[Federal Register Volume 82, Number 68 (Tuesday, April 11, 2017)]
[Notices]
[Pages 17483-17489]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-07181]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80382; File No. SR-DTC-2017-002]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change To Address and Update 
Practices and Policies With Respect to the Credit Risk Rating Matrix 
and Make Other Changes

April 5, 2017.
    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 March 22, 2017, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On March 22, 2017, DTC filed this proposed rule change as an 
advance notice (SR-DTC-2017-801) 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) of 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.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to DTC's Rules, By-
Laws and Organization Certificate (``Rules'').\4\ The proposed rule 
change would amend Rules 1 and 2 in order to (i) address and update 
DTC's practices and policies with respect to the existing matrix 
(hereinafter referred to as the ``Credit Risk Rating Matrix'' or 
``CRRM''), which was, as described in an earlier DTC rule filing,\5\ 
developed by DTC to assign a credit rating to certain Participants 
(``CRRM-Rated Participants'') by evaluating the risks posed by CRRM-
Rated Participants to DTC and its Participants from providing services 
to these CRRM-Rated Participants and (ii) make other amendments to the 
Rules to provide more transparency and clarity regarding DTC's current 
ongoing membership monitoring process.
---------------------------------------------------------------------------

    \4\ Capitalized terms not defined herein are defined in the 
Rules, available at www.dtcc.com/~/media/Files/Downloads/legal/
rules/dtc_rules.pdf.
    \5\ See Securities Exchange Act Release No. 53655 (April 14, 
2006), 71 FR 20428 (April 20, 2006) (SR-DTC-2006-03) (order of the 
Commission) approving a proposed rule change (``2006 Rule Change'') 
of DTC to amend the criteria used by DTC to place Participants on 
surveillance status, including, but not limited to DTC's application 
of the CRRM and the placement of lower rated CRRM-Rated Participants 
on an internal list in order to be monitored more closely (``Watch 
List'').
---------------------------------------------------------------------------

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 Rules 1 and 2 in order to (i) 
address and update DTC's practices and policies with respect to the 
CRRM and (ii) provide more transparency and clarity regarding DTC's 
current membership monitoring process. In this regard, the proposed 
rule change would (i) add proposed definitions for the terms ``Credit 
Risk Rating Matrix'' and ``Watch List'' to Rule 1 (Definitions), as 
discussed below and (ii) amend Rule 2 (Participants and Pledgees) to 
(A) clarify a provision in Section 1 relating to the types of 
information a Participant must provide to DTC upon DTC's request for 
the Participant to demonstrate its satisfactory financial condition and 
operational capability, including its risk management practices with 
respect to services of DTC utilized by the Participant for another 
Person and (B) add a new Section 10 to include provisions relating to 
the monitoring, surveillance and review of Participants, including, but 
not limited to, the application of the CRRM and proposed

[[Page 17484]]

enhancements to the CRRM, as further discussed below.
(i) Background
    DTC occupies an important role in the securities settlement system 
by, among other things, providing services for the settlement of book-
entry transfer and pledge of interests in eligible deposited securities 
and net funds settlement, in connection with which Participants may 
incur net funds settlement obligations to DTC. DTC uses the CRRM, the 
Watch List and the enhanced surveillance to manage and monitor default 
risks of Participants on an ongoing basis, as discussed below. The 
level and frequency of such monitoring for a Participant is determined 
by the Participant's risk of default as assessed by DTC. Participants 
that are deemed by DTC to pose a heightened risk to DTC and its 
Participants are subject to closer and more frequent monitoring.
Existing Credit Risk Rating Matrix
    Pursuant to the 2006 Rule Change, all Participants that are either 
U.S. broker-dealers or U.S. banks are assigned a rating generated 
solely based on quantitative factors by entering financial data of 
those Participants into an internally generated credit rating matrix, 
i.e., the CRRM.\6\ All other types of Participants are monitored by 
credit risk staff using financial criteria deemed relevant by DTC but 
would not be assigned a rating by the CRRM.\7\
---------------------------------------------------------------------------

    \6\ See 2006 Rule Change, SR-DTC-2006-03, 71 FR 20428, which 
explained that the ratings assigned by the CRRM were generated using 
financial data extracted from standard regulatory reports of U.S. 
broker-dealers and banks. A small number of U.S. banks which 
submitted standard regulatory reports were not assigned a rating 
because they did not take deposits or make loans, and therefore the 
regulatory reports of these banks did not contain information on 
asset quality and/or liquidity, which was a data component used in 
the CRRM. Id. However, the 2006 Rule Change provided DTC with 
discretion to continue to ``evaluate the matrix methodology and its 
effectiveness and make such changes as it deems prudent and 
practicable within such time frames as it determines to be 
appropriate.'' Id. DTC has continued to evaluate the CRRM and has 
determined that the CRRM is the most effective method available to 
it to evaluate the default risk presented by any U.S. bank that 
submits regulatory reports, including a bank whose reports exclude 
certain data components as mentioned above. Accordingly, DTC applies 
the CRRM to assign ratings to any U.S. bank that submits regulatory 
reports, including those that were not covered by the CRRM in 2006, 
as reflected in the proposed rule change.
    \7\ In the 2006 Rule Change, DTC noted that these Participants 
would be monitored by credit risk staff by reviewing similar 
criteria as those reviewed for Participants included on the matrix 
but such review would occur outside of the matrix process. Id.
---------------------------------------------------------------------------

    The 2006 Rule Change explained that credit risk staff could 
downgrade a particular Participant's credit rating based on various 
qualitative factors. An example of such qualitative factors might be 
that the Participant in question received a qualified audit opinion on 
its annual audit. DTC noted in the 2006 Rule Change that in order to 
protect DTC and its other Participants, it was important that credit 
risk staff maintain the discretion to downgrade a Participant's credit 
rating on the CRRM and thus subject the Participant to closer 
monitoring.
    The current CRRM is comprised of two credit rating models--one for 
the U.S. broker-dealers and one for the U.S. banks--and generates 
credit ratings for the relevant Participants based on a 7-point rating 
system, with ``1'' being the strongest credit rating and ``7'' being 
the weakest credit rating.
    Over time, the current CRRM has not kept pace with DTC's evolving 
Participant membership base and heightened expectations from regulators 
and stakeholders for robustness of financial models. Specifically, the 
current CRRM only generates credit ratings for those Participants that 
are U.S. banks or U.S. broker-dealers that file standard reports with 
their regulators, which currently comprise 80% of Participants; foreign 
banks and trust companies currently account for 5% of Participants.\8\ 
The number of Participants that are foreign banks or trust companies 
increased from 12 in 2012 to 13 in 2017, and is expected to continue to 
grow over the coming years. Foreign banks and trust companies are 
typically large global financial institutions that have complex 
businesses and conduct a high volume of activities. Although foreign 
banks and trust companies are not currently rated by the CRRM, they are 
monitored by DTC's credit risk staff using financial criteria deemed 
relevant by DTC and can be placed on the Watch List if they experience 
a financial change that presents risk to DTC. Given the increase in the 
number of foreign bank Participants in recent years, there is a need to 
formalize DTC's credit risk evaluation process of the foreign bank or 
trust company Participants by assigning credit ratings to them in order 
to better facilitate the comparability of credit risks among 
Participants.\9\
---------------------------------------------------------------------------

    \8\ As of March 16, 2017, there are 251 Participants, of which 
50 (or 20%) are U.S. banks, 151 (or 60%) are U.S. broker-dealers and 
13 (or 5%) are foreign banks or trust companies.
    \9\ DTC noted in the 2006 Rule Change that the CRRM is applied 
across DTC and its affiliated clearing agencies, NSCC and FICC. 
Specifically, in order to run the CRRM, credit risk staff uses the 
financial data of the applicable DTC Participants in addition to 
data of applicable members of NSCC and FICC. In this way, each 
applicable DTC Participant is rated against other applicable members 
of NSCC and FICC. See 2006 Rule Change, SR-DTC-2006-03, 71 FR 20428.
---------------------------------------------------------------------------

    As mentioned above, a Participant's credit rating is currently 
based solely upon quantitative factors. It is only after the CRRM has 
generated a credit rating with respect to a Participant that such 
Participant's credit rating may be downgraded manually by credit risk 
staff, after taking into consideration relevant qualitative factors. 
The inability of the current CRRM to take into account qualitative 
factors requires frequent and manual overrides by credit risk staff, 
which may result in inconsistent and/or incomplete credit ratings for 
Participants.
    Furthermore, the current CRRM uses a relative scoring approach and 
relies on peer grouping of Participants to calculate the credit rating 
of a Participant. This approach is not ideal because a Participant's 
credit rating can be affected by changes in its peer group even if the 
Participant's financial condition is unchanged.
Proposed Credit Risk Rating Matrix Enhancements
    To improve the coverage and the effectiveness of the current CRRM, 
DTC is proposing three enhancements to the CRRM. The first proposed 
enhancement would expand the scope of CRRM coverage by enabling the 
CRRM to generate credit ratings for Participants that are foreign banks 
or trust companies and that have audited financial data that is 
publicly available. The second proposed enhancement would incorporate 
qualitative factors into the CRRM and therefore is expected to reduce 
the need and the frequency of manual overrides of Participant credit 
ratings. The third enhancement would replace the relative scoring 
approach currently used by CRRM with a statistical approach to estimate 
the absolute probability of default of each Participant.
A. Enable the CRRM to Generate Credit Ratings for Foreign Bank or Trust 
Company Participants
    The current CRRM is comprised of two credit rating models--one for 
the U.S. broker-dealers and one for the U.S. banks. DTC is proposing to 
enhance the CRRM by adding an additional credit rating model for the 
foreign banks and trust companies. The additional model would expand 
the scope of Participants to which the CRRM would apply to include 
foreign banks and trust companies that have audited financial data that 
is publicly available. The CRRM credit rating of a foreign bank or 
trust company that is a Participant

[[Page 17485]]

would be based on quantitative factors, including size, capital, 
leverage, liquidity, profitability and growth, and qualitative factors, 
including market position and sustainability, information reporting and 
compliance, management quality, capital management and business/product 
diversity. By enabling the CRRM to generate credit ratings for these 
Participants, the enhanced CRRM would provide more comprehensive credit 
risk coverage of DTC's membership base.
    With the proposed enhancement to the CRRM as described above, 
applicable foreign bank or trust company Participants would be included 
in the CRRM process and be evaluated more effectively and efficiently 
because financial data with respect to these foreign bank or trust 
company Participants could be extracted from data sources in an 
automated form.\10\
---------------------------------------------------------------------------

    \10\ In the 2006 Rule Change, DTC noted that these Participants 
would be monitored by credit risk staff by reviewing similar 
criteria as those reviewed for Participants included on the CRRM, 
but such review would occur outside of the CRRM process. Id.
---------------------------------------------------------------------------

    After the proposed enhancement, CRRM would be able to generate 
credit ratings on an ongoing basis for all Participants that are U.S. 
banks, U.S. brokers-dealers and foreign banks and trust companies, 
which together represent approximately 85% of Participants.\11\
---------------------------------------------------------------------------

    \11\ As of March 16, 2017, there are 37 Participants that would 
not be rated by the enhanced CRRM, as proposed, because they are 
central securities depositories, securities exchanges, government 
sponsored entities, central counterparties, central banks and U.S. 
trust companies that do not file Call Reports (as defined below).
---------------------------------------------------------------------------

B. Incorporate Qualitative Factors Into the CRRM
    In addition, as proposed, the enhanced CRRM would blend both 
qualitative factors and quantitative factors to produce a credit rating 
for each applicable Participant in relation to the Participant's credit 
risk. For U.S. and foreign banks and trust companies, the enhanced CRRM 
would use a 70/30 weighted split between quantitative and qualitative 
factors to generate credit ratings. For U.S. broker-dealers, the weight 
split between quantitative and qualitative factors would be 60/40. 
These weight splits have been chosen by DTC based on the industry best 
practice as well as research and sensitivity analysis conducted by DTC. 
DTC would review and adjust the weight splits as well as the 
quantitative and qualitative factors, as needed, based on recalibration 
of the CRRM to be conducted by DTC approximately every three to five 
years.
    Although there are advantages to measuring credit risk 
quantitatively, quantitative evaluation models alone are incapable of 
fully capturing all credit risks. Certain qualitative factors may 
indicate that a Participant is or will soon be undergoing financial 
distress, which may in turn signal a higher default exposure to DTC and 
its other Participants. As such, a key enhancement being proposed to 
the CRRM is the incorporation of relevant qualitative factors into each 
of the three credit rating models mentioned above. By including 
qualitative factors in the three credit rating models, the enhanced 
CRRM would capture risks that would otherwise not be accounted for with 
quantitative factors alone.\12\ Adding qualitative factors to the CRRM 
would not only enable it to generate more consistent and comprehensive 
credit ratings for applicable Participants, but it would also help 
reduce the need and frequency of manual credit rating overrides by the 
credit risk staff because overrides would likely only be required under 
more limited circumstances.\13\
---------------------------------------------------------------------------

    \12\ The initial set of qualitative factors that would be 
incorporated into the CRRM includes (a) for U.S. broker dealers, 
market position and sustainability, management quality, capital 
management, liquidity management, geographic diversification, 
business/product diversity and access to funding, (b) for U.S. 
banks, environment, compliance/litigation, management quality, 
liquidity management and parental demands and (c) for foreign banks 
and trust companies, market position and sustainability, information 
reporting and compliance, management quality, capital management and 
business/product diversity.
    \13\ Once a Participant is assigned a credit rating, if 
circumstances warrant, credit risk staff would still have the 
ability to override the CRRM-issued credit rating by manually 
downgrading such rating as they do today. To ensure a conservative 
approach, the CRRM-issued credit ratings cannot be manually 
upgraded.
---------------------------------------------------------------------------

C. Shifting From Relative Scoring to Absolute Scoring
    As proposed, the enhanced CRRM would use an absolute scoring 
approach and rank each Participant based on its individual probability 
of default rather than the relative scoring approach that is currently 
in use. This proposed change is designed to have a Participant's CRRM-
generated credit rating reflect an absolute measure of the 
Participant's default risk and eliminate any potential distortion of a 
Participant's credit rating from the Participant's peer group that may 
occur under the relative scoring approach used in the existing CRRM.
D. Watch List and Enhanced Surveillance
    In addition to the Watch List, DTC also maintains an enhanced 
surveillance list (referenced herein and in the proposed rule text as 
``enhanced surveillance'') for membership monitoring. The enhanced 
surveillance list is generally used when Participants are undergoing 
drastic and unexpected changes in their financial conditions or 
operation capabilities and thus are deemed by DTC to be of the highest 
risk level and/or warrant additional scrutiny due to DTC's ongoing 
concerns about these Participants. Accordingly, Participants that are 
subject to enhanced surveillance are reported to DTC's management 
committees and are also regularly reviewed by a cross-functional team 
comprised of senior management of DTC. More often than not, 
Participants that are subject to enhanced surveillance are also on the 
Watch List. The group of Participants that is subject to enhanced 
surveillance is generally much smaller than the group on the Watch 
List. The enhanced surveillance list is an internal tool for DTC that 
triggers increased monitoring of a Participant above the monitoring 
that occurs when a Participant is on the Watch List.
    A Participant could be placed on the Watch List either based on its 
credit rating of 5, 6 or 7, which can either be generated by the CRRM 
or from a manual downgrade, or when DTC deems such placement as 
necessary to protect DTC and its Participants. In contrast, a 
Participant would be subject to enhanced surveillance only when close 
monitoring of the Participant is deemed necessary to protect DTC and 
its Participants.
(ii) Detailed Description of the Proposed Rule Changes
    The 2006 Rule Change, while setting forth the procedures DTC 
follows with regard to the CRRM and the Watch List, did not incorporate 
these procedures into the text of the Rules. Pursuant to the proposed 
rule change, DTC would amend the Rules to incorporate the CRRM with the 
enhancements proposed above, including (1) the use of both quantitative 
and qualitative factors in generating credit ratings for CRRM-Rated 
Participants, (2) the expansion of the scope of CRRM coverage to enable 
the CRRM to generate credit ratings for Participants that are (a) U.S. 
banks that file the Consolidated Report of Condition and Income (``Call 
Report''), (b) U.S. broker-dealers that file the Financial and 
Operational Combined Uniform Single Report (``FOCUS

[[Page 17486]]

Report'') or the equivalent with their regulators, or (c) foreign banks 
or trust companies that have audited financial data that is publicly 
available and (3) that the CRRM would use an absolute scoring approach 
and rank each Participant based on its individual probability of 
default (rather than the relative scoring approach that is currently in 
use). Also, the proposed rule change would define the CRRM and the 
Watch List and add rule text to provide more transparency and clarity 
regarding DTC's current ongoing membership monitoring process.
    In this regard, the proposed rule change would (i) add proposed 
definitions for CRRM and Watch List to Rule 1 (Definitions) and (ii) 
amend Rule 2 (Participants and Pledgees) (A) Section 1 to clarify a 
provision relating to the types of information a Participant must 
provide to DTC upon DTC's request for the Participant to demonstrate 
its satisfactory financial condition and operational capability, 
including its risk management practices with respect to services of DTC 
utilized by the Participant for another Person or Persons and (B) to 
add a new Section 10 to include provisions relating to the monitoring, 
surveillance and review of Participants, including, but not limited to, 
the application of the CRRM and proposed enhancements to the CRRM, as 
further discussed below.
A. Proposed Changes to Rule 1 (Definitions)
    The proposed rule change would amend Rule 1 to add definitions for 
the CRRM and the Watch List.
    The proposed definition of the CRRM would provide that the term 
``Credit Risk Rating Matrix'' means a matrix of credit ratings of 
Participants as specified in the proposed new Section 10(a) of Rule 2. 
As proposed, the definition would state that the CRRM is developed by 
DTC to evaluate the credit risk such Participants pose to DTC and its 
Participants and is based on factors determined to be relevant by DTC 
from time to time, which factors are designed to collectively reflect 
the financial and operational condition of a Participant. The proposed 
definition would also state that these factors include (i) quantitative 
factors, such as capital, assets, earnings and liquidity and (ii) 
qualitative factors, such as management quality, market position/
environment and capital and liquidity risk management.
    The proposed definition of the Watch List would provide that the 
term ``Watch List'' means, at any time and from time to time, the list 
of Participants whose credit ratings derived from the CRRM are 5, 6 or 
7, as well as Participants that, based on DTC's consideration of 
relevant factors, including those that would be set forth in the 
proposed new Section 10 of Rule 2 (described below), are deemed by DTC 
to pose a heightened risk to DTC and its Participants.
B. Proposed Changes to Section 1 of Rule 2 (Participants and Pledgees)
    Section 1 of Rule 2 provides, among other things, that upon the 
request of DTC, a Participant shall furnish to DTC information 
sufficient to demonstrate its satisfactory financial condition and 
operational capability. The proposed rule change would, by way of 
example, clarify that the types of information that DTC may require in 
this regard include, but are not limited to, such information as DTC 
may request regarding the businesses and operations of the Participant 
and its risk management practices with respect to services of DTC 
utilized by the Participant for another Person.
C. Proposed New Section 10 of Rule 2
    The proposed rule change would add a new Section 10 of Rule 2 to 
include provisions relating to the monitoring, surveillance and review 
of Participants, including, but not limited to, the application of, and 
the proposed enhancements to, the CRRM. In this regard, the proposed 
new Section 10 of Rule 2 would provide that:
    (1) All Participants would be monitored and reviewed by DTC on an 
ongoing and periodic basis, which may include monitoring of news and 
market developments and review of financial reports and other public 
information.
    (2)(i) A Participant that is (A) qualified to be a Participant 
pursuant to (x) Rule 3, Section 1(d) and files the Call Report (i.e., a 
U.S. Bank) or (y) Rule 3, Section 1(h)(ii) and files the FOCUS Report 
or the equivalent with its regulator (i.e., a U.S. broker-dealer) or 
(B) a foreign bank or trust company qualified to be a Participant 
pursuant to Section 2 of the Policy Statement on the Admission of 
Participants and that has audited financial data that is publicly 
available, would be assigned a credit rating by DTC in accordance with 
the CRRM. The proposed rule change would also provide that a 
Participant's credit rating will be reassessed each time the 
Participant provides DTC with requested information pursuant to Section 
1 of Rule 2, or as may be otherwise required under the Rules and 
Procedures \14\ (including proposed new Section 10 of Rule 2).
---------------------------------------------------------------------------

    \14\ Pursuant to Section 1 of Rule 1, the term ``Procedures'' 
means the Procedures, service guides, and regulations of DTC adopted 
pursuant to Rule 27, as amended from time to time. Rules, supra note 
4.
---------------------------------------------------------------------------

    (ii) Because the factors used as part of the CRRM may not identify 
all risks that a CRRM-Rated Participant may present to DTC, DTC may, in 
its discretion, override the CRRM-Rated Participant's credit rating 
derived from the CRRM to downgrade that Participant. In this regard, 
the proposed rule change would provide that (A) such a downgrading may 
result in the Participant being placed on the Watch List, and/or it may 
subject the Participant to enhanced surveillance based on relevant 
factors, including those described in paragraph (4) below and (B) DTC 
may also take such additional actions with regard to the Participant as 
are permitted by the Rules and Procedures.
    (3) Participants other than CRRM-Rated Participants would not be 
assigned a credit rating by the CRRM but may be placed on the Watch 
List and/or may be subject to enhanced surveillance based on relevant 
factors, including those described in paragraph (4) below, as DTC deems 
necessary to protect it and its Participants.
    (4) The factors to be considered by DTC as proposed in paragraphs 
(2)(ii) and (3) above would include, but would not be not limited to, 
(i) news reports and/or regulatory observations that raise reasonable 
concerns relating to the Participant, (ii) reasonable concerns around 
the Participant's liquidity arrangements, (iii) material changes to the 
Participant's organizational structure, (iv) reasonable concerns of DTC 
about the Participant's financial stability due to particular facts and 
circumstances, such as material litigation or other legal and/or 
regulatory risks, (v) failure of the Participant to demonstrate 
satisfactory financial condition or operational capability or if DTC 
has a reasonable concern regarding the Participant's ability to 
maintain applicable participation standards and (vi) failure of the 
Participant to provide information required by DTC to assess risk 
exposure posed by the Participant's activity (including information 
requested by DTC pursuant to Section 1 of Rule 2).
    (5) A Participant being subject to enhanced surveillance or being 
placed on the Watch List would result in more thorough monitoring of 
the Participant's financial condition and/or operational capability, 
which could include, for example, on-site visits or additional due 
diligence information requests from

[[Page 17487]]

DTC. In this regard, the proposed rule change would provide that DTC 
may require a Participant placed on the Watch List and/or subject to 
enhanced surveillance to make more frequent financial disclosures, 
including, without limitation, interim and/or pro forma reports. The 
proposed rule change would also provide that Participants that are 
subject to enhanced surveillance would also be reported to DTC's 
management committees and regularly reviewed by a cross-functional team 
comprised of senior management of DTC. The proposed rule change would 
further provide that DTC may also take such additional actions with 
regard to any Participant (including a Participant placed on the Watch 
List and/or subject to enhanced surveillance) as are permitted by the 
Rules and Procedures.
Implementation Timeframe
    Pending Commission approval, DTC expects to implement this proposal 
promptly. Participants would be advised of the implementation date of 
this proposal through issuance of a DTC Important Notice.
2. Statutory Basis
    Section 17A(b)(3)(F) of the Act requires that the Rules be designed 
to promote the prompt and accurate clearance and settlement of 
securities transactions and to assure the safeguarding of securities 
and funds which are in the custody or control of DTC or for which it is 
responsible.\15\
---------------------------------------------------------------------------

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

    By enhancing the CRRM to enable it to assign credit ratings to 
Participants that are foreign banks or trust companies and that have 
audited financial data that is publicly available, DTC believes that 
the proposed rule change is consistent with Section 17A(b)(3)(F) of the 
Act. This is because the proposed rule change expands the CRRM's 
applicability to a wider group of Participants, which further improves 
DTC's membership monitoring process and better enables DTC to safeguard 
the securities and funds which are in its custody or control or for 
which it is responsible in furtherance of the Act.
    Similarly, by enhancing the CRRM to enable it to incorporate 
qualitative factors when assigning a Participant's credit rating, DTC 
believes that this proposed rule change is consistent with Section 
17A(b)(3)(F) of the Act. This is because the proposed rule change would 
enable DTC to take into account relevant qualitative factors in an 
automated and more effective manner when monitoring the credit risks 
presented by Participants, thus improving DTC's membership monitoring 
process overall, which would in turn better enable DTC to safeguard the 
securities and funds which are in its custody or control or for which 
it is responsible in furtherance of the Act.
    Likewise, by enhancing the CRRM to shift from a relative scoring 
approach to an absolute scoring approach when assigning a Participant's 
credit rating, DTC believes that this proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act. This is because the 
proposed rule change would enable DTC to generate credit ratings for 
Participants that are more reflective of the Participants' default 
risk, thus improving DTC's membership monitoring process overall, which 
would in turn better enable DTC to safeguard the securities and funds 
which are in its custody or control or for which it is responsible in 
furtherance of the Act.
    By providing specificity, clarity and additional transparency to 
the Rules related to DTC's current ongoing membership monitoring 
process, DTC believes that the proposed rule changes to (1) Rule 1 to 
add the definitions of CRRM and Watch List, (2) Section 1 of Rule 2 to 
clarify a provision relating to the types of information a Participant 
must provide to DTC upon DTC's request for the Participant to 
demonstrate its satisfactory financial condition and operational 
capability and (3) add Section 10 of Rule 2 to include provisions 
relating to the monitoring, surveillance and review of Participants, 
including, but not limited to, the application of the CRRM and proposed 
enhancements thereto, are consistent with Section 17A(b)(3)(F) of the 
Act because the proposed rule changes would help ensure that the Rules 
remain accurate and clear. Collectively, the proposed changes would 
help ensure that the Rules are more transparent, accurate and clear, 
which would help enable all stakeholders to readily understand their 
respective rights and obligations with DTC's clearance and settlement 
of securities transactions. Therefore, DTC believes that the proposed 
rule changes would promote the prompt and accurate clearance and 
settlement of securities transactions, consistent with Section 
17A(b)(3)(F) of the Act.
    The proposed enhancements to the CRRM are consistent with Rule 
17Ad-22(e)(3)(i) under the Act, which was recently adopted by the 
Commission.\16\ Rule 17Ad-22(e)(3)(i) will require DTC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to maintain a sound risk management framework for 
comprehensively managing risks that arise in or are born by DTC, which 
includes . . . systems designed to identify, measure, monitor and 
manage the range of risks that arise in or are borne by DTC.\17\ The 
proposed enhancements to the CRRM have been designed to assist DTC in 
identifying, measuring, monitoring and managing the credit risks to DTC 
posed by its Participants. The proposed enhancements to the CRRM 
accomplish this by (i) expanding the CRRM's applicability to a wider 
group of Participants to include Participants that are foreign banks or 
trust companies, (ii) enabling the CRRM to take into account relevant 
qualitative factors in an automated and more effective manner when 
monitoring the credit risks presented by Participants and (iii) 
enabling the CRRM to generate credit ratings for Participants that are 
more reflective of the Participants' default risk by shifting to an 
absolute scoring approach, all of which would improve DTC's membership 
monitoring process overall. Therefore, DTC believes the proposed 
enhancements to the CRRM would assist DTC in identifying, measuring, 
monitoring and managing risks that arise in or are born by DTC, 
consistent with the requirements of Rule 17Ad-22(e)(3)(i).
---------------------------------------------------------------------------

    \16\ 17 CFR 240.17Ad-22(e)(3)(i). The Commission adopted 
amendments to Rule 17Ad-22, including the addition of new subsection 
17Ad-22(e), on September 28, 2016. See Securities Exchange Act 
Release No. 78961 (September 28, 2016), 81 FR 70786 (October 13, 
2016) (S7-03-14). DTC is a ``covered clearing agency'' as defined by 
the new Rule 17Ad-22(a)(5) and must comply with new subsection (e) 
of Rule 17Ad-22 by April 11, 2017. Id.
    \17\ Id.
---------------------------------------------------------------------------

    The proposed rule change to Section 1 of Rule 2 with respect to the 
scope of information that may be requested by DTC from its Participants 
has been designed to be consistent with Rule 17Ad-22(e)(19) under the 
Act, which was recently adopted by the Commission.\18\ Rule 17Ad-
22(e)(19) will require DTC to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to 
identify, monitor, and manage the material risk to DTC arising from 
arrangements in which firms that are indirect participants in DTC rely 
on the services provided by Participants to access DTC's payment, 
clearing, or settlement facilities.\19\ By expressly reflecting in

[[Page 17488]]

the Rules what is already DTC's current practice associated with its 
request for information sufficient to demonstrate a Participant's 
satisfactory financial condition and operational capability to state 
that such request may include information regarding the businesses and 
operations of the Participant, as well as its risk management practices 
with respect to services of DTC utilized by the Participant for another 
Person, this proposed rule change would help enable DTC to have rule 
provisions that are reasonably designed to identify, monitor and manage 
the material risks to DTC arising from tiered participation 
arrangements consistent with Rule 17Ad-22(e)(19).
---------------------------------------------------------------------------

    \18\ 17 CFR 240.17Ad-22(e)(19). Id.
    \19\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    DTC does not believe that the proposed rule change to (i) enable 
the CRRM to generate credit ratings for Participants that are foreign 
banks or trust companies, (ii) incorporate qualitative factors into the 
CRRM and (iii) shift to an absolute scoring approach would impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the Act.\20\ These proposed enhancements to the CRRM 
would improve DTC's Participant credit risk evaluation process by (1) 
expanding the CRRM's credit rating capability and thereby providing 
more comprehensive credit risk coverage of Participants, (2) enabling 
the CRRM to generate more consistent and comprehensive credit ratings 
for Participants and thereby reducing the need and frequency for manual 
downgrades and (3) enabling the CRRM to generate credit ratings for 
Participants that are more reflective of the Participants' default 
risk. However, DTC recognizes that any change to its Participant credit 
risk evaluation process, such as the proposed rule change, may impose a 
burden on competition in terms of potential impact on Participants' 
credit ratings. Nevertheless, DTC believes that any burden on 
competition derived from the proposed rule change would be necessary 
and appropriate in furtherance of the Act because the proposed 
enhancements to the CRRM would help improve DTC's membership monitoring 
process and thus better enable DTC to safeguard the securities and 
funds which are in its custody or control or for which it is 
responsible. Furthermore, the proposed enhancements to the CRRM would 
also assist DTC in identifying, measuring, monitoring and managing 
risks that arise in or are born by DTC. As such, DTC does not believe 
the proposed enhancements to the CRRM would impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
Act.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    DTC does not believe that the proposed rule changes to (i) add 
proposed definitions for CRRM and Watch List to Rule 1 and (ii) amend 
Rule 2 to (A) clarify a provision relating to the types of information 
a Participant must provide to DTC upon DTC's request for the 
Participant to demonstrate its satisfactory financial condition and 
operational capability and (B) add provisions relating to the 
monitoring, surveillance and review of Participants that may operate 
separately or in conjunction with DTC's application of the CRRM, would 
have any impact on competition because each of such proposed rule 
changes is designed to provide additional specificity, clarity and 
transparency in the Rules regarding DTC's current ongoing membership 
monitoring process by expressly providing in the Rules DTC's current 
practices with respect to such process. As such, these proposed rule 
changes would not impact Participants or impose any burden on 
competition.

(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:
    (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 [email protected]. Please include 
File Number SR-DTC-2017-002 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-2017-002. 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 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-2017-002 and should be 
submitted on or before May 2, 2017.
---------------------------------------------------------------------------

    \21\ 17 CFR 200.30-3(a)(12).


[[Page 17489]]


---------------------------------------------------------------------------

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-07181 Filed 4-10-17; 8:45 am]
 BILLING CODE 8011-01-P