
[Federal Register Volume 80, Number 20 (Friday, January 30, 2015)]
[Notices]
[Pages 5188-5190]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-01791]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74142; File Nos. SR-FICC-2014-810; SR-NSCC-2014-811; 
SR-DTC-2014-812]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
National Securities Clearing Corporation; the Depository Trust Company; 
Notice of No Objection to Advance Notices, as Amended, To Amend and 
Restate the Third Amended and Restated Shareholders Agreement, Dated as 
of December 7, 2005

January 27, 2015.
    On November 5, 2014, Fixed Income Clearing Corporation (``FICC''), 
National Securities Clearing Corporation (``NSCC''), and The Depository 
Trust Company (``DTC,'' together with FICC and NSCC, ``Clearing 
Agencies'') filed with the Securities and Exchange Commission 
(``Commission'') advance notices SR-FICC-2014-810, SR-NSCC-2014-811 and 
SR-DTC-2014-812 (``Advance Notices''), pursuant to Section 806(e)(1) of 
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.\2\ On November 17, 2014, the Clearing 
Agencies each filed Amendments No. 1 to the Advance Notices.\3\ On 
November 17, 2014 FICC withdrew Amendment No. 1 and filed Amendment No. 
2 to advance notice SR-FICC-2014-810.\4\ The Advance Notices, as 
amended, were published for comment in the Federal Register on December 
11, 2014.\5\ On December 31, 2014, the Commission published notice of 
its extension of the review period for the Advance Notices.\6\ The 
Commission did not receive any comments on the Advance Notices. This 
publication serves as notice of no objection to the Advance Notices, as 
amended.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ NSCC and DTC filed Amendment Nos. 1 to provide additional 
description of the changes proposed in advance notices SR-NSCC-2014-
811 and SR-DTC-2014-812, respectively.
    \4\ FICC withdrew Amendment No. 1 to advance notice SR-FICC-
2014-810 due to an error in filing the amendment. FICC filed 
Amendment No. 2 to advance notice SR-FICC-2014-810 in order to 
provide additional description of the changes proposed in the 
advance notice.
    \5\ Release No. 34-73755 (Dec. 5, 2014), 79 FR 73665 (Dec. 11, 
2014).
    \6\ Release No. 34-73975 (Dec. 31, 2014), 80 FR 918 (Jan. 7, 
2015).
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I. Description of the Advance Notices

    The Advance Notices are a proposal by the Clearing Agencies, which 
are wholly owned subsidiaries of the Depository Trust and Clearing 
Corporation (``DTCC''), to amend and restate their Third Amended and 
Restated Shareholders Agreement, dated as of December 7, 2005 
(``Existing Shareholders Agreement'') \7\ -- a single agreement 
covering all of the Clearing Agencies and their respective members and 
participants (``Members''). The Clearing Agencies state that the 
proposed revisions to the Existing Shareholders Agreement (``Revised 
Shareholders Agreement'') are the product of a comprehensive review by 
DTCC of its ownership, governance, and capital structure, undertaken 
for the purposes of increasing the financial resources available to 
support the conduct of the businesses of the Clearing Agencies and 
enhancing regulatory risk management.
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    \7\ When the changes proposed in the Advance Notices become 
effective, the title of the Existing Shareholders Agreement will 
become the ``Fourth Amended and Restated Shareholders Agreement.''
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    With the Advance Notices of the Revised Shareholders Agreement, the 
Clearing Agencies propose: (1) To issue new common stock of DTCC 
(``Common Shares''), which mandatory common shareholders (``Mandatory 
Shareholders'') \8\ will be required to purchase, upon approval by the 
DTCC Board of Directors (``Board'') and two-thirds of Mandatory 
Shareholders; (2) to buyback such newly issued Common Shares From 
Mandatory Shareholders, at the Board's discretion and approval; (3) to 
modify the formula for allocating Common Shares among shareholders 
(``Common Shareholders''); (4) to modify the formula for pricing the 
Common Shares; (5) to remove restrictions on the frequency with which 
DTCC can reallocate Common Shares; and (6) make other conforming and 
technical changes. Details of these proposed changes are summarized 
below.
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    \8\ Pursuant to the Existing Shareholders Agreement and the 
rules of each of the Clearing Agencies, some Members, generally 
full-service Members, are required to own Common Shares (i.e., 
Mandatory Shareholders) while other Members, generally limited-
service Members, are permitted but not required to own such shares 
(``Voluntary Shareholders''). Further, certain Members are not 
permitted to purchase and own Common Shares or become parties to the 
Existing Shareholders Agreement.

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[[Page 5189]]

A. Capital Raise Through the Sale of Newly Issued Common Shares to 
Mandatory Shareholders

    Historically, the Clearing Agencies have operated on an at-cost or 
near-cost basis and rebated excess revenues to Members. Recently, 
however, the Clearing Agencies have experienced a greater need to 
increase capital to meet higher operating costs and, as systemically 
important financial market utilities (``SIFMUs''), to satisfy 
heightened risk-management requirements.
    In order to raise capital for business purposes, the Revised 
Shareholders Agreement will enable DTCC to sell newly issued Common 
Shares to Mandatory Shareholders, who will be required to purchase such 
shares. The exercise of this new authority will require approval by the 
Board and two-thirds of the Mandatory Shareholders. The proceeds of the 
sale of the new issuance will be provided by DTCC to the Clearing 
Agencies as working capital. Voluntary Shareholders will not be 
required or permitted to purchase newly issued Common Shares.
    DTCC states that it has performed extensive analyses to determine 
these needs and has considered alternative means to address them. DTCC 
deemed an increase in fees impractical because it would not necessarily 
generate sufficient resources in a reasonable period and fees depend on 
transactional volumes, which may be volatile. DTCC also was concerned 
with the financial burden that significant fee increases could place on 
Members over an extended period.

B. Mandatory Repurchase of Newly Issued Common Shares from Mandatory 
Shareholders

    To allow flexibility to return capital to Mandatory Shareholders if 
the Clearing Agencies have excess, the Revised Shareholders Agreement 
will provide a mechanism under which DTCC may repurchase Common Shares 
from Mandatory Shareholders, on a mandatory basis, in an aggregate 
amount up to the aggregate amount of all newly issued Common Shares. 
Exercise of this new authority will be at the discretion of the 
Board.\9\
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    \9\ The directors of the boards of FICC, NSCC, and DTC are the 
same as the Board's directors.
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C. Updates to the Common Share Allocation Formula

    The formula used to periodically reallocate entitlements to 
purchase Common Shares (``Allocation Formula'') is based on the 
historic development of DTCC.\10\ The Allocation Formula provides that 
(i) 80% of the entitlement to purchase Common Shares is based on the 
amount of fees paid by a Member to the Clearing Agencies, and (ii) the 
remaining 20% of the entitlement is based on the average market value 
of all securities credited to the DTC account of that Member (``Long 
Positions'').
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    \10\ See Release No. 34-73755 (Dec. 5, 2014), 79 FR 73665, 73667 
(Dec. 11, 2014).
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    Today, all users of the Clearing Agencies pay fees to one or more 
of the Clearing Agencies based on usage of the services and facilities 
of the Clearing Agencies, including fees for Long Positions. 
Accordingly, DTCC has determined that it is no longer appropriate for 
the Allocation Formula to include both the market value of Long 
Positions and fees paid to DTC for such Long Positions. As such, the 
Revised Shareholders Agreement will update the Allocation Formula to 
eliminate the market value of Long Positions, so that the formula will 
be based solely on fees paid to the Clearing Agencies.

D. Amendments to the Common Share Price Formula

    The price of Common Shares is used in connection with the purchase 
and sale of such shares among Common Shareholders in the periodic 
reallocation of Common Shares, as well as in connection with the 
transfer of the Common Shares of retiring or disqualified Common 
Shareholders.
    Under the Existing Shareholders Agreement, the price of Common 
Shares is determined by a formula (``Pricing Formula'') that excludes a 
portion of the retained earnings of the Clearing Agencies from DTCC's 
book value, which DTCC argues is a vestige of the historical 
development of DTCC.\11\ Additionally, the basis of the Pricing Formula 
is the full book value of DTCC, which includes intangibles such as 
goodwill.\12\
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    \11\ See id.
    \12\ Intangible items of book value used in this calculation are 
shown on DTCC's Consolidated Statement of Financial Condition. DTCC 
Financial Statements, available at http://dtcc.com/legal/financial-statements.aspx.
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    To make the price of the Common Shares more closely reflect the 
liquidation value of DTCC, the Revised Shareholders Agreement will make 
two amendments to the Pricing Formula. First, the formula will be 
updated to no longer exclude a portion of the retained earnings of the 
Clearing Agencies from DTCC's book value. Second, the formula will be 
updated to reflect the tangible book value of DTCC and the liquidation 
preference of the preferred stock of DTCC.

E. Amendments to the Frequency of Reallocating Common Shares

    The reallocation of Common Shares among Common Shareholders is a 
means of aligning the entitlement to own such shares with the use of 
the Clearing Agencies by the Common Shareholders. The Existing 
Shareholders Agreement limits reallocations to no more than once a 
year, but no less than every three years.
    To allow more frequent reallocations, the Revised Shareholders 
Agreement will permit reallocations to occur more than once a year, as 
determined by the Board, but still no less than once every three years.

F. Other Conforming and Technical Amendments to the Existing 
Shareholders Agreement

    The Revised Shareholders Agreement will also include certain other 
technical amendments, including conforming and clarifying changes. For 
example, the Revised Shareholders Agreement will: (i) Amend the 
definition of ``Common Share Amount'' to clarify that the calculation 
does not include any fees that are pass-through fees (i.e., amounts 
collected by one of the Clearing Agencies for the account of a third 
party and paid by that Clearing Agency to a third party); (ii) amend 
the definition of ``Settlement'' to move the time at which settlement 
is effected from 5:00 p.m. New York City Time on the Settlement Date, 
as such terms are defined in the Existing Shareholders Agreement, to 
4:00 p.m. New York City Time on the Settlement Date; \13\ (iii) update 
the definition of ``Deliver'' to include more convenient and 
contemporary methods of delivering notices, (e.g., by electronic mail), 
as appropriate; and (iv) include Members of FICC's Mortgage-Backed 
Security Division (``MBSD''), other than Cash-Settling Bank Members (as 
such term is defined in the rules of MBSD),\14\ within the definition 
of ``Mandatory Purchaser Participants.''
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    \13\ This is an operational change in order to align Common 
Share settlement times with the routine times of end of day 
settlement for each of the Clearing Agencies.
    \14\ MBSD Rules & Procedures, available at http://www.dtcc.com/
~/media/Files/Downloads/legal/rules/ficc_mbsd_rules.pdf. As a result 
of FICC becoming a central counterparty for transactions processed 
and cleared at MBSD, Release No. 34-66550 (Mar. 9, 2012), 77 FR 
15155 (Mar. 14, 2012), the general rule that full-service Members, 
including users of guaranteed services, of one of the Clearing 
Agencies are Mandatory Purchaser Participants applies to Members of 
MBSD.
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    The Revised Shareholders Agreement also will amend the definition 
of ``Qualified Person,'' which sets forth the types of entities that 
may hold Common Shares, to exclude: (i) Federal Reserve

[[Page 5190]]

Banks because DTCC never intended that such governmental authorities 
should be required to own shares in DTCC, notwithstanding that they may 
use certain services of the Clearing Agencies; (ii) central 
counterparties or central securities depositories because these link 
arrangements are for the purpose of extending clearing agency services 
across borders, or among closely related activities and products, but 
not for ownership purposes; and (iii) any other financial market 
infrastructure or utility that the Board determines shall not be a 
Qualified Person.
    Finally, the Revised Shareholders Agreement will provide that the 
pro-rata re-distribution of the Common Shares of a Common Shareholder 
that is no longer a Qualified Person to all other Common Shareholders 
takes place at the beginning of the following calendar year, rather 
than contemporaneously with such Common Shareholder ceasing to be a 
Qualified Person. This change reflects current practice and is more 
administratively practical.

II. Discussion and Commission Findings

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, the Commission believes that the 
stated purpose of the Clearing Supervision Act is instructive.\15\ The 
stated purpose of the Clearing Supervision Act is to mitigate systemic 
risk in the financial system and promote financial stability by, among 
other things, promoting uniform risk management standards for SIFMUs 
and strengthening the liquidity of SIFMUs.\16\
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    \15\ See 12 U.S.C. 5461(b).
    \16\ Id.
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    Section 805(a)(2) of the Clearing Supervision Act \17\ authorizes 
the Commission to prescribe risk management standards for the payment, 
clearing, and settlement activities of designated clearing entities and 
financial institutions engaged in designated activities for which it is 
the supervisory agency or the appropriate financial regulator. Section 
805(b) of the Clearing Supervision Act \18\ states that the objectives 
and principles for the risk management standards prescribed under 
Section 805(a) shall be to:
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    \17\ 12 U.S.C. 5464(a)(2).
    \18\ 12 U.S.C. 5464(b).
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     Promote robust risk management;
     promote safety and soundness;
     reduce systemic risks; and
     support the stability of the broader financial system.
    The Commission has adopted risk management standards under Section 
805(a)(2) of the Clearing Supervision Act \19\ (``Clearing Agency 
Standards'').\20\ The Clearing Agency Standards became effective on 
January 2, 2013, and require registered 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. As such, 
it is appropriate for the Commission to review advance notices against 
these Clearing Agency Standards and the objectives and principles of 
these risk management standards as described in Section 805(b) of the 
Clearing Supervision Act.\21\ The Commission believes that the proposed 
changes to the Existing Shareholders Agreement promote robust risk 
management, promote safety and soundness, reduce systemic risks, and 
support the stability of the broader financial system, and, thus, align 
with the stated purpose of the Clearing Supervision Act.
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    \19\ 12 U.S.C. 5464(a)(2).
    \20\ Rule 17Ad-22, 17 CFR 240.17Ad-22. Release No. 34-68080 
(Oct. 22, 2012), 77 FR 66220 (Nov. 2, 2012).
    \21\ 12 U.S.C. 5464(b).
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    First, allowing DTCC to issue new Common Shares to Mandatory 
Shareholders for the purpose of infusing the Clearing Agencies with 
additional working capital will enable the Clearing Agencies, which are 
designated SIFMUs, to maintain operations for a longer period during 
times of financial stress. As such, the proposed change promotes the 
safety and soundness of the Clearing Agencies, reduces systemic risks 
presented by the Clearing Agencies, and supports the stability of the 
broader financial system.
    Second, allowing DTCC to buy back newly issued Common Shares from 
Mandatory Shareholders will enable DTCC to return capital to those 
Members, most of which play substantial roles in the financial system, 
when the Clearing Agencies have excess capital. Therefore, the proposed 
change further supports the stability of the broader financial system 
by enabling capital to move from the Clearing Agencies back to Members 
when appropriate.
    Third, the proposal to update the Allocation Formula to no longer 
account for securities held at DTC will more closely align the 
allocation of Common Shares with Common Shareholders' use of the 
Clearing Agencies. Therefore, ownership of the Clearing Agencies will 
more accurately reflect usage of the Clearing Agencies, which should 
further align risks and promote robust management at the Clearing 
Agencies.
    Fourth, the proposal to update the Pricing Formula to (i) no longer 
exclude a portion of the retained earnings of the Clearing Agencies, 
and (ii) change the basis of the formula from DTCC's book value to its 
tangible book value will more accurately reflect the actual liquidation 
value of DTCC. By more accurately reflecting the liquidation value of 
DTCC, shareholders can more accurately account for the value of their 
shares and payments that they may make or receive in a future 
reallocation of Common Shares. Thus, the Mandatory and Voluntary 
Shareholders can better assess their financial position, promoting 
stability of the broader financial system.
    Fifth, the proposal to allow for more than one reallocation of 
Common Shares among Common Shareholders per year will enable DTCC to 
contemporaneously align ownership of Common Shares with Common 
Shareholders' usage of the Clearing Agencies as needed. Similar to the 
proposed change to the Allocation Formula, discussed above, the ability 
to allocate Common Shares more often helps ensure that ownership of the 
Clearing Agencies more accurately reflects use of the Clearing 
Agencies, which should further promote robust risk management at the 
Clearing Agencies.
    Sixth, the technical and conforming changes to the Shareholders 
Agreement will make the Shareholders Agreement more consistent, 
current, and clear, which promotes a more safe and sound execution of 
the agreement by DTCC and its applicable Members.

Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act,\22\ that the Commission does not object to 
advance notices SR-FICC-2014-810, SR-NSCC-2014-811, and SR-DTC-2014-
812, as amended, and that FICC, NSCC, and DTC be and hereby are 
authorized to implement the changes contained in their respective 
advance notices as of the date of this notice.
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    \22\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2015-01791 Filed 1-29-15; 8:45 am]
BILLING CODE 8011-01-P


