[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