[Federal Register Volume 72, Number 226 (Monday, November 26, 2007)]
[Notices]
[Pages 66009-66012]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-22890]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56795; File No. SR-DTC-2007-11]


 Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change To Amend its Operational 
Arrangements as it Applies to Structured Securities

November 15, 2007.
    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 7, 2007, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change described in Items I, II, and III

[[Page 66010]]

below, which items have been prepared primarily by DTC. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested parties.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change seeks approval to amend DTC's Operational 
Arrangements as they apply to Structured Securities. DTC's Operational 
Arrangements is a contractual agreement between DTC, issuers, and 
paying agents that outlines the procedural and operational requirements 
for an issue to become and remain DTC eligible.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, DTC 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. DTC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed filing is to amend DTC's Operational 
Arrangements as it applies to Structured Securities to: extend the 
deadline by which paying agents of such securities must submit periodic 
payment rate information to DTC; effective January 1, 2008, establish 
an exception processing fee applied to certain Structured Securities 
that are unable to comply with the extended deadline; and provide that 
DTC track and make publicly available reports on paying agent 
performance as it relates to timeliness and accuracy of Structured 
Securities payment rate information submitted to DTC.
1. Background
    A Structured Security such as a collateralized mortgage obligation 
or asset-backed security (``ABS'') is a bond backed by a pool of 
underlying financial assets. The underlying assets generally consist of 
receivables such as mortgages, credit card receivables, or student or 
other bank loans for which the timing of principal payments by the 
underlying obligors may be variable and unpredictable. The security may 
also incorporate credit enhancements or other rights that affect the 
amount and timing of payments to investors.
    Communication of periodic payment rates of principal and interest 
(``P&I'') to the end investors in Structured Securities depends on 
application of stringent time frames for information reporting and 
significant interdependencies among servicers of the underlying assets, 
specifically trustees, custodians, paying agents on the securities, 
DTC, and the financial intermediaries that act on behalf of the 
investors. Given the complexity of structure and calculations of cash 
flow from the underlying assets through the issuer to the end investor 
and the interdependencies on timeliness and accuracy of performance 
throughout the chain of servicers and intermediaries, timely and 
accurate submission of payment rate information on Structured 
Securities may be difficult to achieve. As a result, payment rates 
typically are announced late on a significant number of issues, and the 
number of post-payable adjustments made to correct inaccurate payments 
due to inaccurate rates is higher than for any other security type. 
Furthermore, the volume of P&I payments for Structured Securities 
processed through DTC has grown rapidly in recent years and currently 
represents approximately 25% of all P&I payments processed through DTC. 
Incorrect and late payment rate reporting causes increased operations 
processing costs, inefficient cash management, and loss of income.
    Accordingly, DTC formed a cross-industry working group to study the 
severity of the problem of processing Structured Securities P&I and to 
analyze possible solutions.\4\ In its analysis, the working group 
studied the payment rate reporting history of various Structured 
Securities, noting factors such as paying agent and type of deal 
structure. The working group determined that extending the date by 
which paying agents must submit rate information to DTC would allow a 
greater number of Structured Securities to meet DTC's requirements and 
thus be eligible for DTC services. It also concluded that there is a 
significant subset of Structured Securities for which the paying agent 
may not be able to comply even with an extended time frame for delivery 
of payment rate information because of features inherent in the 
structure of the security issue. It determined these securities should 
be expressly identified and handled as issues that require exception 
processing. Finally, it concluded that paying agent rate reporting 
performance on all Structured Securities should be evaluated and made 
publicly available to participants and other relevant parties. 
Accordingly, DTC proposes to implement the changes set forth below.
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    \4\ The group consisted of representative from the Securities 
Industry and Financial Markets Association (SIFMA), major paying 
agents, servicers and master servicers, underwriters, and major 
retail and institutional broker-dealers and custodians.
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2. Proposed Amendments to Operational Arrangements
    DTC's ``Operational Arrangements Necessary for an Issue to Become 
and Remain Eligible for DTC Services'' (``Operational Arrangements'') 
governs issue eligibility for deposit at DTC and issuer and agent 
obligations regarding servicing of the issue thereafter. Regarding 
notification on issues that pay P&I periodically or that pay interest 
at a variable rate, the Operational Arrangements currently requires the 
paying agent on the security to provide payment rate information to DTC 
preferably five business days but no later than two business days prior 
to the payable date.
(i) Extending the Deadline for Reporting on Payment Detail
    The majority of Structured Securities cannot adhere to the current 
Operational Arrangements rate reporting deadline. DTC is proposing to 
amend the Operational Arrangements to require that the payment 
notification regarding Structured Securities be provided to DTC by the 
paying agent preferably five business days but no later than one 
business day prior to the payable date. In addition, DTC will extend 
its current processing deadline for receipt of payment rate files from 
7 p.m to 11:30 p.m. The extended deadline should allow paying agents to 
provide rates in a timely and accurate fashion for a majority of 
Structured Securities issues and should permit the securities to remain 
eligible for DTC's services while providing DTC adequate time to 
process the information without delaying payment by DTC to its 
participants.
(ii) Securities Classifications
    Due to the complexity of certain Structured Securities, it is 
anticipated that certain issues will not be able to meet the amended 
Operational Arrangements requirement for timely payment rate reporting 
even with the extended reporting period. Therefore, DTC proposes to 
distinguish between ``conforming'' and ``non-conforming'' Structured 
Securities. Non-conforming

[[Page 66011]]

Structured Securities will be issues for which the issuer and paying 
agent have concluded that the security has features that will likely 
preclude the paying agent from submitting rate information to DTC in 
conformity with the requirements of the Operational Arrangements. The 
conforming/non-conforming identification will be made at the time the 
security is made eligible at DTC. For each Structured Securities 
underwriting that the issuer and paying agent identified as non-
conforming, the issuer and paying agent shall submit a written 
attestation giving the reason for non-conformance. DTC will in turn 
identify non-conforming Structured Securities to participants and other 
relevant parties and will add an indicator to the appropriate DTC 
systems functions to denote non-conforming securities. Paying agents 
shall be required to evaluate their entire portfolio of Structured 
Securities on deposit at DTC to identify non-conforming securities that 
have previously been made eligible at DTC. Although approximately 15% 
of Structured Security issues currently fail to have rates submitted to 
DTC in a timely manner, it is estimated that approximately only half of 
these have structural impediments to meeting the requirements. Failures 
in timely rate reporting in other instances are believed to be curable 
by improved servicing and reporting on the securities.
(iii) Exception Processing Fee Applicable to Non-Conforming Securities
    Securities processing inefficiencies and rate inaccuracies 
associated with late payment rate reporting lead to increased costs 
associated with non-conforming Structured Securities. In order to 
recoup the increased processing costs, DTC is proposing to impose, 
effective January 1, 2008, an exception processing fee to the managing 
underwriter of the non-conforming issue at the time of underwriting. No 
fee will be charged retroactively on issues already on deposit at DTC 
prior to the implementation of the fee.
    The exception processing fee will be calculated based upon 
anticipated excess costs of Structured Securities P&I processing. Based 
on estimates derived from 2006 costs, the fee would be approximately 
$4,200 per CUSIP. The fee applicable for 2008 would reflect more 
current costs and would be modified accordingly. The amount of the fee 
would be presented to DTC's Board of Directors for approval and filed 
with the SEC as part of DTC's annual establishment of fees, and would 
be modified in accordance with DTC's standard procedures for fee 
modification.
    The aggregate net amount of the exception processing fees will be 
allocated and rebated on a pro rata basis annually to the DTC 
participants for whom DTC processed Structured Securities P&I 
allocations. The total number of allocations would be calculated for 
each participant as a percentage of total annual allocations by DTC and 
that percentage would be applied against the total exception processing 
fund and rebated to each participant. The total exception processing 
fund would be calculated as the sum of all exception processing fees 
less DTC's cost to administer the program.
(iv) Evaluation and Publication of Paying Agent Performance
    DTC is proposing to track and evaluate paying agent performance 
with regard to timeliness and accuracy of payment rate reporting on 
Structured Securities and to make these evaluations available to DTC 
participants and to the public. The purpose of these evaluations is to 
identify poor payment and reporting performance for which a paying 
agent should be able, based on its attestation, to correct any 
underlying servicing issues associated with the payment and information 
flows.
    DTC plans to expand evaluation reports ( ``Report Cards'') that are 
currently used to compare rate submission performance and accuracy of 
Structured Securities paying agents. Currently the Report Cards are 
only distributed among the paying agents being compared. DTC is 
proposing to make the Report Cards available on its Web site. The 
Report Card tracks and reports performance for a given month by paying 
agent with respect to the number of collateralized mortgage obligations 
and asset-backed securities announcements processed, the number of late 
and amended announcements, the payment dollars, late payment dollars, 
and the number of payments and late payments. Timeliness of payment 
rate notification on non-conforming Structured Securities will not be 
included in the proposed paying agent performance evaluation based on 
the paying agent's attestation that it is a non-conforming issue 
subject to an exception processing fee. The other factors will be 
included with respect to both conforming and non-conforming securities.
    In summary, altering the Operational Arrangements to allow paying 
agents additional time in which to calculate payment rates will allow 
more issues of Structured Securities to be eligible at DTC. 
Identification of issues that cannot meet the extended reporting 
deadlines and reporting on paying agent performance will allow the 
industry to anticipate processing inefficiencies associated with 
certain Structured Securities issues. Furthermore, imposition of an 
exception processing fee on Structured Securities that cannot meet the 
extended reporting deadlines due to deal structure will shift the 
expense associated with these securities to the underwriters and 
issuers that create the structure.
    DTC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \5\ and the rules and 
regulations thereunder because the proposed changes removes impediments 
to and perfects the mechanism of a national system for the prompt and 
accurate clearance and settlement of securities transactions.
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    \5\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change will have any 
impact or impose any burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    Written comments relating to the 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 thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period: (i) As the 
Commission may designate up to ninety days of such date 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:
    (A) By order approve such proposed rule change or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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.

[[Page 66012]]

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 e-mail to [email protected]. Please include 
File Number SR-DTC-2007-11 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-DTC-2007-11. This file 
number should be included on the subject line if e-mail 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 Web site (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 inspection and 
copying in the Commission's Public Reference Section, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filings also will be available for 
inspection and copying at the principal office of DTC and on DTC's Web 
site at http://www.dtcc.com/downloads/legal/rule_filings/2007/dtc/2007-11.pdf. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-DTC-
2007-11 and should be submitted on or before December 11, 2007.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-22890 Filed 11-23-07; 8:45 am]
BILLING CODE 8011-01-P