[Federal Register Volume 80, Number 229 (Monday, November 30, 2015)]
[Notices]
[Pages 74819-74822]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-30245]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76510; File No. SR-DTC-2015-011]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Proposed Rule Change Regarding the Acknowledgment
of End-of-Day Net-Net Settlement Balances by Settling Banks
November 23, 2015.
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 November 16, 2015, 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 DTC. DTC filed the proposed rule change pursuant to
section 19(b)(2) \3\ of the Act thereunder. 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\ 15 U.S.C. 78s(b)(2).
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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 the DTC Settlement Service
Guide (``Guide'') to provide that any Settling Bank that does not
affirmatively acknowledge by the Acknowledgment Cutoff Time (as defined
below) its end-of-day net-net settlement balance \4\ or notify DTC of
its refusal to settle for one or more Participants for which it is the
designated Settling Bank, would be deemed to have acknowledged its end-
of-day net-net settlement balance.\5\ DTC would also make other changes
to the Guide as set forth below.
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\4\ The end-of-day net-net settlement balance for each Settling
Bank reflects (i) a net credit amount due to the Settling Bank from
DTC, (ii) a net debit amount due from the Settling Bank to DTC, or
(iii) a zero balance so that no payment is due to or from the
Settling Bank. In accordance with the timeframes set forth in the
Guide, DTC's end-of-day funds settlement process begins with the
posting by DTC of ``final settlement figures'' at approximately 3:45
p.m. each Business Day unless extended.
\5\ Terms not otherwise defined herein have the meaning set
forth in the DTC Rules (the ``Rules''), available at http://www.dtcc.com/legal/rules-and-procedures.aspx.>
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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, 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 such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The purpose of this proposed rule change is to mitigate a risk to
DTC in settlement relating to a Settling Bank's failure to take the
action required to acknowledge its end-of-day net-net settlement
balance, or notify DTC of a refusal to settle for any Participant for
which it is the designated Settling Bank, by the Acknowledgment Cutoff
Time (as defined below).
Background
The DTC end-of-day net settlement structure depends upon the use of
Settling Banks.\6\ Each Participant must designate a Settling Bank to
settle on its behalf. Any Participant that is a bank may settle for
itself.\7\ Today, a Settling Bank that settles for other Participants
must acknowledge its end-of-day net-net settlement balance for the
group of Participants for which it settles, or notify DTC if it refuses
to settle for any Participant for which it is the designated Settling
Bank, by the later of 4:15 p.m. and the time that is 30 minutes after
the Settling Bank end-of-day net-net settlement balances are first made
available by DTC (``Acknowledgment Cutoff Time'').\8\
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\6\ See the Guide at pp. 17-18, available at http://
www.dtcc.com/~/media/Files/Downloads/legal/service-guides/
Settlement.pdf for an overview of the end-of-day net settlement
process.
\7\ See Rule 9(B), supra note 5.
\8\ Currently, a Settling Bank that settles only for itself may
opt out of the requirement to acknowledge its balance, but it cannot
refuse to settle for itself.
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If a Settling Bank notifies DTC that it refuses to settle for a
Participant, DTC would recalculate the Settling Bank's net-net
settlement balance by excluding the net settlement balance of the
Participant for which the Settling Bank refused to settle.\9\ DTC would
then provide the Settling Bank with its adjusted net-net settlement
balance (``Post-Refusal Adjusted Balance''). The Settling Bank may not
refuse to settle for any other Participant on that day and must
immediately respond to DTC to acknowledge its Post-Refusal Adjusted
Balance.
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\9\ Any Participant for which its designated Settling Bank has
refused to settle on its behalf remains obligated to DTC for the
payment of any net debit balance and must make another arrangement
to timely pay that amount by Fedwire.
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After the Acknowledgment Cutoff Time and any adjustments, DTC will
prepare and submit to the National Settlement Service (``NSS'')
provided by the Federal Reserve Banks (individually and collectively,
the ``Fed'') a file (``NSS File'') reflecting the net debits or credits
from and to all Settling Banks. NSS will process a debit or credit of
each Settling Bank's Fed account (``Fed Account''), as applicable.\10\
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\10\ The Guide currently provides that if NSS is unavailable
then, if instructed by DTC, Settling Banks in a net-net debit
balance must remit payments to DTC via Fedwire by the later of 5:00
p.m. or 1 hour after net settlement balances are first made
available. This provision would be clarified to note an operational
detail that all such payments must be remitted prior to the close of
Fedwire.
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Today, failure of a Settling Bank to timely respond to DTC after
posting of final settlement figures creates uncertainty with respect to
timely completion of settlement at DTC. The proposed rule change is
intended to address this issue as discussed below.
Proposal
To promote settlement certainty, DTC is proposing to treat a
Settling Bank that fails to timely provide its affirmative
acknowledgement of its end-of-day net-net settlement balance or notify
DTC of its refusal to settle for one or more Participants for which it
is the designated Settling Bank, as having been deemed to acknowledge
its end-of-day net-net settlement balance.
DTC proposes to modify the Guide to provide that a Settling Bank
that (i) fails to affirmatively acknowledge its end-of-day net-net
settlement balance, or (ii) does not notify DTC of its refusal to
settle on behalf of a Participant or Participants for which it is the
designated Settling Bank, by the Acknowledgement Cutoff Time, would be
deemed to have acknowledged its end-of-day net-net settlement
balance.\11\
[[Page 74820]]
The Settling Bank's balance would then, in the ordinary course of
settlement processing, be debited from or credited to its Fed Account
through the NSS process. Likewise, DTC proposes that the Guide provide
that a Settling Bank that fails to acknowledge immediately upon receipt
its Post-Refusal Adjusted Balance, if any, would be deemed to have
acknowledged its Post-Refusal Adjusted Balance and the Post-Refusal
Adjusted Balance would then, in the ordinary course of settlement
processing, be debited from or credited to its designated Fed Account
through the NSS process.
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\11\ DTC would provide reminders to Settling Banks when they
have not affirmatively acknowledged their settlement balance.
Notwithstanding delivery of reminders, once a Settling Bank is
deemed to have acknowledged its balance, it may not notify DTC of a
refusal to settle for a Participant for which it is the designated
Settling Bank.
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DTC would continue to maintain flexibility and allow for a Settling
Bank to request extra time if the Settling Bank has a reason that it
cannot affirmatively acknowledge or refuse its net-net settlement
balance so long as the Settling Bank notifies DTC accordingly at or
before the Acknowledgement Cutoff Time, or, in the case of a Post-
Refusal Adjusted Balance, it notifies DTC immediately where it is
unable to affirmatively acknowledge its Post-Refusal Adjusted Balance.
In this regard, the Guide would be updated to clarify that the Settling
Bank is required to notify DTC of its request for extra time via a
dedicated DTC Settlement phone ``hotline'' prior to the Acknowledgment
Cutoff Time. In the event that DTC provides the Settling Bank with a
Post-Refusal Adjusted Balance, the Settling Bank would be required to
notify DTC of its request for extra time immediately via the hotline.
Any Settling Bank that timely complies with this notification
requirement would not be deemed to have acknowledged its net-net
Settlement Balance or its Post-Refusal Adjusted Balance.\12\
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\12\ If the problem is due to a connectivity issue with DTC, DTC
may then direct the Settling Bank to submit its acknowledgement/
refusal instruction via email or as otherwise specified by DTC at
that time.
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If, after the initial release of final settlement figures, a
Settling Bank's net-net settlement balance is adjusted for any reason,
other than as a result of the Settling Bank's refusal to settle, then
the Acknowledgment Cutoff Time for that Settling Bank would be extended
to 30 minutes after DTC advises the Settling Bank of the adjusted net-
net settlement balance.
DTC would attempt to contact the Settling Bank if DTC does not
receive a response in the form of (i) an acknowledgment or refusal
prior to the Acknowledgment Cutoff Time, (ii) an immediate
acknowledgment of a Post-Refusal Adjusted Balance, or (iii) a
notification from the Settling Bank that it cannot acknowledge or
refuse, as described in the preceding paragraph.\13\ If DTC is able to
contact the Settling Bank and the Settling Bank notifies DTC that it
cannot, at that time, acknowledge or refuse its net-net settlement
balance, or Post-Refusal Adjusted Balance, as applicable, then the
Settling Bank would not be deemed to have acknowledged its net-net
settlement balance. However, if the Settling Bank cannot be reached,
the Settling Bank would be deemed to have acknowledged its net-net
settlement balance or Post-Refusal Adjusted Balance, as applicable.
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\13\ DTC uses the most recent contact information provided by
the Settling Bank to its DTC Relationship Manager for this purpose.
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DTC would update the Guide to clarify that each Settling Bank must
ensure that it maintains accurate contact details with DTC so that DTC
may contact the Settling Bank regarding settlement issues. Settling
Banks must update any contact details by contacting their DTC
Relationship Manager.
The Fed's cutoff for NSS processing, unless extended, is 5:30 p.m.
In order to facilitate timely processing of the NSS File, DTC would
maintain discretion to exclude a Settling Bank's balance from the NSS
File if the Settling Bank (i) (A) does not acknowledge its net-net
settlement balance by the Acknowledgment Cutoff Time, or (B) does not
immediately acknowledge its Post-Refusal Adjusted Balance; and (ii) is
not deemed to have acknowledged its net-net settlement balance or Post-
Refusal Adjusted Balance because it has notified DTC that it is unable
to affirmatively acknowledge its net-net settlement balance or to
refuse to settle on behalf of a Participant. If DTC proceeds to process
the NSS File excluding the Settling Bank's debit balance, then the
Settling Bank must pay the debit balance via Fedwire. If DTC proceeds
to process the NSS File excluding the Settling Bank's credit balance,
then DTC would pay the credit balance via Fedwire after the Settling
Bank acknowledges its settlement balance.
The text of the Guide would also state that a Settling Bank which
settles on behalf of others that timely notifies DTC that it cannot
acknowledge or refuse its end-of-day net-net settlement balance would
not be assessed a flat fee for failure to acknowledge or notify DTC of
its refusal to settle. However, such a Settling Bank would be charged
interest with respect to any borrowing DTC is required to make to
complete settlement that day for any Participant that the Settling Bank
settles on behalf of, if the Settling Bank has not timely refused to
settle for that Participant.
Additionally, DTC would revise the Guide to:
(i) clarify that it is DTC's Settlement Operations group that
controls and coordinates the settling of Participant and Settling Bank
accounts on DTC's systems;
(ii) define the Federal Reserve Banks individually and collectively
within the Guide's text as the ``Fed'' unless indicated otherwise;
(iii) clarify text for descriptive purposes, and consistent with
the Rules, that Participants make formal arrangements for a Settling
Bank to be designated as the Settling Bank to settle with DTC on the
Participant's behalf;
(iv) clarify that certain online reports DTC provides Participants
and Settling Banks through the processing day reflect ``intraday''
gross debits and credits, and net debit and credit balances;
(v) clarify that a Settling Bank's end-of-day net-net settlement
balance includes the Settling Bank's own settlement obligations as a
Participant if it settles for itself;
(vi) add text for the purpose of context, consistent with the
Rules, that each Participant is obligated to settle timely with DTC and
if its Settling Bank refuses to settle for it then it must make
alternative arrangements to make payment to DTC via Fedwire, [sic]
(vii) add text for the purpose of context, consistent with the
Rules, that a Participant that acts as its own Settling Bank may not
refuse to settle for itself and that it will be in default if it does
not fund its settlement obligation;
(viii) for clarity, change the heading to an existing example of
how a Settling Bank's settlement balance is calculated from
``Settlement Example'' to ``Example of the Calculation of a DTC
Settling Bank's Net-Net Settlement Balance'';
(ix) remove the provision from the Guide indicating that that a
Settling Bank that settles only for itself would need to affirmatively
opt out in order to not be required to affirmatively acknowledge its
settlement balance, and add text simply stating that a Settling Bank
that settles only for itself would not be required to acknowledge its
settlement balance;
(x) clarify the interest charged to Participants for a failure to
settle;
(xi) delete references to a Settling Bank's failure to timely
settle its settlement balance from being referred to as a ``failure to
settle'' and remove references to related procedures as being
``failure-to-settle'' procedures, as the terminology could be confused
with an individual Participant's failure to meet its settlement
obligation;
[[Page 74821]]
(xii) rewrite text in the Guide in light of the proposed changes,
as applicable, including Addendum A of the Guide, to incorporate
proposed changes, consolidate text, clarify text for readability and
eliminate duplication;
(xiii) clarify certain Settling Bank and settlement processing
timeframes;
(xiv) apply initial capitalization as appropriate for the terms
``Participant'' and ``Settling Bank'' where they are used as defined
terms;
(xv) remove references to Participant Terminal System (PTS)
functions, which are no longer used for DTC settlement processing; and
(xvi) insert the title of the Guide on the Guide's front page.
Implementation
The effective date of the proposed rule change would be announced
via a DTC Important Notice.
2. Statutory Basis
Section 17A(b)(3)(F) \14\ of the Act requires that the rules of the
clearing agency be designed, inter alia, to promote the prompt and
accurate clearance and settlement of securities transactions. DTC
believes that the proposed rule change is consistent with this
provision of the Act because the proposed rule change would reduce
delays in the settlement process by allowing DTC to collect net debits
and release net credits within scheduled timeframes despite the failure
of a Settling Bank to affirmatively acknowledge its end-of-day net-net
settlement balance or notify DTC of its refusal to settle for a
Participant for which it is the designated Settling Bank on a timely
basis.
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\14\ 15 U.S.C. 78q-1(b)(3)(F).
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Rule 17Ad-22(d)(5) \15\ promulgated under the Act requires, inter
alia, that a clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to, as applicable,
employ money settlement arrangements that eliminate or strictly limit
the clearing agency's settlement bank risks, that is, its credit and
liquidity risks from the use of banks to effect money settlements with
its participants; and require funds transfers to the clearing agency to
be final when effected. DTC believes the proposed rule change is
consistent with this provision because it would reduce DTC's credit and
liquidity risk by mitigating the risk that end-of-day net-net debit
settlement balances would not be paid due to the failure of a Settling
Bank to respond to DTC after posting of final settlement figures.
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\15\ 17 CFR 240.17Ad-22(d)(5).
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(B) Clearing Agency's Statement on Burden on Competition
DTC does not believe that the proposed rule change would have any
impact, or impose any burden, on competition because the proposed rule
change applies to all Settling Banks and would not have an impact on
Settling Banks' current ability to timely acknowledge their net-net
settlement balances or notify DTC of a refusal to settle on behalf of a
Participant.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
DTC filed a substantially similar proposed rule change on April 15,
2015 (``April Rule Filing''),\16\ which was subsequently withdrawn.\17\
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\16\ Securities Exchange Act Release No. 74830 (April 29, 2015),
80 FR 25727 (May 5, 2015) (File No. SR-DTC-2015-003).
\17\ Securities Exchange Act Release No. 74380 (July 7, 2015),
80 FR 40116 (July 13, 2015) (File No. SR-DTC-2015-003).
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The Commission received a favorable written comment to the April
Rule Filing.\18\ DTC also received written comments in connection with
the April Rule Filing from a Participant that is a Settling Bank for
other Participants. The Participant commented to the effect that it was
expecting, but the April Rule Filing did not clearly state, that a
Settling Bank (i) will be granted an extension to acknowledge its net-
net settlement balance whenever it is requested prior to DTC processing
the NSS File, and (ii) will not be charged a fee in situations where
such an extension has been requested. In order to fully consider these
comments DTC withdrew the April Rule Filing.
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\18\ Letter from Suzanne Shatto (May 3, 2015), available at
https://www.sec.gov/comments/sr-dtc-2015-003/dtc2015003.shtml.
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With respect to (i) above, in order to avoid wider disruption to
the DTC settlement process and the industry, DTC must have the
discretion to promptly complete settlement for the Settling Banks that
have timely acknowledged or have been deemed to have acknowledged their
respective net-net settlement balances. Therefore, although DTC can
grant limited extensions, DTC cannot grant an indefinite extension to a
Settling Bank to acknowledge its balance prior to DTC processing the
NSS File.\19\
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\19\ As stated above, DTC would maintain flexibility to allow
for a Settling Bank to request extra time if the Settling Bank
cannot affirmatively acknowledge or refuse, so long as the Settling
Bank promptly notifies DTC at or before the Acknowledgement Cutoff
Time or upon receipt of an Adjusted Balance.
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With respect to (ii) above, the proposed rule change adds text to
the Guide so that a Settling Bank that timely notifies DTC that it
cannot acknowledge or refuse its net-net settlement balance will not be
charged a flat fee for failure to acknowledge its balance. However the
Settling Bank may be charged interest.
To the extent any additional written comments are received by DTC
on the proposed rule change, DTC will forward them to the Commission.
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:
(A) by order approve or disapprove 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. 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 [email protected]. Please include
File Number SR-DTC-2015-011 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-DTC-2015-011. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements
[[Page 74822]]
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 Web site 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 Web site
(http://dtcc.com/legal/sec-rule-filings.aspx). 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-2015-011 and should be submitted on
or before December 21, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-30245 Filed 11-27-15; 8:45 am]
BILLING CODE 8011-01-P