4, Rules 4120,
4702 and 4703 3 as well as to make
further amendments to Rules 4702 and
4703, as described further below.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/nasdaq/rules, at the principal
33 17
CFR 200.30–3(a)(91).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 References herein to Nasdaq Rules in the 4000
Series shall mean Rules in Nasdaq Equity 4.
1 15
E:\FR\FM\31AUN1.SGM
31AUN1
]]>Agencies
[Federal Register Volume 88, Number 168 (Thursday, August 31, 2023)]
[Notices]
[Pages 60251-60255]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-18776]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98227; File No. SR-DTC-2023-801]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Advance Notice To Raise Prefunded Liquidity
Resources Through the Periodic Issuance and Private Placement of Senior
Notes
August 25, 2023.
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
August 15, 2023, The Depository Trust Company (``DTC'') filed with the
Securities and Exchange Commission (``Commission'') the advance notice
SR-DTC-2023-801 (``Advance Notice'') as described in Items I, II and
III below, which Items have been prepared by the clearing agency. 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).
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice
This advance notice is filed by DTC in connection with a proposal
to raise prefunded liquidity resources through the periodic issuance
and private placement of senior notes (``Debt Issuance''). The proceeds
from the Debt Issuance would supplement DTC's existing default
liquidity risk management resources, as described in greater detail
below.\3\
---------------------------------------------------------------------------
\3\ Capitalized terms not defined herein are defined in the
Rules, By-Laws and Organization Certificate of DTC (``Rules'')
available at www.dtcc.com/~/media/Files/Downloads/legal/rules/
dtc_rules.pdf.
---------------------------------------------------------------------------
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 on the advance notice have not been solicited or
received. DTC will notify the Commission of any written comments
received by DTC.
(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing
Supervision Act
Description of Proposed Change
DTC is proposing to raise prefunded liquidity through the periodic
issuance and private placement of senior notes to qualified
institutional investors in an aggregate amount not to exceed $5
billion, as described in greater detail below. The proceeds of the Debt
Issuance would supplement DTC's qualifying liquidity resources, which
are described in the Clearing Agency Liquidity Risk Management
Framework (``Framework'') \4\ and include cash
[[Page 60252]]
deposits to its Participants Fund and cash that would be obtained by
drawing upon DTC's committed 364-day credit facility with a consortium
of banks (``Line of Credit'').\5\
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release Nos. 82377 (Dec. 21,
2017), 82 FR 61617 (Dec. 28, 2017) (SR-DTC-2017-004; SR-FICC-2017-
008; SR-NSCC-2017-005). Following the completion of the initial
issuance and private placement of senior notes, the Clearing
Agencies would file a proposed rule change to amend the Framework to
include the proceeds of the Debt Issuance as an additional
qualifying liquidity resource of DTC.
\5\ Capitalized terms not defined herein are defined in the
Rules, By-Laws and Organization Certificate of DTC (``Rules'')
available at www.dtcc.com/~/media/Files/Downloads/legal/rules/
dtc_rules.pdf. See also Securities Exchange Act Release No. 80605
(May 5, 2017), 82 FR 21850 (May 10, 2017) (SR-DTC-2017-802; SR-NSCC-
2017-802).
---------------------------------------------------------------------------
More precisely, while the specific terms of any future Debt
Issuance would depend on a number of factors, as described in greater
detail below, DTC is requesting the authority to use the proceeds of
any Debt Issuance as default liquidity.\6\
---------------------------------------------------------------------------
\6\ In addition to default liquidity, DTC may use the proceeds
of a Debt Issuance to prepay a prior Debt Issuance before maturity
but would not use the proceeds for any other purpose. DTC filed as a
confidential exhibit to this filing a sample term sheet that may be
indicative of the possible terms of any future Debt Issuance.
---------------------------------------------------------------------------
DTC, along with its affiliates, National Securities Clearing
Corporation (``NSCC'') and Fixed Income Clearing Corporation (``FICC,''
and, together with NSCC and DTC, the ``Clearing Agencies''), maintain
the Framework which sets forth the manner in which DTC measures,
monitors and manages the liquidity risks that arise in or are borne by
it.\7\ DTC's liquidity risk management strategy and tools are designed
to maintain sufficient available liquid resources to complete system-
wide settlement on each business day, with a high degree of confidence
and notwithstanding the failure to settle of the Participant, or
affiliated family of Participants, with the largest settlement
obligation.\8\
---------------------------------------------------------------------------
\7\ Supra note 4. Each of the Clearing Agencies is a wholly-
owned subsidiary of The Depository Trust & Clearing Corporation,
which operates on a shared service model with respect to the
Clearing Agencies. Most corporate functions are established and
managed on an enterprise-wide basis pursuant to intercompany
agreements under which it is generally DTCC that provides relevant
services to the Clearing Agencies.
\8\ Id.
---------------------------------------------------------------------------
The proposed Debt Issuance would provide DTC with an additional
source of default liquidity, which would allow it to diversify its
sources of default liquidity and mitigate risks to DTC that it is
unable to secure default liquidity resources in an amount necessary to
meet its liquidity needs. DTC utilizes certain rules-based tools,
including the Net Debit Cap and the Collateral Monitor, to manage the
liquidity risks its Participants' present to it.\9\ These two controls
work together to protect the DTC settlement system in the event of a
Participant default. The Collateral Monitor requires net debit
settlement obligations, as they accrue intraday, to be fully
collateralized and the Net Debit Cap limits the amount of any
Participant's net debit settlement obligation to an amount that can be
satisfied with DTC's default liquidity resources. As stated above, DTC
currently maintains two key default liquidity resources to draw upon in
the event of a Participant default: cash deposits to its Participants
Fund and cash that would be obtained by drawing upon the Line of
Credit.\10\ By allowing DTC to diversify its sources of default
liquidity, the proposal would mitigate the risk, for example, that DTC
is unable to renew its Line of Credit at the targeted amount by
providing DTC with an alternative and supplemental source of default
liquidity.
---------------------------------------------------------------------------
\9\ A description of the calculation of each Participant's Net
Debit Cap and Collateral Monitor is available in the Settlement
Service Guide. See DTC Settlement Service Guide, available at
www.dtcc.com/-/media/Files/Downloads/legal/service-guides/Settlement.pdf.
\10\ Under DTC Rule 10 (Discretionary Termination) and DTC Rule
11 (Mandatory Termination), a Participant will be in default if it
fails to pay any amount due to DTC within specified timeframes,
including the failure to fund a settlement obligation, to pay
required deposits to the Participants Fund or to pay adequate
assurances to DTC within the required timeframes. See supra note 5.
---------------------------------------------------------------------------
Terms of the Debt Issuance. DTC does not have immediate plans to
initiate the Debt Issuance. The timing of a Debt Issuance would depend
on a number of factors, including, for example, market conditions for
the issuance of senior notes and the timing of any changes to DTC's
liquidity needs. However, when it determines to do so it would engage a
trustee and underwriting banks to issue the senior notes to qualified
institutional investors through a private placement and offering in
reliance on an exemption from registration under section 4(a)(2) of the
Securities Act of 1933.\11\ DTC would be party to certain transaction
documents in connection with each issuance and private placement,
including an indenture with the trustee and purchase agreements. The
purchase agreements would each be based on the standard form of dealer
agreement for similar debt issuances, which is published by the
Securities Industry and Financial Markets Association.
---------------------------------------------------------------------------
\11\ 15 U.S.C. 77d(a)(2).
---------------------------------------------------------------------------
While the anticipated material terms and conditions of a future
Debt Issuance are summarized below, the actual terms of a future Debt
Issuance would depend on a number of factors, including DTC's liquidity
needs and the debt market conditions at the time of issuance.
Therefore, with the exception of the authorized aggregate amount that
DTC may issue of $5 billion, the anticipated terms summarized below are
reasonable estimates, but may not reflect the actual terms of a future
Debt Issuance.
DTC is proposing to issue up to an aggregate amount of $5 billion
in senior notes, with an expected average amount issued and outstanding
at any time of approximately $2-3 billion, as DTC deems reasonable, or
as necessitated by liquidity needs. While, at the time of this filing,
DTC would not need to issue up to the aggregate amount of $5 billion
based on its current liquidity requirements, DTC believes that is
advisable to authorize up to this aggregate amount in order to help
manage its potential future liquidity needs and the potential risk that
it is not able to obtain the requisite amounts from its other sources
of default liquidity.
DTC estimates that each issuance would be in an amount between
approximately $250 million and $1.5 billion, with an initial issuance
expected to be between approximately $500 million and $1 billion.\12\
DTC believes an initial issuance should be at an amount that would
attract the attention of potential investors. Therefore, DTC believes
that between approximately $500 million and $1 billion would be an
appropriate amount for the initial issuance for this reason.
---------------------------------------------------------------------------
\12\ If market conditions at the time of the inaugural issuance
are favorable, DTC may issue an initial aggregate amount of more
than $1 billion.
---------------------------------------------------------------------------
The senior notes would be represented by unsecured, unsubordinated
and non-convertible medium-term and long-term global notes held in the
name of DTC (as the central securities depository) or its nominee, Cede
& Co. The notes would be issued and transferred only through the book-
entry system of DTC. The senior notes would be interest bearing at
either fixed or floating interest rates that are set at market rates
customary for such type of debt and reflective of the creditworthiness
of DTC.
DTC expects the average maturity of the senior notes issued under
the Debt Issuance would be no shorter than approximately two years and
no longer than approximately ten years, which are the typical lengths
of medium-term and long-term debt. DTC does not believe maturities over
ten years would be suitable as debt with longer maturities are
generally more expensive to issue and may present higher risks related
to interest rates. DTC would time each debt issuance and stagger
maturity dates
[[Page 60253]]
of each issuance in order to ladder the maturities. DTC would have the
ability to make use of optional features to redeem the issued senior
notes, in whole or in part, at any time prior to the maturity date of
notes. More specifically, DTC would have the option to prepay any
amount of principal owed on the issued senior notes before such payment
is due, i.e., before the maturity date.
DTC would hold the proceeds from the Debt Issuance in either its
cash deposit account at the Federal Reserve Bank of New York
(``FRBNY'') or in accounts at other creditworthy financial institutions
in accordance with the Clearing Agency Investment Policy.\13\ These
amounts would be available to draw to complete settlement as needed.
---------------------------------------------------------------------------
\13\ See Securities Exchange Act Release Nos. 79528 (Dec. 12,
2016), 81 FR 91232 (Dec. 16, 2016) (SR-DTC-2016-007, SR-FICC-2016-
005, SR-NSCC-2016-003); 84949 (Dec. 21, 2018), 83 FR 67779 (Dec. 31,
2018) (SR-DTC-2018-012, SR-FICC-2018-014, SR-NSCC-2018-013).
Following the issuance of a Notice of No Objection by the Commission
of this proposal, the Clearing Agencies would file a proposed rule
change to amend the Clearing Agency Investment Policy to include the
proceeds as default liquidity funds, within the definition of
``Investable Funds,'' as such term is defined therein, and provide
that such amounts would be held in bank deposits at eligible
commercial banks or at DTC's cash deposit account at the FRBNY.
---------------------------------------------------------------------------
DTC Liquidity Risk Management. DTC's liquidity needs for settlement
are driven by protecting DTC against the possibility that a Participant
may fail to pay its settlement obligations on a business day. The tools
available to DTC under its Rules (e.g., the Participants Fund, Net
Debit Cap and Collateral Monitor) allow it to regularly test the
sufficiency of liquid resources on an intraday and end-of-day basis and
adjust to stressed circumstances during a settlement day to protect
itself and Participants against liquidity exposure under normal and
stressed market conditions.\14\ DTC calculates its liquidity needs per
Participant (at a legal entity level) and further aggregates these
amounts at a family level (that is, including all affiliated
Participants, based on the assumption that all such affiliates may fail
simultaneously). In this regard, DTC monitors settlement flows and net-
debit obligations on a daily basis, determines the appropriateness of
each Participant's Net Debit Cap and monitors net settlement activity.
---------------------------------------------------------------------------
\14\ Supra note 4.
---------------------------------------------------------------------------
As noted above, the Framework describes DTC's liquidity risk
management strategy, which is designed to maintain sufficient liquid
resources to complete system-wide settlement on each business day, with
a high degree of confidence and notwithstanding the failure to settle
of the Participant, or affiliated family of Participants, with the
largest settlement obligation.\15\ The Framework also describes how DTC
meets its requirement to hold qualifying liquid resources, as such term
is defined in Rule 17Ad-22(a)(14) under the Securities Exchange Act of
1934 (``Act''),\16\ sufficient to meet its minimum liquidity resource
requirement in each relevant currency for which it has payment
obligations owed to its Participants. DTC considers each of its
existing default liquidity resources to be qualifying liquid resources,
and the proceeds from the Debt Issuance would also be default liquidity
that is considered a qualifying liquid resource.
---------------------------------------------------------------------------
\15\ Supra note 5.
\16\ 17 CFR 240.17Ad-22(a)(14).
---------------------------------------------------------------------------
The proceeds from the Debt Issuance would provide DTC with
additional, prefunded, and readily available qualifying liquid
resources to be used to complete system-wide settlement if a
Participant defaults. For DTC, the Participants Fund, Net Debit Cap and
Collateral Monitor tools work together to limit potential liquidity
requirements in default scenarios both on an intra-day and end-of-day
basis. So, while DTC's current available liquidity resources are
sufficient to satisfy the single-largest family default under stressed
but plausible conditions, the Debt Issuance would allow DTC to
diversify its sources of default liquidity and mitigate risks to DTC
that it is unable to secure default liquidity resources in an amount
necessary to meet its liquidity needs. More specifically, the proposal
would provide DTC with the flexibility to reduce its reliance on the
Line of Credit, which is renewed annually and dependent on continued
lender interest and meet any increased liquidity needs it may face in
the future. As a source of prefunded, default liquidity, the Debt
Issuance would provide additional certainty, stability, and safety to
DTC, its Participants, and the U.S. markets that it serves.
By diversifying DTC's sources of qualifying liquid resources, the
Debt Issuance could also mitigate concentration risks related to its
liquidity providers. More specifically, while DTC would not limit the
potential qualified institutional investors that purchase senior notes
and, therefore, is not able to ensure that the Debt Issuance would
reduce concentration risk, the types of entities who typically invest
in senior notes (for example, insurance companies, asset managers and
pension funds) are generally not Participants of DTC or lenders under
the Line of Credit. Therefore, the prospective investors in the senior
notes are not expected to be the same firms that currently provide any
material amount of default liquidity resources to DTC either through
the Line of Credit, or as DTC Participants. In this way, the proposed
Debt Issuance would reduce the concentration risk related to its
liquidity providers, by reducing the likelihood that an impairment of a
liquidity provider to perform under one qualifying liquid resource
would impact DTC's ability to fully access its other qualifying liquid
resources.
Anticipated Effect on and Management of Risk
In connection with its role as a central securities depository
(``CSD''), DTC provides for both the settlement of book-entry transfer
and pledge of interests in eligible deposited securities and net funds
settlement. A financially strong and well-managed, well-designed CSD,
with appropriate risk management arrangements, can reduce the risk
faced by participants, contributing to the goal of systemic financial
stability. In order to sufficiently perform this role, it is critical
that DTC has access to adequate liquidity resources to enable it to
complete system-wide settlement every business day, including following
a Participant default. DTC believes that the overall impact of the
proposed Debt Issuance on risks presented by DTC would be to reduce the
liquidity risks associated with DTC's net settlement obligations by
providing it with an additional source of liquidity to complete system-
wide settlement in the event of a Participant default. DTC further
believes that a reduction in its liquidity risk would reduce systemic
risk and would have a positive impact on the safety and soundness of
the wider financial system.
While the proposed Debt Issuance, like any liquidity resource,
would involve certain risks, most of these risks are standard in any
debt issuance. One risk associated with the proposed Debt Issuance
would be the risk that DTC does not have sufficient funds to repay
issued senior notes when the notes mature. DTC believes that this risk
is extremely remote, as the proceeds of the Debt Issuance would be used
only in the event of a Participant default, and DTC would replenish
that cash, as it would replenish any of its liquidity resources that
are used to facilitate settlement in the event of a Participant
default, with the proceeds of the close out of that defaulted
Participant's portfolio. This notwithstanding, in the event that
proceeds from the close out are
[[Page 60254]]
insufficient to fully repay a liquidity borrowing, then DTC would look
to its loss waterfall to repay any outstanding liquidity
borrowings.\17\ DTC would further mitigate this risk through the timing
of each debt issuance and by staggering the maturity dates of the
issued senior notes in a way that would provide DTC with time to
complete the close out of a defaulted Participant's portfolio. A second
risk is that DTC may be unable to issue new senior notes as issued
notes mature due to, for example, stressed markets at the time the
issued debt matures. This risk is mitigated by the fact that DTC
maintains a number of different default liquidity resources, described
above, and would not depend on the Debt Issuance as its sole source of
liquidity.
---------------------------------------------------------------------------
\17\ See Rule 4 (Participants Fund and Participants Investment)
of the Rules, supra note 5.
---------------------------------------------------------------------------
DTC may be exposed to interest rate risk, which is the risk that a
change in interest rates could cause an increase to the net cost of
carry of the Debt Issuance.\18\ DTC would mitigate this risk by issuing
senior notes at different maturities and at both fixed interest rates
and floating interest rates. The interest rates for the senior notes
issued at floating interest rates would generally correlate with the
rates on investments of those proceeds \19\ and would be expected to
result in a largely stable net spread between the borrowing interest
rate and the investment interest rate, mitigating this risk. For the
senior notes issued with a fixed interest rate, DTC would consider
interest rate swaps as a method to mitigate interest rate risk,
depending on market environment at that time.
---------------------------------------------------------------------------
\18\ The ``net cost of carry'' generally refers to the
difference between the interest earned on the invested proceeds of
an issuance and the interest rate paid on that issuance.
\19\ See supra note 12.
---------------------------------------------------------------------------
DTC could also face a related financial risk that the expense of a
Debt Issuance exceeds DTC's income and may have a negative impact on
DTC's financial health or its creditworthiness. DTC would mitigate this
risk by evaluating the expected net cost of carry (discussed above) of
a Debt Issuance prior to issuing any debt, and if the financing costs
for the issuance of senior notes increase, such that it is not
financially advisable to issue additional senior notes, then DTC may
determine to use its alternative liquidity resources to meet its
liquidity needs during those market conditions.
DTC believes that the significant systemic risk mitigation benefits
of providing DTC with additional, prefunded liquidity resources
outweigh these risks.
Consistency With Clearing Supervision Act
DTC believes that that proposal would be consistent with 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''), specifically with the risk management
objectives and principles of section 802(b)(1), and with certain of the
risk management standards adopted by the Commission pursuant to section
805(a)(2), for the reasons described below.\20\
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\20\ 12 U.S.C. 5464(a)(2) and (b)(1).
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(i) Consistency With Section 805(b)(1) 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.\21\
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\21\ 12 U.S.C. 5464(b)(1).
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DTC believes the proposal is consistent with section 805(b)(1) of
the Clearing Supervision Act because it would support the mitigation of
systemic risk in the financial system and promote financial stability
in the event of a Participant default by strengthening DTC's liquidity.
The proposed Debt Issuance is designed to reduce DTC's liquidity risks
by providing it with an additional source of liquidity to complete
system-wide settlement in the event of a Participant default. By
supplementing DTC's existing default liquidity resources with prefunded
liquidity, the proposal would contribute to DTC's goal of assuring that
DTC has adequate liquidity resources to meet its settlement obligations
notwithstanding the default of any of its Participants.
In its critical role as a CSD, DTC provides for both the settlement
of book-entry transfer and pledge of interests in eligible deposited
securities and net funds settlement. In order to sufficiently perform
this role, it is critical that DTC has access to adequate liquidity
resources to enable it to complete system-wide settlement every
business day, including following a Participant default. Therefore, a
reduction in DTC's liquidity risk would reduce systemic risk and would
have a positive impact on the safety and soundness of the wider
financial system.
As a result, DTC believes the proposed Debt Issuance would be
consistent with the objectives and principles of section 805(b)(1) of
the Clearing Supervision Act, 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 Rule 17Ad-22(e)(7)(i) and (ii) Under the 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.\22\ The Commission has accordingly adopted risk
management standards under section 805(a)(2) of the Clearing
Supervision Act \23\ and section 17A of the Act (``Covered Clearing
Agency Standards'').\24\ 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.\25\
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\22\ 12 U.S.C. 5464(a)(2).
\23\ Id.
\24\ 17 CFR 240.17Ad-22(e).
\25\ Id.
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DTC believes that the proposed Debt Issuance is consistent with
Rule 17Ad-22(e)(7)(i) and (ii) of the Covered Clearing Agency Standards
for the reasons described below.\26\
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\26\ 17 CFR 240.17Ad-22(e)(7)(i), (ii).
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Rule 17Ad-22(e)(7)(i) under the Act requires that DTC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to maintain sufficient liquid resources at the
minimum in all relevant currencies to effect same-day and, where
appropriate, intraday and multiday settlement of payment obligations
with a high degree of confidence under a wide range of foreseeable
stress scenarios that includes, but is not limited to, the default of
the participant family that would generate the largest aggregate
payment obligation for the covered clearing agency in extreme but
plausible market conditions.\27\ Rule
[[Page 60255]]
17Ad-22(e)(7)(ii) under the Act requires that DTC establish, implement,
maintain and enforce written policies and procedures reasonably
designed to hold qualifying liquid resources sufficient to meet the
minimum liquidity resource requirement under Rule 17Ad-22(e)(7)(i) in
each relevant currency for which DTC has payment obligations owed to
its Participants.\28\
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\27\ 17 CFR 240.17Ad-22(e)(7)(i).
\28\ 17 CFR 240.17Ad-22(e)(7)(ii). For purposes of this Rule,
``qualifying liquid resources'' are defined in Rule 17Ad-22(a)(14)
as including, in part, cash held either at the central bank of issue
or at creditworthy commercial banks. 17 CFR 240.17Ad-22(a)(14).
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As described above, the proposed Debt Issuance would provide DTC
with an additional resource of prefunded default liquidity, which it
would use to complete system-wide settlement every business day,
including following a Participant default. The proceeds of the Debt
Issuance would be cash held by DTC at either its cash deposit account
at the FRBNY or at a creditworthy commercial bank, pursuant to the
Clearing Agency Investment Policy.\29\ Therefore, the proceeds of the
Debt Issuance would be considered a qualifying liquid resource, as
defined by Rule 17Ad-22(a)(14).\30\ As such, the proposed Debt Issuance
would support DTC's ability to hold sufficient qualifying liquid
resources to meet its minimum liquidity resource requirement under Rule
17Ad-22(e)(7)(i).\31\
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\29\ Supra note 13.
\30\ 17 CFR 240.17Ad-22(a)(14).
\31\ 17 CFR 240.17Ad-22(e)(7)(i).
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For these reasons, DTC believes the proposal would support DTC's
compliance with Rule 17Ad-22(e)(7)(i) and (ii) by providing it with an
additional qualifying liquid resource.\32\
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\32\ 17 CFR 240.17Ad-22(e)(7)(i), (ii).
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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.
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-2023-801 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to file number SR-DTC-2023-801. 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 a.m. and 3 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).
Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to File Number SR-DTC-2023-801 and should
be submitted on or before September 21, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(91).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-18776 Filed 8-30-23; 8:45 am]
BILLING CODE 8011-01-P
