[Federal Register Volume 83, Number 169 (Thursday, August 30, 2018)]
[Notices]
[Pages 44393-44403]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18864]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83950; File No. SR-DTC-2017-804]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of No Objection to an Advance Notice, as Modified by Amendment 
No. 1, To Amend the Loss Allocation Rules and Make Other Changes

August 27, 2018.
    On December 18, 2017, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') advance 
notice SR-DTC-2017-804 pursuant to Section 806(e)(1) of Title VIII of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act entitled 
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 (``Act'') \2\ to amend DTC's 
application of the Participants Fund, loss allocation rules, voluntary 
retirement process for Participants, the return of certain deposits to 
former Participants, and make other conforming and technical 
changes.\3\ The

[[Page 44394]]

advance notice was published for comment in the Federal Register on 
January 30, 2018.\4\ In that publication, the Commission also 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.\5\ On 
April 10, 2018, the Commission required additional information from DTC 
pursuant to Section 806(e)(1)(D) of the Clearing Supervision Act,\6\ 
which tolled the Commission's period of review of the advance notice 
until 60 days from the date the information required by the Commission 
was received by the Commission.\7\ On June 28, 2018, DTC filed 
Amendment No. 1 to the advance notice to amend and replace in its 
entirety the advance notice as originally filed on December 18, 
2017.\8\ On July 6, 2018, the Commission received a response to its 
request for additional information in consideration of the advance 
notice, which, in turn, added a further 60 days to the review period 
pursuant to Section 806(e)(1)(E) and (G) of the Clearing Supervision 
Act.\9\ The Commission did not receive any comments. This publication 
serves as notice that the Commission does not object to the proposed 
changes set forth in the advance notice, as modified by Amendment No. 1 
(hereinafter, ``Advance Notice'').
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ On December 18, 2017, DTC filed the advance notice as 
proposed rule change SR-DTC-2017-022 with the Commission pursuant to 
Section 19(b)(1) of the Act and Rule 19b-4 thereunder (``Proposed 
Rule Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, 
respectively. The Proposed Rule Change was published in the Federal 
Register on January 8, 2018. Securities Exchange Act Release No. 
82426 (January 2, 2018), 83 FR 913 (January 8, 2018) (SR-DTC-2017-
022). On February 8, 2018, 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. 
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). On March 20, 2018, the Commission instituted 
proceedings to determine whether to approve or disapprove the 
Proposed Rule Change. Securities Exchange Act Release No. 82914 
(March 20, 2018), 83 FR 12978 (March 26, 2018) (SR-DTC-2017-022). On 
June 25, 2018, the Commission designated a longer period for 
Commission action on the proceedings to determine whether to approve 
or disapprove the Proposed Rule Change. Securities Exchange Act 
Release No. 83510 (June 25, 2018), 83 FR 30791 (June 29, 2018) (SR-
DTC-2017-022, SR-FICC-2017-022, SR-NSCC-2017-018). On June 28, 2018, 
DTC filed Amendment No. 1 to the Proposed Rule Change, which was 
published in the Federal Register on July 19, 2018. Securities 
Exchange Act Release No. 83629 (July 13, 2018), 83 FR 34246 (July 
19, 2018) (SR-DTC-2017-022). DTC submitted a courtesy copy of 
Amendment No. 1 to the Proposed Rule Change through the Commission's 
electronic public comment letter mechanism. Accordingly, Amendment 
No. 1 to the Proposed Rule Change has been publicly available on the 
Commission's website at https://www.sec.gov/rules/sro/dtc.htm since 
June 29, 2018. The Commission did not receive any comments. The 
proposal, as set forth in both the advance notice and the Proposed 
Rule Change, each as modified by Amendments No. 1, shall not take 
effect until all required regulatory actions are completed.
    \4\ Securities Exchange Act Release No. 82582 (January 24, 
2018), 83 FR 4297 (January 30, 2018) (SR-DTC-2017-804) (``Notice'').
    \5\ Pursuant to Section 806(e)(1)(H) of the Clearing Supervision 
Act, the Commission may extend the review period of an advance 
notice for an additional 60 days, if the changes proposed in the 
advance notice raise novel or complex issues, subject to the 
Commission providing the clearing agency with prompt written notice 
of the extension. 12 U.S.C. 5465(e)(1)(H). The Commission found that 
the advance notice raised complex issues and, accordingly, extended 
the review period of the advance notice for an additional 60 days 
until April 17, 2018. See Notice, supra note 4.
    \6\ 12 U.S.C. 5465(e)(1)(D).
    \7\ See 12 U.S.C. 5465(e)(1)(E)(ii) and (G)(ii); see Memorandum 
from the Office of Clearance and Settlement Supervision, Division of 
Trading and Markets, titled ``Commission's Request for Additional 
Information,'' available at http://www.sec.gov/rules/sro/dtc-an.shtml.
    \8\ Securities Exchange Act Release No. 83746 (July 31, 2018), 
83 FR 38357 (August 6, 2018) (SR-DTC-2017-804) (``Notice of 
Amendment No. 1''). DTC submitted a courtesy copy of Amendment No. 1 
to the advance notice through the Commission's electronic public 
comment letter mechanism. Accordingly, Amendment No. 1 to the 
advance notice has been publicly available on the Commission's 
website at http://www.sec.gov/rules/sro/dtc-an.shtml since June 29, 
2018.
    \9\ 12 U.S.C. 5465(e)(1)(E) and (G); see Memorandum from the 
Office of Clearance and Settlement Supervision, Division of Trading 
and Markets, titled ``Response to the Commission's Request for 
Additional Information,'' available at http://www.sec.gov/rules/sro/dtc-an.shtml.
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I. Description of the Advance Notice

    The Advance Notice consists of proposed changes to DTC's Rules, By-
Laws and Organization Certificate of DTC (``Rules'') \10\ in order to 
(1) modify the application of the Participants Fund; (2) modify the 
loss allocation process; (3) align DTC's loss allocation rule with the 
three clearing agencies of The Depository Trust & Clearing Corporation 
(``DTCC'')--Fixed Income Clearing Corporation (``FICC'') (including the 
Government Securities Division (``FICC/GSD'') and the Mortgage-Backed 
Securities Division (``FICC/MBSD'')), National Securities Clearing 
Corporation (``NSCC''), and DTC (collectively, the ``DTCC Clearing 
Agencies''); \11\ (4) modify the voluntary retirement process; (5) 
reduce the time within which DTC is required to return a former 
Participant's Actual Participants Fund Deposit; and (6) make conforming 
and technical changes. Each of these proposed changes is described 
below. A detailed description of the specific rule text changes 
proposed in this Advance Notice can be found in the Notice of Amendment 
No. 1.\12\
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    \10\ 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.
    \11\ DTCC is a user-owned and user-governed holding company and 
is the parent company of DTC, FICC, and NSCC. DTCC operates on a 
shared services model with respect to the DTCC Clearing Agencies. 
Most corporate functions are established and managed on an 
enterprise-wide basis pursuant to intercompany agreements under 
which it is generally DTCC that provides a relevant service to a 
DTCC Clearing Agency.
    \12\ See Notice of Amendment No. 1, supra note 8.
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A. Application of the Participants Fund

    Under current Section 3 of Rule 4, if a Participant is obligated to 
DTC and fails to satisfy any obligation, DTC may, in such order and in 
such amounts as DTC shall determine in its sole discretion: (1) Apply 
some or all of the Actual Participants Fund Deposit of such Participant 
to such obligation; (2) pledge some or all of the shares of Preferred 
Stock of such Participant to its lenders as collateral security for a 
loan under the End-of-Day Credit Facility; \13\ and/or (3) sell some or 
all of the shares of Preferred Stock of such Participant to other 
Participants (who shall be required to purchase such shares pro rata 
their Required Preferred Stock Investments at the time of such 
purchase), and apply the proceeds of such sale to satisfy such 
obligation.
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    \13\ DTC states that it maintains a 364-day committed revolving 
line of credit with a syndicate of commercial lenders, renewed every 
year. DTC further states that the committed aggregate amount of the 
End-of-Day Credit Facility (currently $1.9 billion) together with 
the Participants Fund constitute DTC's liquidity resources for 
settlement. Based on these amounts, DTC sets Net Debit Caps that 
limit settlement obligations.
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    Current Rule 4 provides a single set of tools and a common process 
for the use of the Participants Fund for both (1) liquidity purposes to 
complete settlement among non-defaulting Participants, if one or more 
Participants fails to settle, and (2) the satisfaction of losses and 
liabilities due to Participant defaults \14\ or non-default losses that 
are incident to the business of DTC.\15\ For both liquidity \16\ and 
loss scenarios, current Section 4 of Rule 4 provides that an 
application of the Participants Fund would be apportioned among 
Participants ratably in accordance with their Required Participants 
Fund Deposits, less any additional amount

[[Page 44395]]

that a Participant was required to Deposit to the Participants Fund 
pursuant to Section 2 of Rule 9(A).\17\ Current Section 4 of Rule 4 
provides that if DTC incurs a loss or liability which is not satisfied 
by charging the Participant responsible for causing the loss or 
liability, DTC may, in its sole discretion and in such amount as DTC 
would determine, charge the existing retained earnings and undivided 
profits of DTC.
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    \14\ DTC states that the failure of a Participant to satisfy its 
settlement obligation constitutes a liability to DTC. Insofar as DTC 
undertakes to complete settlement among Participants other than the 
Participant that failed to settle, that liability may give rise to 
losses as well.
    \15\ Section 1(f) of Rule 4 defines the term ``business'' with 
respect to DTC as ``the doing of all things in connection with or 
relating to the Corporation's performance of the services specified 
in the first and second paragraphs of Rule 6 or the cessation of 
such services.'' Supra note 10.
    \16\ DTC states that, in contrast to NSCC and FICC, DTC is not a 
central counterparty and does not guarantee obligations of its 
membership. DTC states that the Participants Fund is a mutualized 
pre-funded liquidity and loss resource. Therefore, in contrast to 
NSCC and FICC, DTC does not have an obligation to ``repay'' the 
Participants Fund, and the application of the Participants Fund does 
not convert to a loss.
    \17\ Section 2 of Rule 9(A) provides, in part, ``[a]t the 
request of the Corporation, a Participant or Pledgee shall 
immediately furnish the Corporation with such assurances as the 
Corporation shall require of the financial ability of the 
Participant or Pledgee to fulfill its commitments and shall conform 
to any conditions which the Corporation deems necessary for the 
protection of the Corporation, other Participants or Pledgees, 
including deposits to the Participants Fund . . .'' Supra note 10. 
Pursuant to the proposed change, the additional amount that a 
Participant is required to Deposit to the Participants Fund pursuant 
to Section 2 of Rule 9(A) would be defined as an ``Additional 
Participants Fund Deposit.''
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    Under the current Rules, after the Participants Fund is applied 
pursuant to Section 4, DTC must promptly notify each Participant and 
the Commission of the amount applied and the reasons therefor. Current 
Rule 4 further requires Participants whose Actual Participants Fund 
Deposits have been ratably charged to restore their Required 
Participants Fund Deposits, if such charges create a deficiency. Such 
payments are due upon demand. Iterative pro rata charges relating to 
the same loss or liability are permitted in order to satisfy the loss 
or liability.
    Rule 4 currently provides that a Participant may, within 10 
Business Days after receipt of notice of any pro rata charge, notify 
DTC of its election to terminate its business with DTC, and the 
exposure of the terminating Participant for pro rata charges would be 
capped at the greater of (1) the amount of its Aggregate Required 
Deposit and Investment, as fixed immediately prior to the time of the 
first pro rata charge, plus 100 percent of the amount thereof, or (2) 
the amount of all prior pro rata charges attributable to the same loss 
or liability with respect to which the Participant has not timely 
exercised its right to terminate.
    Proposed Section 3 of Rule 4 would provide that a Participant 
Default occurs when a Participant becomes a Defaulting Participant 
pursuant to Rule 9(B) or is otherwise obligated to DTC pursuant to the 
Rules and Procedures, and fails to satisfy any such obligation. The 
proposal would clarify that DTC would apply some or all of the Actual 
Participants Fund Deposit of a Defaulting Participant to its obligation 
to satisfy the Participant Default, to the extent necessary to 
eliminate such obligation. If such application would be insufficient to 
satisfy such obligation, DTC may, in its sole discretion, to the extent 
necessary to satisfy such obligation (1) pledge some or all of the 
shares of Preferred Stock of such Participant to its lenders as 
collateral security for a loan under the End-of-Day Credit Facility, 
and apply the proceeds of such loan to satisfy such obligation; and/or 
(2) sell some or all of the shares of Preferred Stock of such 
Participant to other Participants (who shall be required to purchase 
such shares pro rata their Required Preferred Stock Investments at the 
time of such purchase), and apply the proceeds of such sale to satisfy 
such obligation.
    The proposed change would also amend and add provisions to separate 
use of the Participants Fund as a liquidity resource to complete 
settlement, reflected in proposed Section 4 of Rule 4, and for loss 
allocation, reflected in proposed Section 5 of Rule 4. DTC states that 
the proposed changes reinforce the distinction between the mechanisms 
to complete settlement on a Business Day, and to mutualize losses that 
may result from a failure to settle or other loss-generating events. 
DTC also states that the change would more closely align the loss 
allocation provisions of proposed Section 5 of Rule 4 to similar 
provisions of the NSCC and FICC rules, to the extent appropriate.
    Proposed Section 4 would address the situation of a Defaulting 
Participant failure to settle if the application of the Actual 
Participants Fund Deposit of that Defaulting Participant, pursuant to 
proposed Section 3, is not sufficient to complete settlement among 
Participants other than the Defaulting Participant (each, a ``non-
defaulting Participant'').\18\
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    \18\ As described above, proposed Rule 4 splits the liquidity 
and loss provisions to more closely align to similar loss allocation 
provisions in NSCC and FICC rules. Pursuant to the proposed change, 
DTC would also align, where appropriate, the liquidity and loss 
provisions within proposed Rule 4. DTC would retain the existing 
Rule 4 concepts of calculating the ratable share of a Participant, 
charging each non-defaulting Participant a pro rata share of an 
application of the Participants Fund to complete settlement, 
providing notice to Participants of such charge, and providing each 
Participant the option to cap its liability for such charges by 
electing to terminate its business with DTC. However, pursuant to 
the proposed change, DTC would modify these concepts and certain 
associated processes to more closely align with the analogous 
proposed loss allocation provisions in proposed Rule 4 (e.g., Loss 
Allocation Notice, Loss Allocation Termination Notification Period, 
and Loss Allocation Cap).
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    Proposed Section 4 would expressly state that the Participants Fund 
shall constitute a liquidity resource which may be applied by DTC, in 
such amounts as it may determine, in its sole discretion, to fund 
settlement among non-defaulting Participants in the event of the 
failure of a Defaulting Participant to satisfy its settlement 
obligation on any Business Day. Such an application of the Participants 
Fund would be charged ratably to the Actual Participants Fund Deposits 
of the non-defaulting Participants on that Business Day. In connection 
with the use of the Participants Fund as a liquidity resource to 
complete settlement when a Participant fails to settle, the proposed 
rule would introduce the term ``pro rata settlement charge,'' in order 
to distinguish application of the Participants Fund to fund settlement 
from pro rata loss allocation charges that would be established in 
proposed Section 5 of Rule 4.
    The pro rata settlement charge for each non-defaulting Participant 
would be based on the ratio of its Required Participants Fund Deposit 
to the sum of the Required Participants Fund Deposits of all such 
Participants on that Business Day (excluding any Additional 
Participants Fund Deposits in both the numerator and denominator of 
such ratio). The calculation of each non-defaulting Participant's pro 
rata settlement charge would be similar to the current Section 4 
calculation of a pro rata charge except that it would not include the 
current distinction for common members of another clearing agency 
pursuant to a Clearing Agency Agreement.\19\ DTC states that it would 
be based on the Required Participants Fund Deposits as fixed on the 
Business Day of the application of the Participants Fund, as opposed to 
the current language ``at the time the loss or liability was 
discovered.'' \20\ The proposed change would require DTC, following the 
application of the Participants Fund to complete settlement, to notify 
each Participant and the Commission of the charge and the reasons 
therefor (``Settlement Charge Notice'').
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    \19\ Rule 4, Section 4(a)(1), supra note 10. DTC states that it 
has determined that this option is unnecessary because, in practice, 
DTC would never have liability under a Clearing Agency Agreement 
that exceeds the excess assets of the Participant that defaulted.
    \20\ DTC states that this change would provide an objective date 
that is more appropriate for the application of the Participants 
Fund to complete settlement, because the ``time the loss or 
liability was discovered'' would necessarily have to be the day the 
Participants Fund was applied to complete settlement.
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    The proposed change would provide each non-defaulting Participant 
an opportunity to elect to terminate its business with DTC and thereby 
cap its exposure to further pro rata settlement

[[Page 44396]]

charges. As proposed, Participants would have five Business Days \21\ 
from the issuance of the first Loss Allocation Notice in any round to 
decide whether to terminate its business with DTC, and thereby benefit 
from its Settlement Charge Cap. In addition, the proposal would change 
the beginning date of such notification period from the receipt of the 
notice to the date of the issuance of the Settlement Charge Notice.\22\ 
A Participant that elects to terminate its business with DTC would, 
subject to its cap, remain responsible for (1) its pro rata settlement 
charge that was the subject of the Settlement Charge Notice, and (2) 
all other pro rata settlement charges until the Participant Termination 
Date. The proposed cap on pro rata settlement charges of a Participant 
that has timely notified DTC of its election to terminate its business 
with DTC would be the amount of its Aggregate Required Deposit and 
Investment, as fixed on the day of the pro rata settlement charge that 
was the subject of the Settlement Charge Notice, plus 100 percent of 
the amount thereof (``Settlement Charge Cap''). The proposed Settlement 
Charge Cap would be no greater than the current cap.\23\
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    \21\ DTC states a five Business Day period would be sufficient 
for a Participant to decide whether to give notice to terminate its 
business with DTC in response to a settlement charge. In addition, a 
five Business Day pro rata settlement charge notification period 
would conform to the proposed loss allocation notification period in 
this proposed change and in the proposed changes for NSCC and FICC. 
See infra note 34.
    \22\ DTC states that setting the start date of the notification 
period to an objective date would enhance transparency and provide a 
common timeframe to all affected Participants.
    \23\ Current Section 8 of Rule 4 provides for a cap that is 
equal to the greater of (a) the amount of its Aggregate Required 
Deposit and Investment, as fixed immediately prior to the time of 
the first pro rata charge, plus 100 percent of the amount thereof, 
or (b) the amount of all prior pro rata charges attributable to the 
same loss or liability with respect to which the Participant has not 
timely exercised its right to limit its obligation as provided 
above. Supra note 10. The alternative limit in clause (b) would be 
eliminated in proposed Section 8(a) in favor of a single defined 
standard.
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    DTC states that the pro rata application of the Actual Participants 
Fund Deposits of non-defaulting Participants to complete settlement 
when there is a Participant Default is not the allocation of a loss. A 
pro rata settlement charge would relate solely to the completion of 
settlement. The proposed loss allocation concepts described below would 
not apply to pro rata settlement charges.\24\
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    \24\ DTC states that proposed Sections 3, 4 and 5 of Rule 4 
together relate, in whole or in part, to what may happen when there 
is a Participant Default. Proposed Section 3 is designed to be the 
basic provision of remedies if a Participant fails to satisfy an 
obligation to DTC. Proposed Section 4 is designed to be a specific 
remedy for a failure to settle by a Defaulting Participant (i.e., a 
specific type of Participant Default). Proposed Section 5 is 
designed to be a remedial provision for a Participant Default when, 
additionally, DTC ceases to act for the Participant and there are 
remaining losses or liabilities. DTC states that if a Participant 
Default occurs, the application of proposed Section 3 would be 
required, while the application of proposed Section 4 would be at 
the discretion of DTC. Whether or not proposed Section 4 has been 
applied, once there is a loss due to a Participant Default and DTC 
ceases to act for the Participant, proposed Section 5 would apply.
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B. Changes to the Loss Allocation Process

    DTC's current loss allocation rules address the use of the 
Participants Fund for both liquidity purposes to complete settlement 
among non-defaulting Participants, and for the satisfaction of losses 
and liabilities due to Participant defaults or certain other losses or 
liabilities incident to the business of DTC, together. For both 
liquidity and loss scenarios, current Section 4 of Rule 4 provides that 
DTC may apply some or all of the Actual Participants Fund Deposits of 
all other Participants, and/or charge the existing retained earnings 
and undivided profits of DTC. Currently, if DTC applies the Actual 
Participants Fund Deposits, any loss or liability will be apportioned 
among Participants ratably in accordance with their Required 
Participants Fund Deposits, less any additional amount that a 
Participant was required to Deposit to the Participants Fund pursuant 
to Section 2 of Rule 9(A). Current Section 4 of Rule 4 provides that if 
there is an unsatisfied loss or liability, DTC may, in its sole 
discretion, charge the existing retained earnings and undivided profits 
of DTC.
    DTC proposes to change the manner in which each of the aspects of 
the loss allocation process described above would be employed. The 
proposal would clarify or adjust certain elements, and introduce 
certain new loss allocation concepts, as further discussed below. In 
addition, the proposal would address the loss allocation process as it 
relates to losses arising from or relating to multiple default or non-
default events in a short period of time, also as described below.
    DTC proposes five key changes to enhance DTC's loss allocation 
process. Specifically, DTC proposes to make changes regarding (1) the 
Corporate Contribution, (2) the Event Period, (3) the loss allocation 
round and notice, (4) the loss allocation termination notice and cap, 
and (5) the governance around non-default losses, each of which is 
discussed below.
(1) Corporate Contribution
    Current Section 4 of Rule 4 provides that if there is an 
unsatisfied loss or liability, DTC may, in its sole discretion and in 
such amount as DTC would determine, charge the existing retained 
earnings and undivided profits of DTC. Under the proposed change, DTC 
would replace the discretionary application of an unspecified amount of 
retained earnings and undivided profits with a mandatory, defined 
Corporate Contribution. The proposed Corporate Contribution would apply 
to losses and liabilities that are incurred by DTC with respect to an 
Event Period, whether arising from a Default Loss Event or Declared 
Non-Default Loss Event, before the allocation of losses to 
Participants.\25\
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    \25\ The proposed change would not apply the Corporate 
Contribution if the Participants Fund is used with respect to a pro 
rata settlement charge. However, if, after a Participant Default, 
the proceeds of the sale of the Collateral of the Participant are 
insufficient to repay the lenders under the End-of-Day Credit 
Facility, and DTC has ceased to act for the Participant, the 
shortfall would be a loss arising from a Default Loss Event, the 
Corporate Contribution would be applied.
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    The proposed Corporate Contribution would be defined to be an 
amount equal to 50 percent of DTC's General Business Risk Capital 
Requirement.\26\ DTC's General Business Risk Capital Requirement, as 
defined in DTC's Clearing Agency Policy on Capital Requirements,\27\ 
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.\28\ 
The proposed Corporate Contribution would be held in addition to DTC's 
General Business Risk Capital Requirement. Proposed Rule 4 also would 
further clarify that DTC can voluntarily apply amounts greater than the 
Corporate Contribution against any loss or liability (including non-
default losses) of DTC, if the Board of Directors, in its sole 
discretion, believes such to be appropriate under the factual situation 
existing at the time. As proposed, if the Corporate Contribution is 
fully or partially used against a loss or liability relating to an 
Event Period, the Corporate Contribution would be reduced to the 
remaining unused amount, if any, during the following 250

[[Page 44397]]

Business Days in order to permit DTC to replenish the Corporate 
Contribution.\29\ Under the proposal, Participants would receive notice 
of any such reduction to the Corporate Contribution.
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    \26\ DTC calculates its General Business Risk Capital 
Requirement as the amount equal to the greatest of (1) an amount 
determined based on its general business profile, (2) an amount 
determined based on the time estimated to execute a recovery or 
orderly wind-down of DTC's critical operations, and (3) an amount 
determined based on an analysis of DTC's estimated operating 
expenses for a six month period.
    \27\ See Securities Exchange Act Release No. 81105 (July 7, 
2017), 82 FR 32399 (July 13, 2017) (SR-DTC-2017-003, SR-NSCC-2017-
004, SR-FICC-2017-007).
    \28\ 17 CFR 240.17Ad-22(e)(15).
    \29\ DTC states that 250 Business Days would be a reasonable 
estimate of the time frame that DTC would be required to replenish 
the Corporate Contribution by equity in accordance with DTC's 
Clearing Agency Policy on Capital Requirements, including a 
conservative additional period to account for any potential delays 
and/or unknown exigencies in times of distress.
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(2) Event Period
    DTC states that in order to clearly define the obligations of DTC 
and its Participants regarding loss allocation and to balance the need 
to manage the risk of sequential loss events against Participants' need 
for certainty concerning their maximum loss allocation exposures, DTC 
proposes to introduce the concept of an Event Period to the Rules to 
address the losses and liabilities that may arise from or relate to 
multiple Default Loss Events and/or Declared Non-Default Loss Events 
that arise in quick succession. Specifically, the proposal would group 
Default Loss Events and Declared Non-Default Loss Events occurring 
within a period of 10 Business Days (``Event Period'') for purposes of 
allocating losses to Participants in one or more rounds, subject to the 
limits of loss allocation as explained below.\30\
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    \30\ DTC states that having a 10 Business Day Event Period would 
provide a reasonable period of time to encompass potential 
sequential Default Loss Events and/or Declared Non-Default Loss 
Events that are likely to be closely linked to an initial event and/
or a severe market dislocation episode, while still providing 
appropriate certainty for Participants concerning their maximum 
exposure to allocated losses with respect to such events.
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    In the case of a loss or liability arising from or relating to a 
Default Loss Event, an Event Period would begin on the day on which DTC 
notifies Participants that it has ceased to act for a Participant (or 
the next Business Day, if such day is not a Business Day). In the case 
of a Declared Non-Default Loss Event, an Event Period would begin on 
the day that DTC notifies Participants of the Declared Non-Default Loss 
Event (or the next Business Day, if such day is not a Business Day). If 
a subsequent Default Loss Event or Declared Non-Default Loss Event 
occurs during an Event Period, any losses or liabilities arising out of 
or relating to any such subsequent event would be resolved as losses or 
liabilities that are part of the same Event Period, without extending 
the duration of such Event Period. An Event Period may include both 
Default Loss Events and Declared Non-Default Loss Events, and there 
would not be separate Event Periods for Default Loss Events or Declared 
Non-Default Loss Events occurring during overlapping 10 Business Day 
periods. The amount of losses that may be allocated by DTC, subject to 
the required Corporate Contribution, and to which a Loss Allocation Cap 
would apply for any Participant that elects to terminate its business 
with DTC in respect of a loss allocation round, would include any and 
all losses from any Default Loss Events and any Declared Non-Default 
Loss Events during the Event Period, regardless of the amount of time, 
during or after the Event Period, required for such losses to be 
crystallized and allocated.\31\
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    \31\ Each Participant that is a Participant on the first day of 
an Event Period would be obligated to pay its pro rata share of 
losses and liabilities arising out of or relating to each Default 
Loss Event (other than a Default Loss Event with respect to which it 
is the CTA Participant) and each Declared Non-Default Loss Event 
occurring during the Event Period.
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    DTC states that in order to enhance clarity, the proposed change 
would define ``Default Loss Event'' as the determination by DTC to 
cease to act for a Participant (``CTA Participant'') pursuant to Rule 
10, Rule 11, or Rule 12. The proposed change also would define 
``Declared Non-Default Loss Event'' as the determination by the Board 
of Directors that a loss or liability incident to the clearance and 
settlement business of DTC may be a significant and substantial loss or 
liability that may materially impair the ability of DTC to provide 
clearance and settlement services in an orderly manner and will 
potentially generate losses to be mutualized among Participants in 
order to ensure that DTC may continue to offer its services in an 
orderly manner.
(3) Loss Allocation Round and Loss Allocation Notice
    Under the proposal, a loss allocation ``round'' 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 (a ``round cap''). When the aggregate amount of losses 
allocated in a round equals the round cap, any additional losses 
relating to the applicable Event Period would be allocated in one or 
more subsequent rounds, in each case subject to a round cap for that 
round. DTC may continue the loss allocation process in successive 
rounds until all losses from the Event Period are allocated among 
Participants that have not submitted a Termination Notice in accordance 
with proposed Section 6(b) of Rule 4.
    Each loss allocation would be communicated to Participants by the 
issuance of a notice that advises each Participant of the amount being 
allocated to it (``Loss Allocation Notice''). The calculation of each 
Participant's pro rata allocation charge would be similar to the 
current Section 4 calculation of a pro rata charge except that it would 
not include the current distinction for common members of another 
clearing agency pursuant to a Clearing Agency Agreement.\32\ In 
addition, it would be based on the Required Participants Fund Deposits 
as fixed on the first day of the Event Period, as opposed to the 
current language ``at the time the loss or liability was discovered.'' 
\33\
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    \32\ See supra note 19.
    \33\ DTC states that this change would provide an objective date 
that is appropriate for the new proposed loss allocation process, 
which would be designed to allocate aggregate losses relating to an 
Event Period, rather than one loss at a time.
---------------------------------------------------------------------------

    Each Loss Allocation Notice would specify the relevant Event Period 
and the round to which it relates. Multiple Loss Allocation Notices may 
be issued with respect to each round, up to the round cap. The first 
Loss Allocation Notice in any first, second, or subsequent round would 
expressly state that such Loss Allocation Notice reflects the beginning 
of the first, second, or subsequent round, as the case may be, and that 
each Participant in that round has five Business Days \34\ from the 
issuance of such first Loss Allocation Notice for the round (such 
period, a ``Loss Allocation Termination Notification Period'') to 
notify DTC of its election to terminate its business with DTC (such 
notification, whether with respect to a Settlement Charge Notice or 
Loss Allocation Notice, a ``Termination Notice'') pursuant to proposed 
Section 8(b) of Rule 4, and thereby benefit from its Loss Allocation 
Cap. In other words, the proposed change would link the Loss Allocation 
Cap to a round in order to provide Participants the option to limit 
their loss allocation exposure at the beginning of each round. After a 
first round of loss allocations with respect to an Event Period, only 
Participants that have not

[[Page 44398]]

submitted a Termination Notice, in accordance with proposed Section 
8(b) of Rule 4, would be subject to further loss allocation with 
respect to that Event Period.
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    \34\ Current Section 8 of Rule 4 provides that the time period 
for a Participant to give notice of its election to terminate its 
business with DTC in respect of a pro rata charge is 10 Business 
Days after receiving notice of a pro rata charge. DTC states that it 
is appropriate to shorten such time period from 10 Business Days to 
five Business Days because DTC needs timely notice of which 
Participants would not be terminating their business with DTC for 
the purpose of calculating the loss allocation for any subsequent 
round. DTC states that five Business Days would provide Participants 
with sufficient time to decide whether to cap their loss allocation 
obligations by terminating their business with DTC.
---------------------------------------------------------------------------

    DTC's current loss allocation provisions provide that if a charge 
is made against a Participant's Actual Participants Fund Deposits, and 
as result thereof the Participant's deposit is less than its Required 
Participants Fund Deposit, the Participant will, upon demand by DTC, be 
required to replenish its deposit to eliminate the deficiency within 
such time as DTC shall require. Under the proposal, Participants would 
receive two Business Days' notice of a loss allocation, and be required 
to pay the requisite amount no later than the second Business Day 
following the issuance of such notice.\35\
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    \35\ DTC states that allowing Participants two Business Days to 
satisfy their loss allocation obligations would provide Participants 
sufficient notice to arrange funding, if necessary, while allowing 
DTC to address losses in a timely manner.
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(4) Termination Notice and Loss Allocation Cap
    DTC's current Rules provide that a Participant may terminate its 
business with DTC by notifying DTC. DTC proposes to enhance the 
termination procedure to clarify and align with the rules of NSCC and 
FICC, where appropriate. As proposed, Participants would have five 
Business Days from the issuance of the first Loss Allocation Notice in 
any round to decide whether to terminate its business with DTC, and 
thereby benefit from its Loss Allocation Cap. The start of each round 
\36\ would allow a Participant the opportunity to notify DTC of its 
election to terminate its business with DTC after satisfaction of the 
losses allocated in such round. In addition, DTC would also change the 
beginning date of such notification period from the receipt of the 
notice to the date of the issuance of the first Loss Allocation Notice 
for any round. Pursuant to the proposed change, a Participant would be 
able to elect to terminate its membership by following the requirements 
in proposed Section 8(b) of Rule 4: (1) Specify in its Termination 
Notice an effective date of termination (``Participant Termination 
Date''), which date shall be no later than 10 Business Days following 
the last day of the applicable Loss Allocation Termination Notification 
Period; (2) cease all activities and use of DTC's services other than 
activities and services necessary to terminate the business of the 
Participant with DTC; and (3) ensure that all activities and use of DTC 
services by such Participant cease on or prior to the Participant 
Termination Date.
---------------------------------------------------------------------------

    \36\ Under the proposal, a Participant would only have the 
opportunity to terminate after the first Loss Allocation Notice in 
any round, and not after each Loss Allocation Notice in any round.
---------------------------------------------------------------------------

    Under the current Rules, the exposure of the terminating 
Participant for pro rata charges would be capped at the greater of (1) 
the amount of its Aggregate Required Deposit and Investment, as fixed 
immediately prior to the time of the first pro rata charge, plus 100 
percent of the amount thereof, or (2) the amount of all prior pro rata 
charges attributable to the same loss or liability with respect to 
which the Participant has not timely exercised its right to terminate. 
Under the proposal, if a Participant timely provides notice of its 
election to terminate its business with DTC as provided in proposed 
Section 8(b) of Rule 4, its maximum payment obligation with respect to 
any loss allocation round would be the amount of its Aggregate Required 
Deposit and Investment, as fixed on the first day of the Event Period, 
plus 100 percent of the amount thereof (``Loss Allocation Cap'').\37\ 
DTC may retain the entire Actual Participants Fund Deposit of a 
Participant subject to loss allocation, up to the Participant's Loss 
Allocation Cap. If a Participant's Loss Allocation Cap exceeds the 
Participant's then-current Required Participants Fund Deposit, the 
Participant would still be required to pay for the excess amount.
---------------------------------------------------------------------------

    \37\ The alternative limit in clause (b) would be eliminated in 
proposed Section 8(b) in favor of a single defined standard. See 
supra note 23.
---------------------------------------------------------------------------

    Specifically, the first round and each subsequent round of loss 
allocation would allocate losses up to a round cap of the aggregate of 
all Loss Allocation Caps of those Participants included in the round. 
If a Participant provides notice of its election to terminate its 
business with DTC, it would be subject to loss allocation in that 
round, up to its Loss Allocation Cap. If the first round of loss 
allocation does not fully cover DTC's losses, a second round will be 
noticed to those Participants that did not elect to terminate in the 
previous round; however, the amount of any second or subsequent round 
cap may differ from the first or preceding round cap because there may 
be fewer Participants in a second or subsequent round if Participants 
elect to terminate their business with DTC as provided in proposed 
Section 8(b) of Rule 4 following the first Loss Allocation Notice in 
any round.
(5) Declared Non-Default Loss Event
    The Rules currently permit DTC to apply the Participants Fund to 
non-default losses,\38\ provided that such loss or liability is 
incident to the business of DTC. DTC proposes to enhance the governance 
around non-default losses that would trigger loss allocation to 
Participants by specifying that the Board of Directors would have to 
determine that there is a non-default loss that may be a significant 
and substantial loss or liability that may materially impair the 
ability of DTC to provide clearance and settlement services in an 
orderly manner and would 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. The 
proposed change would provide that DTC would then be required to 
promptly notify Participants of this determination, which would be 
referred to as a ``Declared Non-Default Loss Event.'' In addition, DTC 
proposes to specify that (1) the Corporate Contribution would apply to 
losses or liabilities arising from a Default Loss Event or a Declared 
Non-Default Loss Event, and (2) the loss allocation process would be 
applied in the same manner regardless of whether a loss arises from a 
Default Loss Event or a Declared Non-Default Loss Event.
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    \38\ Non-default losses may arise from events such as damage to 
physical assets, a cyber-attack, or custody and investment losses.
---------------------------------------------------------------------------

C. Voluntary Retirement Process

    Section 1 of Rule 2 provides that a Participant may terminate its 
business with DTC by notifying DTC in the appropriate manner.\39\ To 
provide additional transparency to Participants with respect to the 
voluntary retirement of a Participant, and to align, where appropriate, 
with the proposed rule changes of NSCC and FICC with respect to 
voluntary termination, DTC is proposing to add proposed Section 6(a) to 
Rule 4, which would be titled, ``Upon Any Voluntary Retirement.'' 
Proposed

[[Page 44399]]

Section 6(a) of Rule 4 would (1) clarify the requirements for a 
Participant that wants to voluntarily terminate its business with DTC, 
and (2) address the situation where a Participant submits a Voluntary 
Retirement Notice and subsequently receives a Settlement Charge Notice 
or the first Loss Allocation Notice in a round on or prior to the 
Voluntary Retirement Date.
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    \39\ Section 1 of Rule 2 provides, in relevant part, that ``[a] 
Participant may terminate its business with the Corporation by 
notifying the Corporation as provided in Sections 7 or 8 of Rule 4 
or, if for a reason other than those specified in said Sections 7 
and 8, by notifying the Corporation thereof; the Participant shall, 
upon receipt of such notice by the Corporation, cease to be a 
Participant. In the event that a Participant shall cease to be a 
Participant, the Corporation shall thereupon cease to make its 
services available to the Participant, except that the Corporation 
may perform services on behalf of the Participant or its successor 
in interest necessary to terminate the business of the Participant 
or its successor with the Corporation, and the Participant or its 
successor shall pay to the Corporation the fees and charges provided 
by these Rules with respect to services performed by the Corporation 
subsequent to the time when the Participant ceases to be a 
Participant.'' Supra note 10. DTC is proposing to modify the 
provision to clarify that the termination would be subject to 
proposed Section 6 of Rule 4.
---------------------------------------------------------------------------

    Specifically, DTC is proposing that if a Participant elects to 
terminate its business with DTC pursuant to Section 1 of Rule 2 for 
reasons other than those specified in proposed Section 8 (a ``Voluntary 
Retirement''), the Participant would be required to: (1) Provide a 
written notice of such termination to DTC (``Voluntary Retirement 
Notice''), as provided for in Section 1 of Rule 2; (2) specify in the 
Voluntary Retirement Notice a desired date for the termination of its 
business with DTC (``Voluntary Retirement Date''); (3) cease all 
activities and use of DTC services other than activities and services 
necessary to terminate the business of the Participant with DTC; and 
(4) ensure that all activities and use of DTC services by the 
Participant cease on or prior to the Voluntary Retirement Date.\40\ 
Proposed Section 6(a) of Rule 4 would provide that if the Participant 
fails to comply with the requirements of proposed Section 6(a), its 
Voluntary Retirement Notice would be deemed void.
---------------------------------------------------------------------------

    \40\ Typically, a Participant would ultimately submit a notice 
after having ceased its transactions and transferred all securities 
out of its Account.
---------------------------------------------------------------------------

    Further, proposed Section 6(a) of Rule 4 would provide that if a 
Participant submits a Voluntary Retirement Notice and subsequently 
receives a Settlement Charge Notice or the first Loss Allocation Notice 
in a round on or prior to the Voluntary Retirement Date, such 
Participant must timely submit a Termination Notice in order to benefit 
from its Settlement Charge Cap or Loss Allocation Cap, as the case may 
be. In such a case, the Termination Notice would supersede and void the 
pending Voluntary Retirement Notice submitted by the Participant.

D. Accelerated Return of Former Participant's Clearing Fund Deposit

    Current Rule 4 provides that after three months from when a Person 
has ceased to be a Participant, DTC shall return to such Person (or its 
successor in interest or legal representative) the amount of the Actual 
Participants Fund Deposit of the former Participant plus accrued and 
unpaid interest to the date of such payment (including any amount added 
to the Actual Participants Fund Deposit of the former Participant 
through the sale of the Participant's Preferred Stock), 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. Otherwise, within four years after a Person has 
ceased to be a Participant, DTC shall return to such Person (or its 
successor in interest or legal representative) the amount of the Actual 
Participants Fund Deposit of the former Participant plus accrued and 
unpaid interest to the date of such payment, except that DTC may offset 
against such payment the amount of any known loss or liability to DTC 
arising out of or related to the obligations of the former Participant 
to DTC.
    DTC proposes to reduce the time, after a Participant ceases to be a 
Participant, at which DTC would be required to return the amount of the 
Actual Participants Fund Deposit of the former Participant plus accrued 
and unpaid interest, whether the Participant ceases to be such because 
it elected to terminate its business with DTC in response to a 
Settlement Charge Notice or Loss Allocation Notice or otherwise. 
Pursuant to the proposed change, the time period would be reduced from 
four years to two years. All other requirements relating to the return 
of the Actual Participants Fund Deposit would remain the same.
    DTC states that the four year retention period was implemented at a 
time when there were more deposits and processing of physical 
certificates, as well as added risks related to manual processing, and 
related claims could surface many years after an alleged event. DTC 
states that the change to two years is appropriate because, currently, 
as DTC and the industry continue to move toward automation and 
dematerialization, claims typically surface more quickly. Therefore, 
DTC states that a shorter retention period of two years would be 
sufficient to maintain a reasonable level of coverage for possible 
claims arising in connection with the activities of a former 
Participant, while allowing DTC to provide some relief to former 
Participants by returning their Actual Participants Fund Deposits more 
quickly.

E. Conforming and Technical Changes

    DTC proposes to make various conforming and technical changes 
necessary to harmonize the remaining current Rules with the proposed 
changes. Such changes include, but are not limited to, (1) inserting, 
deleting, or changing various terms, sentences, or headings for clarity 
and consistency; (2) consolidating certain sections of the Rules for 
clarity; and (3) amending Rule 1 (Definitions; Governing Law) to add 
cross-references to proposed terms that would be defined in Rule 4.

II. Discussion and Commission Findings

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, its stated purpose is instructive: To 
mitigate systemic risk in the financial system and promote financial 
stability by, among other things, promoting uniform risk management 
standards for systemically important financial market utilities and 
strengthening the liquidity of systemically important financial market 
utilities.\41\
---------------------------------------------------------------------------

    \41\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------

    Section 805(a)(2) of the Clearing Supervision Act \42\ authorizes 
the Commission to prescribe risk management standards for the payment, 
clearing and settlement activities of designated clearing entities 
engaged in designated activities for which the Commission is the 
supervisory agency. Section 805(b) of the Clearing Supervision Act \43\ 
provides the following objectives and principles for the Commission's 
risk management standards prescribed under Section 805(a):
---------------------------------------------------------------------------

    \42\ 12 U.S.C. 5464(a)(2).
    \43\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

     To promote robust risk management;
     to promote safety and soundness;
     to reduce systemic risks; and
     to 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 \44\ and Section 17A of the 
Act \45\ (``Rule 17Ad-22'').\46\ Rule 17Ad-22 requires 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.\47\ Therefore, it is appropriate for the 
Commission to review proposed changes in advance notices against the 
objectives and principles of these risk management standards as 
described in Section 805(b) of the Clearing

[[Page 44400]]

Supervision Act \48\ and against Rule 17Ad-22.\49\
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    \44\ 12 U.S.C. 5464(a)(2).
    \45\ 15 U.S.C. 78q-1.
    \46\ 17 CFR 240.17Ad-22.
    \47\ Id.
    \48\ 12 U.S.C. 5464(b).
    \49\ 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------

A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes that the proposed changes in the Advance 
Notice are designed to help DTC promote robust risk management, promote 
safety and soundness, reduce systemic risks, and support the stability 
of the broader financial system as discussed below.
    The proposal would clarify that if a Participant fails to satisfy 
its obligations, such Participant's Actual Participants Fund Deposit 
would be used to eliminate any unpaid obligations of that Participant 
to DTC, as described above. Further, the proposal would modify the 
application of the Participants Fund, and clarify that the Participants 
Fund may be used (1) as a liquidity resource for DTC to fund settlement 
among non-defaulting Participants, and (2) to satisfy losses and 
liabilities of DTC in the loss allocation process. In addition, the 
proposal would add the term ``Participant Default'' to current Section 
3 to clarify that proposed Section 3 would apply when there is a 
failure of a Participant to satisfy any obligation to DTC. The proposal 
would expressly provide for the application of the Actual Participants 
Fund Deposit of the defaulting Participant to satisfy its unpaid 
obligations. The proposal would explicitly state that the Participants 
Fund shall constitute a liquidity resource which may be applied by DTC 
to fund settlement among non-defaulting Participants in the event of 
the failure of a Defaulting Participant to satisfy its settlement 
obligation. In addition, the proposal would provide two separate 
procedures to charge the Participants Fund: One to use it as a 
liquidity resource and another to pay for allocated losses.
    The proposal is designed to give authority explicitly to DTC to use 
the Participants Fund as a liquidity resource to fund settlement among 
non-defaulting Participants. With such clear authority to use the 
Participants Fund as a liquidity resource, DTC would have additional 
liquidity during a stress event, and thus be better able to manage its 
liquidity risks stemming from a Defaulting Participant. This access to 
liquidity during a stress event would help mitigate any risk to 
settlement finality due to DTC having insufficient funds to meet all 
its payment obligations to its Participants. As such, access to this 
liquidity would help to strengthen liquidity of DTC, which is 
designated as systemically important,\50\ and thereby support the 
stability of the broader financial system. Moreover, the Commission 
believes that these changes provide clarity to the application of the 
Participants Fund and would enable DTC and Participants to better 
anticipate and prepare for their potential exposures, which, in turn, 
would allow them to better manage their risk, thereby promoting robust 
risk management as well as safety and soundness.
---------------------------------------------------------------------------

    \50\ See infra note 52.
---------------------------------------------------------------------------

    In addition to the changes to the Participant Fund application, DTC 
proposes to make the following changes to its loss allocation process. 
First, DTC would establish a mandatory Corporate Contribution to be 
applied to DTC's losses and liabilities. The proposed Corporate 
Contribution would be defined to be an amount equal to 50 percent of 
DTC's General Business Risk Capital Requirement. The proposed changes 
also would clarify that the proposed Corporate Contribution would apply 
to both Default Loss Events and Declared Non-Default Loss Events. 
Moreover, the proposal specifies that if the Corporate Contribution is 
applied to a loss or liability relating to an Event Period, then for 
any subsequent Event Periods that occur during the 250 business days 
thereafter, the Corporate Contribution would be reduced to the 
remaining, unused portion of the Corporate Contribution. The Commission 
believes that these changes set clear expectations about how and when 
DTC's Corporate Contribution would be applied to help address a loss, 
and allow DTC to better anticipate and prepare for potential exposures 
that may arise during an Event Period.
    Second, as described above, DTC proposes to introduce the concept 
of an Event Period, which would group Default Loss Events and Declared 
Non-Default Loss Events occurring within a period of 10 Business Days 
for purposes of allocating losses to Participants in one or more 
rounds. Under the current Rules, every time DTC incurs a loss or 
liability, DTC will initiate its current loss allocation process by 
applying its retained earnings and allocating losses. The current Rules 
do not contemplate a situation where loss events occur in quick 
succession. Accordingly, even if multiple losses occur within a short 
period, the current Rules dictate that DTC start the loss allocation 
process separately for each loss event. Having multiple loss allocation 
calculations and notices from DTC and Termination Notices from 
Participants after multiple sequential loss events could cause 
operational risk to DTC, since multiple notices may cause confusion at 
a time of significant stress.
    The Commission believes that the proposed change to introduce an 
Event Period would improve upon the current loss allocation process 
described immediately above. Specifically, the introduction of an Event 
Period would provide a more defined and transparent structure than the 
current loss allocation process. Such an improved structure should 
enable both DTC and each Participant to more effectively manage the 
risks and potential financial obligations presented by sequential 
Default Loss Events and/or Declared Non-Default Loss Events that are 
likely to arise in quick succession, and could be closely linked to an 
initial event and/or market dislocation episode. In other words, the 
proposed Event Period structure should help clarify and define for both 
DTC and Participants how DTC would initiate a single defined loss 
allocation process to cover all loss events within 10 Business Days. As 
a result, all loss allocation calculation and notices from DTC and 
potential Termination Notices from Participants would be tied back to 
one Event Period instead of each individual loss event.
    Third, as described above, the proposal would improve upon the 
approach laid out in DTC's current Rules by providing for a loss 
allocation round, a Loss Allocation Notice process, a Termination 
Notice process, and a Loss Allocation Cap. A loss allocation round 
would be a series of loss allocations relating to an Event Period, the 
aggregate amount of which would be limited by the round cap. When the 
losses allocated in a round equals the round cap, any additional losses 
relating to the Event Period would be allocated in subsequent rounds 
until all losses from the Event Period are allocated among 
Participants. Each loss allocation would be communicated to 
Participants by the issuance of a Loss Allocation Notice. Each 
Participant in a loss allocation round would have five Business Days 
from the issuance of such first Loss Allocation Notice for the round to 
notify DTC of its election to terminate its business with DTC, and 
thereby benefit from its Loss Allocation Cap. The Loss Allocation Cap 
of a Participant would be the amount of its Aggregate Required Deposit 
and Investment, as fixed on the first day of the Event Period, plus 100 
percent of the amount thereof. Participants would have two Business 
Days after DTC issues a first round Loss Allocation Notice to pay the 
amount specified in such notice.

[[Page 44401]]

    The Commission believes that the changes to (1) establish a 
specific Event Period, (2) continue the loss allocation process in 
successive rounds, (3) clearly communicate with its Participants 
regarding their loss allocation obligations, and (4) effectively 
identify continuing Participants for the purpose of calculating loss 
allocation obligations in successive rounds, are designed to make DTC's 
loss allocation process more certain. In addition, the changes are 
designed to provide Participants with a clear set of procedures that 
operate within the proposed loss allocation structure, and provide 
increased predictability and certainty regarding Participants' 
exposures and obligations. Furthermore, by grouping all loss events 
within 10 Business Days, the loss allocation process relating to 
multiple loss events can be streamlined. With enhanced certainty, 
predictability, and efficiency, DTC would then be able to better manage 
its risks from loss events occurring in quick succession, and 
Participants would be able to better manage their risks by deciding 
whether and when to withdraw from membership and limit their exposures 
to DTC. Furthermore, the proposed changes are designed to reduce 
liquidity risk to Participants by providing a two-day window to arrange 
funding to pay for loss allocation, while still allowing DTC to address 
losses in a timely manner.
    Fourth, as described above, DTC proposes to clarify the governance 
around Declared Non-Default Loss Events by providing that the Board of 
Directors would have to determine that there is a non-default loss that 
may be a significant and substantial loss or liability that may 
materially impair the ability of DTC to provide its services in an 
orderly manner. DTC also proposes to provide that DTC would then be 
required to promptly notify Participants of this determination and 
start the loss allocation process concerning the loss stemming from a 
Declared Non-Default Loss Event.
    The Commission believes that the immediately above described 
changes should provide an orderly and transparent procedure to allocate 
a non-default loss by requiring the Board of Directors to make a 
definitive decision to announce an occurrence of a Declared Non-Default 
Loss Event, and requiring DTC to provide a notice to Participants of 
such decision. The Commission further believes that an orderly and 
transparent procedure should result in a risk management process at DTC 
that is more robust as a result of enhanced governance around DTC's 
response to non-default losses, thereby promoting safety and soundness.
    Collectively, the Commission believes that the proposed changes to 
DTC's loss allocation process would provide greater transparency, 
certainty, and efficiency to both DTC and Participants regarding the 
amount of resources and the instances in which DTC would apply such 
resources to address risks arising from Default Loss Events and 
Declared Non-Default Loss Events, which could occur in quick 
succession. The Commission believes that such transparency, certainty, 
and efficiency would allow better predictability to DTC and its 
Participants regarding their exposures, and in turn, would allow a risk 
management process at DTC and its Participants that is more robust in 
response to such events and would improve their ability to continue to 
operate and recover in a safe and sound manner during such events. 
Therefore, the Commission believes that the proposal promotes robust 
risk management as well as safety and soundness.
    In addition to the key changes discussed above, DTC proposes to 
provide additional transparency to Participants with respect to 
voluntary retirement. In particular, the proposal provides that if a 
Participant submits a Voluntary Retirement Notice and subsequently 
receives a Settlement Charge Notice of the first Loss Allocation Notice 
in a round on or prior to the Voluntary Retirement Date, such 
Participant must timely submit a Termination Notice in order to benefit 
from its Settlement Charge Cap or Loss Allocation Cap, as the case may 
be. This proposed change helps to eliminate uncertainty as to the 
obligations of a Participant that submits a termination notice to DTC 
pursuant to the current Rules, and later receives a Settlement Charge 
Notice or a Loss Allocation Notice pursuant to the proposed Rules. 
Accordingly, the Commission believes that the proposal is designed to 
promote robust risk management by eliminating such uncertainty by 
providing a clear termination process, which, in turn should promote 
safety and soundness by enabling better management obligations to DTC.
    Furthermore, the proposed changes would align the loss allocation 
rules of the DTCC Clearing Agencies to the extent practicable and 
appropriate. The alignment is designed to help provide consistent 
treatment for firms that are participants of multiple DTCC Clearing 
Agencies. The Commission believes that providing consistent treatment 
through consistent procedures among the DTCC Clearing Agencies would 
help firms that participate in multiple DTCC Clearing Agencies from 
encountering unnecessary complexities and confusion stemming from 
differences in procedures regarding loss allocation processes, 
particularly at times of significant stress. Accordingly, the 
Commission believes that the change is designed to reduce systemic risk 
and support the stability of the broader financial system.
    Also, DTC proposes to reduce the time within which DTC is required 
to return the Actual Participants Fund Deposit of a former Participant 
from four years to two years. The Commission believes that this 
reduction in time would enable firms that have exited DTC to have 
access to their funds sooner than under the current Rules. While 
acknowledging that the reduction in time could lesson DTC's flexibility 
in liquidity management for the period between two years and four 
years, the Commission believes that DTC's procedures would continue to 
protect DTC and its clearance and settlement services because the rule 
would maintain the provisions that DTC (1) may offset the return of 
funds against the amount of any loss or liability of DTC arising out of 
or relating to the obligations of the former Participant, and (2) could 
retain the funds for up to two years. Therefore, DTC could maintain a 
necessary level of coverage for possible claims arising in connection 
with the DTC activities of a former Participant. Accordingly, the 
Commission believes that the proposed changes to accelerate the return 
of a former Participant's Actual Participants Fund Deposit are designed 
to reduce the systemic risks by reducing financial risks for 
participants of multiple DTCC Clearing Agencies, and in turn, support 
the stability of the broader financial system.
    Finally, DTC proposes to make conforming and technical changes 
necessary to harmonize the current Rules with the proposed changes. The 
Commission believes that these changes are designed to provide clear 
and coherent Rules concerning loss allocation process to DTC and its 
Participants. The Commission further believes that clear and coherent 
Rules should help enhance the ability of DTC and Participants to more 
effectively plan for, manage, and address the risks and financial 
obligations that loss events present to DTC and its Participants. 
Accordingly, the Commission believes that the conforming and technical 
changes are designed to promote robust risk management.
    Therefore, for all of the reasons stated above, the Commission 
believes that the

[[Page 44402]]

changes proposed in the Advance Notice are consistent with the 
objectives and principles of Section 805(b) of the Clearing Supervision 
Act.\51\
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    \51\ 12 U.S.C. 5464(b).
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B. Consistency With Rule 17Ad-22(e)(4)(viii)

    Rule 17Ad-22(e)(4)(viii) under the Act requires, in part, that a 
covered clearing agency \52\ establish, implement, maintain and enforce 
written policies and procedures reasonably designed to effectively 
identify, measure, monitor, and manage its credit exposures to 
participants and those arising from its payment, clearing, and 
settlement processes, including by addressing allocation of credit 
losses the covered clearing agency may face if its collateral and other 
resources are insufficient to fully cover its credit exposures.\53\
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    \52\ A ``covered clearing agency'' means, among other things, a 
clearing agency registered with the Commission under Section 17A of 
the Exchange Act (15 U.S.C. 78q-1 et seq.) that is designated 
systemically important by the Financial Stability Oversight Counsel 
(``FSOC'') pursuant to the Clearing Supervision Act (12 U.S.C. 5461 
et seq.). See 17 CFR 240.17Ad-22(a)(5) and (6). On July 18, 2012, 
FSOC designated DTC as systemically important. U.S. Department of 
the Treasury, ``FSOC Makes First Designations in Effort to Protect 
Against Future Financial Crises,'' available at https://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx. 
Therefore, DTC is a covered clearing agency.
    \53\ 17 CFR 240.17Ad-22(e)(4)(viii).
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    As described above, the proposal would revise the loss allocation 
process to address how DTC would manage loss events, including 
Defaulting Loss Events. Under the proposal, if losses arise out of or 
relate to a Defaulting Loss Event, DTC would first apply its Corporate 
Contribution. If such funds prove insufficient, the proposal provides 
for allocating the remaining losses to the remaining Participants 
through the proposed process. Accordingly, the Commission believes that 
the proposal is reasonably designed to manage DTC's credit exposures to 
its Participants, by addressing allocation of credit losses.
    Therefore, the Commission believes that DTC's proposal is 
consistent with Rule 17Ad-22(e)(4)(viii) under the Act.\54\
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    \54\ Id.
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C. Consistency With Rule 17Ad-22(e)(7)(i)

    Rule 17Ad-22(e)(7)(i) under the Act requires, in part, that a 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to 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 liquidity, by maintaining sufficient 
liquid resources to effect same-day settlement of payment obligations 
with a high degree of confidence under a wide range of foreseeable 
stress scenarios.\55\
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    \55\ 240.17Ad-22(e)(7)(i).
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    As described above, the proposal would clarify that the 
Participants Fund may be used as a liquidity resource which may be 
applied by DTC to fund settlement among non-defaulting Participants. In 
addition, the proposal would provide a separate procedure to charge the 
Participants Fund to use it as a liquidity resource. The proposed 
change is designed to help DTC manage its settlement and funding flows 
on a more timely basis and better effect same day settlement of payment 
obligations in certain foreseeable stress scenarios.
    Therefore, the Commission believes that the proposal is reasonably 
designed to help DTC effectively manage liquidity risk in a timely 
manner to complete settlement, and accordingly is consistent with Rule 
17Ad-22(e)(7)(i).\56\
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    \56\ Id.
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D. Consistency With Rule 17Ad-22(e)(13)

    Rule 17Ad-22(e)(13) under the Act requires, in part, that a covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to ensure the covered 
clearing agency has the authority to take timely action to contain 
losses and liquidity demands and continue to meet its obligations.\57\
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    \57\ 240.17Ad-22(e)(13).
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    As described above, the proposal would establish a more detailed 
and structured loss allocation process by (1) applying a defined and 
mandatory Corporate Contribution to a loss; (2) introducing an Event 
Period; (3) introducing a loss allocation round and notice process; (4) 
modifying the termination process and the cap of terminating 
Participant's loss allocation exposure; and (5) providing the 
governance around a non-default loss. The Commission believes that each 
of these proposed changes helps establish a more transparent and clear 
loss allocation process and authority of DTC to take certain actions, 
such as announcing a Declared Non-Default Loss Event, within the loss 
allocation process. Further, having a more transparent and clear loss 
allocation process as proposed would provide clear authority to DTC to 
allocate losses from Default Loss Events and Declared Non-Default Loss 
Events and take timely actions to contain losses, and continue to meet 
its clearance and settlement obligations.
    Therefore, the Commission believes that DTC's proposal is 
consistent with Rule 17Ad-22(e)(13) under the Act.\58\
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    \58\ Id.
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E. Consistency With Rule 17Ad-22(e)(23)(i) and (ii)

    Rule 17Ad-22(e)(23)(i) under the Act requires that a covered 
clearing agency 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.\59\ Rule 17Ad-22(e)(23)(ii) under the Act 
requires that a covered clearing agency establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
provide sufficient information to enable participants to identify and 
evaluate the risks, fees, and other material costs they incur by 
participating in the covered clearing agency.\60\
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    \59\ 17 CFR 240.17Ad-22(e)(23)(i).
    \60\ 17 CFR 240.17Ad-22(e)(23)(ii).
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    As described above, the proposal would publicly disclose how DTC's 
Corporate Contribution would be calculated and applied. In addition, 
the proposal would establish and publicly disclose a detailed procedure 
in the Rules for loss allocation. More specifically, the proposed 
changes would establish an Event Period, loss allocation rounds, a 
termination process followed by a settlement charge process or loss 
allocation process, and a Loss Allocation Cap that would apply to 
Participants after termination. Additionally, the proposal would align 
the loss allocation rules across the DTCC Clearing Agencies, to help 
provide consistent treatment, and clarify that non-default losses would 
trigger loss allocation to Participants. The proposal would also 
provide for and make known to members the procedures to trigger a loss 
allocation procedure, contribute DTC's Corporate Contribution, allocate 
losses, and withdraw and limit Participant's loss exposure. 
Accordingly, the Commission believes that the proposal is reasonably 
designed to (1) publicly disclose all relevant rules and material 
procedures concerning key aspects of DTC's default rules and 
procedures, and (2) provide sufficient information to enable 
Participants to identify and evaluate the risks by participating in 
DTC.

[[Page 44403]]

    Therefore, the Commission believes that DTC's proposal is 
consistent with Rules 17Ad-22(e)(23)(i) and (ii) under the Act.\61\
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    \61\ 17 CFR 240.17Ad-22(e)(23)(i) and (ii).
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III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act,\62\ that the Commission does not object to 
advance notice SR-DTC-2017-804, as modified by Amendment No. 1, and 
that DTC is authorized to implement the proposal as of the date of this 
notice or the date of an order by the Commission approving proposed 
rule change SR-DTC-2017-022, as modified by Amendment No. 1, whichever 
is later.
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    \62\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18864 Filed 8-29-18; 8:45 am]
BILLING CODE 8011-01-P


