
[Federal Register Volume 78, Number 3 (Friday, January 4, 2013)]
[Notices]
[Pages 795-797]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-31669]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68548; File No. SR-DTC-2012-10]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change To Reduce Liquidity Risk 
Relating to Its Processing of Maturity and Income Presentments and 
Issuances of Money Market Instruments

December 28, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 17, 2012, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change 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. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    DTC is proposing to change the current Largest Provisional Net 
Credit (``LPNC'') risk management control in order to increase 
withholding from one to two largest provisional credits (on an acronym 
\3\ basis). DTC is also proposing to modify its Rules as they relate to 
the Issuing/Paying Agent's (``IPA's'') refusal to pay process. DTC is 
proposing not to permit reversal of a transaction when issuances of 
Money Market Instruments (``MMIs'') in an acronym exceed, in dollar 
value, the maturity or income presentments (``Maturity Obligations'') 
of MMIs in the same acronym on the same day. As a result, at the point 
in time when issuances of MMIs in an acronym exceed, in dollar value, 
the Maturity Obligations of the MMIs in the same acronym on that day, 
DTC will remove the LPNC control with respect to the affected acronym.
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    \3\ DTC employs a four-character acronym to designate an 
issuer's Money Market Instrument program. An issuer can have 
multiple acronyms. The Issuing/Paying Agent's bank uses the 
acronym(s) when submitting an instruction for a given issuer's Money 
Market Instrument securities.
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II. Clearing Agency's Statement of Purpose of, and Statutory Basis for, 
the Proposed Rule Change

    In its filing with the Commission, DTC 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. DTC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\4\
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    \4\ The Commission has modified the text of the summaries 
prepared by DTC.
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(A) Self-Regulatory Organization's Statement of Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    MMI presentment processing is initiated automatically by DTC each 
morning for MMIs maturing that day. The automatic process 
electronically sweeps all maturing positions of MMI

[[Page 796]]

CUSIPs from DTC Participant accounts and creates the Maturity 
Obligations. The matured MMIs are, subject to DTC Rules, delivered to 
the applicable IPA, a DTC Participant, and DTC debits the IPA's account 
for the amount of the Maturity Obligations. In accordance with DTC 
Rules, payment will be due from the IPA for net settlement to the 
extent, if any, that the IPA has a net debit balance in its settlement 
account at end-of-day.
    Without regard to DTC net settlement, MMI issuers and IPAs commonly 
view the primary source of funding of payments for Maturity Obligations 
of MMIs as flowing from new issuances of MMIs in the same acronym by 
that issuer on that day. In a situation where those new issuances 
exceed the Maturity Obligations, the issuer would have no net funds 
payment due to the IPA on that day. However, because Maturity 
Obligations of MMIs are processed automatically at DTC, IPAs currently 
may nevertheless refuse to pay for all of an issuer's maturities. An 
IPA that refuses payment on an MMI must communicate its intention to 
DTC using the DTC Participant Terminal/Browser Service (``PTS/PBS'') 
MMRP function. This communication is referred to as an Issuer Failure/
Refusal to Pay (``RTP'') and it allows the Paying Agent to enter a 
refusal to pay instruction for a particular issuer acronym up to 3:00 
p.m. Eastern Time (``ET'') on the date of the affected maturity or 
income presentment. Such an instruction will cause DTC, pursuant to its 
Rules, to reverse all transactions related to any new issuances in that 
issuer's acronym, including the Maturity Obligations, posing a 
potential for systemic risk since the reversals may override DTC's risk 
management controls (e.g., collateral monitor \5\ and net debit cap 
\6\).
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    \5\ DTC tracks collateral in a Participant's account through the 
Collateral Monitor (``CM''). At all times, the CM reflects the 
amount by which the collateral value in the account exceeds the net 
debit balance in the account. When processing a transaction, DTC 
verifies that the CM of each of the deliverer and receiver will not 
become negative when the transaction is processed. If the 
transaction would cause either party to have a negative CM, the 
transaction will recycle until the deficient account has sufficient 
collateral to proceed or until the applicable cutoff occurs.
    \6\ The net debit cap control is designed so that DTC may 
complete settlement, even if a Participant fails to settle. Before 
completing a transaction in which a Participant is the receiver, DTC 
calculates the effect the transaction would have on such 
Participant's account, and determines whether any resulting net 
debit balance would exceed the Participant's net debit cap. Any 
transaction that would cause the net debit balance to exceed the net 
debit cap is placed on a pending (recycling) queue until the net 
debit cap will not be exceeded by processing the transaction.
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    To mitigate the risks associated with an RTP, DTC employs the LPNC 
risk management control. On each processing day, DTC withholds intraday 
credit from each MMI Participant for the largest credit with respect to 
an issuer's acronym, for purposes of calculating the Participant's net 
settlement balance and collateral monitor. As such, this single largest 
credit is provisional and is not included in the calculation of the 
Participant's collateral monitor or in the settlement balance measured 
against its net debit cap. The LPNC control protects DTC against (i) 
either the single largest issuer failure on a business day, or (ii) 
multiple failures on a business day that, taken together, do not exceed 
the largest provisional net credit.
    Maturity payment procedures were designed to limit credit, 
liquidity, and operational risk for DTC and Participants in the MMI 
program. In an effort to further mitigate these risks, DTC is proposing 
the following changes to current processing associated with (1) the 
LPNC control and (2) limiting intraday MMI reversals under specified 
conditions:
1. Increase Withholding From one to two LPNCs
    DTC is proposing to change the current LPNC risk management control 
in order to increase withholding from one to two largest provisional 
credits (on an acronym basis). DTC believes this will provide increased 
risk protection in the event of transaction reversals due to multiple 
issuer defaults or a single issuer default with two or more MMI 
programs.
    DTC has conducted a simulation analysis to measure the impact to 
IPAs and custodians/dealers of an increase in LPNC controls from one to 
two on settlement blockage \7\ intraday during peak processing periods. 
DTC analyzed the blockage level for both the IPAs and custodians/
dealers as separate segments since each react to the additional 
blockage in different ways. DTC believes the results of the simulation 
analysis indicated that there will be no material change in transaction 
blockage.
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    \7\ Settlement blockage refers to transactions that cannot be 
completed due to a receiver's net debit cap or collateral monitor 
controls.
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2. Eliminate Intraday Reversals When MMI Issuances Exceed Maturity 
Obligations
    DTC is also proposing to modify its Rules as they relate to the 
refusal to pay process. As planned, DTC will not permit reversal of a 
transaction when issuances of MMIs in an acronym exceed, in dollar 
value, the Maturity Obligations of MMIs in the same acronym on the same 
day. In such instances, DTC will not permit reversal of the 
transactions because the IPA would have no reason to exercise the 
refusal to pay for that acronym on that settlement day. As a result, at 
the point in time when issuances of MMIs in an acronym exceed, in 
dollar value, the Maturity Obligations of the MMIs in the same acronym 
on that day, DTC will remove the LPNC control with respect to the 
affected acronym.
    DTC believes the proposed changes will provide additional risk 
protection to DTC and the financial system as a whole. DTC has 
discussed this proposal with various industry groups, including the 
Participants that transact in MMIs, and DTC received no objections to 
the proposal. The Participants understand that the elimination of 
intraday reversals when issuances exceed Maturity Obligations will 
result in no material change in transaction blockage.
    DTC believes the proposed changes should mitigate risk associated 
with MMI transaction reversals due to an IPA refusal to pay 
instruction. Additionally, DTC believes the proposed changes should 
promote settlement finality by precluding reversals for those 
issuances. DTC believes the proposed rule change is consistent with the 
requirements of the Act, specifically Section 17A(b)(3)(F),\8\ and the 
rules and regulations thereunder because the proposed changes should 
facilitate the prompt and accurate clearance and settlement of 
securities transactions by promoting efficiency in and finality of 
settlement.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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(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

    The subject proposal regarding MMIs was developed in consultation 
with various industry organizations. 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.

[[Page 797]]

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 up to 90 days (i) as the 
Commission may designate 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 will:
    (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-2012-10 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-2012-10. 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 
10:00 a.m. and 3:00 p.m. Copies of such filings also will be available 
for inspection and copying at the principal office of DTC and on DTC's 
Web site at http://dtcc.com/downloads/legal/rule_filings/2012/dtc/SR-DTC-2012-10.pdf. 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-
2012-10 and should be submitted on or before January 25, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-31669 Filed 1-3-13; 8:45 am]
BILLING CODE 8011-01-P


