
[Federal Register Volume 78, Number 41 (Friday, March 1, 2013)]
[Notices]
[Pages 13924-13925]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-04750]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68983; File No. SR-DTC-2012-10]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing Amendment No. 2 and Order Approving Proposed Rule 
Change, as Modified by Amendment No. 2, To Reduce Liquidity Risk 
Relating to Its Processing of Maturity and Income Presentments and 
Issuances of Money Market Instruments

February 25, 2013.

I. Introduction

    On December 17, 2012, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-DTC-2012-10 (``Proposed Rule Change'') pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder.\2\ The Proposed Rule Change was published in 
the Federal Register on January 4, 2013.\3\ DTC filed Amendment No. 2 
to the Proposed Rule Change on January 30, 2013.\4\ The Commission 
extended the period of review of the Proposed Rule Change on February 
5, 2013.\5\ The Commission received one comment on the Proposed Rule 
Change.\6\ This publication serves as notice of filing Amendment No. 2 
and order approving the Proposed Rule Change, as modified by Amendment 
No. 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Release No. 34-68548 (Dec. 28, 2012), 78 FR 795 (Jan. 4, 
2013). DTC also filed an advance notice pursuant to Section 
806(e)(1) of the Payment, Clearing, and Settlement Supervision Act 
of 2010 relating to these changes. Release No. 34-68690 (Jan. 18, 
2013), 78 FR 5516 (Jan. 25, 2013).
    \4\ DTC filed Amendment No. 1 to the Proposed Rule Change on 
January 29, 2013, and withdrew it because of technical errors. DTC 
filed Amendment No. 2 to: (i) Correct the technical errors in 
Amendment No. 1 and (ii) correct the text of DTC's Settlement 
Service Guide related to the Proposed Rule Change by adding a 
sentence to clarify the change as stated in the Proposed Rule Change 
and correcting a grammatical error therein.
    \5\ Release No. 34-68834 (Feb. 5, 2013), 78 FR 9762 (Feb. 11, 
2013).
    \6\ See Comment from Karen Jackson dated December 30, 2012, 
http://sec.gov/comments/sr-dtc-2012-10/dtc201210-1.htm. The comment 
discusses the ability of individuals to withdraw money from money 
market accounts, which is not implicated by the proposed rule 
change.
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II. Analysis

A. Description of MMI Processing and Proposed Rule Change

    DTC filed the Proposed Rule Change to permit it to make rule 
changes designed to reduce liquidity risk relating to DTC's processing 
of maturity and income presentments (``Maturity Obligations'') and 
issuances of money market instruments (``MMIs''), as discussed below.
    MMIs are settled at DTC on a trade-for-trade basis. Issuers of MMIs 
that are not direct members of DTC enlist banks (``Issuing/Paying 
Agent'' or ``IPA'') to issue MMIs to broker-dealers, who in turn sell 
the MMIs to MMI investors. Debt issuance instructions are transmitted 
to DTC by the IPA, which triggers DTC crediting the IPA's DTC account 
and creating a deliver order to the broker-dealers' accounts on behalf 
of the investors.
    Maturity Obligations are initiated automatically by DTC early each 
morning for MMIs maturing that day. DTC debits the amount of the 
Maturity Obligations to the appropriate IPA's account and credits the 
same amount to the appropriate broker-dealer and custodian accounts. 
The debits and credits are conditional until final settlement at the 
end of the day. According to DTC, IPAs do not have a legal obligation 
to honor maturing MMIs if they have not received funding from the 
issuer.
    According to DTC, the common source of funding for Maturity 
Obligations is new issuances of MMIs in the same acronym by the same 
issuer on the day the Maturity Obligations are due. In a situation 
where new MMI issuances exceed the Maturity Obligations, the issuer 
would have no net funds payment due to the IPA on that day. However, 
because Maturity Obligations are processed and debited from IPA 
accounts automatically, IPAs currently incur credit risk if the issuers 
do not issue MMIs that exceed the

[[Page 13925]]

Maturity Obligations.\7\ Because IPAs do not have a legal obligation to 
honor maturing MMIs in the absence of funding from the issuer, IPAs may 
communicate to DTC an Issuer Failure/Refusal to Pay (``RTP'') for any 
issuer acronym up to 3:00 p.m. ET on the day of the affected Maturity 
Obligation. Such an instruction causes DTC, pursuant to its Rules, to 
reverse all transactions related to that issuer's acronym, including 
Maturity Obligations and any new MMI issuances, posing a potential for 
systemic risk since the reversals may override DTC's risk management 
controls such as the Collateral Monitor (``CM'') \8\ and net debit cap 
(``Net Debit Cap,'' collectively with CM, ``Settlement Risk 
Controls'').\9\
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    \7\ DTC guidelines suggest that issuers fund their net debit 
obligations to the IPA by 1:00 p.m. ET to alleviate this credit 
risk.
    \8\ A DTC ``Participant'' is a regulated institution that is 
eligible to use and uses DTC's services. See DTC Participant 
Handbook (Sept. 2011). DTC tracks collateral in a Participant's DTC 
account through the 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. See id.
    \9\ 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. See 
DTC Participant Handbook (Sept. 2011).
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    DTC currently withholds intraday from each MMI member the largest 
provisional net credit (``LPNC'') of a single issuer's acronym for 
purposes of calculating the member's position in relation to the 
Settlement Risk Controls. DTC believes that the LPNC control helps 
protect DTC against either (i) 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.
    Recent market events have increased DTC's awareness of the 
possibility of multiple simultaneous MMI issuer failures. Multiple 
simultaneous MMI issuer failures may cause more IPAs on a given day to 
communicate an RTP to DTC, which could increase the amount of the 
reversal that could override the DTC Settlement Risk Controls. As a 
result, DTC is increasing the LPNC withholding to the two largest net 
credits (on an acronym basis). In order to alleviate any settlement 
blockage that may occur as a result of withholding the two largest 
LPNCs and to promote settlement finality, DTC will no longer process an 
RTP initiated by an IPA that serves as both an issuing agent and a 
paying agent in the same acronym on the same day when new MMI issuances 
in an acronym exceed, in dollar value, the Maturity Obligations in the 
same acronym on the same day and the receiving members' Settlement Risk 
Controls permit completion of the transaction. As a result, DTC will 
remove the LPNC withholding with respect to such acronyms at the point 
in time when it eliminates the IPA's option to initiate an RTP.

B. Discussion

    Section 17A(b)(3)(F) of the Act requires that, among other things, 
``[t]he rules of the clearing agency are designed to promote the prompt 
and accurate clearance and settlement of securities transactions and * 
* * to assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible.'' \10\ Furthermore, Commission Rules 17Ad-22(d)(11) 
regarding Default Procedures and 17Ad-22(d)(12) regarding Timing of 
Settlement Finality, both adopted as part of the Clearing Agency 
Standards,\11\ require that clearing agencies establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to establish default procedures that ensure that the clearing 
agency can take timely action to contain losses and liquidity pressures 
and to continue meeting its obligations in the event of a participant 
default, and require that intraday or real-time finality be provided 
where necessary to reduce risks, respectively.\12\
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ Release No. 34-68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2, 
2012).
    \12\ Id. at 131-139.
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    Here, as described in detail above, DTC's proposed rule change to 
increase the LPNC from one to two largest provisional credits should, 
generally, help further safeguard the securities and settlement process 
as a whole, and, more specifically, help DTC better contain losses and 
liquidity pressures, yet continue to meet its obligations; meanwhile, 
DTC's proposed rule change to no longer process RTPs for an acronym 
when the described circumstances are met and, then, remove the LPNC for 
the same acronym when an RTP is no longer viable should improve the 
prompt and accurate clearance and settlement of securities (i.e., 
settlement finality), thus reducing DTC's risk. Since RTPs will no 
longer be processed when new issuances in an acronym exceed Maturity 
Obligations in the same acronym in the same day, removing the LPNC 
control in these cases should not increase DTC's exposure to MMI issuer 
credit risk.

III. Conclusion

    On the basis of the foregoing, the Commission finds the Proposed 
Rule Change, as modified by Amendment No. 2, consistent with the 
requirements of the Act, particularly with the requirements of Section 
17A of the Act,\13\ and the rules and regulations thereunder.
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    \13\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change SR-DTC-2012-10, as modified by 
Amendment No. 2, be and hereby is APPROVED \15\ as of the date of this 
order or the date of the ``Notice of Filing Amendment No. 1 and No 
Objection to Advance Notice Filing, as Modified by Amendment No. 1, to 
Reduce Liquidity Risk Relating to [DTC's] Processing of Maturity and 
Income Presentments and Issuances of Money Market Instruments,'' SR-
DTC-2012-810, whichever is later.
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    \14\ 15 U.S.C. 78s(b)(2).
    \15\ 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).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-04750 Filed 2-28-13; 8:45 am]
BILLING CODE 8011-01-P


