[Federal Register Volume 85, Number 188 (Monday, September 28, 2020)]
[Notices]
[Pages 60847-60854]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-21290]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89952; File No. SR-DTC-2020-011]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change To Amend Rule 4

September 22, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 9, 2020, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I, II and III below, which Items have 
been prepared by the clearing agency.\3\ The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On September 9, 2020, DTC filed this proposed rule change as 
an advance notice (SR-DTC-2020-801) with the Commission 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, 12 U.S.C. 5465(e)(1), and Rule 
19b-4(n)(1)(i) under the Act, 17 CFR 240.19b-4(n)(1)(i). A copy of 
the advance notice is available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change would amend Rule 4 \4\ to provide 
expressly that the Participants Fund continues to be a liquidity 
resource that may be used by DTC to fund a settlement funding gap to 
complete settlement on a Business Day, whether the funding gap is the 
result of a Participant Default or otherwise. In addition, the proposed 
rule change

[[Page 60848]]

would make other technical and clarifying amendments to Rule 4 to 
provide enhanced transparency with respect to use of the Participants 
Fund and other resources to complete settlement on a Business Day, as 
discussed below.
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    \4\ Each capitalized term not otherwise defined herein has its 
respective meaning as set forth in DTC's rules, including, but not 
limited to, the Rules, By-Laws and Organization Certificate of DTC 
(the ``Rules'') and the DTC Settlement Service Guide (the 
``Settlement Guide''), available at http://www.dtcc.com/legal/rules-and-procedures.aspx. The Settlement Guide is a Procedure of DTC 
filed with the Commission that, among other things, operationalizes 
and supplements the DTC Rules that relate to settlement, including, 
but not limited to, Rule 4 (Participants Fund and Participants 
Investment).
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The proposed rule change would amend Rule 4 to provide expressly 
that the Participants Fund continues to be a liquidity resource that 
may be used by DTC to fund a settlement funding gap to complete 
settlement on a Business Day, whether the funding gap is the result of 
a Participant Default or otherwise. In addition, the proposed rule 
change would make other technical and clarifying amendments to Rule 4 
to provide enhanced transparency with respect to use of the 
Participants Fund and other resources to complete settlement on a 
Business Day, as discussed below.
(i) Background
A. DTC Settlement on a Business Day
    DTC is the central securities depository (``CSD'') for 
substantially all corporate and municipal debt and equity securities 
available for trading in the United States. DTC plays a critical role 
in the national financial infrastructure.\5\ As a CSD, DTC provides a 
central location in which securities may be immobilized, and interests 
in those securities are reflected in accounts maintained for its 
Participants, which are financial institutions such as brokers or 
banks.\6\ As a CSD, DTC is structured to provide for the settlement of 
book-entry transfers and pledges of interests in securities between 
Participants, and for end-of-day net funds settlement on each Business 
Day.\7\
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    \5\ See Financial Stability Oversight Council (``FSOC'') 2012 
Annual Report, Appendix A at 166, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Appendix%20A%20Designation%20of%20Systemically%20Important%20Market%20Utilities.pdf.
    \6\ See, e.g., Securities Exchange Act Release No. 20221 
(September 23, 1983), 48 FR 45167, 45168 (October 3, 1983) (File No. 
600-1) (``A securities depository is a ``custodial'' clearing agency 
that operates a centralized system for the handling of securities 
certificates. Depositories accept deposits of securities from 
broker-dealers, banks, and other financial institutions; credit 
those securities to the depositing participants accounts; and, 
pursuant to participant's instructions, effect book-entry movements 
of securities. The physical securities deposited with a depository 
are held in a fungible bulk; each participant or pledgee having an 
interest in securities of a given issue credited to its account has 
a pro rata interest in the physical securities of the issue held in 
custody by the securities depository in its nominee name. 
Depositories collect and pay dividends and interest to participants 
for securities held on deposit. Depositories also provide facilities 
for payment by participants to other participants in connection with 
book-entry deliveries of securities. . . .'').
    \7\ See, e.g., Rule 9(A) (Transactions in Securities and Money 
Payments), Rule 9(B) (Transactions in Eligible Securities), Rule 
9(C) (Transactions in MMI Securities), Rule 9(D) (Settling Banks), 
and Rule 9(E) (Clearing Agency Agreements), supra note 4, which 
provide the mechanism to achieve a ``DVP Model 2 Deferred Net 
Settlement System'' (as defined in Annex D of the Principles for 
Financial Market Infrastructures issued by the Committee on Payment 
and Settlement Systems and the Technical Committee of the 
International Organization of Securities Commissions (April 2012), 
available at https://www.bis.org/cpmi/publ/d101a.pdf).
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    The DTC settlement system records money debits and credits to 
Participant settlement accounts throughout a Business Day. Credits to a 
Participant settlement account arise from deliveries versus payment, 
receipt of payment orders, principal and interest distributions in 
respect of securities held, intraday settlement progress payments and 
any other items or transactions that give rise to a credit. Debits to a 
Participant settlement account are primarily due to receives versus 
payment, as well as other types of charges to the account permitted 
under the Rules. As these debits and credits to a Participant's 
settlement account are recorded intraday, the Participant's settlement 
account will be in a net debit balance or net credit balance from time 
to time and, finally, at the end of a Business Day, a net debit, net 
credit or zero balance is determined. This final net debit or net 
credit balance determines whether the Participant has an obligation to 
pay or to be paid in the process of DTC completing settlement on that 
Business Day. A Participant with an end-of-day net debit balance has an 
obligation to pay DTC that amount; a Participant with an end-of-day net 
credit balance is entitled to receive a payment from DTC. When a 
Participant has an end-of-day zero net balance or an end-of-day net 
credit balance, it is deemed to have satisfied its settlement 
obligations for that Business Day, and securities processed for 
delivery versus payment for delivery to the Participant will be 
credited to its account. When a Participant with a net debit balance 
pays its settlement obligation, and DTC completes system-wide 
settlement, all securities processed for delivery versus payment to 
that Participant on that Business Day will be credited to its account 
and it will have paid for those deliveries. As to payments due to the 
Participant for its deliveries on that Business Day, the Participant 
will have been paid as well, because credits for those deliveries 
intraday have offset and reduced its other debit obligations, even 
though, on balance, it finished the Business Day with a settlement 
obligation. A Participant that defaults on its settlement obligations 
on a Business Day will not have paid for the securities processed for 
delivery versus payment, and the securities will not be credited to its 
account.
B. Settlement Gap on a Business Day
    There may be circumstances in which the amount of settlement 
payments received or available to DTC on a Business Day is not 
sufficient to pay all Participants with an end-of-day net credit 
balance on that Business Day (a ``settlement gap''). A settlement gap 
could occur on a Business Day as a result of, principally, a 
Participant Default, where a Participant fails to pay its settlement 
obligation (a ``default gap''). A settlement gap could also occur on a 
Business Day as a result of causes other than a Participant Default (a 
``non-default gap''). For example, a non-default gap could occur if the 
funds required to complete settlement are not available to DTC, in 
whole or in part, due to an operational or data issue arising at DTC, a 
Participant or Settling Bank, or due to a cyber incident, or other 
technological business disruption.
    The Rules and Procedures of DTC specify the extent of the 
obligation of DTC to achieve settlement on each Business Day, and, as 
DTC is not a central counterparty (``CCP''), do not guarantee 
settlement.\8\ However, as a critical part of the national financial 
infrastructure, if DTC does not complete settlement on a given Business 
Day, there could be significant market-wide

[[Page 60849]]

effects.\9\ The Rules and Procedures of DTC are structured so that if 
there is a settlement gap on a Business Day, DTC has liquidity 
resources to mitigate the risks relating to a disruption to obligations 
settling at DTC on that Business Day. If there is any problem with the 
receipt or disbursement of funds for settlement, the issue would need 
to be addressed quickly. Access to liquidity resources needs to be 
optimized during the tight timeframe in which settlement must be 
completed on a Business Day, in order for DTC to quickly and 
effectively respond to and resolve any settlement gap, whether a 
default gap or non-default gap.
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    \8\ See, e.g., Rule 9(B), supra note 4 (``Each Participant and 
the Corporation shall settle the balance of the Settlement Account 
of the Participant on a daily basis in accordance with these Rules 
and the Procedures. Except as provided in the Procedures, the 
Corporation shall not be obligated to make any settlement payments 
to any Participants until the Corporation has received all of the 
settlement payments that Settling Banks and Participants are 
required to make to the Corporation.'').
    \9\ Supra note 5.
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C. Participants Fund as a Liquidity Resource To Complete Settlement on 
a Business Day
    The Participants Fund is designed to be one of the foundational 
liquidity resources available to DTC to fund a settlement gap to 
complete settlement on a Business Day. Rule 4 contains the key 
provisions of the Rules and Procedures specifying the rights, duties 
and obligations of Participants and DTC with respect to the 
Participants Fund. Every Participant is required to make at least a 
minimum deposit to the Participants Fund, and Participants with higher 
levels of activity that impose greater liquidity risk to the DTC 
settlement system have proportionally larger required deposits. The 
principal purpose of the Participants Fund is, and historically has 
been, to provide a mutualized liquidity resource to satisfy DTC losses 
and liabilities attributable to its business conducted for the benefit 
of its Participants.\10\ Key among these is daily settlement on each 
Business Day, but also, historically, the Participants Fund was a 
resource to cover losses and other liabilities as well.\11\ Prior to 
August 28, 2018, Rule 4 (``Previous Rule 4''), in particular Section 4 
of Previous Rule 4, provided a unified set of provisions that addressed 
this application of the Participants Fund ``in satisfaction of losses 
and liabilities of the Corporation incident to the business of DTC.''
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    \10\ See Settlement Guide at 48, supra note 4 (``The 
Participants Fund . . . provided in DTC Rule 4 create[s] liquidity 
and collateral resources to support the business of DTC and to cover 
losses and liabilities incident to that business.''). The term 
``business'' with respect to DTC means ``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.'' Rule 4, Section 1(f), supra note 
4. The first two paragraphs of Rule 6 describe services provided by 
DTC, including settlement. Rule 6, supra note 4. DTC notes that, as 
early as 1975, the Rules provided that ``[t]he Participants Fund may 
be used by the Corporation for the purposes of its business . . . 
.'' See DTC CA-1 Application for Permanent Registration as a 
Clearing Agency, dated December 15, 1980 (File 600-1) at page 588. 
In addition, the range of permissible uses of a clearing or 
participants fund as covering ``all losses and liabilities incident 
to clearance and settlement activities'' of the clearing agency was 
specifically noted in the 1983 order of the Commission granting DTC 
full registration as a clearing agency. Securities Exchange Act 
Release No. 20221 (September 23, 1983), 48 FR 45167 (October 3, 
1983) (File No. 600-1). The concept was also in Rule 4 of Central 
Certificate Service, Inc., the predecessor of DTC, filed with the 
Commission in 1972. Securities Exchange Act Release No. 9849 
(November 8, 1972), 37 FR 24795 (November 21, 1972) (As described by 
the Commission: ``Rule 4. A participant's fund will require deposits 
by participants upon the basis of a formula established by CCS, 
Inc., based upon usage. The minimum contribution is $10,000. The 
fund is available for the uses specified in the rules including for 
the purposes of its business.'').
    \11\ See id.
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    On August 28, 2018, the Commission approved a rule change filed by 
DTC with respect to Rule 4 (``Loss Allocation Rule Change'').\12\ A 
primary purpose of the Loss Allocation Rule Change was to harmonize the 
loss allocation provisions of the Rules of DTC with similar provisions 
of the rules of its two affiliated CCPs, National Securities Clearing 
Corporation (``NSCC'') and Fixed Income Clearing Corporation (``FICC'') 
(collectively, the ``CCPs'').
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    \12\ See Securities Exchange Act Release No. 83969 (August 28, 
2018), 83 FR 44955 (September 4, 2018) (SR-DTC-2017-022).
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    As part of the Loss Allocation Rule Change, Previous Rule 4 was 
restructured to provide separate and distinct provisions for (i) in 
Section 4 of Rule 4, the application of liquidity resources, including, 
but not limited to, the pro rata application of the Participants Fund, 
in order to complete settlement on a given Business Day when there is a 
settlement gap, and (ii) in Section 5 of Rule 4, the allocation of 
losses and liabilities of DTC arising out of Default Loss Events or 
Declared Non-Default Loss Events.\13\ Revised Section 4 of Rule 4 was 
meant to retain the core principle of Previous Rule 4 for the 
application of the Participants Fund as a liquidity resource to 
complete settlement.\14\ A new Section 5, consisting of loss allocation 
provisions that were revised for substantial conformity with revisions 
for the CCPs, was inserted into Rule 4 to provide a discrete loss 
allocation waterfall (``Loss Allocation Waterfall'') more comparable to 
NSCC and FICC.
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    \13\ As a result, the main sections of Rule 4 relating to the 
Participants Fund are: Section 1, which focuses on Required 
Participants Fund Deposits and Actual Participants Fund Deposits, 
and briefly addresses the maintenance, permitted use and investment 
of the Participants Fund; Section 3, which provides for the 
application of a defaulting Participant's own Actual Participants 
Fund Deposit to its unpaid settlement obligations; and Section 4, 
which provides for, in relevant part, the pro rata application of 
the Actual Participants Fund Deposits of all Participants (except a 
defaulting Participant) to fund a settlement gap on a Business Day. 
DTC notes that Section 5 of Rule 4 does not provide for the direct 
application of the Participants Fund as part of the Loss Allocation 
Waterfall. The reference in Section 1(f) of Rule 4 to the use of the 
Actual Participants Fund Deposits ``to satisfy losses and 
liabilities of the Corporation incident to the business of the 
Corporation, as provided in Section 5 of this Rule'' refers to the 
application of the Actual Participants Fund Deposit of a Participant 
that fails to timely make its loss allocation payment under the Loss 
Allocation Waterfall, as provided for in Section 3 of Rule 4. 
Accordingly, this proposed rule change has no relationship to or 
effect on the Loss Allocation Waterfall. Nor do the proposed 
drafting changes to Section 4 of Rule 4 affect, in any degree, the 
likelihood of the occurrence of a Default Loss Event or Declared 
Non-Default Loss Event subject to Section 5.
    \14\ See infra note 16.
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    Nevertheless, as explained in more detail below, DTC now recognizes 
that certain of the provisions of amended Section 4 of Rule 4 might be 
read in a manner that conflicts with the stated, and historical, 
purpose of the Participants Fund.\15\ Specifically, certain provisions 
might be construed to narrow the scope of use of the Participants Fund 
for settlement to a default gap only.\16\ Therefore, because settlement 
is a critical service of DTC, and the Participants Fund is a critical 
liquidity resource to fund any settlement gap, DTC is proposing to 
amend certain provisions of Section 4 of Rule 4 to reflect expressly 
that the Participants Fund continues to be a liquidity resource that 
may be used by DTC to fund a settlement gap to complete settlement on a 
Business Day, whether the settlement gap is the result of a Participant 
Default, or otherwise.
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    \15\ See supra note 10.
    \16\ The rule filing for the Loss Allocation Rule Change did not 
mention any intention to narrow the scope of the permitted use of 
the Participants Fund under Rule 4. See Securities Exchange Act 
Release No. 83629 (July 13, 2018), 83 FR 34246, 34248 (July 19, 
2018) (SR-DTC-2017-022) (``The proposed rule change would retain the 
core principles of [Previous] Rule 4 for both application of the 
Participants Fund as a liquidity resource to complete settlement and 
for loss allocation.'').
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(ii) Overview of Proposed Rule Change
A. Sections 3 and 4 of Rule 4
    Currently, Sections 3 and 4 are the primary sections of Rule 4 that 
are relevant to the application of the Participants Fund to fund a 
settlement gap.
    Section 3 of Rule 4 provides, in relevant part, that ``[i]f a 
Participant is a Participant that is a Defaulting Participant pursuant 
to Rule 9(B) or is otherwise obligated to the Corporation pursuant to 
these Rules and the Procedures and fails to satisfy any such obligation 
(a ``Participant Default'') . . . the Corporation shall, to the extent

[[Page 60850]]

necessary to eliminate such obligation, apply some or all of the Actual 
Participants Fund Deposit of such Participant to such obligation to 
satisfy the Participant Default.'' \17\
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    \17\ Supra note 4.
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    Section 3 of Rule 4 is the basic provision of remedies if a 
Participant fails to satisfy an obligation to DTC.\18\ In that case, 
DTC may apply the Actual Participants Fund Deposit of the responsible 
Participant to the extent necessary to satisfy its Participant Default. 
A Participant Default includes a situation where a Participant fails to 
pay its net debit balance at the end of a Business Day. If the amount 
of the Actual Participants Fund Deposit of the responsible Participant 
is insufficient to satisfy its net debit balance, DTC has recourse to 
the Actual Participants Fund Deposits of the other Participants, to be 
charged pro rata in accordance with Section 4 of Rule 4.
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    \18\ Therefore, Section 3 of Rule 4 does not apply to a 
situation where there is no Participant Default.

    Section 4 of Rule 4 currently provides:
    The Participants Fund shall constitute a liquidity resource 
which may be applied by the Corporation in such amounts as the 
Corporation shall determine, in its sole discretion, to fund 
settlement if there is a Defaulting Participant and the amount 
charged to the Actual Participants Fund Deposit of the Defaulting 
Participant pursuant to Section 3 of this Rule is not sufficient to 
complete settlement. In that case, the Corporation may apply the 
Actual Participants Fund Deposits of Participants other than the 
Defaulting Participant (each, a ``non-defaulting Participant'') as 
provided in this Section and/or apply such other liquidity resources 
as may be available to the Corporation from time to time, including 
the End-of-Day Credit Facility.
    If the Participants Fund is applied to complete settlement, the 
Corporation shall promptly after the event notify each Participant 
and the SEC of the amount applied and the reasons therefor 
(``Settlement Charge Notice''). Each non-defaulting Participant's 
pro rata share of such application of the Participants Fund (each, a 
``pro rata settlement charge'') shall be equal to (i) its Required 
Participants Fund Deposit, as such Required Participants Fund 
Deposit was fixed on the Business Day of such application less its 
Additional Participants Fund Deposit, if any, on that day, divided 
by (ii) the sum of the Required Participants Fund Deposits of all 
non-defaulting Participants, as such Required Participants Fund 
Deposits were fixed on that day, less the sum of the Additional 
Participants Fund Deposits, if any, of such non-defaulting 
Participants on that day.\19\
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    \19\ Supra note 4. The proposed rule change would not affect the 
balance of Section 4 of Rule 4. Section 4 of Rule 4 also provides, 
in part, that a Participant shall have a period of five Business 
Days following issuance of a Settlement Charge Notice to notify DTC 
of its election to terminate its business with DTC and thereby cap 
its maximum obligation with respect to other pro rata settlement 
charges (``Settlement Charge Cap''). If the Participant gives such 
notice, Section 4 of Rule 4 provides that DTC may still retain the 
entire amount of the Actual Participants Fund Deposit of a 
Participant subject to a pro rata settlement charge, up to the 
amount of the Participant's Settlement Charge Cap. Section 4 of Rule 
4 also provides that if the Actual Participants Fund Deposit of a 
Participant is applied pursuant to Section 4 of Rule 4, and, as a 
result, the Actual Participants Fund Deposit of such Participant is 
less than its Required Participants Fund Deposit, the Participant 
must, upon the demand of DTC and within such time as DTC may 
require, deposit to the Participants Fund the amount in cash needed 
to eliminate any resulting deficiency in its Required Participants 
Fund Deposit.

    The above provisions of Section 4 of Rule 4 were drafted as part of 
the restructuring and revision of Rule 4 in connection to the Loss 
Allocation Rule Change. The intention was that these new provisions 
would track the historical principle of Section 4 of Previous Rule 4 
that the Participants Fund may be applied to a loss or liability, 
including a settlement gap, that could not be satisfied by charging the 
Actual Participants Fund Deposit of a Participant pursuant to Section 3 
of Rule 4. Nevertheless, because Section 4 of Rule 4 is now silent as 
to the use of the Participants Fund to complete settlement when there 
is a non-default gap, it could be construed as limiting the pro rata 
application of the Participants Fund to fund a settlement gap to 
default scenarios.
    On each Business Day, settlement occurs during a tight timeframe, 
in conjunction with the Federal Reserve's National Settlement Service 
(NSS) and Fedwire.\20\ If there is any problem with the receipt or 
disbursement of funds for settlement, it would need to be addressed 
quickly. The Participants Fund is designed as ready ``cash on hand'' 
for settlement and is, typically, the most available liquidity resource 
for settlement. If the scope of the permitted use of the Participants 
Fund to fund a settlement gap on a Business Day is not expressly stated 
in Rule 4, there is a possibility that DTC's ability on a Business Day 
to quickly and effectively respond to and resolve any settlement gap 
could be adversely affected. Use of the Participants Fund needs to be 
optimized during the tight timeframe because extensive settlement 
delays might cause significant market disruptive effects. The proposed 
rule change is designed to confirm, expressly, ready access to the 
Participants Fund for settlement purposes, whatever the settlement gap 
scenario.
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    \20\ See Settlement Guide at 19-20, supra note 4.
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    In light of the foregoing, in order to facilitate timely action by 
DTC in connection with any settlement gap, DTC is proposing to amend 
Section 4 of Rule 4 to provide expressly for the use of the 
Participants Fund to fund settlement irrespective of whether the 
settlement gap is a default gap or a non-default gap.
B. Technical and Clarifying Changes
    DTC believes that certain other amendments that were made pursuant 
to the Loss Allocation Rule Change may have impacted the transparency 
of Section 4 of Rule 4 with respect to use of the Participants Fund and 
other resources for settlement. Therefore, as described below, DTC is 
proposing to (i) clarify that a Participant's pro rata share of an 
application of the Participants Fund would be the same whether there is 
a default gap or a non-default gap, (ii) restore the express provision 
for the optional use of a discretionary amount of existing retained 
earnings of DTC to fund settlement, (iii) specifically state that DTC 
may apply its available resources to fund settlement, in such order and 
in such amounts as it determines, in its sole discretion, and (iv) make 
ministerial changes for conformity and readability.
(iii) Proposed Rule Change
A. Section 4 of Rule 4
    Section 4 of Rule 4, Heading:
    In order to reflect that Section 4 of Rule 4 would address the 
liquidity resources to fund settlement, including the application of 
the Participants Fund to fund settlement when there is a default gap or 
a non-default gap, DTC is proposing to replace the current heading of 
Section 4 of Rule 4 ``Application of Participants Fund Deposits of Non-
Defaulting Participants'' with ``Liquidity Resources to Fund 
Settlement; Application of Participants Fund.''
    Section 4 of Rule 4 (Proposed New First Paragraph):
    DTC is proposing to add a new opening paragraph to Section 4 of 
Rule 4 that would reflect and summarize the purpose of the proposed 
Section 4 of Rule 4. Specifically, DTC is proposing to add the 
following paragraph: ``This Section sets forth liquidity resources 
available to the Corporation to fund settlement on a Business Day, in 
the event of a Participant Default or otherwise.''
    Section 4 of Rule 4, First Paragraph (Proposed Second Paragraph):
    DTC is proposing to:
    1. Streamline the language referring to a settlement gap resulting 
from an unsatisfied Participant Default \21\ by

[[Page 60851]]

revising the text to state that, ``If, on a Business Day, there is a 
Participant Default which is not satisfied pursuant to Section 3 of 
this Rule by the application of the Actual Participants Fund Deposit of 
a Participant, . . . '';
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    \21\ The current default gap language is ``if there is a 
Defaulting Participant and the amount charged to the Actual 
Participants Fund Deposit of the Defaulting Participant pursuant to 
Section 3 of this Rule is not sufficient to complete settlement.''
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    2. Expressly address a non-default gap by adding the phrase `` . . 
. or if Section 3 is not applicable, . . . '' into the description of 
the circumstances in which DTC may apply the Participants Fund to fund 
settlement; \22\
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    \22\ Section 3 of Rule 4 applies when there is a Participant 
Default. If there is no Participant Default, Section 3 of Rule 4 
does not apply. Therefore, if there is a settlement gap where 
Section 3 of Rule 4 is inapplicable, such settlement gap could be 
considered a non-default gap.
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    3. Revise the language that refers to DTC's sole discretion to 
apply its liquidity resources, including Participants Fund, to fund 
settlement,\23\ to state, `` . . . in such order and in such amounts as 
the Corporation shall determine, in its sole discretion, to the extent 
necessary to fund settlement on the Business Day:''; and
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    \23\ Rule 4 currently states: ``The Participants Fund shall 
constitute a liquidity resource which may be applied by the 
Corporation in such amounts as the Corporation shall determine, in 
its sole discretion, to fund settlement . . . and/or apply such 
other liquidity resources as may be available to the Corporation 
from time to time, including the End-of-Day Credit Facility.''
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    4. Enhance the transparency of Section 4 of Rule 4 with respect to 
liquidity resources that may be available to DTC to fund settlement by 
amending Section 4 of Rule 4 to provide DTC may apply:
    (a) the Actual Participants Fund Deposits of all Participants 
(other than a Participant whose Actual Participants Fund Deposit is 
exhausted pursuant to Section 3);
    (b) the existing retained earnings or undivided profits of DTC; or
    (c) any other liquidity resources as may be available to DTC from 
time to time, including, but not limited to, the End-of-Day Credit 
Facility.
    Specifically, with respect to (a), DTC is proposing to replace the 
reference in the first paragraph of Section 4 of Rule 4 to ``non-
defaulting Participants'' with ``all Participants (other than a 
Participant whose Actual Participants Fund Deposit is exhausted 
pursuant to Section 3).'' The purpose of this change is to provide 
expressly that (i) in the case of a non-default gap, all Participants 
would be charged a pro rata share of the application of the 
Participants Fund, and (ii) a Participant that cured its Participant 
Default pursuant to Section 3 by the application of some, but not all, 
of its Actual Participants Fund Deposit on that Business Day, would 
still be subject to a pro rata share of the application of the 
Participants Fund to fund settlement, up to the remaining balance of 
its Actual Participants Fund Deposit, if there is (x) a default gap 
(due to the default of another Participant) or (y) a non-default gap.
    With respect to (b), in order to enhance the transparency of 
available resources to fund settlement, DTC is proposing to restore the 
express provision for the optional use of a discretionary amount of 
existing retained earnings of DTC \24\ that had appeared in previous 
versions of Rule 4, including Section 4 of Previous Rule 4.\25\ With 
respect to (c), DTC is proposing to insert the phrase ``but not limited 
to,'' after ``including,'' in order to make clear that DTC may have 
other liquidity resources available in addition to the End-of-Day 
Credit Facility.
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    \24\ The retained earnings of DTC are reflected in its quarterly 
condensed consolidated financial statements and annual financial 
statements, available at http://www.dtcc.com/legal/financial-statements.
    \25\ As noted above, the loss allocation provisions of Rule 4 
are not relevant to the application of liquidity resources to a 
settlement gap on a given Business Day. As such, the optional use of 
the existing retained earnings of DTC to fund settlement is separate 
and distinct from calculation of, or application of, the Corporate 
Contribution required in Section 5 of Rule 4.
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    In sum, pursuant to the above proposed changes, the revised 
paragraph would state:

    If, on a Business Day, there is a Participant Default which is 
not satisfied pursuant to Section 3 of this Rule by the application 
of the Actual Participants Fund Deposit of a Participant, or if 
Section 3 is not applicable, then the Corporation shall apply, in 
such order and in such amounts as the Corporation shall determine, 
in its sole discretion, to the extent necessary to fund settlement 
on the Business Day:
    (a) The Actual Participants Fund Deposits of all Participants 
(other than a Participant whose Actual Participants Fund Deposit is 
exhausted pursuant to Section 3);
    (b) the existing retained earnings or undivided profits of the 
Corporation; or
    (c) any other liquidity resources as may be available to the 
Corporation from time to time, including, but not limited to, the 
End-of-Day Credit Facility.

    Section 4 of Rule 4, Second Paragraph (Proposed Fifth Paragraph):
    For conformity, DTC is proposing to modify this paragraph to 
conform with the proposed changes to the third paragraph. Specifically, 
pursuant to the proposed rule change, this paragraph would state: ``If 
the Participants Fund is applied pursuant to paragraph (a) of this 
Section, the Corporation shall promptly after the event notify each 
Participant and the SEC of the amount of the Participants Fund applied 
and the reasons therefor (``Settlement Charge Notice'').''
    In addition, to further streamline Section 4 of Rule 4, DTC is 
proposing to move the proposed amended paragraph to follow the proposed 
fourth paragraph.
    Section 4 of Rule 4, Proposed Third Paragraph:
    For enhanced transparency with respect to the governance relating 
to a pro rata application of the Participants Fund, DTC is proposing to 
add the following paragraph:
    A determination to apply the Participants Fund pursuant to this 
Section shall be made by either the Chief Executive Officer, Chief Risk 
Officer, Chief Financial Officer, a member of any management committee, 
Treasurer or any Managing Director as may be designated by the Chief 
Risk Officer from time to time. The Board of Directors (or an 
authorized Committee thereof) shall be promptly informed of the 
determination.
    Section 4 of Rule 4, Third Paragraph (Proposed Fourth Paragraph):
    Pursuant to the proposed rule change, DTC would revise this 
paragraph \26\ to make clarifying changes that reflect that a 
Participant's pro rata share of an application of the Participants Fund 
would be the same whether there is a default gap or a non-default gap. 
Specifically, DTC is proposing to (i) remove the references to ``non-
defaulting Participants,'' (ii) streamline the language by representing 
the calculation of a pro rata share as a ratio, instead of a division 
calculation, (iii) make conforming changes with the foregoing, and (iv) 
for consistency and clarity, make ministerial word changes and replace 
references to ``day'' with the defined term ``Business Day.''
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    \26\ Currently, the paragraph states: ``Each non-defaulting 
Participant's pro rata share of such application of the Participants 
Fund (each, a ``pro rata settlement charge'') shall be equal to (i) 
its Required Participants Fund Deposit, as such Required 
Participants Fund Deposit was fixed on the Business Day of such 
application less its Additional Participants Fund Deposit, if any, 
on that day, divided by (ii) the sum of the Required Participants 
Fund Deposits of all non-defaulting Participants, as such Required 
Participants Fund Deposits were fixed on that day, less the sum of 
the Additional Participants Fund Deposits, if any, of such non-
defaulting Participants on that day.''
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    In sum, DTC is proposing that this paragraph be revised to state: 
``The pro rata share of the Actual Participants Fund Deposit of any 
Participant applied pursuant to paragraph (a) shall be equal to the 
ratio of (i) the Required Participants Fund Deposit of the Participant, 
as fixed on the Business

[[Page 60852]]

Day on which such charge is made less its Additional Participants Fund 
Deposit, if any, on that Business Day, to (ii) the sum of the Required 
Participants Fund Deposits, as fixed on the Business Day on which such 
charge is made, of all Participants so charged on that Business Day, 
less the sum of the Additional Participants Fund Deposits, if any, of 
those Participants on that Business Day. The amount so charged to the 
Actual Participants Fund Deposit of a Participant shall constitute a 
``pro rata settlement charge'' with respect to that Participant.''
    Section 4 of Rule 4, Fifth, Sixth, Seventh and Eighth Paragraphs 
(Proposed Paragraphs Six, Seven, Eight and Nine):
    There would be no changes to these paragraphs. The proposed rule 
change would not affect the Settlement Charge Termination Notification 
Period, the Settlement Charge Cap, nor the right of DTC to retain the 
entire amount of the Actual Participants Fund Deposit of a Participant 
subject to a pro rata settlement charge, up to the amount of the 
Participant's Settlement Charge Cap. The proposed rule change would not 
affect the requirement that if the Actual Participants Fund Deposit of 
a Participant is applied pursuant to Section 4 of Rule 4, and, as a 
result, the Actual Participants Fund Deposit of such Participant is 
less than its Required Participants Fund Deposit, the Participant must, 
upon the demand of DTC and within such time as DTC would require, 
deposit to the Participants Fund the amount in cash needed to eliminate 
any resulting deficiency in its Required Participants Fund Deposit.
B. Section 1(f) of Rule 4
    Section 1(f) of Rule 4 currently states, in relevant part: ``The 
Actual Participants Fund Deposits of Participants to the Participants 
Fund shall be held by the Corporation and may be used or invested as 
provided in these Rules and as specified in the Procedures. The Actual 
Participants Fund Deposits of Participants may be used (i) to satisfy 
the obligations of Participants to the Corporation, as provided in 
Section 3 of this Rule, (ii) to fund settlement among non-defaulting 
Participants, as provided in Section 4 of this Rule and (iii) to 
satisfy losses and liabilities of the Corporation incident to the 
business of the Corporation, as provided in Section 5 of this Rule.''
    In conformity with the proposed changes to Section 4 of Rule 4, DTC 
is proposing a ministerial change of removing the word ``non-
defaulting'' from Section 1(f) of Rule 4.
2. Statutory Basis
    DTC believes that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a registered clearing agency. Specifically, DTC believes 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \27\ and Rule 17Ad-22(e)(1) promulgated under the Act,\28\ 
for the reasons described below.
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    \27\ 15 U.S.C. 78q-1(b)(3)(F).
    \28\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules 
be designed to promote the prompt and accurate clearance and settlement 
of securities transactions.\29\ The proposed rule changes to (i) amend 
Rule 4 to provide expressly that the Participants Fund may be used by 
DTC to fund a settlement gap, whether it is a default gap or a non-
default gap, and (ii) make other technical changes to provide enhanced 
transparency with respect to use of the Participants Fund and other 
resources for settlement, are intended to enhance the overall 
efficiency and effectiveness of end-of-day settlement in circumstances 
where there is a settlement gap.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The proposed rule change would amend Section 4 of Rule 4 to provide 
expressly for the pro rata application of the Participants Fund to any 
settlement gap, including a non-default gap. As noted above, if there 
were a question as to DTC's right to apply the Participants Fund to a 
non-default gap, DTC's ability on a Business Day to quickly and 
effectively respond to and resolve any such settlement gap and complete 
settlement might be adversely affected, which could interfere with the 
prompt and accurate clearance and settlement of securities 
transactions.
    The proposed rule change would also make other technical and 
clarifying amendments in order to provide enhanced transparency with 
respect to use of the Participants Fund and other resources for 
settlement. The proposed amendments would (i) clarify that a 
Participant's pro rata share of an application of the Participants Fund 
would be the same whether there is a default gap or a non-default gap, 
(ii) restore the express provision for the optional use of a 
discretionary amount of existing retained earnings of DTC to fund 
settlement, (iii) specifically state that DTC may apply its available 
resources to fund settlement, in such order and in such amounts as it 
determines, in its sole discretion, and (iv) make ministerial changes 
for conformity and readability. Without the foregoing changes, DTC's 
rights with respect to the manner and use of its liquidity resources to 
fund settlement might not be promptly ascertainable, particularly in a 
time of stress.
    Therefore, the proposed rule change is designed to enhance the 
overall efficiency and effectiveness of settlement on a Business Day in 
circumstances where there is a settlement gap by facilitating timely 
action by DTC to complete settlement on a Business Day when there is a 
settlement gap, including, but not limited to, in situations where 
Section 3 of Rule 4 is not applicable. The ability of DTC to take 
timely action to fund a settlement gap, including, but not limited to, 
the pro rata application of the Participants Fund, would allow DTC to 
continue to support end-of-day net funds settlement in connection with 
book-entry transfers of securities on each Business Day, thereby 
promoting the prompt and accurate clearance and settlement of 
securities transactions, consistent with Section 17A(b)(3)(F) of the 
Act, cited above.
    Rule 17Ad-22(e)(1) under the Act requires that DTC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide for a well-founded, clear, transparent, 
and enforceable legal basis for each aspect of its activities in all 
relevant jurisdictions.\30\ As discussed above, changes to Section 4 of 
Previous Rule 4 might be construed as narrowing the scope of use of the 
Participants Fund for settlement to a default gap, even though the 
Participants Fund is a liquidity resource that is available to fund any 
settlement gap. By amending Rule 4 to provide expressly that the 
Participants Fund continues to be a liquidity resource that may be used 
by DTC to fund a settlement gap to complete settlement on a Business 
Day, whether the settlement gap is the result of a Participant Default 
or otherwise, the proposed rule change is designed to provide an 
expressly clear, transparent and enforceable legal basis for the 
application of the Participants Fund to a settlement gap, whether or 
not caused by a Participant Default, consistent with Rule 17Ad-22(e)(1) 
under the Act, cited above.
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    \30\ 17 CFR 240.17Ad-22(e)(1).
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(B) Clearing Agency's Statement on Burden on Competition

    DTC believes that the proposed rule change to amend certain 
provisions of

[[Page 60853]]

Rule 4 to reflect expressly that the Participants Fund continues to be 
a liquidity resource to fund a settlement gap on a Business Day, 
whether there is a default gap or a non-default gap, could impose a 
burden on competition.\31\
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    As noted above, the Participants Fund is designed to be one of the 
foundational liquidity resources available to DTC to fund a settlement 
gap to complete settlement on a Business Day. The proposed rule change 
would enhance DTC's ability to quickly and effectively use the pro rata 
application of the Participants Fund to respond to a non-default gap on 
a Business Day. DTC recognizes, however, that a pro rata application of 
the Participants Fund to fund a settlement gap, including a non-default 
gap, could potentially result in a deficiency in the Required 
Participants Fund Deposit of one or more Participants, which could 
potentially impose a burden on competition. Under Rule 4, in the event 
of a deficiency in the Required Participants Fund Deposit of a 
Participant after a pro rata application of the Participants Fund to a 
settlement gap, the Participant, upon the demand of DTC and within such 
time as DTC may require, would be required to deposit into the 
Participants Fund the amount of cash needed to eliminate the 
deficiency.\32\ While the proposed rule change does not change or 
affect this long-standing replenishment obligation,\33\ DTC 
acknowledges that such demand for additional capital on a Participant 
could be a competitive burden for the Participant.
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    \32\ See supra note 19.
    \33\ See DTC CA-1 Application for Permanent Registration as a 
Clearing Agency, dated December 15, 1980 (File 600-1) at page 589 
(``Rule 4 . . . Section 5. If a pro rata charge is made against a 
Participant's contribution to the Participants Fund pursuant to 
Section 4 of this Rule, such Participant shall immediately upon 
demand, which shall be made by the Corporation as soon as 
practicable after such charge, make good the deficiency in the 
amount of its contribution resulting from such pro rata charge. . . 
.'').
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    DTC does not believe that any burden imposed by the proposed rule 
change would be significant. First, if DTC were to use a pro rata 
application of the Participants Fund to fund a non-default gap, it 
would not necessarily result in a deficiency to the Required 
Participants Fund Deposit of any Participant. Whether there would be 
any deficiencies would depend on the facts and circumstances on that 
Business Day, including, but not limited to, the amount of funds a 
Participant has on deposit in the Participants Fund that is in excess 
of its Required Participants Fund Deposit, as well as the aggregate 
amount of the pro rata application of the Participants Fund to fund the 
settlement gap. Second, the Required Participants Fund Deposit of a 
Participant is itself based on the amount of activity of the 
Participant, and therefore any burden on a Participant from the 
requirement to replenish its Required Participants Fund Deposit would 
be proportional to the volume of its business activity at DTC.
    Regardless of whether the potential burden on competition is 
significant, DTC believes that any burden on competition that may be 
created by the proposed rule change would be necessary and appropriate 
in furtherance of the purposes of the Act, as permitted by Section 
17A(b)(3)(I) of the Act.\34\
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    DTC believes that any burden on competition created by the proposed 
rule change would be necessary to promote the prompt and accurate 
clearance and settlement of securities transactions, consistent with 
Section 17A(b)(3)(F) of the Act.\35\ As noted above, if the scope of 
the permitted use of the Participants Fund to fund a settlement gap on 
a Business Day could be construed as limited to a default settlement 
gap, DTC's ability on a Business Day to quickly and effectively respond 
to and resolve any settlement gap could be adversely affected by the 
perceived limitation on use of the Participants Fund. This, in turn, 
could cause settlement delays that might interfere with the prompt and 
accurate clearance and settlement of securities transactions. 
Therefore, DTC believes any burden that may be created by the proposed 
rule change would be necessary in furtherance of the purposes of the 
Act, as permitted by Section 17A(b)(3)(I) of the Act.\36\
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78q-1(b)(3)(F).
    \36\ 15 U.S.C. 78q-1(b)(3)(I).
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    Furthermore, DTC believes that any burden on competition resulting 
from the proposed rule change would be appropriate in furtherance of 
the purposes of the Act, as permitted by Section 17A(b)(3)(I) of the 
Act.\37\ First, The Participants Fund is designed as ready ``cash on 
hand'' for settlement and is, typically, the most available liquidity 
resource for settlement. The proposed rule change is designed to 
enhance DTC's ability to use this readily available resource to fund a 
non-default gap and to continue to support end-of-day net funds 
settlement. Second, as noted above, any competitive burden imposed on 
Participants would be proportional to their activity at DTC. Therefore, 
DTC believes any burden that may be created by the proposed rule change 
would be appropriate in furtherance of the purposes of the Act, as 
permitted by Section 17A(b)(3)(I) of the Act.\38\
---------------------------------------------------------------------------

    \37\ Id.
    \38\ Id.
---------------------------------------------------------------------------

    DTC does not believe that the proposed rule change to make 
technical and clarifying amendments to provide enhanced transparency 
with respect to use of the Participants Fund and other resources for 
settlement would have an impact on competition.\39\ The proposed rule 
change would (i) clarify that a Participant's pro rata share of an 
application of the Participants Fund would be the same whether there is 
a default gap or a non-default gap, (ii) restore the express provision 
for the optional use of a discretionary amount of existing retained 
earnings of DTC to fund settlement, (iii) specifically state that DTC 
may apply its available resources to fund settlement, in such order and 
in such amounts as it determines, in its sole discretion, and (iv) make 
ministerial changes for conformity and readability. Taken together, 
these proposed rule changes would provide a more transparent framework 
for the use of DTC's available liquidity resources to fund a settlement 
gap, as determined by DTC in its sole discretion, and would not change 
the rights or obligations of Participants in connection thereto. 
Therefore, DTC believes that the proposed rule change to make technical 
and clarifying changes to provide enhanced transparency with respect to 
use of the Participants Fund and other resources for settlement would 
not have an impact on competition.\40\
---------------------------------------------------------------------------

    \39\ Id.
    \40\ Id.
---------------------------------------------------------------------------

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    Written comments relating to this proposed rule change have not 
been solicited or received. DTC will notify the Commission of any 
written comments received by DTC.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:

[[Page 60854]]

    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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 rule-comments@sec.gov. Please include 
File Number SR-DTC-2020-011 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549.

All submissions should refer to File Number SR-DTC-2020-011. 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 DTCC'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-2020-011 and should be submitted on 
or before October 19, 2020.
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    \41\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-21290 Filed 9-25-20; 8:45 am]
BILLING CODE 8011-01-P


