
[Federal Register Volume 77, Number 16 (Wednesday, January 25, 2012)]
[Notices]
[Pages 3833-3834]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-1378]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66186; File No. SR-DTC-2011-09]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving 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

January 19, 2012.

I. Introduction

    On November 21, 2011, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-DTC-2011-09 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 \2\ 
thereunder. The proposed rule change was published for comment in the 
Federal Register on December 8, 2011.\3\ The Commission received no 
comment letters regarding the proposal. For the reasons discussed 
below, the Commission is granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-65871 (December 2, 
2011), 76 FR 76790 (December 8, 2011). In its filing with the 
Commission, DTC included statements concerning the purpose of and 
basis for the proposed rule change. The text of these statements is 
incorporated into the discussion of the proposed rule change in 
Section II below.
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II. Description

    Pursuant to the rule change, DTC will 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). 
Under the proposed change, DTC would temporarily reduce each 
Participant's maximum net debit cap for night cycle processing \4\ 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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    \4\ DTC processes settlement in two cycles each 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 approximately 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. Friday 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. One of the key risk management controls in this 
process is the net debit cap, which limits the net debit balance of a 
Participant, intraday and at settlement, to DTC's available liquidity 
resources. (The net debit balance must also be fully 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.\5\ 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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    \5\ 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. 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 \6\ over the extended periods of 
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 opening 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 for any affected Participant or family of related 
Participants to its full net debit cap at the open of day cycle 
processing for the next business day in the ordinary course of 
business.\7\
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    \6\ ``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.
    \7\ 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 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

[[Page 3834]]

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, which represents 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 by the Participant by instructing deliveries 
versus payment that would generate credits to offset debits. Under the 
proposed revised practice, at the time net debit caps are restored for 
same-day settlement, any transactions that are 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.\8\ 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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    \8\ 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 believes that the proposed rule change would 
mitigate systemic risk due to the potential shortfall in liquidity 
associated with the net settlement failure of a Participant with only 
minimal impact on Participants and processing.

III. Discussion

    Section 19(b)(2)(B) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\9\ In particular, Section 17A(b)(3)(A) \10\ of the Act 
requires, among other things, that the clearing agency be so organized 
and have the capacity to safeguard the securities and funds which are 
in the custody or control of such clearing agency or for which it is 
responsible.
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    \9\ 15 U.S.C. 78s(b)(2)(B).
    \10\ 15 U.S.C. 78q-1(b)(3)(A).
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    Because the proposed change would allow DTC to enhance the risk 
management controls by temporarily reducing each Participant's and 
family of 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, the Commission believes that the proposed rule 
change is consistent with DTC's safeguarding obligations under the Act.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) \11\ of the 
Act, that the proposed rule change (File No. SR-DTC-2011-09) be, and 
hereby is, approved.\12\
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
    \13\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
Kevin M. O'Neill,
Deputy Secretary .
[FR Doc. 2012-1378 Filed 1-24-12; 8:45 am]
BILLING CODE 8011-01-P


