[Federal Register Volume 78, Number 41 (Friday, March 1, 2013)]
[Notices]
[Pages 13917-13919]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-04749]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68982; File No. SR-DTC-2012-810]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing Amendment No. 1 and No Objection to Advance Notice 
Filing, as Modified by Amendment No. 1, To Reduce Liquidity Risk 
Relating to Its Processing of Maturity and Income Presentments and 
Issuances of Money Market Instruments

February 25, 2013.

I. Introduction

    On December 28, 2012, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') advance 
notice SR-DTC-2012-810 (``Advance Notice'') pursuant to Section 806(e) 
of Title VIII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act''),\1\ entitled the Payment, Clearing, 
and Settlement Supervision Act of 2010 (``Clearing Supervision Act'' or 
``Title VIII'') and Rule 19b-4(n) of the Securities Exchange Act of 
1934 (``Exchange Act''). The Advance Notice was published in the 
Federal Register on January 18, 2013.\2\ DTC filed Amendment No. 1 to 
the Advance Notice on January 30, 2013.\3\ The Commission received one 
comment on the Advance Notice.\4\ This publication serves as notice of 
filing Amendment No. 1 and of no objection to the Advance Notice, as 
modified by Amendment No. 1.
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    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ Release No. 34-68690 (Jan. 18, 2013), 78 FR 5516 (Jan. 25, 
2013). DTC also filed a proposed rule change under Section 19(b)(1) 
of the Exchange Act relating to these changes. Release No. 34-68548 
(Dec. 28, 2012), 78 FR 795 (Jan. 4, 2013). The Commission extended 
the period of review of the proposed rule change on February 5, 
2013. Release No. 34-68834 (Feb. 5, 2013), 78 FR 9762 (Feb. 11, 
2013).
    \3\ The Amendment revised the text of DTC's Settlement Service 
Guide related to the Advance Notice by adding a sentence to clarify 
the change as stated in the Advance Notice and correcting a 
grammatical error.
    \4\ See Comment from Karen Jackson dated December 30, 2012, 
http://sec.gov/comments/sr-dtc-2012-10/dtc201210-1.htm. The comment 
discusses the ability of individuals to withdraw money from money 
market accounts, which is not implicated by the proposed rule 
change.
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II. Analysis

A. Description of MMI Processing and Proposed Rule Change

    DTC filed the Advance Notice to permit it to make rule changes 
designed to reduce liquidity risk relating to DTC's processing of 
maturity and income presentments (``Maturity Obligations'') and 
issuances of money market instruments (``MMIs''), as discussed below.
    MMIs are settled at DTC on a trade-for-trade basis. Issuers of MMIs 
that are not direct members of DTC enlist banks (``Issuing/Paying 
Agent'' or ``IPA'') to issue MMIs to broker-dealers, who in turn sell 
the MMIs to MMI investors. Debt issuance instructions are transmitted 
to DTC by the IPA, which triggers DTC crediting the IPA's DTC account 
and creating a deliver order to the broker-dealers' accounts on behalf 
of the investors.
    Maturity Obligations are initiated automatically by DTC early each 
morning for MMIs maturing that day. DTC debits the amount of the 
Maturity Obligations to the appropriate IPA's account and credits the 
same amount to the appropriate broker-dealer and custodian accounts. 
The debits and credits are conditional until final settlement at the 
end of the day. According to DTC, IPAs do not have a legal obligation 
to honor maturing MMIs if they have not received funding from the 
issuer.
    According to DTC, the common source of funding for Maturity 
Obligations is new issuances of MMIs in the same acronym by the same 
issuer on the day the Maturity Obligations are due. In a situation 
where new MMI issuances exceed the Maturity Obligations, the issuer 
would have no net funds payment due to the IPA on that day. However, 
because Maturity Obligations are processed and debited from IPA 
accounts automatically, IPAs currently incur credit risk if the issuers 
do not issue MMIs that exceed the

[[Page 13918]]

Maturity Obligations.\5\ Because IPAs do not have a legal obligation to 
honor maturing MMIs in the absence of funding from the issuer, IPAs may 
communicate to DTC an Issuer Failure/Refusal to Pay (``RTP'') for any 
issuer acronym up to 3:00 p.m. ET on the day of the affected Maturity 
Obligation. Such an instruction causes DTC, pursuant to its Rules, to 
reverse all transactions related to that issuer's acronym, including 
Maturity Obligations and any new MMI issuances, posing a potential for 
systemic risk since the reversals may override DTC's risk management 
controls such as the Collateral Monitor (``CM'') \6\ and net debit cap 
(``Net Debit Cap,'' collectively with CM, ``Settlement Risk 
Controls'').\7\
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    \5\ DTC guidelines suggest that issuers fund their net debit 
obligations to the IPA by 1:00 p.m. ET to alleviate this credit 
risk.
    \6\ A DTC ``Participant'' is a regulated institution that is 
eligible to use and uses DTC's services. See DTC Participant 
Handbook (Sept. 2011). DTC tracks collateral in a Participant's DTC 
account through the CM. At all times, the CM reflects the amount by 
which the collateral value in the account exceeds the net debit 
balance in the account. When processing a transaction, DTC verifies 
that the CM of each of the deliverer and receiver will not become 
negative when the transaction is processed. If the transaction would 
cause either party to have a negative CM, the transaction will 
recycle until the deficient account has sufficient collateral to 
proceed or until the applicable cutoff occurs. See id.
    \7\ The Net Debit Cap control is designed so that DTC may 
complete settlement even if a Participant fails to settle. Before 
completing a transaction in which a Participant is the receiver, DTC 
calculates the effect the transaction would have on such 
Participant's account, and determines whether any resulting net 
debit balance would exceed the Participant's net debit cap. Any 
transaction that would cause the net debit balance to exceed the net 
debit cap is placed on a pending (recycling) queue until the net 
debit cap will not be exceeded by processing the transaction. See 
DTC Participant Handbook (Sept. 2011).
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    DTC currently withholds intraday from each MMI member the largest 
provisional net credit (``LPNC'') of a single issuer's acronym for 
purposes of calculating the member's position in relation to the 
Settlement Risk Controls. DTC believes that the LPNC control helps 
protect DTC against either (i) the single largest issuer failure on a 
business day, or (ii) multiple failures on a business day that, taken 
together, do not exceed the largest provisional net credit.
    Recent market events have increased DTC's awareness of the 
possibility of multiple simultaneous MMI issuer failures. Multiple 
simultaneous MMI issuer failures may cause more IPAs on a given day to 
communicate an RTP to DTC, which could increase the amount of the 
reversal that could override the DTC Settlement Risk Controls. As a 
result, DTC is increasing the LPNC withholding to the two largest net 
credits (on an acronym basis). In order to alleviate any settlement 
blockage that may occur as a result of withholding the two largest 
LPNCs and to promote settlement finality, DTC will no longer process an 
RTP initiated by an IPA that serves as both an issuing agent and a 
paying agent in the same acronym on the same day when new MMI issuances 
in an acronym exceed, in dollar value, the Maturity Obligations in the 
same acronym on the same day and the receiving members' Settlement Risk 
Controls permit completion of the transaction. As a result, DTC will 
remove the LPNC withholding with respect to such acronyms at the point 
in time when it eliminates the IPA's option to initiate an RTP.

B. Discussion

    Although Title VIII does not specify a standard of review for an 
Advance Notice, the stated purpose of Title VIII is instructive.\8\ The 
stated purpose of Title VIII is 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 (``FMUs'') \9\ and providing an 
enhanced role for the Federal Reserve Board in the supervision of risk 
management standards for systemically-important FMUs.\10\
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    \8\ 12 U.S.C. 5461(b).
    \9\ DTC was designated a systemically-important FMU on July 18, 
2012, by the Financial Stability Oversight Council. Financial 
Stability Oversight Council 2012 Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
    \10\ 12 U.S.C. 5461(b).
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    Section 805(a)(2) of the Clearing Supervision Act \11\ authorizes 
the Commission to prescribe risk management standards for the payment, 
clearing, and settlement activities of designated clearing entities and 
financial institutions engaged in designated activities for which it is 
the supervisory agency or the appropriate financial regulator. Section 
805(b) of the Clearing Supervision Act \12\ states that the objectives 
and principles for the risk management standards prescribed under 
Section 805(a) shall be to:
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    \11\ 12 U.S.C. 5464(a)(2).
    \12\ 12 U.S.C. 5464(b).
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     Promote robust risk management;
     Promote safety and soundness;
     Reduce systemic risks; and
     Support the stability of the broader financial system.
    The Commission adopted risk management standards under Section 
805(a)(2) of the Clearing Supervision Act on October 22, 2012 
(``Clearing Agency Standards'').\13\ The Clearing Agency Standards 
became effective on January 2, 2013 and require clearing agencies that 
perform central counterparty services 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.\14\ As 
such, it is appropriate for the Commission to review Advance Notices 
against these risk management standards that the Commission promulgated 
under Section 805(a) and the objectives and principles of these risk 
management standards as described in Section 805(b).
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    \13\ Release No. 34-68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2, 
2012).
    \14\ The Clearing Agency Standards are substantially similar to 
the risk management standards established by the Board of Governors 
governing the operations of designated FMUs that are not clearing 
entities and financial institutions engaged in designated activities 
for which the Commission or the Commodity Futures Trading Commission 
is the Supervisory Agency. See Financial Market Utilities, 77 FR 
45907 (Aug. 2, 2012).
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    The proposal to increase the LPNC withholding from one to two on an 
acronym basis is designed to further mitigate intraday credit risk 
borne by DTC and its members during the time between the initiation of 
Maturity Obligations and the MMI issuer funding for those Maturity 
Obligations, typically by issuing new MMIs. DTC states that the 
initiative for the proposal was a heightened awareness of the 
possibility of multiple simultaneous MMI issuer failures. The proposal 
to no longer process an RTP initiated by an IPA when new issuances in 
an acronym exceed, in dollar value, the Maturity Obligations in the 
same acronym on the same day is designed to promote settlement finality 
and to alleviate the possibility of settlement blockage that may result 
from DTC increasing the LPNC withholding from one to two. Consistent 
with Section 805(a), the Commission believes these changes promote the 
safety and soundness of the operations of DTC, reduce systemic risks 
typically associated with MMI transactions, and support the stability 
of the broader financial system by promoting settlement finality of MMI 
transactions.
    Furthermore, Commission Rules 17Ad-22(d)(11) regarding Default 
Procedures and 17Ad-22(d)(12) regarding Timing of Settlement Finality, 
both adopted as part of the Clearing

[[Page 13919]]

Agency Standards,\15\ require that clearing agencies establish, 
implement, maintain and enforce, written policies and procedures 
reasonably designed to establish default procedures that ensure that 
the clearing agency can take timely action to contain losses and 
liquidity pressures and to continue meeting its obligations in the 
event of a participant default, and require that intraday or real-time 
finality be provided where necessary to reduce risks, respectively.\16\ 
Here, as described in detail above, DTC's proposed rule change to 
increase the LPNC from one to two largest provisional credits should 
help it better contain losses and liquidity pressures, yet continue to 
meet its obligations; meanwhile, DTC's proposed rule change to no 
longer process RTPs for an acronym when the described circumstances are 
met and, then, remove the LPNC for the same acronym when an RTP is no 
longer viable should improve settlement finality, thus reducing DTC's 
risk. Since RTPs will no longer be processed when new issuances in an 
acronym exceed Maturity Obligations in the same acronym in the same 
day, removing the LPNC control in these cases should not increase DTC's 
exposure to MMI issuer credit risk.
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    \15\ Release No. 34-68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2, 
2012).
    \16\ Id. at 131-139.
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III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act,\17\ that the Commission does not object to 
the proposed rule change described in the Advance Notice, as modified 
by Amendment No. 1, and that DTC be and hereby is authorized to 
implement the proposed rule change as of the date of this notice or the 
date of the ``Notice of Filing Amendment No. 2 and Order Approving 
Proposed Rule Change, as Modified by Amendment No. 2, to Reduce 
Liquidity Risk Relating to [DTC's] Processing of Maturity and Income 
Presentments and Issuances of Money Market Instruments,'' SR-DTC-2012-
10, whichever is later.
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    \17\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-04749 Filed 2-28-13; 8:45 am]
BILLING CODE 8011-01-P