[Federal Register Volume 83, Number 20 (Tuesday, January 30, 2018)]
[Notices]
[Pages 4297-4310]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-01691]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82582; File No. SR-DTC-2017-804]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Extension of the Review Period of an Advance 
Notice To Amend the Loss Allocation Rules and Make Other Changes

January 24, 2018.
    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 (``Clearing 
Supervision Act'') and Rule 19b-4(n)(1)(i) under the Securities 
Exchange Act of 1934 (``Act''),\1\ notice is hereby given that on 
December 18, 2017, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') advance notice 
SR-DTC-2017-804 (``Advance Notice'') as described in Items I and II 
below, which Items have been prepared by the clearing agency.\2\ The 
Commission is publishing this notice to solicit comments on the Advance 
Notice from interested persons and to extend the review period of the 
Advance Notice for an additional 60 days pursuant to Section 
806(e)(1)(H) of the Clearing Supervision Act.\3\
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    \1\ 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-4(n)(1)(i), 
respectively.
    \2\ On December 18, 2017, DTC filed the Advance Notice as a 
proposed rule change (SR-DTC-2017-022) with the Commission pursuant 
to Section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4 
thereunder, 17 CFR 240.19b-4. A copy of the proposed rule change is 
available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
    \3\ 12 U.S.C. 5465(e)(1)(H).
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    This advance notice is filed by DTC in connection with proposed 
modifications to the Rules, By-Laws and Organization Certificate of DTC 
(``Rules'').\4\ The proposed rule change would revise Rule 4 
(Participants Fund and Participants Investment) to (i) provide separate 
sections for (x) the use of the Participants Fund as a liquidity 
resource for settlement and (y) loss allocation among Participants of 
losses and liabilities arising out of Participant defaults or due to 
non-default events; and (ii) enhance the resiliency of DTC's loss 
allocation process so that DTC can take timely action to contain 
multiple loss events that occur in succession during a short period of 
time. In connection therewith, the proposed rule change would (i) align 
the loss allocation rules of the three clearing agencies of The 
Depository Trust & Clearing Corporation (``DTCC''), namely DTC, 
National Securities Clearing Corporation (``NSCC''), and Fixed Income 
Clearing Corporation (``FICC'') (collectively, the ``DTCC Clearing 
Agencies''),\5\ so as to provide consistent treatment, to the extent 
practicable and appropriate, especially for firms that are participants 
of two or more DTCC Clearing Agencies, (ii) increase transparency and 
accessibility of the provisions relating to the use of the Participants 
Fund as a liquidity resource for settlement and the loss allocation 
provisions, by enhancing their readability and clarity, (iii) require a 
defined corporate contribution to losses and liabilities that are 
incurred by DTC prior to any allocation among Participants, whether 
such losses and liabilities arise out of Participant defaults or due to 
non-default events, (iv) reduce the time within which DTC is required 
to return a former Participant's Actual Participants Fund Deposit, and 
(v) make conforming and technical changes. The proposed rule change 
would also amend Rule 1 (Definitions; Governing Law) to add cross-
references to terms that would be defined in proposed Rule 4, as 
discussed below.
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    \4\ Each capitalized term not otherwise defined herein has its 
respective meaning as set forth in the Rules, available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
    \5\ On December 18, 2017, NSCC and FICC submitted proposed rule 
changes and advance notices to enhance their rules regarding 
allocation of losses. See SR-NSCC-2017-018, SR-FICC-2017-022 and SR-
NSCC-2017-806, SR-FICC-2017-806, which were filed with the 
Commission and the Board of Governors of the Federal Reserve System, 
respectively, available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the Advance Notice 
and discussed any comments it received on the Advance Notice. 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 and B below, of the most significant aspects of such 
statements.

(A) Clearing Agency's Statement on Comments on the Advance Notice 
Received From Members, Participants or Others

    Written comments relating to this proposal have not been solicited 
or received. DTC will notify the Commission of any written comments 
received by DTC.

(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing 
Supervision Act

Nature of the Proposed Change
    The proposed rule change would revise Rule 4 (Participants Fund and 
Participants Investment) to (i) provide separate sections for (x) the 
use of the Participants Fund as a liquidity resource for settlement and 
(y) loss allocation among Participants of losses and liabilities 
arising out of Participant defaults or due to non-default events; and 
(ii) enhance the resiliency of DTC's loss allocation process so that 
DTC can take timely action to contain multiple loss events that occur 
in succession during a short period of time. In connection therewith, 
the proposed rule change would (i) align the loss allocation rules of 
the DTCC Clearing Agencies, so as to provide consistent treatment, to 
the extent practicable and appropriate, especially for firms that are 
participants of two or more DTCC Clearing Agencies, (ii) increase 
transparency and accessibility of the provisions relating to the use of 
the Participants Fund as a liquidity resource for settlement and the 
loss allocation provisions, by enhancing their readability and clarity, 
(iii) require a defined corporate contribution to losses and 
liabilities that are incurred by DTC prior to any allocation among 
Participants, whether such losses and liabilities arise out of 
Participant defaults or due to non-default events, (iv) reduce the time 
within which DTC is required to return a former Participant's Actual 
Participants Fund Deposit, and (v) make conforming and technical 
changes. The proposed rule change would also amend Rule 1 (Definitions; 
Governing Law) to add cross-references to terms that would be defined 
in proposed Rule 4, as discussed below.
(i) Background
    Current Rule 4 provides a single set of tools and a common process 
for the use

[[Page 4298]]

of the Participants Fund for both liquidity purposes to complete 
settlement among non-defaulting Participants, if one or more 
Participants fails to settle,\6\ and for the satisfaction of losses and 
liabilities due to Participant defaults or certain other losses or 
liabilities incident to the business of DTC.\7\ The proposed rule 
change would amend and add provisions to separate use of the 
Participants Fund as a liquidity resource to complete settlement, 
reflected in proposed Section 4 of Rule 4, and for loss allocation, 
reflected in proposed Section 5 of Rule 4.
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    \6\ DTC's primary objective is to complete settlement on each 
Business Day in reliance on liquidity resources comprised of, 
primarily, the Participants Fund and a committed secured line of 
credit from a syndicate of lenders. Settlement obligations of each 
Participant are limited by the amount of these liquidity resources 
through its Net Debit Cap and fully secured by Collateral of the 
Participant measured by its Collateral Monitor. These risk 
management controls are designed so that DTC may complete settlement 
notwithstanding the failure to settle of a Participant or Affiliated 
Family of Participants with the largest settlement obligation on any 
Business Day. The proposed rule change clarifies the use of the 
Participants Fund in this respect. The Actual Participants Fund 
Deposits of defaulting Participants would be applied to satisfy 
their settlement obligations and, should those be insufficient, the 
balance of the Participants Fund is also available as a liquidity 
resource. Collateral of defaulting Participants may be pledged to 
secure a borrowing under the committed line of credit.
    \7\ It may be noted that absent extreme circumstances, DTC 
believes that it is unlikely that DTC would need to act under 
proposed Sections 4 or 5 of Rule 4.
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    The proposed rule change would retain the core principles of 
current Rule 4 for both application of the Participants Fund as a 
liquidity resource to complete settlement and for loss allocation, 
while clarifying or refining certain provisions and introducing certain 
new concepts relating to loss allocation. In connection with the use of 
the Participants Fund as a liquidity resource to complete settlement 
when a Participant fails to settle, the proposed rule would introduce 
the term ``pro rata settlement charge,'' for the use of the 
Participants Fund to complete settlement as apportioned among non-
defaulting Participants. The existing term generically applied to such 
a use or to a loss allocation is simply a ``pro rata charge''.\8\
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    \8\ See Rule 4, Section 5, supra note 4.
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    For loss allocation, the proposed rule change, like current Rule 4, 
would continue to apply to both default and non-default losses and 
liabilities, and, to the extent allocated among Participants, would be 
charged ratably in accordance with their Required Participants Fund 
Deposits.\9\ A new provision would require DTC to contribute to a loss 
or liability, either arising from a Participant default or non-default 
event, prior to any allocation among Participants. The proposed rule 
change would also introduce the new concepts of an ``Event Period'' and 
a ``round'' to address the allocation of losses arising from multiple 
events that occur in succession during a short period of time. These 
proposed rule changes would be substantially similar in these respects 
to analogous proposed rule changes for NSCC and FICC.
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    \9\ It may be noted that for NSCC and FICC, the proposed rule 
changes for loss allocation include a ``look-back'' period to 
calculate a member's pro rata share and cap. The concept of a look-
back or average is already built into DTC's calculation of 
Participants Fund requirements, which are based on a rolling sixty 
(60) day average of a Participant's six highest intraday net debit 
peaks.
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Current Rule 4 Provides for Application of the Participants Fund 
Through Pro Rata Charges
    Current Rule 4 addresses the Participants Fund and Participants 
Investment requirements and, among other things, the permitted uses of 
the Participants Fund and Participants Investment.\10\ Pursuant to 
current Rule 4, DTC maintains a cash Participants Fund. The Required 
Participants Fund Deposit for any Participant is based on the liquidity 
risk it poses to DTC relative to other Participants.\11\
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    \10\ Each Participant is required to invest in DTC Series A 
Preferred Stock, ratably on a basis calculated in substantially the 
same manner as the Required Participants Fund Deposit. The Preferred 
Stock constitutes capital of DTC and is also available for use as 
provided in current and proposed Section 3 of Rule 4. This proposed 
rule change does not alter the Required Preferred Stock Investment.
    \11\ Supra note 6.
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    Default of a Participant. Under Section 3 of current Rule 4, if a 
Participant is obligated to DTC and fails to satisfy any obligation, 
DTC may, in such order and in such amounts as DTC shall determine in 
its sole discretion: (a) Apply some or all of the Actual Participants 
Fund Deposit of such Participant to such obligation; (b) Pledge some or 
all of the shares of Preferred Stock of such Participant to its lenders 
as collateral security for a loan under the End-of-Day Credit Facility; 
\12\ and/or (c) sell some or all of the shares of Preferred Stock of 
such Participant to other Participants (who shall be required to 
purchase such shares pro rata their Required Preferred Stock 
Investments at the time of such purchase), and apply the proceeds of 
such sale to satisfy such obligation.
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    \12\ As part of its liquidity risk management regime, DTC 
maintains a 364-day committed revolving line of credit with a 
syndicate of commercial lenders, renewed every year. The committed 
aggregate amount of the End-of-Day Credit Facility (currently $1.9 
billion) together with the Participants Fund constitute DTC's 
liquidity resources for settlement. Based on these amounts, DTC sets 
Net Debit Caps that limit settlement obligations.
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    Application of the Participants Fund. Section 4 of current Rule 4 
addresses the application of the Participants Fund if DTC incurs a loss 
or liability, which would include application of the Participants Fund 
to complete settlement or the allocation of losses once determined, 
including non-default losses. For both liquidity and loss scenarios, 
Section 4 of current Rule 4 provides that an application of the 
Participants Fund would be apportioned among Participants ratably in 
accordance with their Required Participants Fund Deposits, less any 
additional amount that a Participant was required to Deposit to the 
Participants Fund pursuant to Section 2 of Rule 9(A).\13\ It also 
provides for the optional use of an amount of DTC's retained earnings 
and undivided profits.
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    \13\ Section 2 of Rule 9(A) provides, in part, ``At the request 
of the Corporation, a Participant or Pledgee shall immediately 
furnish the Corporation with such assurances as the Corporation 
shall require of the financial ability of the Participant or Pledgee 
to fulfill its commitments and shall conform to any conditions which 
the Corporation deems necessary for the protection of the 
Corporation, other Participants or Pledgees, including deposits to 
the Participants Fund . . .'' Pursuant to the proposed rule change, 
the additional amount that a Participant is required to Deposit to 
the Participants Fund pursuant to Section 2 of Rule 9(A) would be 
defined as an ``Additional Participants Fund Deposit.'' This is not 
a new concept, only the addition of a defined term for greater 
clarity. In the proposed rule change, this amount continues to be 
included or excluded as provided in current Rule 4, as noted below.
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    After the Participants Fund is applied pursuant to current Section 
4, DTC must promptly notify each Participant and the Commission of the 
amount applied and the reasons therefor.
    Current Rule 4 further requires Participants whose Actual 
Participants Fund Deposits have been ratably charged to restore their 
Required Participants Fund Deposits, if such charges create a 
deficiency. Such payments are due upon demand. Iterative pro rata 
charges relating to the same loss or liability are permitted in order 
to satisfy the loss or liability.
    Rule 4 currently provides that a Participant may, within ten (10) 
Business Days after receipt of notice of any pro rata charge, notify 
DTC of its election to terminate its business with DTC, and the 
exposure of the terminating Participant for pro rata charges would be 
capped at the greater of (a) the amount of its Aggregate Required 
Deposit and Investment, as fixed immediately prior to the time of the 
first pro rata charge, plus 100% of the amount thereof, or (b) the 
amount of

[[Page 4299]]

all prior pro rata charges attributable to the same loss or liability 
with respect to which the Participant has not timely exercised its 
right to terminate.
Overview of the Proposed Rule Changes
A. Application of Participants Fund to Participant Default and for 
Settlement
    Proposed Section 3 of Rule 4 would retain the concept that when a 
Participant is obligated to DTC and fails to satisfy such obligation, 
which would be defined as a ``Participant Default,'' DTC may apply the 
Actual Participants Fund Deposit of the Participant to such obligation 
to satisfy the Participant Default. The proposed definition of 
``Participant Default'' is for drafting clarity and use in related 
provisions.
    Proposed Section 4 would address the situation of a Participant 
failure to settle (which is one type of Participant Default) if the 
application of the Actual Participants Fund Deposit of that 
Participant, pursuant to proposed Section 3, is not sufficient to 
complete settlement among non-defaulting Participants.
    Proposed Section 4 would expressly state that the Participants Fund 
may be applied by DTC, in such amounts as it may determine, in its sole 
discretion, to fund settlement among non-defaulting Participants in the 
event of the failure of a Participant to satisfy its settlement 
obligation on any Business Day. Such an application of the Participants 
Fund would be charged ratably to the Actual Participants Fund Deposits 
of the non-defaulting Participants on that Business Day. The pro rata 
charge per non-defaulting Participant would be based on the ratio of 
its Required Participants Fund Deposit to the sum of the Required 
Participants Fund Deposits of all such Participants on that Business 
Day (excluding any Additional Participants Fund Deposits in both the 
numerator and denominator of such ratio). The proposed rule change 
would identify this as a ``pro rata settlement charge,'' in order to 
distinguish application of the Participants Fund to fund settlement 
from pro rata loss allocation charges that would be established in 
proposed Section 5 of Rule 4.
    The calculation of each non-defaulting Participant's pro rata 
settlement charge would be similar to the current Section 4 calculation 
of a pro rata charge except that, for greater simplicity, it would not 
include the current distinction for common members of another clearing 
agency pursuant to a Clearing Agency Agreement.\14\ For enhanced 
clarity as to the date of determination of the ratio, it would be based 
on the Required Participants Fund Deposits as fixed on the Business Day 
of the application of the Participants Fund, as opposed to the current 
language ``at the time the loss or liability was discovered.'' \15\
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    \14\ Rule 4, Section 4(a)(1), supra note 4. DTC has determined 
that this option is unnecessary because, in practice, DTC would 
never have liability under a Clearing Agency Agreement that exceeds 
the excess assets of the Participant that defaulted.
    \15\ DTC believes that this change would provide an objective 
date that is more appropriate for the application of the 
Participants Fund to complete settlement, because the ``time the 
loss or liability was discovered'' would necessarily have to be the 
day the Participants Fund was applied to complete settlement.
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    The proposed rule change would retain the concept that requires 
DTC, following the application of the Participants Fund to complete 
settlement, to notify each Participant and the Commission of the charge 
and the reasons therefor (``Settlement Charge Notice'').
    The proposed rule change also would retain the concept of providing 
each non-defaulting Participant an opportunity to elect to terminate 
its business with DTC and thereby cap its exposure to further pro rata 
settlement charges. The proposed rule change would shorten the 
notification period for the election to terminate from ten (10) 
Business Days to five (5) Business Days,\16\ and would also change the 
beginning date of such notification period from the receipt of the 
notice to the date of the issuance of the settlement Charge Notice.\17\ 
A Participant that elects to terminate its business with DTC would, 
subject to its cap, remain responsible for (i) its pro rata settlement 
charge that was the subject of the Settlement Charge Notice and (ii) 
all other pro rata settlement charges until the Participant Termination 
Date (as defined below and in the proposed rule change). The proposed 
cap on pro rata settlement charges of a Participant that has timely 
notified DTC of its election to terminate its business with DTC would 
be the amount of its Aggregate Required Deposit and Investment, as 
fixed on the day of the pro rata settlement charge that was the subject 
of the Settlement Charge Notice, plus 100% of the amount thereof. The 
proposed cap would be no greater than the current cap.\18\
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    \16\ DTC believes this shorter period would be sufficient for a 
Participant to decide whether to give notice to terminate its 
business with DTC in response to a settlement charge. In addition, a 
five (5) Business Day pro rata settlement charge notification period 
would conform to the proposed loss allocation notification period in 
this proposed rule change and in the proposed rule changes for NSCC 
and FICC. See infra note 31. See also supra note 5.
    \17\ DTC believes that setting the start date of the 
notification period to an objective date would enhance transparency 
and provide a common timeframe to all affected Participants.
    \18\ Section 8 of current Rule 4 provides for a cap that is 
equal to the greater of (a) the amount of its Aggregate Required 
Deposit and Investment, as fixed immediately prior to the time of 
the first pro rata charge, plus 100% of the amount thereof, or (b) 
the amount of all prior pro rata charges attributable to the same 
loss or liability with respect to which the Participant has not 
timely exercised its right to limit its obligation as provided 
above. Supra note 4. The alternative limit in clause (b) would be 
eliminated in proposed Section 8(a) in favor of a single defined 
standard.
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    The pro rata application of the Actual Participants Fund Deposits 
of non-defaulting Participants to complete settlement when there is a 
Participant Default is not the allocation of a loss. A pro rata 
settlement charge would relate solely to the completion of settlement. 
New proposed loss allocation concepts described below, including, but 
not limited to, a ``round,'' ``Event Period,'' and ``Corporate 
Contribution,'' would not apply to pro rata settlement charges.\19\
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    \19\ Proposed Sections 3, 4 and 5 of Rule 4 together relate, in 
whole or in part, to what may happen when there is a Participant 
Default. Proposed Section 3 is the basic provision of remedies if a 
Participant fails to satisfy an obligation to DTC. Proposed Section 
4 is a specific remedy for a failure to settle, i.e., a specific 
type of Participant Default. Proposed Section 5 is also a remedial 
provision for a Participant Default when, additionally, DTC ceases 
to act for the Participant and there are remaining losses or 
liabilities. If a Participant Default occurs, the application of 
proposed Section 3 would be required, the application of proposed 
Section 4 would be at the discretion of DTC and the application of 
proposed Section 5 would only be triggered by the determination of 
DTC to cease to act for the defaulting Participant coupled with 
losses or liabilities incurred by DTC. Whether or not proposed 
Section 4 has been applied, once there is a loss due to a 
Participant Default and DTC ceases to act for the defaulting 
Participant, proposed Section 5 would apply.
    A principal type of Participant Default is a failure to settle. 
A Participant's obligation to pay any amount due in settlement is 
secured by Collateral of the Participant. When the Participant fails 
to pay its settlement obligation, under Rule 9(B), Section 2, DTC 
has the right to Pledge or sell such Collateral to satisfy the 
obligation. Supra note 4. (It is more likely that DTC would borrow 
against the Collateral to complete settlement on the Business Day, 
because it is unlikely to be able to liquidate Collateral for same 
day funds in time to settle on that Business Day.) If DTC Pledges 
the Collateral to secure a loan to fund settlement (e.g., under the 
End-of-Day Credit Facility), the Collateral would have to be sold to 
obtain funds to repay the loan. In any such sale of the Collateral, 
there is a risk, heightened in times of market stress, that the 
proceeds of the sale would be insufficient to repay the loan. That 
deficiency would be a liability or loss to which proposed Section 5 
of Rule 4 would apply, i.e., a Default Loss Event.
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B. Changes To Enhance Resiliency of DTC's Loss Allocation Process
    In order to enhance the resiliency of DTC's loss allocation process 
and to align, to the extent practicable and appropriate, its loss 
allocation approach to that of the other DTCC Clearing

[[Page 4300]]

Agencies, DTC proposes to introduce certain new concepts and to modify 
other aspects of its loss allocation waterfall. The proposed rule 
change would adopt an enhanced allocation approach for losses, whether 
arising from Default Loss Events or Declared Non-Default Loss Events 
(as defined below). In addition, the proposed rule change would clarify 
the loss allocation process as it relates to losses arising from or 
relating to multiple default or non-default events in a short period of 
time.
    Accordingly, DTC is proposing four (4) key changes to enhance DTC's 
loss allocation process:
(1) Mandatory Corporate Contribution
    Section 4 of current Rule 4 provides that if there is an 
unsatisfied loss or liability, DTC may, in its sole discretion and in 
such amount as DTC would determine, ``charge the existing retained 
earnings and undivided profits'' of DTC.
    Under the proposed rule change, DTC would replace the discretionary 
application of an unspecified amount of retained earnings and undivided 
profits with a mandatory, defined Corporate Contribution (as defined 
below and in the proposed rule change). The Corporate Contribution 
would be used for losses and liabilities that are incurred by DTC with 
respect to an Event Period (as defined below and in the proposed rule 
change), whether arising from a Default Loss Event or Declared Non-
Default Loss Event, before the allocation of losses to Participants.
    The proposed ``Corporate Contribution'' would be defined to be an 
amount equal to fifty percent (50%) of DTC's General Business Risk 
Capital Requirement as of the end of the calendar quarter immediately 
preceding the Event Period.\20\ DTC's General Business Risk Capital 
Requirement, as defined in DTC's Clearing Agency Policy on Capital 
Requirements,\21\ is, at a minimum, equal to the regulatory capital 
that DTC is required to maintain in compliance with Rule 17Ad-22(e)(15) 
under the Act.\22\ The Corporate Contribution would be held in addition 
to DTC's General Business Risk Capital Requirement.
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    \20\ DTC calculates its General Business Risk Capital 
Requirement as the amount equal to the greatest of (i) an amount 
determined based on its general business profile, (ii) an amount 
determined based on the time estimated to execute a recovery or 
orderly wind-down of DTC's critical operations, and (iii) an amount 
determined based on an analysis of DTC's estimated operating 
expenses for a six (6) month period.
    \21\ See Securities Exchange Act Release No. 81105 (July 7, 
2017), 82 FR 32399 (July 13, 2017) (SR-DTC-2017-003).
    \22\ 17 CFR 240.17Ad-22(e)(15).
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    The proposed Corporate Contribution would apply to losses arising 
from Default Loss Events and Declared Non-Default Loss Events, and 
would be a mandatory contribution of DTC prior to any allocation among 
Participants.\23\ As proposed, if the proposed Corporate Contribution 
is fully or partially used against a loss or liability relating to an 
Event Period, the Corporate Contribution would be reduced to the 
remaining unused amount, if any, during the following two hundred fifty 
(250) Business Days in order to permit DTC to replenish the Corporate 
Contribution.\24\ To ensure transparency, Participants would receive 
notice of any such reduction to the Corporate Contribution.
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    \23\ The proposed rule change would not require a Corporate 
Contribution with respect to a pro rata settlement charge. However, 
as discussed above, if, after a Participant Default, the proceeds of 
the sale of the Collateral of the Participant are insufficient to 
replenish the Participants Fund and/or repay the lenders under the 
End-of-Day Credit Facility, and DTC has ceased to act for the 
Participant, the shortfall would be a loss arising from a Default 
Loss Event, subject to the Corporate Contribution.
    \24\ DTC believes that two hundred fifty (250) Business Days 
would be a reasonable estimate of the time frame that DTC would 
require to replenish the Corporate Contribution by equity in 
accordance with DTC's Clearing Agency Policy on Capital 
Requirements, including a conservative additional period to account 
for any potential delays and/or unknown exigencies in times of 
distress.
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    By requiring a defined contribution of DTC corporate funds towards 
losses and liabilities arising from Default Loss Events and Declared 
Non-Default Loss Events, the proposed rule change would limit 
Participant obligations to the extent of such Corporate Contribution 
and thereby provide greater clarity and transparency to Participants as 
to the calculation of their exposure to losses and liabilities.
    Proposed Rule 4 would also further clarify that DTC can voluntarily 
apply amounts greater than the Corporate Contribution against any loss 
or liability (including non-default losses) of DTC, if the Board of 
Directors, in its sole discretion, believes such to be appropriate 
under the factual situation existing at the time.
    The proposed rule changes relating to the calculation and mandatory 
application of the Corporate Contribution are set forth in proposed 
Section 5 of Rule 4.
(2) Introducing an Event Period
    The proposed rule change would clearly define the obligations of 
DTC and its Participants regarding the allocation of losses or 
liabilities (i) relating to or arising out of a Participant Default 
which is not satisfied pursuant to proposed Section 3 of Rule 4 and DTC 
has ceased to act for such Participant (a ``Default Loss Event'') and/
or (ii) otherwise incident to the business of DTC,\25\ as determined in 
proposed Rule 4 (a ``Declared Non-Default Loss Event''). In order to 
balance the need to manage the risk of sequential loss events against 
Participants' need for certainty concerning maximum loss allocation 
exposures, DTC is proposing to introduce the concept of an ``Event 
Period'' to address the losses and liabilities that may arise from or 
relate to multiple Default Loss Events and/or Declared Non-Default Loss 
Events that arise in quick succession. Specifically, the proposal would 
group Default Loss Events and Declared Non-Default Loss Events 
occurring in a period of ten (10) Business Days (``Event Period'') for 
purposes of allocating losses to Participants in one or more rounds, 
subject to the limits of loss allocation set forth in the proposed rule 
change and as explained below.\26\ In the case of a loss or liability 
arising from or relating to a Default Loss Event, an Event Period would 
begin on the day on which DTC notifies Participants that it has ceased 
to act for a Participant (or the next Business Day, if such day is not 
a Business Day). In the case of a Declared Non-Default Loss Event, the 
Event Period would begin on the day that DTC notifies Participants of 
the determination by the Board of Directors that the applicable loss or 
liability incident to the business of DTC may be a significant and 
substantial loss or liability that may materially impair the ability of 
DTC to provide clearance and settlement services in an orderly manner 
and will potentially generate losses to be mutualized among 
Participants in order to ensure that DTC may continue to offer 
clearance and settlement services in an orderly manner. If a subsequent 
Default Loss Event or Declared Non-Default Loss Event occurs within the 
Event Period, any losses or liabilities arising out of or relating to 
any such subsequent event

[[Page 4301]]

would be resolved as losses or liabilities that are part of the same 
Event Period, without extending the duration of such Event Period. An 
Event Period may include both Default Loss Events and Declared Non-
Default Loss Events, and there would not be separate Event Periods for 
Default Loss Events or Declared Non-Default Loss Events occurring 
within overlapping ten (10) Business Day periods.
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    \25\ Section 1(f) of Rule 4 defines the term ``business'' with 
respect to DTC as ``the doing of all things in connection with or 
relating to the Corporation's performance of the services specified 
in the first and second paragraphs of Rule 6 or the cessation of 
such services.'' Supra note 4.
    \26\ DTC believes that having a ten (10) Business Day Event 
Period would provide a reasonable period of time to encompass 
potential sequential Default Loss Events and/or Declared Non-Default 
Loss Events that are likely to be closely linked to an initial event 
and/or a severe market dislocation episode, while still providing 
appropriate certainty for Participants concerning their maximum 
exposure to allocated losses with respect to such events.
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    The amount of losses that may be allocated by DTC, subject to the 
required Corporate Contribution, and to which a Loss Allocation Cap (as 
defined below and in the proposed rule change) would apply for any 
terminating Participant, would include any and all losses from any 
Default Loss Events and any Declared Non-Default Loss Events during the 
Event Period, regardless of the amount of time, during or after the 
Event Period, required for such losses to be crystallized and 
allocated.
    The proposed rule changes relating to the implementation of an 
Event Period are set forth in proposed Section 5 of Rule 4.
(3) Introducing the Concept of ``Rounds'' and Loss Allocation Notice
    Pursuant to the proposed rule change, a loss allocation ``round'' 
would mean a series of loss allocations relating to an Event Period, 
the aggregate amount of which is limited by the sum of the Loss 
Allocation Caps of affected Participants (a ``round cap''). When the 
aggregate amount of losses allocated in a round equals the round cap, 
any additional losses relating to the applicable Event Period would be 
allocated in one or more subsequent rounds, in each case subject to a 
round cap for that round. DTC would continue the loss allocation 
process in successive rounds until all losses from the Event Period are 
allocated among Participants that have not submitted a Termination 
Notice (as defined below and in the proposed rule change) in accordance 
with proposed Section 6(b) of Rule 4.
    The calculation of each Participant's pro rata allocation charge 
would be similar to the current Section 4 calculation of a pro rata 
charge except that, for greater simplicity, it would not include the 
current distinction for common members of another clearing agency 
pursuant to a Clearing Agency Agreement.\27\ In addition, for enhanced 
clarity as to the date of determination of the ratio, it would be based 
on the Required Participants Fund Deposits as fixed on the first day of 
the Event Period, as opposed to the current language ``at the time the 
loss or liability was discovered.'' \28\
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    \27\ See supra note 14.
    \28\ DTC believes that this change would provide an objective 
date that is appropriate for the new proposed loss allocation 
process, which would be designed to allocate aggregate losses 
relating to an Event Period, rather than one loss at a time.
---------------------------------------------------------------------------

    DTC would notify Participants subject to loss allocation of the 
amounts being allocated to them (``Loss Allocation Notice'') in 
successive rounds of loss allocations. Each Loss Allocation Notice 
would specify the relevant Event Period and the round to which it 
relates. Participants would receive two (2) Business Days' notice of a 
loss allocation,\29\ and Participants would be required to pay the 
requisite amount no later than the second Business Day following the 
issuance of such notice.\30\ Multiple Loss Allocation Notices may be 
issued with respect to each round, up to the round cap.
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    \29\ DTC believes allowing Participants two (2) Business Days to 
satisfy their loss allocation obligations would provide Participants 
sufficient notice to arrange funding, if necessary, while allowing 
DTC to address losses in a timely manner.
    \30\ Section 4 of current Rule 4 provides that if the 
Participants Fund is applied to a loss or liability, DTC must notify 
each Participant of the charge and the reasons therefor. Proposed 
Section 5 would modify this process to (i) require DTC to give prior 
notice; and (ii) require Participants to pay loss allocation 
charges, rather than directly charging their Required Participants 
Fund Deposits. DTC believes that shifting from the two-step 
methodology of applying the Participants Fund and then requiring 
Participants to immediately replenish it to requiring direct payment 
would increase efficiency, while preserving the right to charge the 
Settlement Account of the Participant in the event the Participant 
doesn't timely pay. Such a failure to pay would be, self-evidently, 
a Participant Default, triggering recourse to the Actual 
Participants Fund Deposit of the Participant under proposed Section 
3 of Rule 4. In addition, this change would provide greater 
stability for DTC in times of stress by allowing DTC to retain the 
Participants Fund, its critical pre-funded resource, while charging 
loss allocations.
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    The first Loss Allocation Notice in any first, second, or 
subsequent round would expressly state that such Loss Allocation Notice 
reflects the beginning of the first, second, or subsequent round, as 
the case may be, and that each Participant in that round has five (5) 
Business Days \31\ from the issuance \32\ of such first Loss Allocation 
Notice for the round (such period, a ``Loss Allocation Termination 
Notification Period'') to notify DTC of its election to terminate its 
business with DTC pursuant to proposed Section 8(b) of Rule 4, and 
thereby benefit from its Loss Allocation Cap.
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    \31\ Section 8 of current Rule 4 provides that the time period 
for a Participant to give notice of its election to terminate its 
business with DTC in respect of a pro rata charge is ten (10) 
Business Days after receiving notice of a pro rata charge. DTC 
believes that it is appropriate to shorten such time period from ten 
(10) Business Days to five (5) Business Days because DTC needs 
timely notice of which Participants would not be terminating their 
business with DTC for the purpose of calculating the loss allocation 
for any subsequent round. DTC believes that five (5) Business Days 
would provide Participants with sufficient time to decide whether to 
cap their loss allocation obligations by terminating their business 
with DTC.
    \32\ See supra note 17.
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    The round cap of any second or subsequent round may differ from the 
first or preceding round cap because there may be fewer Participants in 
a second or subsequent round if Participants elect to terminate their 
business with DTC as provided in proposed Section 8(b) of Rule 4 
following the first Loss Allocation Notice in any round.
    For example, for illustrative purposes only, after the required 
Corporate Contribution, if DTC has a $4 billion loss determined with 
respect to an Event Period and the sum of Loss Allocation Caps for all 
Participants subject to the loss allocation is $3 billion, the first 
round would begin when DTC issues the first Loss Allocation Notice for 
that Event Period. DTC could issue one or more Loss Allocation Notices 
for the first round until the sum of losses allocated equals $3 
billion. Once the $3 billion is allocated, the first round would end 
and DTC would need a second round in order to allocate the remaining $1 
billion of loss. DTC would then issue a Loss Allocation Notice for the 
$1 billion and this notice would be the first Loss Allocation Notice 
for the second round. The issuance of the Loss Allocation Notice for 
the $1 billion would begin the second round.
    The proposed rule change would link the Loss Allocation Cap to a 
round in order to provide Participants the option to limit their loss 
allocation exposure at the beginning of each round. As proposed, a 
Participant could limit its loss allocation exposure to its Loss 
Allocation Cap by providing notice of its election to terminate its 
business with DTC within five (5) Business Days after the issuance of 
the first Loss Allocation Notice in any round.
    The proposed rule changes relating to the implementation of 
``rounds'' and Loss Allocation Notices are set forth in proposed 
Section 5 of Rule 4.
(4) Capping Terminating Participants' Loss Allocation Exposure and 
Related Changes
    As discussed above, the proposed rule change would continue to 
provide Participants the opportunity to limit their loss allocation 
exposure by offering a termination option; however, the associated 
withdrawal process would be modified.
    As proposed, if a Participant provides notice of its election to 
terminate its

[[Page 4302]]

business with DTC as provided in proposed Section 8(b) of Rule 4, its 
maximum payment obligation with respect to any loss allocation round 
would be the amount of its Aggregate Required Deposit and Investment, 
as fixed on the first day of the Event Period, plus 100% of the amount 
thereof (``Loss Allocation Cap''),\33\ provided that the Participant 
complies with the requirements of the termination process in proposed 
Section 6 of Rule 4. DTC may retain the entire Actual Participants Fund 
Deposit of a Participant subject to loss allocation, up to the 
Participant's Loss Allocation Cap. If a Participant's Loss Allocation 
Cap exceeds the Participant's then-current Required Participants Fund 
Deposit, it must still pay the excess amount.
---------------------------------------------------------------------------

    \33\ See supra note 18. The alternative limit in clause (b) 
would be eliminated in proposed Section 8(b) in favor of a single 
defined standard.
---------------------------------------------------------------------------

    As proposed, Participants would have five (5) Business Days from 
the issuance of the first Loss Allocation Notice in any round to decide 
whether to terminate its business with DTC, and thereby benefit from 
its Loss Allocation Cap. The start of each round \34\ would allow a 
Participant the opportunity to notify DTC of its election to terminate 
its business with DTC after satisfaction of the losses allocated in 
such round.
---------------------------------------------------------------------------

    \34\ i.e., a Participant will only have the opportunity to 
terminate after the first Loss Allocation Notice in any round, and 
not after each Loss Allocation Notice in any round.
---------------------------------------------------------------------------

    Specifically, the first round and each subsequent round of loss 
allocation would allocate losses up to a round cap of the aggregate of 
all Loss Allocation Caps of those Participants included in the round. 
If a Participant provides notice of its election to terminate its 
business with DTC, it would be subject to loss allocation in that 
round, up to its Loss Allocation Cap. If the first round of loss 
allocation does not fully cover DTC's losses, a second round will be 
noticed to those Participants that did not elect to terminate in the 
previous round. As noted above, the amount of any second or subsequent 
round cap may differ from the first or preceding round cap because 
there may be fewer Participants in a second or subsequent round if 
Participants elect to terminate their business with DTC as provided in 
proposed Section 8(b) of Rule 4 following the first Loss Allocation 
Notice in any round.
    Pursuant to the proposed rule change, in order to avail itself of 
its Loss Allocation Cap, the Participant would need to follow the 
requirements in proposed Section 6 of Rule 4. In addition to retaining 
the substance of the existing requirements for any termination that are 
set forth in Section 6 of current Rule 4, proposed Section 6 also would 
provide that a Participant that provides a termination notice in 
connection with a loss allocation must: (1) Specify in the termination 
notice an effective date of termination (``Participant Termination 
Date''), which date shall be no later than ten (10) Business Days 
following the last day of the applicable Loss Allocation Termination 
Notification Period; (2) cease all activity that would result in 
transactions being submitted to DTC for clearance and settlement after 
the Participant Termination Date; and (3) ensure that all activities 
and use of DTC services for which such Participant may have any 
obligation to DTC cease prior to the Participant Termination Date.
    The proposed rule changes are designed to enable DTC to continue 
the loss allocation process in successive rounds until all of DTC's 
losses are allocated. Until all losses related to an Event Period are 
allocated and paid, DTC may retain the entire Actual Participants Fund 
Deposit of a Participant subject to loss allocation, up to the 
Participant's Loss Allocation Cap.
    The proposed rule changes relating to capping terminating 
Participants' loss allocation exposure and related changes to the 
termination process are set forth in proposed Sections 5, 6, and 8 of 
Rule 4.
C. Clarifying Changes Relating to Loss Allocation for Non-Default 
Events
    The proposed rule changes are intended to make the provisions in 
the Rules governing loss allocation more transparent and accessible to 
Participants. In particular, DTC is proposing the following change 
relating to loss allocation to provide clarity around the governance 
for the allocation of losses arising from a non-default event.\35\
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    \35\ Non-default losses may arise from events such as damage to 
physical assets, a cyber-attack, or custody and investment losses.
---------------------------------------------------------------------------

    Currently, DTC can use the Participants Fund to satisfy losses and 
liabilities arising from a Participant Default or arising from an event 
that is not due to a Participant Default (i.e., a non-default loss), 
provided that such loss or liability is incident to the business of 
DTC.\36\
---------------------------------------------------------------------------

    \36\ See supra note 25.
---------------------------------------------------------------------------

    DTC is proposing to clarify the governance around non-default 
losses that would trigger loss allocation to Participants by specifying 
that the Board of Directors would have to determine that there is a 
non-default loss that may be a significant and substantial loss or 
liability that may materially impair the ability of DTC to provide 
clearance and settlement services in an orderly manner and will 
potentially generate losses to be mutualized among the Participants in 
order to ensure that DTC may continue to offer clearance and settlement 
services in an orderly manner. The proposed rule change would provide 
that DTC would then be required to promptly notify Participants of this 
determination, which is referred to in the proposed rule as a Declared 
Non-Default Loss Event, as discussed above.
    Finally, as previously discussed, pursuant to the proposed rule 
change, proposed Rule 4 would include language to clarify that (i) the 
Corporate Contribution would apply to losses or liabilities arising 
from a Default Loss Event or a Declared Non-Default Loss Event, and 
(ii) the loss allocation waterfall would be applied in the same manner 
regardless of whether a loss arises from a Default Loss Event or a 
Declared Non-Default Loss Event.
    The proposed rule changes relating to Declared Non-Default Loss 
Events and Participants' obligations for such events are set forth in 
proposed Section 5 of Rule 4.
D. Changes to the Retention Time for the Actual Participants Fund 
Deposit of a Former Participant.
    Current Rule 4 provides that after three months from when a Person 
has ceased to be a Participant, DTC shall return to such Person (or its 
successor in interest or legal representative) the amount of the Actual 
Participants Fund Deposit of the former Participant plus accrued and 
unpaid interest to the date of such payment (including any amount added 
to the Actual Participants Fund Deposit of the former Participant 
through the sale of the Participant's Preferred Stock), provided that 
DTC receives such indemnities and guarantees as DTC deems satisfactory 
with respect to the matured and contingent obligations of the former 
Participant to DTC. Otherwise, within four years after a Person has 
ceased to be a Participant, DTC shall return to such Person (or its 
successor in interest or legal representative) the amount of the Actual 
Participants Fund Deposit of the former Participant plus accrued and 
unpaid interest to the date of such payment, except that DTC may offset 
against such payment the amount of any known loss or liability to DTC 
arising out of or related to the obligations of the former Participant 
to DTC.
    DTC is proposing to reduce the time, after a Participant ceases to 
be a Participant, at which DTC would be

[[Page 4303]]

required to return the amount of the Actual Participants Fund Deposit 
of the former Participant plus accrued and unpaid interest, whether the 
Participant ceases to be such because it elected to terminate its 
business with DTC in response to a Settlement Charge Notice or Loss 
Allocation Notice or otherwise. Pursuant to the proposed rule change, 
the time period would be reduced from four (4) years to two (2) years. 
All other requirements relating to the return of the Actual 
Participants Fund Deposit would remain the same.
    The four (4) year retention period was implemented at a time when 
there were more deposits and processing of physical certificates, as 
well as added risks related to manual processing, and related claims 
could surface many years after an alleged event. DTC believes that the 
change to two (2) years is appropriate because, currently, as DTC and 
the industry continue to move toward automation and dematerialization, 
claims typically surface more quickly. Therefore, DTC believes that a 
shorter retention period of two (2) years would be sufficient to 
maintain a reasonable level of coverage for possible claims arising in 
connection with the activities of a former Participant, while allowing 
DTC to provide some relief to former Participants by returning their 
Actual Participants Fund Deposits more quickly.
(ii) Proposed Rule Changes
    The foregoing changes as well as other changes (including a number 
of technical and conforming changes) that DTC is proposing in order to 
improve the transparency and accessibility of Rule 4 are described in 
detail below.
A. Changes Relating to the Retention of the Actual Participants Fund 
Deposit of a Former Participant
Section 1(h) (Proposed Section 1(g))
    As discussed above, DTC is proposing to replace ``four'' years with 
``two'' years, in order to reduce the time within which DTC would be 
required to return the Actual Participants Fund Deposit of a former 
Participant. In addition, DTC is proposing to (i) add the heading 
``Return of Participants Fund Deposits to Participants'' to proposed 
Section 1(g), (ii) update a cross reference, and (iii) correct two 
typographical errors.
B. Changes Relating to Participant Default, Pro Rata Settlement Charges 
and Loss Allocation
Section 3
    As discussed above, Section 3 of current Rule 4 provides that, if a 
Participant fails to satisfy an obligation to DTC, DTC may, in such 
order and in such amounts as DTC determines, apply the Actual 
Participants Fund Deposit of the defaulting Participant, Pledge the 
shares of Preferred Stock of the defaulting Participant to its lenders 
as collateral security for a loan, and/or sell the shares of Preferred 
Stock of the defaulting Participant to other Participants. Pursuant to 
the proposed rule change, Section 3 would retain most of these 
provisions, with the following modifications:
    DTC proposes to add the term ``Participant Default'' in proposed 
Section 3 as a defined term for the failure of a Participant to satisfy 
an obligation to DTC, for drafting clarity and use in related 
provisions. In addition, the proposed rule change clarifies that, in 
the case of a Participant Default, DTC would first apply the Actual 
Participants Fund Deposit of the Participant to any unsatisfied 
obligations, before taking any other actions. This proposed 
clarification would reflect the current practice of DTC, and would 
provide Participants with enhanced transparency into the actions DTC 
would take with respect to the Participants Fund deposits and 
Participants Investment of a Participant that has failed to satisfy its 
obligations to DTC.
    DTC proposes to correct the term ``End-of-Day Facility,'' to the 
existing defined term ``End-of-Day Credit Facility.'' DTC further 
proposes to clarify that, if DTC pledges some or all of the shares of 
Preferred Stock of a Participant to its lenders as collateral security 
for a loan under the End-of-Day Credit Facility, DTC would apply the 
proceeds of such loan to the obligation the Participant had failed to 
satisfy, which is not expressly stated in Section 3 of current Rule 4.
    In addition, DTC is proposing to make three ministerial changes to 
enhance readability by: (i) Removing the duplicative ``in,'' in the 
phrase ``in such order and in such amounts,'' (ii) replacing the word 
``eliminate'' with ``satisfy,'' and (iii) to conform to proposed 
changes, renumbering the list of actions that DTC may take when there 
is a Participant Default.
    DTC is also proposing to add the heading ``Application of 
Participants Fund Deposits and Preferred Stock Investments to 
Participant Default'' to Section 3.
Section 4 and Section 5
    As noted above, Section 4 of current Rule 4 provides that if DTC 
incurs a loss or liability which is not satisfied by charging the 
Participant responsible for the loss pursuant to Section 3 of Rule 4, 
then DTC may, in any order and in any amount as DTC may determine, in 
its sole discretion, to the extent necessary to satisfy such loss or 
liability, ratably apply some or all of the Actual Participants Fund 
Deposits of all other Participants to such loss or liability and/or 
charge the existing retained earnings and undivided profits of DTC. 
This provision relates to losses and liabilities that may be due to the 
failure of a Participant to satisfy obligations to DTC, if the Actual 
Participants Fund Deposit of that Participant does not fully satisfy 
the obligation, or to losses and liabilities for which no single 
Participant is obligated, i.e., a ``non-default loss.''
    As discussed above, current Rule 4 currently provides a single set 
of tools and common processes for using the Participants Fund as both a 
liquidity resource and for the satisfaction of other losses and 
liabilities. The proposed rule change would provide separate liquidity 
and loss allocation provisions. More specifically, proposed Section 4 
of Rule 4 would reflect the process for a ``pro rata settlement 
charge,'' the application of the Actual Participants Fund Deposits of 
non-defaulting Participants for liquidity purposes in order to complete 
settlement, when a Participant fails to satisfy its settlement 
obligation and the amount charged to its Actual Participants Fund 
Deposit by DTC pursuant to Section 3 of Rule 4 is insufficient to 
complete settlement. Proposed Section 5 of Rule 4 would contain the 
proposed loss allocation provisions.
Proposed Section 4
    Pursuant to the proposed rule change, current Section 4 would be 
replaced in its entirety by proposed Section 4, and titled 
``Application of Participants Fund Deposits of Non-Defaulting 
Participants.'' First, for clarity, proposed Section 4 would expressly 
state that ``The Participants Fund shall constitute a liquidity 
resource which may be applied by the Corporation in such amounts as the 
Corporation shall determine, in its sole discretion, to fund settlement 
among non-defaulting Participants in the event of the failure of a 
Participant to satisfy its settlement obligation on any Business Day. 
If the amount charged to the Actual Participants Fund Deposit of a 
Participant pursuant to Section 3 of this Rule is not sufficient to 
complete settlement among non-defaulting Participants on that Business 
Day, the Corporation may apply the Actual Participants Fund Deposits of 
non-defaulting Participants as provided in this Section and/or apply 
such other

[[Page 4304]]

liquidity resources as may be available to the Corporation from time to 
time, including the End-of-Day Credit Facility.''
    Proposed Section 4 would retain the current principle that DTC must 
notify Participants and the Commission when it applies the Participants 
Fund deposits of non-defaulting Participants, by stating that if the 
Actual Participants Fund Deposits of non-defaulting Participants are 
applied to complete settlement, DTC must promptly notify each 
Participant and the Commission of the amount of the charge and the 
reasons therefor, and would define such notice as a Settlement Charge 
Notice.
    Proposed Section 4 would retain the current calculation of pro rata 
charges by providing that each non-defaulting Participant's \37\ pro 
rata share of any such application of the Participants Fund, defined as 
a ``pro rata settlement charge,'' shall be equal to (i) its Required 
Participants Fund Deposit, as such Required Participants Fund Deposit 
was fixed on the Business Day of such application \38\ less its 
Additional Participants Fund Deposit, if any, on that day, divided by 
(ii) the sum of the Required Participants Fund Deposits of all non-
defaulting Participants, as such Required Participants Fund Deposits 
were fixed on that day, less the sum of the Additional Participants 
Fund Deposits, if any, of such non-defaulting Participants on that day.
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    \37\ See supra note 14.
    \38\ See supra note 15.
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    Proposed Section 4 would also provide a period of time within which 
a Participant could notify DTC of its election to terminate its 
business with DTC and thereby cap its liability, by providing that a 
Participant shall have a period of five (5) Business Days following the 
issuance of a Settlement Charge Notice (``Settlement Charge Termination 
Notification Period'') to notify DTC of its election to terminate its 
business with DTC pursuant to proposed Section 8(a), and thereby 
benefit from its Settlement Charge Cap, as set forth in proposed 
Section 8(a).\39\ Proposed Section 4 would also require that any 
Participant that gives DTC notice of its election to terminate its 
business with DTC must comply with proposed Section 6 of Rule 4,\40\ 
and if it does not, its election to terminate shall be deemed void.
---------------------------------------------------------------------------

    \39\ See supra note 16.
    \40\ Proposed Section 6 is discussed below.
---------------------------------------------------------------------------

    Proposed Section 4 would further provide that DTC may retain the 
entire amount of the Actual Participants Fund Deposit of a Participant 
subject to a pro rata settlement charge, up to the amount of the 
Participant's Settlement Charge Cap in accordance with proposed Section 
8(a) of Rule 4.
    Section 5 of current Rule 4 provides that ``Except as provided in 
Section 8 of this Rule, if a pro rata charge is made pursuant to 
Section 4 of the current Rule against the Required Participants Fund 
Deposit of a Participant, and, as a consequence, the Actual 
Participants Fund Deposit of such Participant is less than its Required 
Participants Fund Deposit, the Participant shall, upon the demand of 
the Corporation, within such time as the Corporation shall require, 
Deposit to the Participants Fund the amount in cash needed to eliminate 
any resulting deficiency in its Required Participants Fund Deposit. If 
the Participant shall fail to make such deposit to the Participants 
Fund, the Corporation may take disciplinary action against the 
Participant pursuant to these Rules. Any disciplinary action which the 
Corporation takes pursuant to these Rules, or the voluntary or 
involuntary cessation of participation by the Participant, shall not 
affect the obligations of the Participant to the Corporation or any 
remedy to which the Corporation may be entitled under applicable law.''
    Proposed Section 4 would incorporate Section 5 of current Rule 4, 
modified as follows: (i) Conformed to reflect the consolidation of 
Section 5 into proposed Section 4, (ii) replacement of ``Except as 
provided in'' with ``Subject to,'' to harmonize with language used 
elsewhere in proposed Rule 4, and (iii) corrections of two 
typographical errors, in order to accurately reflect that the Actual 
Participants Fund Deposit of a Participant would be applied, and not 
the Required Participants Fund Deposit, and to capitalize the word 
``deposit'' because it is a defined term.
Proposed Section 5
    Proposed Section 5 of Rule 4 would address the substantially new 
and revised proposed loss allocation, which would apply to losses and 
liabilities relating to or arising out of a Default Loss Event or a 
Declared Non-Default Loss Event. Pursuant to the proposed rule change, 
DTC would restructure and modify its existing loss allocation waterfall 
as described below. The heading ``Loss Allocation Waterfall'' would be 
added to proposed Section 5.
    Proposed Section 5 would establish the concept of an ``Event 
Period'' to provide for a clear and transparent way of handling 
multiple loss events occurring in a period of ten (10) Business Days, 
which would be grouped into an Event Period. As stated above, both 
Default Loss Events and Declared Non-Default Loss Events could occur 
within the same Event Period.
    The Event Period with respect to a Default Loss Event would begin 
on the day on which DTC notifies Participants that it has ceased to act 
for the Participant (or the next Business Day, if such day is not a 
Business Day). In the case of a Declared Non-Default Loss Event, the 
Event Period would begin on the day that DTC notifies Participants of 
the determination by the Board of Directors that the applicable loss or 
liability incident to the business of DTC may be a significant and 
substantial loss or liability that may materially impair the ability of 
DTC to provide clearance and settlement services in an orderly manner 
and will potentially generate losses to be mutualized among 
Participants in order to ensure that DTC may continue to offer 
clearance and settlement services in an orderly manner. Proposed 
Section 5 would provide that if a subsequent Default Loss Event or 
Declared Non-Default Loss Event occurs during an Event Period, any 
losses or liabilities arising out of or relating to any such subsequent 
event would be resolved as losses or liabilities that are part of the 
same Event Period, without extending the duration of such Event Period.
    Under proposed Section 5, the loss allocation waterfall would begin 
with a new mandatory Corporate Contribution from DTC. Rule 4 currently 
provides that the use of any retained earnings and undivided profits by 
DTC is a voluntary contribution of a discretionary amount of its 
retained earnings. Proposed Section 5 of Rule 4 would, instead, require 
a defined corporate contribution to losses and liabilities that are 
incurred by DTC with respect to an Event Period. As proposed, the 
Corporate Contribution to losses or liabilities that are incurred by 
DTC with respect to an Event Period would be defined as an amount that 
is equal to fifty percent (50%) of the amount calculated by DTC in 
respect of its General Business Risk Capital Requirement as of the end 
of the calendar quarter immediately preceding the Event Period.\41\ 
DTC's General Business Risk Capital Requirement, as defined in DTC's 
Clearing Agency Policy on Capital Requirements,\42\ is, at a minimum, 
equal to the regulatory capital that DTC is required to maintain in 
compliance with Rule 17Ad-22(e)(15) under the Act.\43\
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    \41\ See supra note 20.
    \42\ See supra note 21.
    \43\ 17 CFR 240.17Ad-22(e)(15).
---------------------------------------------------------------------------

    If DTC applies the Corporate Contribution to a loss or liability 
arising out of or relating to one or more Default

[[Page 4305]]

Loss Events or Declared Non-Default Loss Events relating to an Event 
Period, then for any subsequent Event Periods that occur during the 
next two hundred fifty (250) Business Days, the Corporate Contribution 
would be reduced to the remaining unused portion of the Corporate 
Contribution amount that was applied for the first Event Period.\44\ 
Proposed Section 5 would require DTC to notify Participants of any such 
reduction to the Corporate Contribution.
---------------------------------------------------------------------------

    \44\ See supra note 24.
---------------------------------------------------------------------------

    Proposed Section 5 of Rule 4 would provide that nothing in the 
Rules would prevent DTC from voluntarily applying amounts greater than 
the Corporate Contribution against any DTC loss or liability, if the 
Board of Directors, in its sole discretion, believes such to be 
appropriate under the factual situation existing at the time.
    Proposed Section 5 of Rule 4 would provide that DTC shall apply the 
Corporate Contribution to losses and liabilities that arise out of or 
relate to one or more Default Loss Events and/or Declared Non-Default 
Loss Events that occur within an Event Period. The proposed rule change 
also provides that if losses and liabilities with respect to such Event 
Period remain unsatisfied following application of the Corporate 
Contribution, DTC would allocate such losses and liabilities to 
Participants, as described below.
    Proposed Section 5 of Rule 4 would state that all Participants 
would be subject to loss allocation for losses and liabilities arising 
out of or relating to a Declared Non-Default Loss Event; however, in 
the case of losses and liabilities arising out of or relating to a 
Default Loss Event, only non-defaulting Participants would be subject 
to loss allocation. In addition, DTC is proposing to clarify that after 
a first round of loss allocations with respect to an Event Period, only 
Participants that have not submitted a Termination Notice in accordance 
with proposed Section 6(b) of Rule 4 would be subject to loss 
allocations with respect to subsequent rounds relating to that Event 
Period. The proposed change would also provide that DTC may retain the 
entire Actual Participants Fund Deposit of a Participant subject to 
loss allocation, up to the Participant's Loss Allocation Cap in 
accordance with proposed Section 8(b) of Rule 4.
    Pursuant to the proposed rule change, DTC would notify Participants 
subject to loss allocation of the amounts being allocated to them by a 
Loss Allocation Notice in successive rounds of loss allocations. 
Proposed Section 5 would state that a loss allocation ``round'' would 
mean a series of loss allocations relating to an Event Period, the 
aggregate amount of which is limited by the sum of the Loss Allocation 
Caps of affected Participants (a ``round cap''). When the aggregate 
amount of losses allocated in a round equals the round cap, any 
additional losses relating to the applicable Event Period would be 
allocated in one or more subsequent rounds, in each case subject to a 
round cap for that round. DTC may continue the loss allocation process 
in successive rounds until all losses from the Event Period are 
allocated among Participants that have not submitted a Termination 
Notice in accordance with proposed Section 6(b) of Rule 4.
    Each loss allocation would be communicated to Participants by 
issuance of a Loss Allocation Notice. Each Loss Allocation Notice would 
specify the relevant Event Period and the round to which it relates. 
The first Loss Allocation Notice in any first, second, or subsequent 
round would expressly state that such Loss Allocation Notice reflects 
the beginning of the first, second, or subsequent round, as the case 
may be, and that each Participant in that round has five (5) Business 
Days from the issuance of such first Loss Allocation Notice for the 
round \45\ to notify DTC of its election to terminate its business with 
DTC pursuant to proposed Section 8(b) of Rule 4, and thereby benefit 
from its Loss Allocation Cap.\46\
---------------------------------------------------------------------------

    \45\ i.e., the Loss Allocation Termination Notification Period 
for that round.
    \46\ See supra note 31.
---------------------------------------------------------------------------

    Loss allocation obligations would continue to be calculated based 
upon a Participant's pro rata share of the loss.\47\ As proposed, each 
Participant's pro rata share of losses and liabilities to be allocated 
in any round shall be equal to (i) (A) its Required Participants Fund 
Deposit, as such Required Participants Fund Deposit was fixed on the 
first day of the Event Period,\48\ less (B) its Additional Participants 
Fund Deposit, if any, on such day, divided by (ii) (A) the sum of the 
Required Participants Fund Deposits of all Participants subject to loss 
allocation in such round, as such Required Participants Fund Deposits 
were fixed on such day, less (B) the sum of any Additional Participants 
Fund Deposits, if any, of all Participants subject to loss allocation 
in such round on such day.\49\
---------------------------------------------------------------------------

    \47\ See supra note 27.
    \48\ Supra note 15.
    \49\ Supra note 9.
---------------------------------------------------------------------------

    As proposed, Participants would have two (2) Business Days after 
DTC issues a first round Loss Allocation Notice to pay the amount 
specified in any such notice. In contrast to the current Section 4, 
under which DTC may apply the Actual Participants Fund Deposits of 
Participants directly to the satisfaction of loss allocation amounts, 
under proposed Section 5, DTC would require Participants to pay their 
loss allocation amounts (leaving their Actual Participants Fund 
Deposits intact).\50\ On a subsequent round (i.e., if the first round 
did not cover the entire loss of the Event Period because DTC was only 
able to allocate up to the sum of the Loss Allocation Caps of those 
Participants included in the round), Participants would also have two 
(2) Business Days after notice by DTC to pay their loss allocation 
amounts (again subject to their Loss Allocation Caps), unless a 
Participant timely notified (or will timely notify) DTC of its election 
to terminate its business with DTC with respect to a prior loss 
allocation round.
---------------------------------------------------------------------------

    \50\ See supra note 30.
---------------------------------------------------------------------------

    Under the proposal, if a Participant fails to make its required 
payment in respect of a Loss Allocation Notice by the time such payment 
is due, DTC would have the right to proceed against such Participant as 
a Participant that has failed to satisfy an obligation in accordance 
with proposed Section 3 of Rule 4 described above. Participants who 
wish to terminate their business with DTC would be required to comply 
with the requirements in proposed Section 6 of Rule 4, described 
further below. Specifically, proposed Section 5 would provide that if, 
after notifying DTC of its election to terminate its business with DTC 
pursuant to proposed Section 8(b) of Rule 4, the Participant fails to 
comply with the provisions of proposed Section 6 of Rule 4, its notice 
of termination would be deemed void and any further losses resulting 
from the applicable Event Period may be allocated against it as if it 
had not given such notice.
Section 6
    Section 6 of Rule 4 currently provides that whenever a Participant 
ceases to be such, it continues to be obligated (a) to satisfy any 
deficiency in the amount of its Required Participants Fund Deposit and/
or Required Preferred Stock Investment that it did not satisfy prior to 
such time, including (i) any deficiency resulting from a pro rata 
charge with respect to which the Participant has given notice to DTC of 
its election to terminate its business with DTC pursuant to Section 8 
of Rule 4 and (ii) any deficiency the Participant is required to 
satisfy pursuant to Sections 3 (an obligation that a

[[Page 4306]]

Participant failed to satisfy) or 5 (the requirement of a Participant 
to eliminate the deficiency in its Required Participants Fund Deposit) 
of Rule 4 and (b) to discharge any liability of the Participant to DTC 
resulting from the transactions of the Participant open at the time it 
ceases to be a Participant or on account of transactions occurring 
while it was a Participant.
    Proposed Section 6 of Rule 4, titled ``Obligations of Participant 
Upon Termination,'' would consolidate the termination requirements from 
Section 6 of current Rule 4 into proposed Section 6(a), titled ``Upon 
Any Termination,'' and would modify them to conform to other proposed 
rule changes. Specifically, proposed Section 6(a) would state that, 
subject to proposed Section 8 of the Rule, whenever a Participant 
ceases to be such, it shall continue to be obligated (i) to satisfy any 
deficiency in the amounts of its Required Participants Fund Deposit 
and/or Required Preferred Stock Investment that it did not satisfy 
prior to such time, including any deficiency the Participant is 
required to satisfy pursuant to proposed Sections 3 or 4 of the Rule, 
and (ii) to discharge any liability of the Participant to DTC resulting 
from the transactions of the Participant open at the time it ceases to 
be a Participant or on account of transactions occurring while it was a 
Participant.
    Proposed Section 6(b), titled ``Upon Termination Following 
Settlement Charge or Loss Allocation,'' would state that if a 
Participant timely notifies DTC of its election to terminate its 
business with DTC in respect of a pro rata settlement charge as set 
forth in proposed Section 4 of Rule 4 or a loss allocation as set forth 
in proposed Section 5 of Rule 4 (``Termination Notice''), the 
Participant would be required to: (1) Specify in the Termination Notice 
a Participant Termination Date, which date shall be no later than ten 
Business Days following the last day of the applicable Settlement 
Charge Termination Notification Period or Loss Allocation Termination 
Notification Period; (2) cease all activity that would result in 
transactions being submitted to DTC for clearance and settlement after 
the Participant Termination Date; and (3) ensure that all activities 
and use of DTC services for which such Participant may have any 
obligation to DTC cease prior to the Participant Termination Date.
    DTC is proposing to include a sentence in proposed Section 6(b) to 
make it clear that if the Participant fails to comply with the 
requirements set forth in this section, its Termination Notice will be 
deemed void, and the Participant will remain subject to further pro 
rata settlement charges pursuant to proposed Section 4 of Rule 4 or 
loss allocations pursuant to proposed Section 5 of Rule 4, as 
applicable, as if it had not given such notice.
Section 8
    Pursuant to the proposed rule change, Section 8 would be titled 
``Termination; Obligation for Pro Rata Settlement Charges and Loss 
Allocations,'' and would be divided among proposed Section 8(a) 
``Settlement Charges,'' proposed Section 8(b) ``Loss Allocations,'' 
proposed Section 8(c) ``Maximum Obligation,'' and proposed Section 8(d) 
``Obligation to Replenish Deposit.''
    Pursuant to proposed Section 8(a), if a Participant, within five 
(5) Business Days after issuance of a Settlement Charge Notice pursuant 
to proposed Section 4 of Rule 4, gives notice to DTC of its election to 
terminate its business with DTC, the Participant would remain obligated 
for (i) its pro rata settlement charge that was the subject of such 
Settlement Charge Notice and (ii) all other pro rata settlement charges 
made by DTC until the Participant Termination Date. Proposed Section 
8(a) would provide that the terminating Participant's obligation would 
be limited to the amount of its Aggregate Required Deposit and 
Investment, as fixed on the day of the pro rata settlement charge that 
was the subject of the Settlement Charge Notice, plus 100% of the 
amount thereof, which is substantively the same limitation as provided 
for pro rata charges in Section 8 of current Rule 4.\51\
---------------------------------------------------------------------------

    \51\ See supra note 18.
---------------------------------------------------------------------------

    Pursuant to proposed Section 8(b), if a Participant, within five 
(5) Business Days after the issuance of a first Loss Allocation Notice 
for any round pursuant to proposed Section 5 of Rule 4 gives notice to 
DTC of its election to terminate its business with DTC, the Participant 
shall remain liable for (i) the loss allocation that was the subject of 
such notice and (ii) all other loss allocations made by DTC with 
respect to the same Event Period. The obligation of a Participant which 
elects to terminate its business with DTC would be limited to the 
amount of its Aggregate Required Deposit and Investment, as fixed on 
the first day of the Event Period, plus 100% of the amount thereof, 
which is substantively the same limitation as provided for pro rata 
charges in Section 8 of current Rule 4.\52\
---------------------------------------------------------------------------

    \52\ See supra note 33.
---------------------------------------------------------------------------

    Proposed Section 8(c) would provide that under no circumstances 
would the aggregate obligation of a Participant under proposed Section 
8(a) and proposed Section 8(b) exceed the amount of its Aggregate 
Required Deposit and Investment, as fixed on the earlier of the (i) day 
of the pro rata settlement charge that was the subject of the 
Settlement Charge Notice giving rise to a Termination Notice, and (ii) 
first day of the Event Period that was the subject of the first Loss 
Allocation Notice in a round giving rise to a Termination Notice, plus 
100% of the amount thereof. The purpose of proposed Section 8(c) is to 
address a situation where a Participant could otherwise be subject to 
both a Settlement Charge Cap and Loss Allocation Cap.
    Proposed Section 8(d) would retain the last paragraph in Section 8 
of current Rule 4, replacing ``pro rata charge'' with ``pro rata 
settlement charge'' and ``loss allocation.'' \53\ Proposed Section 8(d) 
would provide that if the amount of the Actual Participants Fund 
Deposit of a Participant is insufficient to satisfy a pro rata 
settlement charge pursuant to proposed Section 4 and proposed Section 
8(a) or a loss allocation pursuant to proposed Section 5 and proposed 
Section 8(b), the Participant would be obligated to Deposit the amount 
of any such deficiency to the Participants Fund notwithstanding the 
fact that the Participant subsequently ceases to be a Participant.
---------------------------------------------------------------------------

    \53\ This is a ministerial change because this paragraph 
currently applies to Section 4 of current Rule 4, which includes 
charges to complete settlement and for loss allocation, as would be 
provided in proposed Section 4 and proposed Section 5 of Rule 4.
---------------------------------------------------------------------------

Section 9
    Pursuant to the proposed rule change, proposed Section 9 of Rule 4 
would provide that the recovery and repayment provisions in current 
Rule 4 apply to both pro rata settlement charges and loss 
allocations.\54\ Specifically, proposed Section 9 would provide that if 
an amount is charged ratably pursuant to proposed Section 4 or 
allocated ratably pursuant to proposed Section 5 and such amount is 
recovered by DTC, in whole or in part, the net amount of the recovery 
shall be repaid ratably (on the same basis that it was originally 
charged or allocated) to the Persons against which the amount

[[Page 4307]]

was originally charged or allocated by (i) crediting the appropriate 
amounts to the Actual Participants Fund Deposits of Persons which are 
still Participants and (ii) paying the appropriate amounts in cash to 
Persons which are not still Participants.
---------------------------------------------------------------------------

    \54\ This is a ministerial change because Section 9 currently 
applies to Section 4 of current Rule 4, which includes charges to 
complete settlement and for loss allocation, as would be provided in 
proposed Section 4 and proposed Section 5 of Rule 4.
---------------------------------------------------------------------------

    DTC further proposes to add the heading ``Recovery and Repayment'' 
to proposed Section 9.
C. Other Proposed Clarifying, Conforming and Technical Changes to Rule 
4
Section 1
    Section 1(a) and Section 1(b). Section 1(a) addresses, among other 
things, the formula for determining the Required Participants Fund 
Deposits of Participants. DTC is proposing to insert the words ``or 
wind-down'' to make it clear that the formulas for determining the 
Required Participants Fund Deposits of Participants and the amount of 
the minimum Required Participants Fund Deposit would be fixed by DTC so 
as to assure that the aggregate amount of Required Participants Fund 
Deposits of Participants will be increased to provide for the costs and 
expenses incurred by it incidental to the wind-down of DTC, in addition 
to the voluntary liquidation of DTC.\55\ Further, DTC proposes to 
delete the extraneous phrase ``if any.'' For increased clarity and 
readability, DTC is proposing to consolidate Section 1(b) into Section 
1(a), and to relocate the sentences ``The Corporation may require a 
Participant to Deposit an additional amount to the Participants Fund 
pursuant to Section 2 of Rule 9(A). Any such additional amount shall be 
part of the Required Participants Fund Deposit of such Participant.'' 
from Section 1(a) to a new proposed Section 1(b). In addition to the 
relocation, DTC would add a defined term for such additional amount, as 
``Additional Participants Fund Deposit,'' for drafting convenience and 
transparency throughout proposed Rule 4. Further, DTC proposes to add 
the headings ``Required Participants Fund Deposits'' and ``Additional 
Participants Fund Deposits'' to Section 1(a) and proposed Section 1(b), 
respectively.
---------------------------------------------------------------------------

    \55\ On December 18, 2017, DTC submitted a proposed rule change 
and advance notice to adopt the Recovery & Wind-down Plan of DTC, 
and amend the Rules in order to adopt Rule 32(A) (Wind-down of the 
Corporation) and Rule 38 (Market Disruption and Force Majeure). See 
SR-DTC-2017-021 and SR-DTC-2017-803, which were filed with the 
Commission and the Board of Governors of the Federal Reserve System, 
respectively, available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
---------------------------------------------------------------------------

    Section 1(c). For enhanced readability, DTC is proposing to add the 
heading ``Voluntary Participants Fund Deposits'' to Section 1(c) of 
Rule 4, and to replace the word ``as'' with ``in the manner.''
    Section 1(d). For enhanced clarity, DTC is proposing to modify 
Section 1(d) to make it clear that any Additional Participants Fund 
Deposit is required to be in cash. DTC is also proposing to delete the 
extraneous phrase ``pursuant to this Section'' and to replace language 
regarding Section 2 of Rule 9(A) with the proposed defined term 
``Additional Participants Fund Deposit.'' Further, DTC proposes to add 
the heading ``Cash Participants Fund'' to Section 1(d) of Rule 4.
    Section 1(e). For enhanced clarity, DTC is proposing to add the 
language ``among Account Families'' to clarify the scope of the 
allocation described in Section 1(e). In addition, DTC proposes to add 
the heading ``Allocation of Participants Fund Deposits Among Account 
Families'' to Section 1(e) of Rule 4.
    Section 1(f). Section 1(f) addresses, among other things, the 
permitted use of the Participants Fund. For consistency with the 
balance of Section 1(f), the first paragraph would be amended to state 
that the Actual Participants Fund Deposits of Participants ``may be 
used or invested'' instead of stating ``shall be applied.'' Section 
1(f) provides, in part, that the Participants Fund is limited to the 
satisfaction of losses or liabilities of DTC incident to the business 
of DTC. Section 1(f) currently defines ``business'' with respect to DTC 
as ``the doing of all things in connection with or relating to [DTC's] 
performance of the services specified in the first and second 
paragraphs of Rule 6 or the cessation of such services.'' For enhanced 
transparency of the permitted uses of the Participants Fund, proposed 
Section 1(f) would be amended to explicitly state that the Actual 
Participants Fund Deposits of Participants may be used (i) to satisfy 
the obligations of Participants to DTC, as provided in proposed Section 
3, (ii) to fund settlement among non-defaulting Participants, as 
provided in proposed Section 4 and (iii) to satisfy losses and 
liabilities of DTC incident to the business of DTC, as provided in 
proposed Section 5. Section 1(f) would also be amended to make the 
definition of ``business'' applicable to the entirety of Rule 4, 
instead of just Section 1(f), as the term would appear elsewhere in the 
rule pursuant to the proposed rule change. In addition, DTC proposes to 
add the heading ``Maintenance, Permitted Use and Investment of 
Participants Fund'' to Section 1(f) of Rule 4.
    Section 1(g) (consolidated into proposed Section 1(f)). Pursuant to 
the proposed rule change, DTC would consolidate current Section 1(g) 
into proposed Section 1(f), and modify language to make it clear that 
DTC may invest cash in the Participants Fund in accordance with the 
Clearing Agency Investment Policy adopted by DTC.\56\ Further, language 
would be streamlined by replacing ``securities, repurchase agreements 
or deposits'' with ``financial assets,'' and ``securities and 
repurchase agreements in which such cash is invested'' with ``its 
investment of such cash.''
---------------------------------------------------------------------------

    \56\ See Securities Exchange Act Release No. 79528 (December 12, 
2016), 81 FR 91232 (December 16, 2016) (SR-DTC-2016-007).
---------------------------------------------------------------------------

Section 2
    Pursuant to the proposed rule change, Section 2 of Rule 4 would be 
titled ``Participants Investment.''
    Section 2(a)-2(d) (Proposed Section 2(a)). For clarity, DTC is 
proposing to consolidate Sections 2(b)-2(d) into proposed Section 2(a) 
and would add the heading ``Required Preferred Stock Investments'' to 
proposed Section 2(a). In addition, DTC proposes to modify certain 
language to update references and cross-references to specific 
subsections to reflect the proposed changes to the numbering of the 
subsections in proposed Section 2 of Rule 4.
    Section 2(e) (Proposed Section 2(b)). For enhanced clarity, DTC is 
proposing to add the language ``among Account Families'' to clarify the 
scope of the allocation described in proposed Section 2(b). In 
addition, DTC proposes to add the heading ``Allocation of Preferred 
Stock Investments Among Account Families'' to proposed Section 2(b) of 
Rule 4.
    Section 2(f) (Proposed Section 2(c)). DTC is proposing to add 
language to clarify that when any Pledge of a Preferred Stock Security 
Interest pursuant to proposed Section 2(c) of Rule 4 is made by 
appropriate entries on the books of DTC, the Rules, in addition to such 
entries, shall be deemed to be a security agreement for purposes of the 
New York Uniform Commercial Code. In addition, DTC proposes to update a 
cross-reference to proposed Section 2(c). In addition, DTC proposes to 
add the heading ``Security Interest in Preferred Stock Investments of 
Participants'' to proposed Section 2(c).
    Sections 2(g)-2(i) (Proposed Sections 2(d)-2(f)). DTC proposes to 
add the headings ``Dividends on Preferred Stock Investments of 
Participants,'' ``Sale of Preferred Stock Investments of

[[Page 4308]]

Participants,'' and ``Permitted Transfers of Preferred Stock 
Investments of Participants'' to proposed Sections 2(d), 2(e), and 
2(f), respectively. Proposed Sections 2(e) and 2(f) would be modified 
to update cross-references to certain subsections. In addition, 
proposed Section 2(f) would be modified to renumber paragraphs and 
internal lists for consistency with the numbering schemes in Rule 4.
    Section 7. For clarity, DTC is proposing to amend Section 7 of Rule 
4 to (i) replace language referencing Additional Participants Fund 
Deposits with the proposed defined term, (ii) update cross-references 
to reflect proposed renumbering, and (iii) add the headings ``Increased 
Participants Fund Deposits and Preferred Stock Investments,'' 
``Required Participants Fund Deposits,'' and ``Required Preferred Stock 
Investments'' to proposed Sections 7, 7(a) and 7(b) of Rule 4, 
respectively.
D. Proposed Changes to Rule 1
    DTC is proposing to amend Rule 1 (Definitions; Governing Law) to 
add cross-references to proposed terms that would be defined in Rule 4, 
and to delete one defined term. The defined terms to be added are: 
``Additional Participants Fund Deposit,'' ``Corporate Contribution,'' 
``Declared Non-Default Loss Event,'' ``Default Loss Event,'' ``Event 
Period,'' ``Loss Allocation Cap,'' ``Loss Allocation Notice,'' ``Loss 
Allocation Termination Notification Period,'' ``Participant Default,'' 
``Participant Termination Date,'' ``Settlement Charge Cap,'' 
``Settlement Charge Notice,'' ``Settlement Charge Termination 
Notification Period,'' and ``Termination Notice''. The term ``Section 8 
Pro Rata Charge'' would be deleted from Rule 1, because it would be 
deleted from proposed Rule 4 as no longer necessary.
Participant Outreach
    Beginning in August 2017, DTC has conducted outreach to 
Participants in order to provide them with advance notice of the 
proposed changes. As of the date of this filing, no written comments 
relating to the proposed changes have been received in response to this 
outreach. The Commission will be notified of any written comments 
received.
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.
Expected Effect on Risks to the Clearing Agency, Its Participants and 
the Market
    DTC believes that the proposed rule changes to clarify the remedies 
available to DTC with respect to a Participant Default, including the 
application of the Participants Fund as a liquidity resource, and by 
clarifying and providing the related processes, would provide clarity 
as to the application of the Participants Fund to fund settlement and 
would mitigate any risk to settlement finality due to Participant 
Default.
    DTC believes that the proposed rule change to enhance the 
resiliency of DTC's loss allocation process and to shorten the time 
within which DTC is required to return the Actual Participants Fund 
Deposit of a former Participant would reduce the risk of uncertainty to 
DTC, its Participants and the market overall.
    By replacing the discretionary application of DTC retained earnings 
to losses and liabilities with a mandatory and defined amount of the 
Corporate Contribution, the proposed rule change is designed to provide 
enhanced transparency and accessibility to Participants as to how much 
DTC would contribute in the event of a loss or liability. The proposed 
rule change also clarifies that the Corporate Contribution applies to 
both Default Loss Events and Declared Non-Default Loss Events. The 
proposed rule change would provide greater transparency as to the 
proposed replenishment period for the Corporate Contribution, which 
would allow Participants to better assess the adequacy of DTC's loss 
allocation process. Taken together, the proposed rule changes with 
respect to the Corporate Contribution would enhance the overall 
resiliency of DTC's loss allocation process by specifying the 
calculation and application of DTC's Corporate Contribution, including 
the proposed replenishment period, and would allow Participants to 
better assess the adequacy of DTC's loss allocation process.
    By introducing the concept of an Event Period, DTC would be able to 
group Default Loss Events and Declared Non-Default Loss Events 
occurring within a period of ten (10) Business Days for purposes of 
allocating losses to Participants. DTC believes that the Event Period 
would provide a defined structure for the loss allocation process to 
encompass potential sequential Default Loss Events or Declared Non-
Default Loss Events that may or may not be closely linked to an initial 
event and/or a market dislocation episode. Having this structure would 
enhance the overall resiliency of DTC's loss allocation process because 
the proposed rule would expressly address losses that may arise from 
multiple Default Loss Events and/or Declared Non-Default Loss Events 
that arise in quick succession. Moreover, the proposed Event Period 
structure would provide certainty for Participants concerning their 
maximum exposure to mutualized loss allocation with respect to such 
events.
    By introducing the concept of ``rounds'' (and accompanying Loss 
Allocation Notices) and applying this concept to the timing of loss 
allocation payments and the Participant termination process in 
connection with the loss allocation process, DTC would (i) set forth a 
defined amount that it would allocate to Participants during each round 
(i.e., the round cap), (ii) advise Participants of loss allocation 
obligation information as well as round information through the 
issuance of Loss Allocation Notices, and (iii) provide Participants 
with the option to limit their loss allocation exposure after the 
issuance of the first Loss Allocation Notice in each round. These 
proposed rule changes would enhance the overall resiliency of DTC's 
loss allocation process because they would expressly permit DTC to 
continue the loss allocation process in successive rounds until all of 
DTC's losses are allocated and enable DTC to identify continuing 
Participants for purposes of calculating subsequent loss allocation 
obligations in successive rounds. Moreover, the proposed rule changes 
would define for Participants a clear manner and process in which they 
could cap their loss allocation exposure to DTC.
    By reducing the time within which DTC is required to return the 
Actual Participants Fund Deposit of a former Participant, DTC would 
enable firms that have exited DTC to have access to their funds sooner 
than under current Rule 4 while maintaining the protection of DTC and 
its provision of clearance and settlement services. DTC would continue 
to be protected under the proposed rule change, which will maintain the 
provision that DTC may offset the return of funds against the amount of 
any loss or liability of DTC arising out of or relating to the 
obligations of the former Participant to DTC, and would provide that 
DTC could retain the funds for up to two (2) years. As such, DTC would 
maintain a necessary level of coverage for possible claims arising in 
connection with the DTC activities of a former Participant.
Management of Identified Risks
    DTC is proposing the rule changes as described in detail above in 
order to (i)

[[Page 4309]]

provide clarity as to the application of the Participants Fund to fund 
settlement when a Participant fails to settle, (ii) enhance the 
resiliency of DTC's loss allocation process, and (iii) provide clarity 
and certainty to Participants regarding DTC's loss allocation process.
Consistency With the Clearing Supervision Act
    The proposed rule change would be consistent with Section 805(b) of 
the Clearing Supervision Act.\57\ The objectives and principles of 
Section 805(b) of the Clearing Supervision Act are to promote robust 
risk management, promote safety and soundness, reduce systemic risks, 
and support the stability of the broader financial system.\58\
---------------------------------------------------------------------------

    \57\ 12 U.S.C. 5464(b).
    \58\ Id.
---------------------------------------------------------------------------

    The proposed rule change would provide clarity and certainty around 
the use of the Participants Fund in connection with a Participant 
Default by expressly providing for the application of the Actual 
Participants Fund Deposit of the defaulting Participant to its unpaid 
obligations, and by providing a defined process for pro rata settlement 
charges to non-defaulting Participants that is separate from the loss 
allocation process. Together, these proposed rule changes more clearly 
specify the rights and obligations of DTC and its Participants in 
respect of the application of the Participants Fund. Reducing the risk 
of uncertainty to DTC, its Participants, and the market overall would 
promote robust risk management, promote safety and soundness, reduce 
systemic risks, and support the stability of the broader financial 
system. Therefore, DTC believes that the proposed rule changes to 
provide clarity and certainty around the use of the Participants Fund 
in connection with a Participant Default, and to provide a defined 
process for pro rata settlement charges to the Actual Participants Fund 
Deposits of non-defaulting Participants, are consistent with the 
objectives and principles of Section 805(b) of the Clearing Supervision 
Act cited above.
    The proposed rule change would enhance the resiliency of DTC's loss 
allocation process by (1) requiring a defined contribution of DTC 
corporate funds to a loss, (2) introducing an Event Period, and (3) 
introducing the concept of ``rounds'' (and accompanying Loss Allocation 
Notices) and applying this concept to the timing of loss allocation 
payments and the Participant termination process in connection with the 
loss allocation process. Together, these proposed rule changes would 
(i) create greater certainty for Participants regarding DTC's 
obligation towards a loss, (ii) more clearly specify DTC's and 
Participants' obligations toward a loss and balance the need to manage 
the risk of sequential defaults and other potential loss events against 
Participants' need for certainty concerning their maximum exposures, 
and (iii) provide Participants the opportunity to limit their exposure 
to DTC by capping their exposure to loss allocation. Reducing the risk 
of uncertainty to DTC, its Participants and the market overall would 
promote robust risk management, promote safety and soundness, reduce 
systemic risks, and support the stability of the broader financial 
system. Therefore, DTC believes that the proposed rule change to 
enhance the resiliency of DTC's loss allocation process is consistent 
with the objectives and principles of Section 805(b) of the Clearing 
Supervision Act cited above.
    The proposed rule change is also consistent with Rules 17Ad-
22(e)(7)(i), 17Ad-22(e)(13) and (e)(23)(i), promulgated under the 
Act.\59\
---------------------------------------------------------------------------

    \59\ 17 CFR 240.17Ad-22(e)(7)(i), (e)(13) and (e)(23)(i).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7)(i) under the Act requires, in part, that DTC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to effectively measure, monitor, and 
manage the liquidity risk that arises in or is borne by DTC, including 
measuring, monitoring, and managing its settlement and funding flows on 
an ongoing and timely basis, and its use of intraday liquidity, by 
maintaining sufficient liquid resources to effect same-day settlement 
of payment obligations with a high degree of confidence under a wide 
range of foreseeable stress scenarios.\60\ By clarifying the remedies 
available to DTC with respect to a Participant Default, including the 
application of the Participants Fund as a liquidity resource, and by 
clarifying and providing the related processes, the proposed rule 
change is designed so that DTC may manage its settlement and funding 
flows on a timely basis and apply the Participants Fund as a liquid 
resource in order to effect same day settlement of payment obligations 
with a high degree of confidence. Therefore, DTC believes that the 
proposed rule changes with respect to the application of the Actual 
Participants Fund Deposits of non-defaulting Participants to complete 
settlement are consistent with Rule 17Ad-22(e)(7)(i) under the Act.
---------------------------------------------------------------------------

    \60\ Id. at 240.17Ad-22(e)(7)(i).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(13) under the Act requires, in part, that DTC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to ensure DTC has the authority and 
operational capacity to take timely action to contain losses and 
liquidity demands and continue to meet its obligations.\61\ The 
proposed rule changes to (1) require a defined Corporate Contribution 
to a loss, (2) introduce an Event Period, (3) introduce the concept of 
``rounds'' (and accompanying Loss Allocation Notices) and apply this 
concept to the timing of loss allocation payments and the Participant 
termination process in connection with the loss allocation process, 
taken together, are designed to enhance the resiliency of DTC's loss 
allocation process. Having a resilient loss allocation process would 
help ensure that DTC can effectively and timely address losses relating 
to or arising out of Default Loss Events and/or Declared Non-Default 
Loss Events, which in turn would help DTC contain losses and continue 
to conduct its clearance and settlement business. In addition, by 
providing clarity as to the application of the Participants Fund to 
fund settlement in the event of a Participant Default, the proposed 
rule change is designed to clarify that DTC is authorized to use the 
Participants Fund to fund settlement. Therefore, DTC believes that the 
proposed rule changes to enhance the resiliency of DTC's loss 
allocation process, and to provide clarity as to the application of the 
Participants Fund to fund settlement, are consistent with Rule 17Ad-
22(e)(13) under the Act.
---------------------------------------------------------------------------

    \61\ Id. at 240.17Ad-22(e)(13).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(23)(i) under the Act requires DTC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to publicly disclose all relevant rules and 
material procedures, including key aspects of DTC's default rules and 
procedures.\62\ The proposed rule changes to (i) separate the 
provisions for the use of the Participants Fund for settlement and for 
loss allocation, (ii) make clarifying changes to the provisions 
regarding the application of the Participants Fund to complete 
settlement and for the allocation of losses, (iii) further align the 
loss allocation rules of the DTCC Clearing Agencies, (iv) improve the 
overall transparency and accessibility of the provisions in the Rules 
governing loss allocation, and (v) make technical and conforming 
changes, would not only ensure that DTC's loss allocation rules are, to 
the extent practicable and appropriate, consistent with the loss

[[Page 4310]]

allocation rules of the other DTCC Clearing Agencies, but also would 
help to ensure that DTC's loss allocation rules are transparent and 
clear to Participants. Aligning the loss allocation rules of the DTCC 
Clearing Agencies would provide consistent treatment, to the extent 
practicable and appropriate, especially for firms that are participants 
of two or more DTCC Clearing Agencies. Having transparent and clear 
loss allocation rules would enable Participants to better understand 
the key aspects of DTC's Rules and Procedures relating to Participant 
Default, as well as non-default events, and provide Participants with 
increased predictability and certainty regarding their exposures and 
obligations. As such, DTC believes that the proposed rule changes with 
respect to pro rata settlement charges, and to align the loss 
allocation rules across the DTCC Clearing Agencies and to improve the 
overall transparency and accessibility of DTC's loss allocation rules 
are consistent with Rule 17Ad-22(e)(23)(i) under the Act.
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    \62\ Id. at 240.17Ad-22(e)(23)(i).
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III. Date of Effectiveness of the Advance Notice and Timing for 
Commission Action

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received,\63\ unless extended as described below. The clearing agency 
shall not implement the proposed change if the Commission has any 
objection to the proposed change.\64\
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    \63\ 12 U.S.C. 5465(e)(1)(G).
    \64\ 12 U.S.C. 5465(e)(1)(F).
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    Pursuant to Section 806(e)(1)(H) of the Clearing Supervision 
Act,\65\ the Commission may extend the review period of an advance 
notice for an additional 60 days, if the changes proposed in the 
advance notice raise novel or complex issues, subject to the Commission 
providing the clearing agency with prompt written notice of the 
extension.
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    \65\ 12 U.S.C. 5465(e)(1)(H).
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    Here, as the Commission has not requested any additional 
information, the date that is 60 days after DTC filed the Advance 
Notice with the Commission is February 16, 2018. However, the 
Commission is extending the review period of the Advance Notice for an 
additional 60 days under Section 806(e)(1)(H) of the Clearing 
Supervision Act \66\ because the Commission finds that the Advance 
Notice raises complex issues. Specifically, the proposed changes are 
substantial, detailed, and interrelated to corresponding proposals by 
NSCC and FICC.\67\ The proposed changes would provide a comprehensive 
revision to such loss allocation process when addressing losses from 
either a Participant Default or a non-default event. In doing so, DTC 
would clarify certain elements of, introduce new concepts to, and 
modify other aspects of its loss allocation waterfall as described 
above. Furthermore, the proposed changes would align the loss 
allocation rules across all three DTCC Clearing Agencies, in order to 
help provide consistent treatment of the rules, to the extent 
practicable and appropriate, especially for firms that are participants 
of two or more DTCC Clearing Agencies.
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    \66\ Id.
    \67\ Supra note 5 (listing the corresponding proposals by NSCC 
and FICC).
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    Accordingly, pursuant to Section 806(e)(1)(H) of the Clearing 
Supervision Act,\68\ the Commission is extending the review period of 
the Advance Notice to April 17, 2018 which is the date by which the 
Commission shall notify the clearing agency of any objection regarding 
the Advance Notice, unless the Commission requests further information 
for consideration of the Advance Notice (SR-DTC-2017-804).\69\
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    \68\ 12 U.S.C. 5465(e)(1)(H).
    \69\ This extension extends the time periods under Sections 
806(e)(1)(E) and (G) of the Clearing Supervision Act. 12 U.S.C. 
5465(e)(1)(E) and (G).
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    The clearing agency shall post notice on its website of proposed 
changes that are implemented.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.\70\
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    \70\ See supra note 2 (concerning the clearing agency's related 
proposed rule change).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. 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-2017-804 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-2017-804. 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 website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the Advance Notice that are filed with the 
Commission, and all written communications relating to the Advance 
Notice 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 website 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 website 
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions.
    You should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-DTC-2017-804 
and should be submitted on or before February 14, 2018.

    By the Commission.
Eduardo A. Aleman
Assistant Secretary.
[FR Doc. 2018-01691 Filed 1-29-18; 8:45 am]
 BILLING CODE 8011-01-P