
[Federal Register Volume 81, Number 142 (Monday, July 25, 2016)]
[Notices]
[Pages 48482-48485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-17445]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78358; File No. SR-DTC-2016-004]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving Proposed Rule Change To Establish a Link With Euroclear

July 19, 2016.
    On June 3, 2016, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') proposed rule 
change SR-DTC-2016-004 pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ to 
establish a link (``EB Link'') between DTC and Euroclear Bank SA/NV 
(``EB''). The proposed rule change was published for comment in the 
Federal Register on June 16, 2016.\3\ The Commission did not receive 
any comment letters on the proposed rule change. 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\ See Securities Exchange Act Release No. 78031 (June 10, 
2016), 81 FR 39303 (June 16, 2016) (SR-DTC-2016-004).
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I. Description of the Proposed Rule Change

    The following is a description of the proposed rule change, as 
provided primarily by DTC:
    The proposed rule change consists of amendments to the Rules, By-
Laws and Organization Certificate of The Depository Trust Company (the 
``Rules'') \4\ in order to add new Rule 34 (EB Link) to establish EB 
Link between DTC and EB for DTC Participants that are also EB 
participants (``CP Participants'') to use Securities held at DTC for EB 
Collateral Transactions (as defined below). The proposed Rule 34 
specifies the Accounts, Free Deliveries, and the terms and conditions 
that together comprise collateral positioning (``Collateral 
Positioning'' or ``CP'') for CP Participants. The proposed rule change 
will: (i) Allow CP Participants to designate a sub-account for 
Collateral Positioning (a ``CP Sub-Account'') of Securities selected by 
the CP Participant (the ``CP Securities'') to Deliver to EB; and (ii) 
establish the Securities Account of EB (the ``EB Account'') on the 
books of DTC to receive and hold such CP Securities. DTC understands 
that EB will then credit such CP Securities to an account it maintains 
on its books for such CP Participant for use in transfers on the books 
of EB (``EB Collateral Transactions'') in connection with EB's 
collateral management services (``EB CMS''), as described below.\5\
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    \4\ Each capitalized term not otherwise defined herein has its 
respective meaning as set forth in the Rules, available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
    \5\ On May 9, 2016, EB filed an application with the Commission 
on Form CA-1, seeking to amend its existing exemption from clearing 
agency registration by expanding its existing exemption to authorize 
EB to offer EB CMS to its U.S. participants for U.S. equities (the 
``EB CA-1 Amendment''). DTC understands that the EB CA-1 Amendment 
is necessary for EB to offer EB CMS, and consequently, the DTCC 
Euroclear Global Collateral Ltd. (``DEGCL'') Inventory Management 
Service (``DEGCL IMS''), to U.S. participants for U.S. equities. 
Commission approval of this proposed rule change to add new Rule 34 
(EB Link) will have no effect on the authority of EB pursuant to the 
EB CA-1 Amendment. In addition, this proposed rule change provides 
that it will not be implemented until the EB CA-1 Amendment is 
approved by the Commission.
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(i) Background

(a) New Regulations Require Better Access to and Management of 
Securities Collateral
    New and enhanced regulatory requirements are leading derivative and 
financing counterparties to seek increased efficiency in the 
availability and deployment of collateral and streamlined margin 
processing. More specifically, the phase-in period of the Basel III 
liquidity rules,\6\ as well as recent regulatory changes by the 
Commodity Futures Trading Commission,\7\ the U.S. prudential 
regulators,\8\ European Market Infrastructure Regulation,\9\ and the 
Basel

[[Page 48483]]

Committee on Banking Supervision (``BCBS'') and the International 
Organization of Securities Commissions (``IOSCO''),\10\ have resulted 
in increased capital requirements, mandatory central clearing of more 
derivatives transactions, and new margining rules for bilateral trades, 
driving a significant increased demand for high quality collateral.
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    \6\ Basel Committee on Banking Supervision, Basel III: A global 
framework for more resilient banks and the banking system, December 
2010 and revised June 2011; Basel Committee on Banking Supervision, 
Basel III: The Liquidity Coverage Ratio and liquidity risk 
monitoring tools, January 2013; Basel Committee on Banking 
Supervision, Basel III: The net stable funding ratio, October 2014, 
available at www.bis.org/bcbs/basel3.htm.
    \7\ Margin Requirements for Uncleared Swaps for Swap Dealers and 
Major Swap Participants, 81 FR 635 (January 6, 2016); 17 CFR parts 
23 and 140.
    \8\ Margin and Capital Requirements for Covered Swap Entities, 
80 FR 74840 (November 30, 2015); 12 CFR parts 45, 237, 349, 624 and 
1221. The U.S. prudential regulators include: Office of the 
Comptroller of the Currency--Treasury, Board of Governors of the 
Federal Reserve System, Federal Deposit Insurance Corporation, Farm 
Credit Administration, and the Federal Housing Finance Agency.
    \9\ European Supervisory Authorities' (ESAs) Final Draft 
Regulatory Technical Standards on risk-mitigation techniques for 
OTC-derivative contracts not cleared by a CCP under Article 11(15) 
of Regulation (EU) No 648/2012 (EMIR), available at https://www.eba.europa.eu/documents/10180/1398349/RTS+on+Risk+Mitigation+Techniques+for+OTC+contracts+%28JC-2016-+18%29.pdf/fb0b3387-3366-4c56-9e25-74b2a4997e1d.
    \10\ BCBS-IOSCO, Margin requirements for non-centrally cleared 
derivatives (March 2015), available at http://www.bis.org/bcbs/publ/d317.htm.
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    These regulatory changes further include requirements for initial 
margin for counterparties as well as a reduction or removal of 
thresholds for variation margin.\11\ It is expected that the inclusion 
of initial margin will significantly increase the amount of collateral 
required and will create additional margin calls by affected 
counterparties. In addition, it is expected that the removal or 
reduction of thresholds for variation margin will mean any changes in 
underlying valuations may trigger increased margin calls requiring 
market participants to hold additional collateral available for 
posting. Also, these regulatory changes include new restrictions on 
eligible collateral, requiring the use of highly liquid assets, 
prescribed haircuts, segregation requirements, as well as a prohibition 
on rehypothecation for initial margin. Given these forthcoming 
requirements, counterparties will need to access and deploy collateral 
more effectively.
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    \11\ Initial margin means money, securities, or property posted 
by a party to a swap as performance bond to cover potential future 
exposures arising from changes in the market value of the position. 
Variation margin means a payment made by or collateral posted by a 
party to a swap to cover the current exposure arising from changes 
in the market value of the position since the trade was executed or 
the previous time the position was marked to market. See 17 CFR 
23.700.
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(b) Proposed Rule Change Will Support DEGCL IMS
    DEGCL is a United Kingdom (``UK'') joint venture of DTCC and 
Euroclear S.A./N.V. (``Euroclear''), authorized by the Financial 
Conduct Authority (``FCA'') in the UK as a ``service company'' \12\ in 
accordance with applicable law of the UK. DEGCL was formed for the 
purpose of offering global information, record keeping, and processing 
services for derivatives collateral transactions and other types of 
financing transactions. DEGCL seeks to provide services to its users, 
including buy-side and sell-side financial institutions, in meeting 
their risk management and regulatory requirements for the holding and 
exchange of collateral, as required by these new regulatory 
requirements.
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    \12\ DEGCL was authorized as a ``service company'' by the FCA on 
March 29, 2016. A ``service company,'' as defined in the FCA 
Handbook, Glossary, is: ``[A] firm whose only permitted activities 
are making arrangements with a view to transactions in investments, 
and agreeing to carry on that regulated activity, and whose Part 4A 
permission: (a) Incorporates a limitation substantially to the 
effect that the firm carry on regulated activities only with market 
counterparties or intermediate customers; and (b) includes 
requirements substantially to the effect that the firm must not: (i) 
Guarantee, or otherwise accept responsibility for, the performance, 
by a participant in arrangements made by the firm in carrying on 
regulated activities, of obligations undertaken by that participant 
in connection with those arrangements; or (ii) approve any financial 
promotion on behalf of any other person or any specified class of 
persons; or (iii) in carrying on its regulated activities, provide 
services otherwise than in accordance with documents (of a kind 
specified in the requirement) provided by the firm to the FCA.'' FCA 
Handbook, Glossary, available at https://www.handbook.fca.org.uk/handbook/glossary.
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    In particular, DEGCL IMS will address the increased demand for 
cross-border availability of securities collateral, some of which may 
be held at DTC. The purpose of DEGCL IMS is to offer to its users a 
more global view of their collateral assets and support cross-border 
mobility and to integrate information and record keeping for collateral 
use of Securities held at DTC and EB.
    DEGCL IMS will be operated by EB and other entities in the 
Euroclear group, as the service provider to DEGCL, in accordance with 
appropriate agreements among these parties and in compliance with 
applicable regulatory requirements. There is no direct relationship 
between DTC and DEGCL IMS. DEGCL IMS will be offered to any financial 
institution that is both a DTC Participant and a participant of EB that 
has elected to use EB CMS (``EB Collateral Participant'').

(ii) EB Link and Collateral Positioning Will Offer Global Collateral 
Mobility for Securities Held at DTC by CP Participants

    The proposed rule change will establish the EB Link between DTC and 
EB through which a CP Participant could Deliver Securities from its 
Account to its CP Sub-Account and, from there, to the EB Account at 
DTC. The object is for EB to then credit the Securities to an account 
of the CP Participant on the books of EB for use in EB CMS.
    For purposes of the EB Link, EB has become a Participant of 
DTC,\13\ in order to establish the EB Account to which CP Securities 
will be credited. Accordingly, EB will act in two capacities: (i) On 
its own behalf as a Participant of DTC, to maintain the EB Account in 
which CP Securities may be held, so that EB may effect book entry 
transfers of those Securities on its own books and records; and (ii) on 
behalf of each CP Participant as the representative (the ``CP 
Representative'') of such CP Participant, to provide instructions to 
DTC on the CP Participant's behalf for the Delivery of CP Securities 
from the CP Sub-Account, and to receive certain information (x) once 
each Business Day, identifying the CP Securities that are credited to 
the CP Sub-Account at the time of the report (the ``CP Securities 
Report''), and (y) that specified CP Securities have been Delivered 
into or out of the CP Sub-Account, and/or that an instruction has been 
given to DTC to Deliver specified CP Securities out of the CP Sub-
Account, as applicable (the ``Delivery Information'').
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    \13\ EB was accepted as a Participant on February 18, 2016. Upon 
approval of EB as a Participant, EB, like any other Participant, 
signed a Participant's Agreement pursuant to which it agreed, inter 
alia, that the DTC Rules shall be a part of the terms and conditions 
of every contract or transaction that EB may make or have with DTC, 
including the Regulation Systems Compliance and Integrity testing 
requirements set forth in DTC Rule 2 (Participants and Pledgees).
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    The CP Participant will authorize EB as its CP Representative, to 
provide instructions on its behalf, and to receive the CP Securities 
Report and Delivery Information. Both the CP Securities Report and 
Delivery Information will include, with respect to the CP Securities 
specified therein, the following information: (i) The CUSIP, ISIN, or 
other identification number of the CP Securities; and (ii) the number 
of shares or other units or principal amount of the CP Securities.
    The CP Participant will instruct DTC to Deliver the CP Securities 
from the CP Participant's Account to its CP Sub-Account. After the CP 
Securities have been credited to the CP Sub-Account, EB, as CP 
Representative, may instruct DTC to make a Free Delivery of the 
appropriate CP Securities from the CP Sub-Account to the EB 
Account.\14\ All Deliveries from the CP Participant's Account to its CP 
Sub-Account and from the CP Sub-Account to the EB

[[Page 48484]]

Account will be Free Deliveries, subject to DTC risk management 
controls.\15\
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    \14\ EB will determine the eligibility of CP Securities for 
DEGCL IMS on the basis of the eligibility profile provided to DEGCL 
by its user counterparties, and subject to EB's securities 
eligibility rules.
    \15\ DTC risk management controls, including Collateral Monitor 
and Net Debit Cap (as defined in Rule 1, Section 1 of the DTC Rules, 
supra note 4), are designed so that DTC may complete system-wide 
settlement notwithstanding the failure to settle of its largest 
Participant or affiliated family of Participants. The Collateral 
Monitor tests whether a Receiver has adequate collateral to secure 
the amount of its net debit balance. The Net Debit Cap limits the 
Net Debit Balance of a Participant so that it cannot exceed DTC 
liquidity resources for settlement. Pursuant to these controls under 
applicable DTC Rules and Procedures, any Delivery instruction order 
to a CP Sub-Account that will cause the CP Participant to exceed its 
Net Debit Cap (which a Free Delivery should not) or to have 
insufficient DTC collateral to secure its obligations to DTC (which 
is possible), will not be processed by DTC. CP Deliveries will be 
processed in the same order and with the same priority as otherwise 
provided in the DTC Rules and Procedures (i.e., such Deliveries will 
not take precedence over any other type of Delivery in the DTC 
system).
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    After CP Securities have been credited to the EB Account, it will 
then be EB's responsibility to credit them to an account at EB 
maintained for the CP Participant, as an EB Collateral Participant. The 
originating CP Participant, as an EB Collateral Participant, may then 
choose to hold the CP Securities in an account at EB, pending use in 
any EB Collateral Transaction, or transfer the CP Securities on the 
books of EB to one or more other EB Collateral Participants in 
connection with EB Collateral Transactions.
    EB may instruct DTC to Deliver CP Securities from the EB Account to 
the CP Sub-Account from which such CP Securities originated. This may 
occur if: (i) The CP Participant as a DEGCL IMS user changes its DEGCL 
IMS inventory profile in a way that renders the CP Securities credited 
to the EB Account no longer eligible for DEGCL IMS; (ii) the CP 
Participant submits a Delivery instruction for such CP Securities; \16\ 
or (iii) the CP Securities are subject to a corporate action or tax 
event.\17\
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    \16\ If at any time a CP Participant has a pending instruction 
for Delivery of Securities that had been Delivered from its CP Sub-
Account to the EB Account, DTC understands that EB will instruct DTC 
to Deliver those Securities from the EB Account back to the CP Sub-
Account from which they originated.
    \17\ If EB does not Deliver the CP Securities back to the CP 
Sub-Account of the CP Participant prior to the applicable record 
date for a corporate action, the corporate action will be processed 
by DTC in the ordinary course to EB as the Participant holding the 
Securities on the Record Date.
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    EB may also instruct DTC to Deliver CP Securities from the EB 
Account to the Securities Account of a Participant that EB has 
designated as its global custodian (``EB Global Custodian'').\18\ The 
CP Securities held in the EB Account are held there exclusively for EB 
Collateral Transactions, so this proposed rule change will require EB 
to Deliver CP Securities from the EB Account to the Securities Account 
of the EB Global Custodian in connection with any liquidation of those 
CP Securities.
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    \18\ EB has not been a direct DTC Participant or had a 
Securities Account at DTC prior to this proposed EB Link; EB has 
held Eligible Securities only as an indirect participant through a 
bank that it characterizes as its ``global custodian'' and that is a 
DTC Participant. The EB Link is proposed to be established for, and 
expressly limited to, Collateral Positioning in connection with EB 
Collateral Transactions. EB may continue to use the EB Global 
Custodian for other EB transactions and to hold non-CP Securities 
indirectly at DTC.
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(iii) Proposed Rule Change

    The proposed rule change will add Rule 34 to the DTC Rules, to 
provide for:
    1. The establishment and maintenance of a CP Sub-Account for each 
CP Participant;
    2. The establishment and maintenance of the EB Account for the 
purpose of Collateral Positioning Deliveries;
    3. Free Deliveries of CP Securities by a CP Participant from an 
Account of the CP Participant to its CP Sub-Account, and back to (A) 
the originating Account of the CP Participant; (B) another Non-CP 
Account of the CP Participant; or (C) the Account of another 
Participant;
    4. Free Deliveries of CP Securities as instructed by EB, as CP 
Representative of the CP Participant, from the CP Sub-Account of the CP 
Participant to the EB Account;
    5. Free Deliveries of CP Securities as instructed by EB from the EB 
Account to (A) the CP Sub-Account from which such CP Securities 
originated, or (B) the Account of the EB Global Custodian;
    6. Information to be provided by DTC to EB, as CP Representative of 
the CP Participant, specifically, the CP Securities Report and the 
Delivery Information;
    7. The requirement that Deliveries provided in the proposed rule 
change must be Free Deliveries, and shall be subject to the terms and 
provisions of the DTC Rules and the Procedures applicable to the 
Deliveries of Securities, including DTC risk management controls; and
    8. DTC's disclaimer of liability to: (A) Any CP Participant as a 
result of acting on instructions from EB or providing EB the Delivery 
Information or the CP Securities Report pursuant to Rule 34; (B) EB as 
a result of acting on instructions from a CP Participant pursuant to 
Rule 34; (C) EB or any CP Participant as a result of any loss relating 
to Rule 34, unless caused directly by DTC's gross negligence, willful 
misconduct, or violation of Federal securities laws for which there is 
a private rights of action; and (D) to any third party for any reason, 
including without limitation, DEGCL.

(iv) Implementation Timeframe

    This proposed rule change will be implemented on the later of: (i) 
The date of Commission approval of this filing; and (ii) the date of a 
Commission order approving the EB CA-1 Amendment, authorizing EB to 
offer EB CMS to U.S. EB Collateral Participants for U.S. equities. 
Participants will be advised of the implementation date through the 
issuance of a DTC Important Notice.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \19\ 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 rules and regulations thereunder applicable 
to such organization. The Commission believes that the proposal is 
consistent with Section 17A(b)(3)(F) of the Act \20\ and Rule 17Ad-
22(d)(7) thereunder,\21\ as described in detail below.
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    \19\ 15 U.S.C. 78s(b)(2)(C).
    \20\ 15 U.S.C. 78q-1(b)(3)(F).
    \21\ 17 CFR 240.17Ad-22(d)(7).
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(i) Consistency With Section 17A(b)(3)(F)

    Section 17A(b)(3)(F) of the Act \22\ requires, among other things, 
that the rules of the clearing agency be 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. The Commission understands that EB is currently an 
indirect Participant holding DTC Eligible Securities through one or 
more other financial institutions that are direct Participants. With 
this proposal, a direct link will be established between DTC and EB 
(i.e., the EB Link), through which Participants can more directly 
deploy their securities collateral for EB Collateral Transactions. As 
such, transactions will be processed with EB more efficiently by 
eliminating a step in processing such transactions, thus promoting 
prompt and accurate transactions and the safeguarding of securities and 
funds in the custody or control of DTC, consistent with the 
requirements of the Act, in particular Section 17A(b)(3)(F), cited 
above.
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    \22\ 15 U.S.C. 78q-1(b)(3)(F).

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(ii) Consistency With Rule 17Ad-22(d)(7)

    Rule 17Ad-22(d)(7) under the Act \23\ requires a clearing agency, 
such as DTC, to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to evaluate the potential 
sources of risks that can arise when the clearing agency establishes 
links either cross-border or domestically to clear or settle trades, 
and ensure that the risks are managed prudently on an ongoing 
basis.\24\ In developing the proposed EB Link, DTC stated that it 
evaluated the risks that could arise by establishing a link with EB, a 
foreign central securities depository. DTC stated that it determined 
that all Deliveries between CP Sub-Accounts and the EB Account will be 
subject to DTC risk management controls and will be limited to Free 
Deliveries. Therefore, there should be minimum risk, in particular, no 
funds settlement risk, associated with EB Link.
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    \23\ 17 CFR 240.17Ad-22(d)(7).
    \24\ 17 CFR 240.17Ad-22(d)(7).
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III. 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 \25\ and the 
rules and regulations thereunder.
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    \25\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that proposed rule change SR-DTC-2016-004 be, and hereby is, 
approved.\26\
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    \26\ 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.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-17445 Filed 7-22-16; 8:45 am]
BILLING CODE 8011-01-P


