[Federal Register Volume 73, Number 251 (Wednesday, December 31, 2008)]
[Notices]
[Pages 80481-80482]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-31048]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59148; File No. SR-DTC-2008-12]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving Proposed Rule Change As Amended To Increase Liquidity 
Resources

December 23, 2008.

I. Introduction

    On August 26, 2008, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') and on 
September 9, 2008, and on September 30, 2008, amended proposed rule 
change SR-DTC-2008-12 pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'').\1\ Notice of the proposal was published 
in the Federal Register on October 21, 2008.\2\ The Commission received 
no comment letters. For the reasons discussed below, the Commission is 
approving the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 58757A (October 14, 
2008), 73 FR 62578.
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II. Description

    The proposed rule change seeks to increase the liquidity resources 
of DTC to ensure it has sufficient liquidity to cover the failure of a 
financial family of affiliated DTC Participants (``Affiliated 
Family'').\3\ An Affiliated Family means a Participant that controls 
another Participant or other Participants and each Participant that is 
under the control of the controlling Participant. For purposes of this 
definition, ``control'' means the direct or indirect ownership of more 
than 50% of the voting securities or other voting interests of an 
entity.\4\
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    \3\ DTC currently has 332 Participants, most of which are 
broker-dealers or banks with one Participant account. Large 
integrated organizations, however, typically have several ``legal 
entities'' with each being DTC Participants (e.g., a bank custodian 
entity and a separate securities firm entity).
    \4\ Under this definition, DTC currently has 47 Affiliated 
Families.
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    To ensure that DTC is able to complete its settlement obligations 
each day in the event of a Participant's inability to settle with DTC, 
DTC currently maintains liquidity resources of $2.5 billion composed of 
a $600 million all-cash Participants Fund and a committed line of 
credit in the amount of $1.9 billion with a consortium of banks. DTC's 
committed line of credit was recently increased from $1.4 billion. 
Given that financial firms have become increasingly interdependent, DTC 
recognizes that there is a possibility of ``contagion'' among several 
related Participants. Financial problems at one Participant may impact 
the stability of another related Participant, potentially causing both 
to fail simultaneously. Because of concerns about this potential, DTC 
and its regulators have agreed that DTC should increase its available 
liquidity resources so that DTC would be able to withstand the failure 
of a financial family of affiliated DTC Participants.\5\ To do so, DTC 
will (i) increase by $700 million the total cash deposits to DTC's all-
cash Participants Fund so that the aggregate amount of the required 
cash deposits to DTC's Participant Fund plus the required preferred 
stock investments of Participants will be increased to $1.3 billion 
from $600 million and (ii) limit the aggregate maximum net debit cap 
\6\ for any Affiliated Family to $3 billion.
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    \5\ The Commission is the primary federal regulator of DTC as a 
clearing agency. DTC is also a limited purpose trust company 
established under New York Banking Law and a state member bank of 
the Federal Reserve System. As such, the The Federal Reserve Bank of 
New York (FRBNY) and the New York State Department of Banking also 
have regulatory authority over DTC.
    \6\ In order to ensure that timely settlement can be completed 
in the event of a failure to settle by the Participant with the 
largest settlement obligation, DTC by sets debit limits (called net 
debit caps) for each Participant. A Participant's net debit is 
limited throughout the processing day to a net debit cap that is the 
lesser of four amounts: (1) An amount based on the average of the 
three largest net debits that the Participant incurred over a 
rolling 70 business day period, (2) an amount, if any, determined by 
the Participant's settling bank, (3) an amount, if any, determined 
by DTC, or (4) $1.8 billion.
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    The following variables are currently used in the determination of 
each Participant's required Participant's Fund deposit:
    (1) The six largest intraday net debit peaks for a Participant over 
a rolling 60-business day period.
    (2) Minimum Fund Deposit: $10,000.
    (3) Fund Size: $600 Million.
    DTC will continue to employ these variables to calculate the first 
$600 million of the required $1.3 billion Fund. The remaining $700 
million will be allocated proportionately among the Affiliated Families 
whose aggregate net debit caps per family exceed $2.3 billion.\7\ An 
Affiliated Family whose net debit cap exceeds $2.3 billion would be 
required to contribute a portion of the remaining $700 million 
calculated by dividing the amount by which the Affiliated Family's net 
debit cap exceeds $2.3 billion by the sum of the amounts by which each 
Affiliated Family's net debit cap exceeds $2.3 billion.\8\ Once an 
Affiliated Family's additional Participant's Fund requirement has been 
established, DTC will allocate this sum among the Participants 
comprising the Affiliated Family in proportion to each Participant's 
adjusted net debit cap.\9\ This algorithm will be systematically used 
to calculate the allocations for the Participants of each Affiliated 
Family, unless each of the Participants that comprise an Affiliated 
Family provides DTC with written instructions to allocate the aggregate 
net debit cap differently. While the Participants of an Affiliated 
Family may give instructions to reapportion their net debit caps among 
themselves, they cannot reallocate to any one Participant a debit cap 
that is greater than the DTC system calculated net debit cap for that 
Participant.
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    \7\ This amount is based on DTC's practice of maintaining a 
liquidity cushion of $200 million between its largest net debit cap 
and its liquidity resources (i.e., DTC's current liquidity of $2.5 
billion minus the $200 liquidity cushion it maintains).
    \8\ DTC will adjust the net debit caps of the Participants that 
comprise an Affiliated Family so that the aggregate affiliated net 
debit cap does not exceed $3 billion. Currently 18 Affiliate 
Families consisting of 57 DTC Participants will be subject to these 
Affiliated Family provisions. Thirteen Affiliated Families will be 
required to reduce their overall Net debit caps.
    \9\ The proposed DTC Affiliated Family Algorithm can be viewed 
on the Commission's Web site at http://www.sec.gov/rules/sro/dtc/2008/34-58757.pdf and at DTC's Web site at http://www.dtcc.com/downloads/legal/rule_filings/2008/dtc/2008-12.pdf.
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III. Discussion

    Section 19(b) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization. Section 17A(b)(3)(F) of the Act requires that the rules 
of a clearing agency be designed to assure the safeguarding of 
securities and funds in DTC's custody or control or for which it is 
responsible.\10\ The Commission believes that DTC's rule change is 
consistent with this Section because it should help assure the 
safeguarding of securities and funds in DTC's custody or

[[Page 80482]]

control or for which it is responsible by increasing DTC's liquidity 
resources to enable it to complete settlement in the event of a failure 
of a financial family of affiliated Participants.
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change, as amended, is consistent with the requirements 
of the Act and in particular Section 17A of the Act and the rules and 
regulations thereunder. In approving the proposed rule change, the 
Commission considered the proposal's impact on efficiency, competition, 
and capital formation.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-2008-12), as amended, be 
and hereby is approved.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-31048 Filed 12-30-08; 8:45 am]
BILLING CODE 8011-01-P