[Federal Register Volume 84, Number 118 (Wednesday, June 19, 2019)]
[Notices]
[Pages 28602-28605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12924]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86099; File No. SR-DTC-2019-002]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Modify the Operational Arrangements and Fee Guide Relating to 
Structured Securities

June 13, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 5, 2019, The Depository Trust Company (``DTC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II and III below, which Items have been 
prepared by the clearing agency. DTC filed the proposed rule change 
pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) 
thereunder.\4\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).

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[[Page 28603]]

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

    The proposed rule change consists of modifications to (i) the DTC 
Operational Arrangements (Necessary for Securities to Become and Remain 
Eligible for DTC Services) (``OA'') \5\ to eliminate the requirement 
that an Issuer's paying agent (``Paying Agent''), and a Participant 
that is the managing underwriter (``Underwriter''), for certain 
issuances of structured securities (``Structured Securities'') that 
have features that may affect the timeliness of payment of principal 
and interest (``Non-Conforming Structured Securities''), submit an 
attestation (``Attestation'') \6\ relating to the Non-Conforming 
Structured Securities, as described below; (ii) the Guide to the DTC 
Fee Schedule (``Fee Guide'') \7\ to eliminate an exception processing 
fee (``Exception Processing Fee'') charged to Underwriters relating to 
making Non-Conforming Structured Securities eligible for DTC services; 
and (iii) the OA to eliminate a provision that excludes Non-Conforming 
Structured Securities from statistics published by DTC regarding the 
timeliness of submission of rate information for Structured Securities, 
as described below.\8\
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    \5\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/issue-eligibility/eligibility/operational-arrangements.pdf.
    \6\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/issue-eligibility/special-letters/Non-Conforming-Structured-
Securities-Attestation-Letter.pdf (Non-Conforming Structured 
Securities Attestation). A Paying Agent and Underwriter must provide 
an Attestation to DTC to inform DTC when a Security to be made 
eligible for DTC services is a Non-Conforming Structured Security. 
The Attestation also documents the understanding of the Underwriter 
that DTC would charge the Exception Processing Fee with regard to 
the Non-Conforming Structured Security.
    \7\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/fee-guides/dtcfeeguide.pdf.
    \8\ Capitalized terms not defined herein are defined in the 
Rules, By-Laws and Organization Certificate of DTC (the ``Rules''), 
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
rules/dtc_rules.pdf, and the OA, supra note 5.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The proposed rule change consists of proposed modifications to (i) 
the OA \9\ to eliminate the requirement that a Paying Agent, and an 
Underwriter, for Non-Conforming Structured Securities, submit an 
Attestation \10\ relating to the Non-Conforming Structured Securities, 
as described below; (ii) the Fee Guide \11\ to eliminate the Exception 
Processing Fee; and (iii) the OA to eliminate a provision that excludes 
Non-Conforming Structured Securities from statistics published by DTC 
regarding the timeliness of submission of rate information for 
Structured Securities, as described below.
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    \9\ Supra note 5.
    \10\ Supra note 6.
    \11\ Supra note 7.
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Background
    A Structured Security, such as a collateralized mortgage obligation 
or asset-backed security, is a debt security backed by a pool of 
underlying financial assets. The underlying assets generally consist of 
receivables such as mortgages, credit card receivables, student or 
other bank loans for which the timing of principal payments by the 
underlying obligors may be variable and unpredictable. A Structured 
Security may also incorporate credit enhancements or other rights that 
affect the amount and timing of payments to investors.
    Communication of periodic payment rates of principal and interest 
to the end investors in Structured Securities depends on information 
reporting and significant interdependencies among servicers of the 
underlying assets, trustees, custodians, Paying Agents, DTC, and the 
financial intermediaries that act on behalf of the investors. 
Historically, given the complexity of structure and calculations of 
cash flow from the underlying assets, and the interdependencies on 
timeliness and accuracy of performance throughout the chain of 
servicers and intermediaries, payment rates for Non-Conforming 
Structured Securities were often announced late. Processing 
inefficiencies and inaccuracies associated with late payment rate 
reporting led to increased costs for DTC associated with processing 
Non-Conforming Structured Securities.
    In 2008, in order to recoup its processing costs relating to Non-
Conforming Structured Securities, DTC implemented the Exception 
Processing Fee in the amount of $4,200 per CUSIP to an Underwriter at 
the time of a Non-Conforming Structured Security becoming eligible for 
DTC services.\12\ At the same time, the OA was amended to add a 
requirement for Underwriters and Paying Agents to submit the 
Attestation \13\ to identify Non-Conforming Structured Securities as 
they are made eligible for DTC services.\14\ In addition, DTC expanded 
the distribution of ``Report Cards'' to Paying Agents relating to the 
tracking and evaluating of Paying Agent performance with regard to 
timeliness and accuracy of payment rate reporting on Structured 
Securities, to make the Report Cards available to the public on DTC's 
website.\15\
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    \12\ See Securities Exchange Act Release No. 57193 (January 24, 
2008), 73 FR 5614 (January 30, 2008).
    \13\ Supra note 6.
    \14\ See Securities Exchange Act Release No. 57542 (March 20, 
2008), 73 FR 16403 (March 27, 2008).
    \15\ See id.
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    The volume of new issuances of Structured Securities coming to 
market, including those relating to mortgages and other asset types, 
have significantly declined since 2007 and the beginnings of the 
financial crisis.\16\ The decline has been attributed, at least in 
part, to structural changes made to the Structured Securities 
marketplace that have occurred since the financial crisis, including 
regulatory changes related to credit-related risk controls for the 
underwriting of Structured Securities and standards by which loans that 
underlie Structured Securities are originated.\17\ At DTC, volumes of 
Structured Securities processed at DTC ranged from 52,000-55,000 
issuances per year from 2004-2008. Since that time, due largely to 
changes in the marketplace, volumes of Structured Securities issuances 
have steadily dropped with average volumes since 2009 falling below 
10,000 issuances per year. Additionally, the number of Non-Conforming 
Structured Securities at DTC has fallen as a percentage of overall 
Structured Securities issuances. Currently 6.4% of the active 
Structured Securities on DTC's security master file are marked as Non-
Conforming Structured Securities, but since the beginning of 2014 less 
than 1% of newly issued Structured Securities have been

[[Page 28604]]

marked as Non-Conforming Structured Securities.
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    \16\ See An He & Bruce Mizrach, FINRA Office of the Chief 
Economist, Analysis of Securitized Asset Liquidity (June 2017) at 5, 
available at https://www.finra.org/sites/default/files/Analysis_of_Securitized_Asset_Liquidity.pdf.
    \17\ See S&P Global Ratings, Ten Years after the Financial 
Crisis, Global Securitization Lending Transformed by Regulation and 
Economic Growth (July 21, 2017) at 1-6, available at https://www.spratings.com/documents/20184/1393097/SF10Years/b0f1300a-5ed5-407d-8d3b-77fdc3b1f20c.
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Proposed Changes to the OA and the Fee Guide
    The processing of the Attestation by DTC increased the amount of 
resources necessary for DTC staff to facilitate Non-Conforming 
Structured Securities becoming eligible for DTC services. However, the 
reduction of new issues of Non-Conforming Structured Securities, as 
described above, has reduced the resources required by DTC, including 
manual processing of paperwork and data entries in the DTC system by 
DTC staff, to efficiently process Non-Conforming Structured Securities. 
In this regard, DTC would be able to balance its costs associated with 
the processing of Non-Conforming Structured Securities with its service 
fees applicable to securities processing,\18\ without additionally 
charging an Exception Processing Fee. Therefore, DTC proposes to 
eliminate the Exception Processing Fee, which would facilitate DTC's 
ability to balance its costs with its service fees. Also, because DTC 
proposes to eliminate the Exception Processing Fee, DTC has determined 
that it is no longer necessary for it to obtain an Attestation from a 
Paying Agent and Participant by which they notify DTC that an issue 
comprises Non-Conforming Structured Securities and the Participant 
agrees to pay the Exception Processing Fee.
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    \18\ See Fee Guide, supra note 7.
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    Therefore, pursuant to the proposed rule change, DTC would modify 
(i) the OA to eliminate the requirement that a Paying Agent, and an 
Underwriter, for Non-Conforming Structured Securities, submit an 
Attestation relating to the Non-Conforming Structured Securities; and 
(ii) the Fee Guide to eliminate the Exception Processing Fee.
    Since, pursuant to the proposed rule change, DTC would no longer 
receive Attestations from Paying Agents and Underwriters notifying DTC 
that Structured Securities are non-conforming, and therefore would not 
distinguish between Non-Conforming Structured Securities and other 
Structured Securities for the purposes described above, DTC would amend 
the OA to eliminate a provision that excludes Non-Conforming Structured 
Securities from statistics published by DTC regarding the timeliness of 
submission of rate information for Structured Securities. In this 
regard, the OA would be amended to remove text providing for the 
exclusion of Non-Conforming Structured Securities from the Report Card 
results. DTC believes the due to the small percentage of Non-Conforming 
Structured Securities issued in relation to all other Structured 
Securities issued, that Non-Conforming Structured Securities can be 
included in the Report Cards without materially impacting results 
reflected in the Report Cards.
Implementation Timeframe
    DTC would implement the proposed changes no earlier than thirty 
(30) days after the date of filing, or such shorter time as the 
Commission may designate, and no later than July 10, 2019. DTC would 
announce the implementation date of the proposed changes by Important 
Notice, posted to its website.
2. Statutory Basis
    Section 17A(b)(3)(F) of the Act \19\ requires that the rules of the 
clearing agency be designed, inter alia, to promote the prompt and 
accurate clearance and settlement of securities transactions. DTC 
believes that the proposed rule change is consistent with this 
provision of the Act because by amending (i) the OA to eliminate the 
requirement for the Attestation and (ii) the Fee Guide to remove the 
Exception Processing Fee, the proposed rule change would eliminate 
extra steps necessary for Participants to request eligibility for Non-
Conforming Structured Securities that are not otherwise required for 
other Structured Securities. By eliminating the requirements as 
described in (i) and (ii) above, the proposed rule change would promote 
the prompt and accurate clearance and settlement of securities 
transactions by facilitating the ability of Participants to make Non-
Conforming Structured Securities eligible for DTC's book-entry 
settlement services, without requiring the Participant to take the 
extra step of submitting an Attestation and incurring the cost 
associated with the Exception Processing Fee as part of the standard 
eligibility process for such Securities.
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    \19\ 15 U.S.C. 78q-1(b)(3)(F).
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    DTC believes the removal of text from the OA that provides for the 
exclusion of Non-Conforming Structured Securities from the Report Card, 
as described above, would be consistent with the above cited provision 
of the Act. While the inclusion of Non-Conforming Structured Securities 
in the Report Cards would not have a material effect on results 
reflected in Report Cards, no longer excluding Non-Conforming 
Structured Securities results would allow Report Cards to provide for a 
complete overview with respect to timeliness and accuracy of payment 
rate reporting for Participants with respect to all Structured 
Securities processed at DTC. By providing more complete information 
with respect to payment rate reporting for Structured Securities, the 
proposed rule change would allow Report Cards to include information 
that would facilitate (i) Participants' understanding of the timeliness 
and accuracy of payment rate reporting on Structured Securities and 
(ii) decisions they may they might make with respect to transactions in 
Structured Securities. Therefore, by facilitating Participants' 
understanding of payment rate information in this regard, the proposed 
rule change would promote the prompt and accurate clearance and 
settlement of securities transactions consistent with the Act.
    Section 17A(b)(3)(D) of the Act \20\ requires that the rules of the 
clearing agency provide for the equitable allocation of reasonable 
dues, fees, and other charges among its participants. As described 
above, DTC would eliminate the Exception Processing Fee pursuant to the 
proposed rule change because the reduction of new issues of Non-
Conforming Structured Securities has reduced the resources required by 
DTC to efficiently process Non-Conforming Structured Securities. In 
this regard, DTC would be able to cover its costs associated with the 
processing of Non-Conforming Structured Securities with its service 
fees applicable to securities processing, without additionally charging 
an Exception Processing Fee. Therefore, DTC believes that the proposed 
rule change provides for the equitable allocation of reasonable fees 
among its participants by eliminating a fee that is no longer necessary 
for DTC to charge to balance its costs associated with the processing 
of Non-Conforming Structured Securities with its service fees 
applicable to securities processing.\21\
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    \20\ 15 U.S.C. 78q-1(b)(3)(D).
    \21\ See Fee Guide, supra note 7.
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(B) Clearing Agency's Statement on Burden on Competition

    DTC believes that the proposed rule change could impact 
competition.\22\ DTC does not believe the proposed rule change would 
impose any burden on competition, because as discussed above, the 
volume of new issuances in Non-Conforming Structured Securities is very 
low compared to Structured Securities generally, and the proposed 
changes described above would not have a material effect with respect 
to (a) the obligations and costs of Participants utilizing DTC 
services, or (b)

[[Page 28605]]

information included on Report Cards. DTC believes the proposed rule 
change may promote competition, because the reduced cost to 
Participants to request eligibility for Non-Conforming Structed 
Securities, due to the proposed elimination of the Exception Processing 
Fee, may facilitate a Participant's ability to request eligibility for 
such Securities at DTC.
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    \22\ 15 U.S.C. 78q-1(b)(3)(I).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

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

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

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) impose any significant burden on competition; and
    (iii) become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \23\ and 
Rule 19b-4(f)(6) thereunder.\24\
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    \23\ 15 U.S.C. 78s(b)(3)(A).
    \24\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-DTC-2019-002 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549.

All submissions should refer to File Number SR-DTC-2019-002. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for 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-2019-002 and should be submitted on 
or before July 10, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-12924 Filed 6-18-19; 8:45 am]
BILLING CODE 8011-01-P