[Federal Register Volume 82, Number 103 (Wednesday, May 31, 2017)]
[Notices]
[Pages 25038-25041]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-11151]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80762; File No. SR-DTC-2017-007]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Modify the DTC Settlement Service Guide To Make Technical Revisions 
To Clarify and Provide Enhanced Transparency With Respect to the 
Calculation and Adjustment of Required Participants Fund Deposits

May 24, 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 May 16, 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\ DTC filed the proposed rule change 
pursuant to Section 19(b)(3)(A) \4\ of the Act and Rule 19b-4(f)(1) \5\ 
thereunder. The proposed rule change was effective upon filing with the 
Commission. 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\ Capitalized terms not otherwise defined herein have the 
respective meanings set forth in the Rules, By-laws and Organization 
Certificate (``Rules'') of The Depository Trust Company (``DTC''), 
available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(1).
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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 text of the DTC Settlement 
Service Guide (``Settlement Guide'') \6\ to make technical revisions to 
clarify, and provide enhanced transparency with respect to, the (i) 
calculation of the Required Participants Fund Deposit of a Participant 
\7\ and (ii) factors that DTC may take into account in evaluating an 
adjustment to the Required Participants Fund Deposit of a 
Participant.\8\ The proposed rule change would also amend the text of 
the Settlement Guide to (i) change and add defined terms, (ii) make (a) 
changes for enhanced clarity and readability and (b) grammatical 
corrections and (iii) add new section headings, as discussed below.
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    \6\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/Settlement.pdf.
    \7\ Rule 1, Section 1, supra note 3. The Required Participants 
Fund Deposit of a Participant is the amount the Participant is 
required to Deposit to the Participants Fund pursuant to Section 1 
of Rule 4. Rule 4, Section 1, supra note 3. Deposit, in this 
context, pursuant to Section 1 of Rule 1, means causing the 
appropriate amount in cash to be paid to DTC for credit to the 
Participants Fund pursuant to Section 1 of Rule 4. Rule 1, Section 
1, supra note 3. The Participants Fund, described more fully below, 
is provided for in Rule 4. Rule 4, supra note 3. The Settlement 
Guide, which is proposed to be amended hereby, sets forth Procedures 
for the calculation and payment of such Deposits. See Settlement 
Guide, supra note 6 at 47-50. Procedures, in this context, pursuant 
to Section 1 of Rule 1, means ``the Procedures, service guides, and 
regulations of DTC adopted pursuant to Rule 27, as amended from time 
to time.'' Rule 1, Section 1, supra note 3. The Settlement Guide 
constitutes Procedures of DTC, as defined in the Rules. See 
Settlement Guide, supra note 6 at 3.
    \8\ Rule 9(A), Section 2, supra note 3. Pursuant to Rule 9(A), 
at the request of DTC, a Participant or Pledgee shall immediately 
furnish DTC with such assurances as DTC shall require of the 
financial ability of the Participant or Pledgee to fulfill its 
commitments and shall conform to any conditions which DTC deems 
necessary for the protection of DTC, other Participants or Pledgees, 
including deposits to the Participants Fund.
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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, 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 the text of the Settlement 
Guide \9\ to make technical revisions to clarify, and provide enhanced 
transparency with respect to, the (i) calculation of the Required 
Participants Fund Deposit of a Participant and (ii) factors that DTC 
may take into account in evaluating an adjustment to the Required 
Participants Fund Deposit of a Participant. The proposed rule change 
would also amend the text of the Settlement Guide to (i) change and add 
defined terms, (ii) make (a) changes for enhanced clarity and 
readability and (b) grammatical corrections and (iii) add new section 
headings, as discussed below.
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    \9\ Supra note 6.
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Participants Fund Components and Calculations
    DTC maintains a cash Participants Fund in an aggregate amount based 
on maintaining liquidity resources sufficient to complete net 
settlement among non-defaulting Participants if a Participant, or 
Affiliated Family of Participants, with the largest net settlement 
obligation failed to settle.\10\ If a Participant fails to settle, its 
entire Actual Participants Fund Deposit (the Required Participants Fund 
Deposit plus any Voluntary Participants Fund Deposit) may be applied to 
satisfy any liability or loss due to its default.
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    \10\ The DTC net settlement system and the Rules are structured 
so that the net settlement obligation of a Participant (its Net 
Debit Balance) is limited by its Net Debit Cap. The maximum Net 
Debit Cap of any Participant is $1.8 BN and the maximum Net Debit 
Cap for an Affiliated Family of Participants is $2.85 BN. See 
Settlement Guide, supra note 6 at 64-65. These limits are determined 
based on liquidity resources available to DTC in the cash 
Participants Fund or under a committed line of credit from a 
syndicate of commercial lenders for $1.9 BN (``Line of Credit''). 
Id. Cash in the Participants Fund equals the aggregate amount of 
Deposits to the Participants Fund by all Participants and the total 
amount of the Participants Fund is required to be at least $1.15 BN. 
See Settlement Guide, supra note 6 at 48. This proposed rule change 
sets forth the basis on which the Required Participants Fund Deposit 
of any Participant shall be calculated and certain factors that may 
be considered by DTC if further assurances are required with respect 
to a Participant.
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    The amount of the Required Participants Fund Deposit for any 
Participant is set by DTC in accordance with its Rules and the 
Settlement Guide.\11\ Each Participant must make at least a minimum 
Deposit of $7,500 to the Participants Fund.\12\ Those Participants with 
higher liquidity demands are required to Deposit additional amounts. 
Two additional amounts are determined by (i) the Participants' own 
activity and (ii) whether they belong to an Affiliated Family of 
Participants that has a has a Net Debit Cap that exceeds $2.15 BN.\13\ 
With respect to the former additional amount, the activity of each 
Participant is calculated based on a rolling average over 60 Business 
Days of the Participant's six highest intraday net debit peaks \14\ 
(for a Participant, at any time, its ``PF Average'').\15\ The latter 
additional amount is based on a formula that takes into account the 
amount by

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which the Affiliated Family's Net Debit Cap exceeds $2.15 BN.\16\
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    \11\ See Rule 4, supra note 3 and Settlement Guide, supra note 6 
at 47-49.
    \12\ Settlement Guide, supra note 2 at 47.
    \13\ Settlement Guide, supra note 6 at 48-49.
    \14\ DTC monitors the levels of each Participant's net 
settlement debits during each Business Day and records the highest 
net debit. This measure of liquidity is referred to as the 
Participant's intraday net debit peak. See Settlement Guide, supra 
note 6 at 48.
    \15\ Id.
    \16\ Settlement Guide, supra note 6 at 48-49.
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    In aggregate, the Participants Fund includes four component 
amounts, as clarified in this proposed rule change: the ``Core Fund,'' 
the ``Base Fund,'' the ``Incremental Fund'' and the ``Liquidity Fund,'' 
as defined below.\17\ The ``Core Fund'' is set by DTC at an aggregate 
amount of $450 million and is comprised of the Base Fund and the 
Incremental Fund.\18\ The ``Base Fund'' is the sum of minimum deposits 
by all Participants, i.e., the amount that is $7,500 times the number 
of Participants, at any time.\19\ The ``Incremental Fund'' is the 
balance of the Core Fund up to $450 million; \20\ this is the amount 
that must be ratably allocated based on Participants' activity, as 
reflected by their intraday net debit peaks, among Participants that 
are required to pay more than a minimum deposit.\21\ The proposed rule 
change sets forth the basis for that ratable allocation. Additionally, 
the ``Liquidity Fund'' component (set at $700 million) applies to 
Participants whose Affiliated Families have Net Debit Caps that exceed 
$2.15 BN, as currently set forth in the Settlement Guide.\22\
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    \17\ The composition of each of these components is described in 
the Settlement Guide, however (i) the Base Fund and the Core Fund 
are not assigned specific defined terms and (ii) the Incremental 
Fund and the Liquidity Fund are defined as the ``PF Differential'' 
and the ``Additional Amount,'' respectively, as discussed below. See 
Settlement Guide, supra note 6 at 47-49. For enhanced clarity in 
this regard, the four components would be renamed and/or defined in 
the Settlement Guide, as discussed below. See discussion infra 
``Changes to Defined Terms and Grammatical Revisions.''
    \18\ See supra text accompanying note 17.
    \19\ Id.
    \20\ Id.
    \21\ Those Participants whose PF Averages exceed the total 
amount of the Base Fund are required to make a Deposit to the 
Incremental Fund. This is because a Participant whose PF Average 
exceeds the total amount of the Base Fund, on an average basis, 
exceeds the liquidity resources provided by the Base Fund during the 
60-day rolling period used to determine a PF Average.
    \22\ See Settlement Guide, supra note 6 at 48-49. The amount of 
the Deposit to the Liquidity Fund that is allocated among an 
Affiliated Family of Participants is determined based on a ratio 
determined by dividing the amount by which the Participant's 
Affiliated Family Net Debit Cap exceeds $2.15 BN by the sum of the 
amounts by which each Affiliated Families' Net Debit Cap exceeds 
$2.15 BN. Once an Affiliated Family's Liquidity Fund allocation has 
been established in this regard, DTC will allocate this sum among 
the Participants comprising the Affiliated Family in proportion to 
each Participant's individual Net Debit Cap. Id. In this regard, the 
Liquidity Fund represents an additional amount allocated 
proportionally among the Affiliated Families that present the 
greatest liquidity risk to DTC. See also Securities Exchange Act 
Release No. 59148 (December 23, 2008), 73 FR 251 (December 31, 
2008)(SR-DTC-2008-12).
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    The proposed rule change clarifies the description in the 
Settlement Guide of the calculation of the amount of the Deposit by 
each Participant to the Incremental Fund and sets forth the methodology 
used to calculate that amount, as further described below under 
``Settlement Guide Changes.''
Additional Required Participants Fund Deposits
    If DTC becomes concerned with a Participant's operational or 
financial soundness, DTC may require adequate assurances of financial 
or operational capacity from the Participant, as a risk mitigant,\23\ 
including an additional Deposit to the Participants Fund.\24\ Any 
additional requirements are designed to provide appropriate incentives 
to affected Participant(s) to address the underlying condition or 
activity. In determining whether it is appropriate to require an 
additional Deposit to the Participants Fund for a Participant, DTC 
takes into account credit, market, operational or other concerns 
regarding the Participant. Typically, the following factors may be 
considered, including: (i) The Participant's liquidity arrangements; 
(ii) the Participant's overall financial condition; (iii) published 
news or reports and/or regulatory observations relating to the 
Participant; and (iv) the Participant's internal credit rating, if any. 
As guidance to Participants regarding these types of considerations, 
DTC proposes to add text to the Settlement Guide illustrating these 
concerns, as further described below under ``Settlement Guide 
Changes.''
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    \23\ Rule 9(A), Section 2, supra note 8.
    \24\ Any such additional amount shall be part of the Required 
Participants Fund Deposit of the Participant. See Rule 4, Section 
1(a), supra note 3.
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Settlement Guide Changes
Calculation of Incremental Fund
    First, the proposed rule change would amend the text of the 
Settlement Guide to provide the methodology by which DTC takes into 
account the activity of each Participant to allocate the portion of a 
Participant's Required Participants Fund Deposit to the Incremental 
Fund, as set forth below.
    In order to determine the amount a Participant must Deposit to the 
Incremental Fund, DTC makes the following calculations.
    First, DTC determines the PF Average of each Participant as the 
rolling average, over 60 Business Days, of the Participant's six 
highest intraday net debit peaks (as noted above).
    Second, DTC arrays these PF Averages from highest to lowest and 
``ranks'' them accordingly. As a result, each Participant will have a 
``PF Average Rank,'' an absolute number that is the Participant's 
numerical ranking in this array.
    Each Participant's PF Average is compared to the next lowest ranked 
PF Average and DTC calculates the difference between the higher PF 
Average and the next lower ranked PF Average to determine, for the 
Participant in question, its ``Ranked Amount Difference.''
    Separately, a ``Factor'' is calculated by dividing the amount of 
the Incremental Fund by the PF Average of the Participant with the 
highest PF Average Rank minus the amount of the Base Fund.
    Finally, the amount that a Participant shall Deposit to the 
Incremental Fund (``Required Incremental Fund Deposit'') is calculated 
as the sum of each Participant's Ranked Amount Difference, divided by 
the Participant's PF Average Rank, and multiplied by the Factor, for 
all Participants with a PF Average Rank that is less than or equal to 
the PF Average Rank of the Participant.
    The purpose of this calculation is to provide for an equitable 
distribution of the Incremental Fund among Participants, based on the 
amount by which each Participant's PF Average exceeds the amount of the 
Base Fund.
Adjustments to a Required Participants Fund Deposit
    The proposed rule change would further amend the text of the 
Settlement Guide to state that DTC may increase the Required 
Participants Fund Deposit of a Participant as provided in Rule 9(A), 
including due to a credit, market, operational, or other concern 
regarding the Participant. For illustrative purposes, typically, the 
following factors may be taken into consideration for such an increase:
    (a) The Participant's liquidity arrangement, if any;
    (b) the Participant's overall financial condition at the time and 
its apparent stability or volatility;
    (c) published news or reports and/or regulatory observations 
relating to the Participant; and
    (d) the Participant's internal credit rating, if any.
Changes to Defined Terms and Grammatical Revisions
    The Settlement Guide currently defines the portion of the 
Participants Fund represented by the Liquidity Fund as the ``Remaining 
Amount'' and the portion represented by the Incremental Fund as the 
``PF Differential.'' The

[[Page 25040]]

proposed rule change would replace the current term ``Remaining 
Amount'' with ``Liquidity Fund'' and ``PF Differential'' with 
``Incremental Fund.'' The proposed rule change would also add to the 
Settlement Guide defined terms for Core Fund, Base Fund, Factor, PF 
Average Rank, Ranked Amount Difference and Required Incremental Fund 
Deposit to be defined as these terms are defined above.
    Finally, the proposed rule change would make (i) changes to the 
text of the Settlement Guide for readability, (ii) grammatical 
corrections to punctuation and spacing and (iii) add the headings 
``Core Fund'' and ``Liquidity Fund'' above the sections that would 
discuss calculations of the Core Fund and the Liquidity Fund, 
respectively.
Effective Date of Proposed Rule Change
    The proposed rule change would become effective immediately upon 
filing with the Commission.
2. Statutory Basis
    Section 17A(b)(3)(F) of the Act \25\ requires, inter alia, that the 
Rules promote the prompt and accurate clearance and settlement of 
securities transactions. DTC believes that the proposed rule change is 
consistent with this provision because it (i) clarifies the existing 
methodology utilized by DTC to calculate Required Participants Fund 
Deposits, (ii) clarifies the factors that DTC may take into account in 
evaluating an adjustment to the Required Participants Fund Deposit of a 
Participant and (iii) makes other clarifying changes for readability 
and grammatical changes to the text of the Settlement Guide in this 
regard. As discussed above, funds Deposited to the Participants Fund 
provide DTC with liquidity resources necessary to complete end-of-day 
settlement notwithstanding the failure to settle of the Participant or 
Affiliated Family of Participants with the largest settlement 
obligation, as limited by the maximum Net Debit Cap for a Participant, 
or the maximum Affiliated Family Net Debit Cap, as applicable. 
Collectively, the proposed changes would enhance the transparency and 
clarity of the applicable provisions of the Settlement Guide, which 
would enable stakeholders to readily understand DTC's methodology for 
computation of Required Participants Fund Deposits. Therefore, by 
providing stakeholders with enhanced transparency and clarity with 
regard to the description of the computation of Required Participants 
Fund Deposits, which provide DTC with the liquidity to complete end-of-
day settlement notwithstanding the failure to settle of the Participant 
or Affiliated Family of Participants with the largest settlement 
obligation, as limited by the maximum Net Debit Cap for a Participant, 
or the maximum Affiliated Net Debit Cap, as applicable, DTC believes 
that the proposed rule change, would promote the prompt and accurate 
clearance and settlement of securities transactions consistent with 
Section 17A(b)(3)(F) of the Act.
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    \25\ 15 U.S.C. 78q-1(b)(3)(F).
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    The proposed rule change is also designed to be consistent with 
Rule 17Ad-22(e)(7) of the Act.\26\ Rule 17Ad-22(e)(7) requires DTC, 
inter alia, to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to, as applicable, to 
effectively measure, monitor, and manage the liquidity risk that arises 
in or is borne by the covered clearing agency,\27\ including measuring, 
monitoring, and managing its use of intraday liquidity by, at a minimum 
maintaining sufficient liquid resources to effect same-day settlement 
with a high degree of confidence under a wide range of stress scenarios 
that includes, but is not limited to, the default of the participant 
family that would generate the largest aggregate payment obligation for 
the covered clearing agency in extreme but plausible market conditions. 
As discussed above, the proposed rule change would (i) clarify and, 
provide greater transparency in the Settlement Guide with respect to, 
the (a) methodology used by DTC to calculate Required Participants Fund 
Deposits, which, in conjunction with the Line of Credit, provides DTC 
with an amount of liquidity sufficient to complete end-of-day 
settlement notwithstanding the failure to settle of the Participant or 
Affiliated Family of Participants with the largest settlement 
obligation as limited by the maximum Net Debit Cap for a Participant, 
or the maximum Affiliated Family Net Debit Cap, as applicable and (b) 
factors that DTC may take into account in evaluating an adjustment to a 
Participant's Required Participants Fund Deposit to address an 
underlying condition or activity of a Participant that exposes DTC to 
heightened risk due to a credit, market, operational, or other concern 
regarding the Participant, as discussed above and (ii) make other 
clarifying changes for readability and grammatical changes to the text 
of the Settlement Guide in this regard. Therefore, because the proposed 
changes to the Settlement Guide collectively clarify and provide 
greater transparency with regard to the Procedures used by DTC to 
measure, monitor, and manage each Participant's Required Participants 
Fund Deposit with respect to (i) the amount of liquidity exposure 
presented by the Participant to DTC through the Participant's DTC 
activity so that DTC maintains sufficient liquid resources which it may 
use to complete end-of-day settlement notwithstanding the failure to 
settle of the Participant or Affiliated Family of Participants with the 
largest settlement obligation, (ii) factors considered with respect to 
additional risk exposure presented by the Participant and (iii) 
readability and grammatical changes to the text of the Settlement Guide 
in this regard, DTC believes that the proposed rule change is 
consistent with Rule 17Ad-22(e)(7) promulgated under the Act.
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    \26\ 17 CFR 240.17Ad-22(e)(7).
    \27\ DTC is a ``covered clearing agency'' as defined by new Rule 
17Ad-22(a)(5) and must comply with subsection (e) of Rule 17Ad-22. 
See Securities Exchange Act Release No. 78961 (September 28, 2016), 
81 FR 70786 (October 13, 2016) (S7-03-14).
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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 on competition because the proposed rule change consists of 
clarifying changes to the Settlement Guide that do not alter the 
methodology by which Required Participants Fund Deposits are 
calculated.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    DTC has not solicited and does not intend to solicit comments 
regarding the proposed rule change. DTC has not received any 
unsolicited written comments from interested parties. To the extent DTC 
receives written comments on the proposed rule change, DTC will forward 
such comments to the Commission.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) \28\ of the Act and paragraph (f) of Rule 19b-4 \29\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors,

[[Page 25041]]

or otherwise in furtherance of the purposes of the Act.
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    \28\ 15 U.S.C. 78s(b)(3)(A).
    \29\ 17 CFR 240.19b-4(f).
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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-2017-007 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-2017-007. 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-2017-007 and should be 
submitted on or before June 20, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-11151 Filed 5-30-17; 8:45 am]
 BILLING CODE 8011-01-P