
[Federal Register Volume 76, Number 236 (Thursday, December 8, 2011)]
[Notices]
[Pages 76790-76791]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-31479]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65871; File No. SR-DTC-2011-09]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change To Modify a Practice in Order 
To Mitigate Systemic Risk, Specifically Liquidity Related, Associated 
With DTC End of Day Net Funds Settlement

 December 2, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 \2\ thereunder notice is hereby given that 
on November 21, 2011, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I, II, and III, below, which Items 
have been prepared primarily by DTC. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    As more fully set forth below, the proposed change DTC is proposing 
to temporarily reduce each Participant's maximum net debit cap for 
night cycle processing of valued transactions over weekends and 
holidays and to restore such debit cap at the start of day cycle 
processing for the next settlement date (i.e., the first business day 
following the weekend or holiday).

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Corporation included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The Corporation has prepared summaries, set 
forth in sections A, B, and C below, of the most significant aspects of 
such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    (i) Under the proposed change, DTC would temporarily reduce each 
Participant's maximum net debit cap for night cycle processing \3\ of 
valued transactions over weekends and holidays and would restore such 
debit cap at the start of day cycle processing for the next settlement 
date (i.e., the first business day following the weekend or holiday). 
In doing so, DTC believes it would reduce the systemic risk associated 
with a liquidity shortfall and would enhance the safety and soundness 
of the U.S. settlement system.
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    \3\ DTC processes settlement in two cycles per business day: (i) 
A night cycle that begins at approximately 9 p.m. and finishes at 
approximately 11:30 p.m. and (ii) a day cycle that begins at 
approximately 3 a.m. and completes at 3:30 p.m. For Monday 
settlement, the night cycle begins on the preceding Friday evening 
at 9 p.m. and ends at 11:30 p.m. that night; the day cycle does not 
begin until 3 a.m. on Monday.
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Background on DTC Settlement and the Net Debit Cap Control
    DTC's Settlement System is structured so that Participants may make 
intraday book-entry deliveries versus payment of securities held in 
their DTC accounts. These transfers generate debits to the settlement 
account of each receiving Participant and credits to the settlement 
account of each delivering Participant. As debits and credits of 
multiple transactions net over the course of the business day a 
Participant will have either a net debit balance or net credit balance 
from time to time and at settlement will be in either a net debit or 
net credit balance position. Participants having a net debit balance 
for settlement owe payments of the amount of the net debit to DTC. In 
order that DTC has the resources to achieve end-of-day settlement among 
non-defaulting Participants, DTC maintains liquidity resources 
sufficient to complete settlement, notwithstanding the failure of its 
largest Participant to pay, by covering the net debit balance of a 
defaulting Participant. The key risk management control in this process 
is the net debit cap, which limits the net debit balance of a 
Participant, intraday and at settlement, to available liquidity 
resources. (The net debit balance must also be collateralized by 
sufficient collateral measured by the collateral monitor risk control.) 
DTC assigns a net debit cap to each Participant based on the 
Participant's activity and currently limits the maximum net debit cap 
for a Participant to $1.8 billion and for a family of related 
Participants to $3 billion aggregate.\4\ This settlement structure is 
designed to support the efficient recycling of intraday liquidity to 
facilitate the settlement of transactions while limiting systemic risk 
due to Participant failure.
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    \4\ These net debit caps are supported by $3.2 billion of 
liquidity resources at DTC in the form of a $1.3 billion all-cash 
Participants Fund and a $1.9 billion committed line of credit 
available for settlement in the event that a Participant fails to 
pay its net debit balance at settlement.
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    With Friday night cycle processing over weekends and holidays, 
however, Participants may accrue net debit balances for end-of-day 
settlement on the next business day, which is two to three calendar 
days away from the actual settlement. DTC has recognized that during 
such extended processing, external credit events may occur, including, 
in particular, the possibility of a weekend insolvency.
Change in Night Cycle Processing
    To address the liquidity risk \5\ over the extended periods for 
weekends and holidays, DTC is proposing to reduce the maximum net debit 
cap temporarily over the extended period for any Participant or any 
family of related Participants to $1.5 billion at the open of night 
cycle processing on any DTC business day for which the succeeding 
calendar day is not a business day. DTC would then restore the net 
debit cap of any affected Participant to its full net debit cap at the 
open of day cycle processing for the next business day in the ordinary 
course of business.\6\
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    \5\ ``Liquidity risk'' refers to the financial risk associated 
with access to liquidity to cover the failure of a Participant to 
fund its net settlement obligation to DTC.
    \6\ Today, DTC may reduce a Participant's net debit cap (see, 
e.g., DTC Rule 1, definition of Net Debit Cap which permits DTC to 
set the Net Debit Cap of a Participant at ``any other amount 
determined by [DTC], in its sole discretion.''). Accordingly, after 
a temporary weekend or holiday reduction as proposed herein, DTC may 
elect not to restore the net debit cap of any affected Participant. 
By way of example only, and in line with the purpose of this 
proposed change in practice, DTC would not expect to restore the net 
debit cap of a Participant that had become insolvent in the 
intervening non-business days or as to which DTC is concerned with 
its credit status. (DTC would take the same approach to holidays, 
that is, whenever two business days are not successive.)
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Risk Reduction and Anticipated Minimal Settlement System and 
Participant Impact
    The purpose of this proposed change in processing practice is to 
minimize systemic risk to U.S. markets and to DTC Participants as well 
as to minimize direct liquidity risk to DTC by the

[[Page 76791]]

management of net debit balances over extended processing periods such 
as weekends and holidays.
    The highest net debit caps at DTC are established primarily to 
support the settlement of Money Market Instrument (``MMI'') 
transactions. MMI transactions are high value, same day settling 
transactions that are processed principally in the afternoon on any 
settlement day. Because these transactions are processed during the day 
cycle only, they should not be affected by the proposed modification to 
processing in the night-cycle for weekends and holidays.
    In order to determine the potential effects of lowering the net 
debit caps for certain night cycle processing as proposed in this rule 
filing, DTC conducted a simulation study in which the maximum net debit 
cap for a Participant and for a Participant family was set at $1.5 
billion. The study found that net debit cap related blockage increased 
by only 1.13% on average, representing a gross value of approximately 
$913 million out of approximately $70 billion processed in each night 
cycle for settlement on the next business day. For Participants that 
might encounter transaction blockage, this blockage could be further 
minimized at their discretion by improving their processing systems by 
instructing deliveries versus payment that would generate credits to 
offset debits. With the proposed revised practice, at the time net 
debit caps are restored for same-day settlement, any transactions that 
pending due to the lower net debit cap would be reprocessed and would 
be completed at the start of the day cycle, assuming no other 
changes.\7\ DTC recognizes that this change in practice may affect 
transaction management for certain Participants and has taken the 
initiative to discuss the proposal with all of those Participants and 
has received no objections. Certain Participants indicated that they 
would consider changes that could lessen the impact by implementing 
their own night cycle process improvements.
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    \7\ The Participants with increased blockage in the simulation 
often have large net debits in the night cycle because they do not 
send in Night Deliver Orders (``NDOs'') or they exempt or withhold 
from night cycle processing many or all of their Institutional 
Deliveries that would otherwise create credits.
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    Accordingly, DTC submits that the proposed rule change would 
mitigate systemic risk due to any potential shortfall in liquidity 
associated with net settlement failure with only minimal Participant 
and processing impact.
    (ii) The proposed rule change is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to DTC 
as well as with the CPSS/IOSCO Recommendations for Securities 
Settlement Systems applicable to DTC in that it supports efficient, 
timely, and final net funds settlement. The proposed change is designed 
to facilitate the prompt and accurate clearance and settlement of 
securities transactions by promoting efficiencies and enhancing the 
risk management controls associated with the funds settlement of 
securities transactions.

B. Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change will have any 
impact or impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments relating to the proposed rule change have not yet 
been solicited or received. DTC will notify the Commission of any 
written comments received by DTC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission shall: 
(a) By order approve or disapprove such proposed rule change or (b) 
institute proceedings to determine whether the proposed rule change 
should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-DTC-2011-09 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-DTC-2011-09. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site 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 such filing also will be available for 
inspection and copying at DTC's principal office and on DTC's Web site 
at http://www.dtc.org. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly.
    All submissions should refer to File Number SR-DTC-2011-09 and 
should be submitted on or before December 29, 2011.


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-31479 Filed 12-7-11; 8:45 am]
BILLING CODE 8011-01-P


