[Federal Register Volume 83, Number 58 (Monday, March 26, 2018)]
[Notices]
[Pages 12978-12980]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06020]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82914; File No. SR-DTC-2017-022]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change To Amend the Loss Allocation Rules 
and Make Other Changes

March 20, 2018.

I. Introduction

    On December 18, 2017, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-DTC-2017-022 
to amend the loss allocation rules and make other changes (``Proposed 
Rule Change'').\3\ The Proposed Rule Change was published for comment 
in the Federal Register on January 8, 2018.\4\ The Commission did not 
receive any comments on the Proposed Rule Change. On February 8, 2018, 
pursuant to Section 19(b)(2)(A)(ii)(I) of the Act,\5\ the Commission 
designated a longer period within which to approve, disapprove, or 
institute proceedings to determine whether to approve or disapprove the 
Proposed Rule Change.\6\ This order institutes proceedings, pursuant to 
Section 19(b)(2)(B) of the Act,\7\ to determine whether to approve or 
disapprove the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On December 18, 2017, DTC filed this proposal as an advance 
notice (SR-DTC-2017-804) with the Commission pursuant to Section 
806(e)(1) of the Payment, Clearing, and Settlement Supervision Act 
of 2010 (``Clearing Supervision Act'') and Rule 19b-4(n)(1)(i) of 
the Act (``Advance Notice''). On January 24, 2018, the Commission 
extended the review period of the Advance Notice for an additional 
60 days pursuant to Section 806(e)(1)(H) of the Clearing Supervision 
Act. See 12 U.S.C. 5465(e)(1); 17 CFR 240.19b-4(n)(1)(i); 12 U.S.C. 
5465(e)(1)(H); and Securities Exchange Act Release No. 82582 
(January 24, 2018), 83 FR 4297 (January 30, 2018) (SR-DTC-2017-804).
    \4\ Securities Exchange Act Release No. 82426 (January 2, 2018), 
83 FR 913 (January 8, 2018) (SR-DTC-2017-022) (``Notice'').
    \5\ 15 U.S.C. 78s(b)(2)(A)(ii)(I).
    \6\ Securities Exchange Act Release No. 82670 (February 8, 
2018), 83 FR 6626 (February 14, 2018) (SR-DTC-2017-022; SR-FICC-
2017-022; SR-NSCC-2017-018).
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change \8\
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    \8\ The Commission notes that the Summary of the Proposed Rule 
Change section does not describe the Proposed Rule Change in its 
entirety. Other changes include, but are not limited to, the 
clarification of defined terms, various aspects of the settlement 
charges, and detailed procedures of the loss allocation. The 
complete Proposed Rule Change can be found in the Notice. See 
Notice, supra note 4. In addition, the text of the Proposed Rule 
Change is available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
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    As described in the Notice,\9\ DTC proposes to revise Rule 4 
(Participants Fund and Participants Investment) to primarily change (i) 
the application of the Participants Fund in a Participant Default and 
for settlement,\10\ (ii) the loss allocation process,\11\ (iii) the 
loss allocation governance for Non-Default Events,\12\ and (iv) the 
retention time for the Actual Participants Fund Deposit of former 
participants.\13\ Furthermore, the Proposed Rule change would revise 
Rule 1 (Definitions; Governing Law) to add cross-references to terms 
that would be defined in proposed Rule 4.\14\
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    \9\ The description of the Proposed Rule Change herein is based 
on the statements prepared by DTC in the Notice. See Notice, supra 
note 4. Each capitalized term not otherwise defined herein has its 
respective meaning either (i) as set forth in the Rules, By-Laws and 
Organization Certificate of DTC, available at http://www.dtcc.com/legal/rules-and-procedures.aspx, or (ii) as set forth in the Notice.
    \10\ See Notice, supra note 4, at 914-15.
    \11\ See id. at 915-18.
    \12\ See id. at 918.
    \13\ See id. at 918-19.
    \14\ See id. at 919.
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A. Application of the Participants Fund in a Participant Default and 
for Settlement

    DTC proposes to revise Rule 4, Section 4 (Application of 
Participants Fund Deposits of Non-Defaulting Participants) to address 
the situation where the application of the Actual Participants Fund 
Deposit of a Participant that has failed to settle is insufficient to 
complete settlement among non-defaulting Participants on any Business 
Day.\15\ In such a situation, proposed Section 4 would state that the 
Participants Fund shall constitute a liquidity resource which may be 
applied by DTC in such amounts as DTC shall determine, in its sole 
discretion, to fund settlement among non-defaulting Participants.\16\
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    \15\ Id. at 915.
    \16\ Id. at 919.

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[[Page 12979]]

B. Loss Allocation Process

    DTC proposes to revise Rule 4, Section 5 (Loss Allocation 
Waterfall) to address the loss allocation of losses and liabilities 
relating to or arising out of a Default Loss Event or a Declared Non-
Default Loss Event.\17\ DTC proposes four key changes to its loss 
allocation process.
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    \17\ Id. at 920-21.
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    First, DTC proposes to replace the current discretionary 
application of an unspecified amount of retained earnings and undivided 
profits with a mandatory, defined Corporate Contribution.\18\ The 
proposed Corporate Contribution would be defined as an amount equal to 
50 percent of DTC's General Business Risk Capital Requirement as of the 
end of the calendar quarter immediately preceding the Event Period.\19\ 
DTC's General Business Risk Capital Requirement is, at a minimum, equal 
to the regulatory capital that DTC is required to maintain in 
compliance with Rule 17Ad-22(e)(15) under the Act.\20\
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    \18\ Id. at 916.
    \19\ Id.
    \20\ Id.; 17 CFR 240.17Ad-22(e)(15).
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    Second, DTC proposes to introduce an Event Period to address the 
allocation of losses and liabilities (i) relating to or arising out of 
a Participant Default, where DTC has ceased to act for such 
Participant, and/or (ii) otherwise incident to the business of DTC, as 
determined in proposed Rule 4.\21\ DTC proposes to group together 
Default Loss Events and Declared Non-Default Loss Events occurring in a 
period of 10 Business Days for purposes of allocating losses to 
Participants.\22\
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    \21\ Notice, supra note 4, at 916.
    \22\ Id.
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    Third, DTC proposes to introduce a loss allocation ``round,'' which 
would mean ``a series of loss allocations relating to an Event Period, 
the aggregate amount of which is limited by the sum of the Loss 
Allocation Caps of affected Participants.'' \23\ DTC would notify 
Participants subject to a loss allocation of the amounts being 
allocated to them.\24\ Participants would be required to pay the 
requisite amount no later than the second Business Day following the 
issuance of such notice.\25\
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    \23\ Id. at 917.
    \24\ Id.
    \25\ Id.
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    Fourth, the Proposed Rule Change would continue to provide 
Participants the opportunity to limit their loss allocation exposure by 
offering a termination option, but the associated withdrawal process 
would be modified.\26\ As proposed, if a Participant provides notice of 
its election to terminate its business with DTC as provided, in 
general, its maximum payment obligation with respect to any loss 
allocation round would be the amount of its Aggregate Requirement 
Deposit and Investment, as fixed on the first day of the Event Period, 
plus 100 percent of the amount thereof.\27\ Participants would have 
five Business Days from the issuance of the first Loss Allocation 
Notice in any round to decide whether to terminate its participation 
with DTC, and thereby benefit from its Loss Allocation Cap.\28\
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    \26\ Id. at 917-18.
    \27\ Id. at 917.
    \28\ Id. at 918.
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C. Loss Allocation Governance for Non-Default Events

    DTC proposes to clarify the governance around Non-Default Loss 
Event that would trigger loss allocation to Participants. Specifically, 
DTC proposes to require its Board of Directors to determine that there 
is a non-default loss that (i) may present a significant and 
substantial loss or liability, so as to materially impair the ability 
to DTC to provide clearance and settlement services in an orderly 
manner, and (ii) will potentially generate losses to be mutualized 
among the Participants in order to ensure that DTC may continue to 
offer clearance and settlement services in an orderly manner.\29\
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    \29\ Id. at 918.
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D. Retention Time for the Actual Participants Fund Deposit of a Former 
Participant

    DTC proposes to reduce its retention time for the Actual 
Participants Fund Deposit of a Former Participant in certain situations 
from four years to two years.\30\ Currently Rule 4 provides that, in 
general, after three months from when a Person has ceased to be 
Participant, DTC shall return to such Person the amount of the Actual 
Participants Fund Deposit of the former Participant of such payment 
provided that DTC receives such indemnities and guarantees as DTC deems 
satisfactory with respect to the matured and contingent obligations of 
the former Participant to DTC.\31\ Otherwise, within four years after a 
Person has ceased to be a Participant, DTC shall return to such Person 
the amount of the Actual Participants Fund Deposit of the former 
Participant.\32\ DTC proposes to reduce the four year retention period 
to two years, and preserve all other requirements relating to the 
return of the Actual Participants Fund Deposit.\33\
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    \30\ Id. at 918-19.
    \31\ Id. at 918.
    \32\ Id.
    \33\ Id.
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III. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \34\ to determine whether the Proposed Rule 
Change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the Proposed Rule Change. Institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the Proposed Rule Change, 
and provide the Commission with arguments to support the Commission's 
analysis as to whether to approve or disapprove the Proposed Rule 
Change.
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    \34\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\35\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the Proposed 
Rule Change's consistency with Section 17A of the Act,\36\ and the 
rules thereunder, including the following provisions:
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    \35\ Id.
    \36\ 15 U.S.C. 78q-1.
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     Section 17A(b)(3)(F) of the Act,\37\ which requires, among 
other things, that the rules of a clearing agency, such as DTC, must be 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions, 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, and to protect investors and the public 
interest;
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    \37\ 15 U.S.C. 78q-1(b)(3)(F).
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     Rule 17Ad-22(e)(7)(i) under the Act,\38\ which requires a 
covered clearing agency, such as DTC, to establish, implement, maintain 
and enforce written policies and procedures reasonably designed to, 
among other things, effectively measure, monitor, and manage the 
liquidity risk that arises in or is borne by the covered clearing 
agency, including measuring, monitoring, and managing its settlement 
and funding flows on an ongoing and timely basis, and its use of 
intraday

[[Page 12980]]

liquidity by, at a minimum, maintaining sufficient liquid resources to 
effect same-day and, where appropriate, intraday and multiday 
settlement of payment obligations with a high degree of confidence 
under a wide range of foreseeable stress scenarios that includes, but 
is not limited to, the default of the participant family that would 
generate the largest aggregate payment obligation for the covered 
clearing agency in extreme but plausible market conditions;
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    \38\ 17 CFR 240.17Ad-22(e)(1).
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     Rule 17Ad-22(e)(13) under the Act, which requires, in 
general, a covered clearing agency, such as DTC, to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to ensure the covered clearing agency has the 
authority and operational capacity to take timely action to contain 
losses and liquidity demands and continue to meet its obligations.
     Rule 17Ad-22(e)(23)(i) under the Act,\39\ which requires a 
covered clearing agency, such as DTC, to establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
publicly disclose all relevant rules and material procedures, including 
key aspects of its default rules and procedures.
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    \39\ 17 CFR 240.17Ad-22(e)(23)(i).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the Proposed Rule Change. In particular, the Commission invites 
the written views of interested persons concerning whether the Proposed 
Rule Change is consistent with Section 17A(b)(3)(F) of the Act,\40\ 
Rule 17Ad-22(e)(7)(i) under the Act,\41\ Rule 17Ad-22(e)(13) under the 
Act,\42\ Rule 17Ad-22(e)(23)(i) under the Act,\43\ or any other 
provision of the Act, or the rules and regulations thereunder. Although 
there do not appear to be any issues relevant to approval or 
disapproval that would be facilitated by an oral presentation of views, 
data, and arguments, the Commission will consider, pursuant to Rule 
19b-4(g) under the Act,\44\ any request for an opportunity to make an 
oral presentation.\45\
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    \40\ 15 U.S.C. 78q-1(b)(3)(F).
    \41\ 17 CFR 240.17Ad-22(e)(7)(i).
    \42\ 17 CFR 240.17Ad-22(e)(13).
    \43\ 17 CFR 240.17Ad-22(e)(23)(i).
    \44\ 17 CFR 240.19b-4(g).
    \45\ Section 19(b)(2) of the Act grants to the Commission 
flexibility to determine what type of proceeding--either oral or 
notice and opportunity for written comments--is appropriate for 
consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the Proposed Rule Change should be approved 
or disapproved by April 16, 2018. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
April 30, 2018.
    The Commission asks that commenters address the sufficiency of 
DTC's statements in support of the Proposed Rule Change, which are set 
forth in the Notice,\46\ in addition to any other comments they may 
wish to submit about the Proposed Rule Change.
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    \46\ See Notice, supra note 4.
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    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 [email protected]. Please include 
File Number SR-DTC-2017-022 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
    All submissions should refer to File Number SR-DTC-2017-022. 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 website (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 website 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 the filing also will be available for inspection 
and copying at the principal office of DTC and on The Depository Trust 
& Clearing Corporation's website (http://dtcc.com/legal/sec-rule-filings.aspx). All comments received will be posted without change. 
Persons submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-DTC-2017-022 and should be 
submitted on or before April 16, 2018. Rebuttal comments should be 
submitted by April 30, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\47\
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    \47\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-06020 Filed 3-23-18; 8:45 am]
 BILLING CODE 8011-01-P


